POST-EFFECTIVE AMENDMENT TO FORM S-4
As filed with the Securities and Exchange Commission on
May 23, 2006
Registration
No. 333-133616
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Post-Effective Amendment No. 1
to
Form S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CCH II, LLC
and
CCH II Capital Corp.
(Exact name of registrants as specified in their charters)
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Delaware |
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4841 |
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03-0511293 |
Delaware |
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4841 |
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13-4257703 |
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(State or other jurisdiction of
incorporation or organization) |
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(Primary Standard Industrial
Classification Code Number) |
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(I.R.S. Employer
Identification Number) |
12405 Powerscourt Drive
St. Louis, Missouri 63131
(314) 965-0555
(Address, including zip code, and telephone number, including
area code, of
registrants principal executive offices)
Grier C. Raclin
Executive Vice President, General Counsel
and Corporate Secretary
12405 Powerscourt Drive
St. Louis, Missouri 63131
(314) 965-0555
(Name, address, including zip code, and telephone number,
including area code,
of agent for service)
Copies to:
Dennis J. Friedman
Jeffrey L. Kochian
Gibson, Dunn & Crutcher LLP
200 Park Avenue
New York, NY 10166
(212) 351-4000
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the effective date of
this Registration Statement.
If the securities being registered on this form are being
offered in connection with the formation of a holding company
and there is compliance with General Instruction G, check the
following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
The Registrants hereby amend this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrants shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such date as
the Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where such offer or sale is not
permitted.
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SUBJECT TO COMPLETION, DATED
MAY 23, 2006
PROSPECTUS
CCH II, LLC
CCH II Capital Corp.
Offer to Exchange
$450,000,000 in Aggregate Principal Amount
of 10.250% Senior Notes due 2010
which have been registered under the Securities Act
for any and all outstanding 10.250% Senior Notes due
2010
Issued by CCH II, LLC and
CCH II Capital Corp. on January 30, 2006
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This exchange offer expires at 5:00 p.m., New York City
time,
on ,
2006, unless extended. |
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No public market currently exists for the original notes or
the new notes. We do not intend to list the new notes on any
securities exchange or to seek approval for quotation through
any automated quotation system. |
CCH II, LLC and CCH II Capital Corp. hereby offer to
exchange any and all of the $450,000,000 aggregate principal
amount of their 10.250% Senior Notes due 2010 (the
new notes), which have been registered under the
Securities Act of 1933, as amended, pursuant to a Registration
Statement of which this prospectus is part, for a like principal
amount of their 10.250% Senior Notes due 2010 (the
original notes) outstanding on the date hereof upon
the terms and subject to the conditions set forth in this
prospectus and in the accompanying letter of transmittal (which
together constitute the exchange offer). The terms of the new
notes are identical in all material respects to those of the
original notes, except for certain transfer restrictions and
registration rights relating to the original notes. The new
notes will be issued pursuant to, and entitled to the benefits
of the supplemental indenture under our indenture, dated as of
September 23, 2003, as supplemented among CCH II, LLC,
CCH II Capital Corp. and Wells Fargo Bank, N.A., as trustee.
You should carefully consider the risk factors beginning on
page 15 of this prospectus before deciding whether or not
to participate in the exchange offer.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
The date of this prospectus
is ,
2006.
TABLE OF CONTENTS
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on
Form S-4
(Registration
No. 333-133616)
with respect to the securities we are offering for exchange.
This prospectus, which forms part of this registration
statement, does not contain all the information included in the
registration statement, including its exhibits and schedules.
For further information about us and the securities described in
this prospectus, you should refer to the registration statement
and its exhibits and schedules. Statements we make in this
prospectus about certain contracts or other documents are not
necessarily complete. When we make such statements, we refer you
to the copies of the contracts or documents that are filed as
exhibits to the registration statement, because those statements
are qualified in all respects by reference to those exhibits.
The registration statement, including the exhibits and
schedules, is on file at the offices of the Securities and
Exchange Commission and may be inspected without charge. Our
Securities and Exchange Commission filings are also available to
the public at the Securities and Exchange Commissions
website at www.sec.gov.
You may also obtain this information without charge by writing
or telephoning us at the following address and phone number:
Charter Plaza, 12405 Powerscourt Drive, St. Louis, Missouri
63131. Our telephone number is (314) 965-0555. To obtain
timely delivery, you must request this information no later than
five business days before the date you must make your investment
decision. Therefore, you must request this information no later
than ,
2006.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements within the
meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act, regarding, among other
things, our plans, strategies and prospects, both business and
financial. 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. Many of the forward-looking
statements contained in this prospectus may be identified by the
use of forward-looking words such as believe,
expect, anticipate, should,
planned, will, may,
intend, estimated and
potential, among others. Important factors that
could cause actual results to differ materially from the
forward-looking statements we make in this prospectus are set
forth in this prospectus and in other reports or documents that
we file from time to time with the Securities and Exchange
Commission, or 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 and our parent companies 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 and our parent
companies ability to be able to provide under applicable
debt instruments such funds (by dividend, investment or
otherwise) to the applicable obligor of such debt; |
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our and our parent companies ability to comply with all
covenants in our and our parent companies indentures and
credit facilities, any violation of which would result in a
violation of the applicable facility or indenture and could
trigger a default of other obligations under cross-default
provisions; |
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our and our parent companies ability to pay or refinance
debt prior to or when it becomes due and/or to take advantage of
market opportunities and market windows to refinance that debt
through new issuances, exchange offers or otherwise, including
restructuring our and our parent companies balance sheet
and leverage position; |
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our ability to sustain and grow revenues and cash flows from
operating activities by offering video, high-speed Internet,
telephone and other services and to maintain and grow a stable
customer base, particularly in the face of increasingly
aggressive competition from other service providers; |
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our ability to obtain programming at reasonable prices or to
pass programming cost increases on to our customers; |
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general business conditions, economic uncertainty or
slowdown; and |
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the effects of governmental regulation, including but not
limited to local franchise authorities, on our business. |
All forward-looking statements attributable to us or any person
acting on our behalf are expressly qualified in their entirety
by this cautionary statement.
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SUMMARY
This summary contains a general discussion of our business,
the exchange offer and summary financial information. It does
not contain all the information that you should consider before
making a decision whether to tender your original notes in
exchange for new notes. For a more complete understanding of the
exchange offer, you should read this entire prospectus and the
related documents to which we refer.
For a chart showing our ownership structure, see page 5.
Unless otherwise noted, all business data included in this
summary is as of March 31, 2006.
CCH II, LLC (CCH II) is a direct
subsidiary of CCH I, LLC (CCH I), which is an
indirect subsidiary of Charter Communications Holdings, LLC
(Charter Holdings). Charter Holdings is an indirect
subsidiary of Charter Communications, Inc.
(Charter). CCH II is a holding company with no
operations of its own. CCH II Capital Corp.
(CCH II Capital) is a wholly owned subsidiary
of CCH II. CCH II Capital is a company with no
operations of its own and no subsidiaries.
Unless otherwise stated, the discussion in this prospectus of
our business and operations includes the business of CCH II
and its direct and indirect subsidiaries. The terms
we, us and our refer to
CCH II and its direct and indirect subsidiaries on a
consolidated basis.
Our Business
We are a broadband communications company operating in the
United States, with approximately 6.20 million customers at
March 31, 2006. Through our broadband network of coaxial
and fiber optic cable, we offer our customers traditional cable
video programming (analog and digital, which we refer to as
video service), high-speed Internet access, advanced
broadband cable services (such as video on demand
(VOD), high definition television service, and
interactive television) and, in some of our markets, telephone
service. See Business Products and
Services for further description of these terms, including
customers.
At March 31, 2006, we served approximately
5.91 million analog video customers, of which approximately
2.87 million were also digital video customers. We also
served approximately 2.32 million high-speed Internet
customers (including approximately 266,900 who received only
high-speed Internet services). We also provided telephone
service to approximately 191,100 customers (including
approximately 20,800 who received telephone service only).
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. The information posted or
linked on this website is not part of this prospectus and you
should rely solely on the information contained in this
prospectus and the related documents to which we refer herein
when deciding whether or not to tender your original notes in
exchange for new notes.
Strategy
Our strategy is to leverage the capacity and the capabilities of
our broadband network to become the premier provider of in-home
entertainment and communications services in the communities we
serve. By offering excellent value and variety to our customers
through creative product bundles, strategic pricing and
packaging of all our products and services, our goal is to
increase profitable revenues that will enable us to maximize
return on our invested capital.
Building on the foundation established throughout 2005, in 2006,
we will strive toward:
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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; and |
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driving operating and capital effectiveness. |
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Providing superior customer service is an essential element of
our fundamental business strategy. We strive to continually
improve the end-to-end
customer experience and increase customer loyalty by effectively
managing our customer care contact centers in alignment with
technical operations. We are seeking to instill a
customer-service-oriented culture throughout the organization
and will continue to focus on excellence by pursuing further
improvements in customer service, technical operations, sales
and marketing.
We are dedicated to fostering strong relationships and making
not only financial investments, but the investment of time and
effort to strengthen the communities we serve. We have developed
programs and initiatives that provide valuable television time
to groups and organizations over our cable networks.
Providing desirable products and services and investing in
profitable marketing programs are major components of our sales
strategy. Bundling services, combining two or more services for
one discounted price, is fundamental to our marketing strategy.
We believe that combining our products into bundled offerings
provides value to our customers that distinguishes us from the
competition. We believe bundled offerings increase penetration
of all our products and services and improves customer retention
and perception. Through targeted marketing of bundled services,
we will pursue growth in our customer base and improvements in
customer satisfaction. Targeted marketing also promotes the
appropriate matching of services with customer needs leading to
improved retention of existing customers and lower bad debt
expense.
Expanding telephone service to additional markets and achieving
increased telephone service penetration will be a high priority
in 2006 and will be important to revenue growth. We plan to add
enhancements to our high-speed Internet service to provide
customers the best possible Internet experience. Our digital
video platform enables us to provide customers advanced video
products and services such as VOD, high-definition television
and digital video recorder (DVR) service. We will
also continue to explore additional product and service
offerings to complement and enhance our existing offerings and
generate profitable revenue growth.
In addition to the focus on our primary residential customer
base, we will strive to expand the marketing of our video and
high-speed Internet services to the business community and
introduce telephone service, which we believe has growth
potential.
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Operating and Capital Effectiveness |
We plan to further capitalize on initiatives launched during
2005 to continue to drive operating and capital effectiveness.
Specifically, additional improvements in work force management
will enhance the efficient operation of our customer care
centers and technical operations functions. We will continue to
place the highest priority for capital spending on
revenue-generating initiatives such as telephone deployment.
With over 92% of our homes passed having bandwidth of 550
megahertz or higher, we believe our broadband network provides
the infrastructure to deliver the products and services
todays consumer desires. In 2005 we invested in programs
and initiatives to improve all aspects of operations, and going
forward we will seek to capitalize on that solid foundation. We
plan to leverage both our broadband network and prior
investments in operational efficiencies to generate profitable
revenue growth.
Through our targeted marketing strategy, we plan to meet the
needs of our current customers and potential customers with
desirable, value-based offerings. We will seek to capitalize on
the capabilities of our broadband network in order to bring
innovative products and services to the marketplace. Our
employees are dedicated to our customer-first philosophy, and we
will strive to support their continued professional growth and
development, providing the right tools and training necessary to
accomplish our
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goals. We believe our strategy differentiates us from the
competition and plan to enhance our ability to continue to grow
our broadband operations in the communities we serve.
Certain Significant Developments in 2005 and 2006
We and our parent companies continue to pursue opportunities to
improve our and our parent companies liquidity. Our and
our parent companies efforts in this regard have resulted
in the completion of a number of transactions in 2005 and 2006,
as follows:
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the April 2006 refinancing of our existing credit facilities
(see Recent Events Credit Facility
Refinancing); |
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the January 2006 sale by us of an additional $450 million
principal amount of original notes due 2010; |
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the September 2005 exchange by our direct and indirect parent
companies, Charter Holdings, CCH I and CCH I Holdings, LLC
(CIH), of approximately $6.8 billion in total
principal amount of outstanding debt securities of Charter
Holdings in a private placement for new debt securities; |
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the August 2005 sale by our subsidiaries, CCO Holdings and
CCO Holdings Capital Corp., of $300 million of
83/4
% senior notes due 2013; |
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the March and June 2005 issuance of $333 million of Charter
Communications Operating, LLC (Charter Operating)
notes in exchange for $346 million of Charter Holdings
notes; |
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the repurchase during 2005 of $136 million of
Charters 4.75% convertible senior notes due 2006
leaving $20 million in principal amount
outstanding; and |
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the March 2005 redemption of all of CC V Holdings, LLCs
outstanding 11.875% senior discount notes due 2008 at a
total cost of $122 million. |
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Recent Events
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Credit Facility Refinancing |
In April 2006, Charter Operating completed a $6.85 billion
refinancing of its credit facilities including a new
$350 million revolving/term facility (which converts to a
term loan in one year), a $5.0 billion term loan due in
2013 and certain amendments to the existing $1.5 billion
revolving credit facility. In addition, the refinancing reduced
margins on Eurodollar rate Term A & B loans to 2.625% from a
weighted average of 3.15% previously and margins on base rate
term loans to 1.625% from a weighted average of 2.15%
previously. Concurrent with this refinancing, the CCO Holdings
bridge loan was terminated.
In February and March 2006, Charter signed three separate
definitive agreements to sell certain cable television systems
serving a total of approximately 360,000 analog video customers
in West Virginia, Virginia, Illinois, Kentucky, Nevada,
Colorado, New Mexico and Utah for a total of approximately
$971 million. These transactions are expected to close in
the third quarter of 2006. We expect to use the net proceeds
from the asset sales to repay (but not reduce permanently)
amounts outstanding under our revolving credit facility and that
the asset sale proceeds, along with other existing sources of
funds, will provide additional liquidity supplementing our cash
availability in 2006 and beyond.
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Organizational Structure
The chart below sets forth our organizational structure and that
of our direct and indirect parent companies and 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 March 31, 2006 and do not give effect
to any exercise, conversion or exchange of then outstanding
options, preferred stock, convertible notes and other
convertible or exchangeable securities.
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(1) |
Charter acts as the sole manager of Charter Communications
Holding Company, LLC (Charter Holdco) and its direct
and indirect limited liability company subsidiaries, including
CCH II. |
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(2) |
These membership units are held by Charter Investment, Inc.
(CII) and Vulcan Cable III Inc., each of which
is 100% owned by Paul G. Allen, Charters Chairman and
controlling shareholder. They are exchangeable at any time on a
one-for-one basis for shares of Charter Class A common
stock. |
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(3) |
The percentages shown in this table reflect the issuance of the
116.9 million shares of Charter Class A common stock
issued in 2005 and February 2006 and the corresponding issuance
of an equal number of mirror membership units by Charter Holdco
to Charter. However, for accounting purposes, Charters
common equity interest in Charter Holdco is 48%, and
Paul G. Allens ownership of Charter Holdco is 52%.
These percentages exclude the 116.9 million mirror
membership units issued to Charter due to the required return of
the issued mirror units upon return of the shares offered
pursuant to the share lending agreement. |
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(4) |
Represents preferred membership interests in CC VIII, LLC
(CC VIII) a subsidiary of CC V Holdings,
LLC, and an exchangeable accreting note issued by CCHC, LLC
(CCHC) related to the settlement of the CC VIII
dispute. See Certain Relationships and Related
Transactions Transactions Arising Out of Our
Organizational Structure and Mr. Allens Investment in
Charter Communications, Inc. and Its Subsidiaries
Equity Put Rights CC VIII. |
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The Exchange Offer
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Original Notes |
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10.250% Senior Notes due 2010, which we issued on
January 30, 2006. |
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New Notes |
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10.250% Senior Notes due 2010, the offering and sale of
which is registered under the Securities Act of 1933. |
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Exchange Offer |
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We are offering to issue registered new notes in exchange for a
like principal amount and like denomination of our original
notes. We are offering to issue these registered new notes to
satisfy our obligations under an exchange and registration
rights agreement that we entered into with the initial
purchasers of the original notes when we sold the original notes
in a transaction that was exempt from the registration
requirements of the Securities Act. You may tender your original
notes for exchange by following the procedures described under
the caption The Exchange Offer. |
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Tenders; Expiration date;
Withdrawal |
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The exchange offer will expire at 5:00 p.m., New York City time,
on ,
2006, which is within 30 business days after the exchange offer
registration statement was declared effective, unless we extend
it. If you decide to exchange your original notes for new notes,
you must acknowledge that you are not engaging in, and do not
intend to engage in, a distribution of the new notes. You may
withdraw any original notes that you tender for exchange at any
time prior to the expiration of the exchange offer. If we decide
for any reason not to accept any original notes you have
tendered for exchange, those original notes will be returned to
you without cost promptly after the expiration or termination of
the exchange offer. See The Exchange Offer
Terms of the Exchange Offer for a more complete
description of the tender and withdrawal provisions. |
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Accrued Interest on the New Notes and Original Notes |
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The new notes will bear interest from March 15, 2006 (the
date of the last interest payment in respect of the original
notes). Holders of original notes that are accepted for exchange
will be deemed to have waived the right to receive any payment
in respect of interest on such original notes accrued to the
date of issuance of the new notes. |
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Conditions to the Exchange Offer |
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The exchange offer is subject to customary conditions, some of
which we may waive. See The Exchange Offer
Conditions to the Exchange Offer for a description of the
conditions. Other than the federal securities laws, we are not
subject to federal or state regulatory requirements in
connection with the exchange offer. |
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Certain Federal Income Tax Considerations |
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The exchange of original notes for exchange notes in the
exchange offer will not be a taxable event for United States
federal income tax purposes. See Important United States
Federal Income Tax Considerations. |
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Exchange Agent |
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Wells Fargo Bank, N.A. is serving as exchange agent. |
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Use of Proceeds |
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We will not receive any proceeds from the exchange offer. |
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Consequences of failure to exchange your original notes |
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Original notes that are not tendered or that are tendered but
not accepted will continue to be subject to the restrictions on
transfer that are described in the legend on those notes. In
general, you may offer or sell your original notes only if they
are registered under, or offered or sold under an exemption
from, the Securities Act and applicable state securities laws.
Except in limited circumstances with respect to specific types
of holders of original notes, we, however, will have no further
obligation to register the original notes. If you do not
participate in the exchange offer, the liquidity of your
original notes could be adversely affected. |
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Consequences of exchanging your original notes |
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Based on interpretations of the staff of the SEC, we believe
that you may offer for resale, resell or otherwise transfer the
new notes that we issue in the exchange offer without complying
with the registration and prospectus delivery requirements of
the Securities Act if you: |
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acquire the new notes issued in the exchange offer
in the ordinary course of your business; |
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are not participating, do not intend to participate,
and have no arrangement or undertaking with anyone to
participate, in the distribution of the new notes issued to you
in the exchange offer, and |
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are not an affiliate of our company as
defined in Rule 405 of the Securities Act. |
If any of these conditions is not satisfied and you transfer any
new notes issued to you in the exchange offer without delivering
a proper prospectus or without qualifying for a registration
exemption, you may incur liability under the Securities Act. We
will not be responsible for or indemnify you against any
liability you may incur.
Any broker-dealer that acquires new notes in the exchange offer
for its own account in exchange for original notes which it
acquired through market-making or other trading activities, must
acknowledge that it will deliver a prospectus when it resells or
transfers any new notes issued in the exchange offer. See
Plan of Distribution for a description of the
prospectus delivery obligations of broker-dealers in the
exchange offer.
Summary Terms of the New Notes
The terms of the new notes we are issuing in this exchange offer
and the terms of the original notes of the same series are
identical in all material respects, except the new notes offered
in the exchange offer:
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will have been registered under the Securities Act: |
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will not contain transfer restrictions and registration rights
that relate to the original notes; and |
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will not contain provisions relating to the payment of
additional interest to be made to the holders of the original
notes under circumstances related to the timing of the exchange
offer. |
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A brief description of the material terms of the new notes
follows:
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Issuers |
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CCH II and CCH II Capital. |
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Notes Offered |
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$450 million aggregate principal amount of
10.250% Senior Notes due 2010. |
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Maturity |
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September 15, 2010. |
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Interest Payment Dates |
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March 15 and September 15 of each year, beginning on
September 15, 2006. |
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Forms and Terms |
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The form and terms of the new notes will be the same as the form
and terms of the original notes except that: |
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the new notes have been registered under the
Securities Act of 1933 and, therefore, will not bear legends
restricting their transfer; and |
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you will not be entitled to any exchange or
registration rights with respect to the new notes and the new
notes will not provide for additional interest in connection
with registration defaults. |
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The new notes will evidence the same debt as the original notes.
They will be entitled to the benefits of the indenture governing
the original notes and will be treated under the indenture as a
single class with the original notes. |
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In addition, the new notes will be pari passu with, of the same
class as, will vote on any matter submitted to noteholders with
and otherwise be identical in all respects to, our outstanding
$1.6 billion 10.250% Senior Notes due 2010 that were
originally issued in September 2003 (the 2003 notes)
except that the new notes will bear a different CUSIP number
from the 2003 notes. |
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Ranking |
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The new notes will be: |
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our senior unsecured securities; |
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effectively subordinated to any of our secured
indebtedness, to the extent of the value of the assets securing
such indebtedness; |
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equal in right of payment with all of our existing
and future unsecured debt, including the outstanding 2003 notes; |
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senior in right of payment to all of our future
subordinated debt; and |
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structurally subordinated to all indebtedness and
other liabilities of our subsidiaries, including indebtedness
under our subsidiaries notes and credit facilities as well
as their trade debt. |
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As of March 31, 2006, the indebtedness and other
liabilities of CCH II and its subsidiaries reflected on our
consolidated balance sheet totaled approximately
$12.2 billion, and the new notes are structurally
subordinated to approximately $10.2 billion of that amount. |
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Optional Redemption |
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The new notes may be redeemed in whole or in part at our option
from time to time as described in the section entitled
Description of the Notes Optional
Redemption. |
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Restricted Covenants |
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The indenture governing the new notes will, among other things,
restrict our ability and the ability of certain of our
subsidiaries to: |
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incur indebtedness; |
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create liens; |
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pay dividends or make distributions in respect of
capital stock and other restricted payments; |
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make investments; |
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sell assets; |
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create restrictions on the ability of restricted
subsidiaries to make certain payments; |
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enter into transactions with affiliates; or |
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consolidate, merge or sell all or substantially all
assets. |
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These covenants are subject to important exceptions and
qualifications as described under Description of the
Notes Certain Covenants, including provisions
allowing us, as long as our leverage ratio is below 5.5 to 1.0,
to incur additional indebtedness and make investments. We are
also permitted under these covenants, regardless of our leverage
ratio, to provide funds to our parent companies to pay interest
on, or, subject to meeting our leverage ratio test, retire or
repurchase, their debt obligations. |
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Change of Control |
|
Following a Change of Control, as defined in Description
of the Notes Certain Definitions, we will be
required to offer to purchase all of the new notes at a purchase
price of 101% of their principal amount plus accrued and unpaid
interest, if any, to the date of purchase thereof. |
|
Events of Default |
|
For a discussion of events that will permit acceleration of the
payment of the principal of and accrued interest on the new
notes, see Description of Notes Events of
Default and Remedies. |
|
|
Absence of Established Markets for the Notes |
|
We do not intend to apply for the new notes to be listed on any
securities exchange or to arrange for any quotation system to
quote them. In addition, because the new notes will have a
different CUSIP number, they will not trade fungibly with the
2003 notes. Accordingly, we cannot assure you that liquid
markets will develop for the new notes. |
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10
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|
United States Federal Income Tax Considerations |
|
The original notes were issued at a discount to their stated
redemption price at maturity, so you will be required to include
in your ordinary income for U.S. federal income tax purposes
original issue discount as it accrues regardless of your method
of accounting. See Important United States federal income
tax considerations. |
|
You should carefully consider all of the information in this
prospectus. In particular, you should evaluate the information
beginning on page 15 under Risk Factors for a
discussion of risks associated with an investment in the new
notes.
For more complete information about the new notes, see the
Description of the Notes section of this prospectus.
11
Summary Consolidated Financial Data
In March 2003, CCH II was formed. CCH II is a holding
company whose primary assets are equity interests in our cable
operating subsidiaries. At that time, Charter Holdings entered
into a series of transactions and contributions which had the
effect of (i) creating CCH II, CCH II Capital,
CCH I, our direct parent, and our subsidiary, CCO Holdings;
and (ii) combining and contributing all of its interest in
cable operations not previously owned by Charter Operating to
Charter Operating. These transactions were accounted for as a
reorganization of entities under common control. Accordingly,
the financial information for CCH II combines the
historical financial condition, cash flows and results of
operations of Charter Operating, and the operations of
subsidiaries contributed by Charter Holdings for all periods
presented.
The following table presents summary financial and other data
for CCH II and its subsidiaries and has been derived from
the audited consolidated financial statements of CCH II and
its subsidiaries for the three years ended December 31,
2005 and the unaudited consolidated financial statements of
CCH II and its subsidiaries for the three months ended
March 31, 2006. The pro forma data set forth below
represent our unaudited pro forma consolidated financial
statements after giving effect to the following transactions as
if they occurred on January 1 of the respective period for
the statement of operations data and other financial data and as
of the last day of the respective period for the operating data:
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(1) the repayment in February 2005 of $530 million of
borrowings under the Charter Operating revolving credit facility
with net proceeds from the issuance and sale of the CCO Holdings
senior floating rate notes in December 2004, which were
included in our cash balance at December 31, 2004; |
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|
(2) the redemption of all of CC V Holdings, LLCs
outstanding 11.875% senior discount notes due 2008 with
cash on hand in March 2005; |
|
|
(3) the issuance and sale of $300 million of CCO
Holdings
83/4
% senior notes in August 2005; and |
|
|
(4) the issuance and sale of $450 million of original
notes in January 2006 and the use of such proceeds to pay down
credit facilities. |
12
The following information should be read in conjunction with
Selected Historical Consolidated Financial Data,
Capitalization, Unaudited Pro Forma
Consolidated Financial Statements, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the historical consolidated financial
statements and related notes included elsewhere in this
prospectus.
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|
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Three Months | |
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|
Year Ended December 31, | |
|
Ended March 31, | |
|
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| |
|
| |
|
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
Actual | |
|
Actual | |
|
Actual | |
|
Pro Forma(a) | |
|
Pro Forma(a) | |
|
Actual | |
|
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| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
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(dollars in millions) | |
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video
|
|
$ |
3,461 |
|
|
$ |
3,373 |
|
|
$ |
3,401 |
|
|
$ |
3,401 |
|
|
$ |
842 |
|
|
$ |
869 |
|
|
|
High-speed Internet
|
|
|
556 |
|
|
|
741 |
|
|
|
908 |
|
|
|
908 |
|
|
|
215 |
|
|
|
254 |
|
|
|
Telephone
|
|
|
14 |
|
|
|
18 |
|
|
|
36 |
|
|
|
36 |
|
|
|
6 |
|
|
|
20 |
|
|
|
Advertising sales
|
|
|
263 |
|
|
|
289 |
|
|
|
294 |
|
|
|
294 |
|
|
|
64 |
|
|
|
70 |
|
|
|
Commercial
|
|
|
204 |
|
|
|
238 |
|
|
|
279 |
|
|
|
279 |
|
|
|
65 |
|
|
|
76 |
|
|
|
Other
|
|
|
321 |
|
|
|
318 |
|
|
|
336 |
|
|
|
336 |
|
|
|
79 |
|
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
4,819 |
|
|
|
4,977 |
|
|
|
5,254 |
|
|
|
5,254 |
|
|
|
1,271 |
|
|
|
1,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (excluding depreciation and amortization)
|
|
|
1,952 |
|
|
|
2,080 |
|
|
|
2,293 |
|
|
|
2,293 |
|
|
|
559 |
|
|
|
626 |
|
|
|
Selling, general and administrative
|
|
|
944 |
|
|
|
1,002 |
|
|
|
1,048 |
|
|
|
1,048 |
|
|
|
241 |
|
|
|
281 |
|
|
|
Depreciation and amortization
|
|
|
1,453 |
|
|
|
1,495 |
|
|
|
1,499 |
|
|
|
1,499 |
|
|
|
381 |
|
|
|
358 |
|
|
|
Impairment of franchises
|
|
|
|
|
|
|
2,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairment charges
|
|
|
|
|
|
|
|
|
|
|
39 |
|
|
|
39 |
|
|
|
31 |
|
|
|
99 |
|
|
|
Other operating (income) expenses, net
|
|
|
(46 |
) |
|
|
13 |
|
|
|
32 |
|
|
|
32 |
|
|
|
8 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
4,303 |
|
|
|
7,023 |
|
|
|
4,911 |
|
|
|
4,911 |
|
|
|
1,220 |
|
|
|
1,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
516 |
|
|
|
(2,046 |
) |
|
|
343 |
|
|
|
343 |
|
|
|
51 |
|
|
|
7 |
|
|
Interest expense, net
|
|
|
(545 |
) |
|
|
(726 |
) |
|
|
(858 |
) |
|
|
(887 |
) |
|
|
(203 |
) |
|
|
(239 |
) |
|
Other income, net
|
|
|
27 |
|
|
|
71 |
|
|
|
99 |
|
|
|
104 |
|
|
|
25 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and cumulative effect of accounting
change
|
|
|
(2 |
) |
|
|
(2,701 |
) |
|
|
(416 |
) |
|
|
(440 |
) |
|
|
(127 |
) |
|
|
(226 |
) |
|
Income tax benefit (expense)
|
|
|
(13 |
) |
|
|
35 |
|
|
|
(9 |
) |
|
|
(9 |
) |
|
|
(6 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of accounting change
|
|
$ |
(15 |
) |
|
$ |
(2,666 |
) |
|
$ |
(425 |
) |
|
$ |
(449 |
) |
|
$ |
(133 |
) |
|
$ |
(228 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$ |
804 |
|
|
$ |
893 |
|
|
$ |
1,088 |
|
|
$ |
1,088 |
|
|
$ |
211 |
|
|
$ |
241 |
|
|
Ratio of earnings to cover fixed charges(b)
|
|
|
1.05 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
Deficiency of earnings to cover fixed
charges(b)
|
|
|
N/A |
|
|
$ |
2,721 |
|
|
$ |
449 |
|
|
$ |
473 |
|
|
$ |
124 |
|
|
$ |
222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
March 31, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
Actual | |
|
Actual | |
|
Actual | |
|
Actual | |
|
|
| |
|
| |
|
| |
|
| |
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(end of period)(c):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Analog video customers
|
|
|
5,991,500 |
|
|
|
5,884,500 |
|
|
|
5,984,800 |
|
|
|
5,913,900 |
|
|
Digital video customers
|
|
|
2,674,700 |
|
|
|
2,796,600 |
|
|
|
2,694,600 |
|
|
|
2,866,400 |
|
|
Residential high-speed Internet customers
|
|
|
1,884,400 |
|
|
|
2,196,400 |
|
|
|
1,978,400 |
|
|
|
2,322,400 |
|
|
Telephone customers
|
|
|
45,400 |
|
|
|
121,500 |
|
|
|
55,300 |
|
|
|
191,100 |
|
13
|
|
|
|
|
|
|
Actual | |
|
|
As of March 31, | |
|
|
2006 | |
|
|
| |
|
|
(dollars in millions) | |
Balance Sheet Data
|
|
|
|
|
(end of period):
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
26 |
|
Total assets
|
|
|
15,889 |
|
Long-term debt
|
|
|
10,720 |
|
Loans payable-related party
|
|
|
129 |
|
Minority interest(d)
|
|
|
626 |
|
Members equity
|
|
|
3,042 |
|
|
|
|
(a) |
Pro forma loss before cumulative effect of accounting change
exceeded actual loss before cumulative effect of accounting
change by $24 million and $0 for the year ended
December 31, 2005 and three months ended March 31,
2005, respectively. |
|
|
|
(b) |
Earnings include net loss plus fixed charges. Fixed charges
consist of interest expense and an estimated interest component
of rent expense. |
|
|
|
(c) |
See Business Products and Services for
definitions of the terms contained in this section. |
|
|
|
(d) |
Minority interest represents preferred membership interests in
CC VIII. This preferred interest arises from approximately
$630 million of preferred membership units issued by CC
VIII in connection with an acquisition in February 2000 and was
the subject of a dispute between Charter and Mr. Allen,
Charters Chairman and controlling shareholder that was
settled October 31, 2005. See Certain Relationships
and Related Transactions Transactions Arising Out of
Our Organizational Structure and Mr. Allens
Investment in Charter and Its Subsidiaries Equity
Put Rights CC VIII. |
|
14
RISK FACTORS
The new notes, like the original notes, entail the following
risks. You should carefully consider these risk factors, as well
as the other information contained in this prospectus, before
making a decision to continue your investment in the notes or to
tender your original notes in exchange for the new notes. In
this prospectus, when we refer to notes, we are
referring to both the original notes and the new notes.
Risks Related to Substantial Indebtedness of Us and Our
Parent Companies
We and our parent companies have a significant amount of
existing debt and may incur significant additional debt,
including secured debt, in the future, which could adversely
affect our and our parent companies financial health and
our and their ability to react to changes in our
business.
We and our parent companies have a significant amount of debt
and may (subject to applicable restrictions in our and their
debt instruments) incur additional debt in the future.
As of March 31, 2006, our total debt reflected on our
consolidated balance sheet was approximately $10.7 billion,
our members equity was approximately $3.0 billion and
the deficiency of earnings to cover fixed charges for the three
months ended March 31, 2006, was approximately
$222 million. The maturities of these obligations are set
forth in Description of Other Indebtedness.
As of March 31, 2006, our parent companies had
approximately $883 million aggregate principal amount of
convertible notes outstanding, $20 million and
$863 million of which matures in 2006 and 2009,
respectively, and approximately $7.8 billion principal
amount of high-yield notes outstanding with approximately
$105 million, $0, $684 million and $7.0 billion
maturing in 2007, 2008, 2009 and thereafter, respectively. Our
parent companies will need to raise additional capital and/or
receive distributions or payments from us in order to satisfy
their debt obligations in 2007 and beyond. However, because of
their significant indebtedness, our and our parent
companies ability to raise additional capital at
reasonable rates or at all is uncertain, and our and our parent
companies ability to make distributions or payments to our
and their parent companies is subject to availability of funds
and restrictions under our applicable debt instruments as more
fully described in Description of Other
Indebtedness. If we or our parent companies were to engage
in a recapitalization or other similar transaction, our
noteholders might not receive principal and interest to which
they are contractually entitled.
Our and our parent companies significant amount of debt
could have other important consequences to you. 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 and our parent
companies debt, which will reduce our funds available for
working capital, capital expenditures and other general
corporate expenses; |
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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; |
|
|
|
place us at a disadvantage as compared to our competitors that
have proportionately less debt; |
|
|
|
make us vulnerable to interest rate increases, because a
significant portion of our borrowings are, and will continue to
be, at variable rates of interest; |
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|
expose us to increased interest expense as we refinance existing
lower interest rate instruments; |
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|
adversely affect our relationship with customers and suppliers; |
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|
|
limit our and our parent companies ability to borrow
additional funds in the future, if we need them, due to
applicable financial and restrictive covenants in our and our
parent companies debt; and |
15
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|
|
make it more difficult for us to satisfy our obligations to the
holders of our notes and to the lenders under our credit
facilities as well as our parent companies ability to
satisfy their obligations to their noteholders. |
A default by us or one of our parent companies under our or its
debt obligations could result in the acceleration of those
obligations and the obligations under our and our parent
companies other notes. We and our parent companies may
incur substantial additional debt in the future. If current debt
levels increase, the related risks that we and you now face will
intensify.
Any failure by our parent companies to satisfy their
substantial debt obligations could have a material adverse
effect on us.
Because Charter is our sole manager and because we are
indirectly and directly wholly owned by Charter Holdings, CIH
and CCH I, their financial or liquidity problems could cause
serious disruption to our business and could have a material
adverse effect on our operations and results. A failure by
certain of our parent companies to satisfy their debt payment
obligations or a bankruptcy filing by certain of our parent
companies would give the lenders under the Charter Operating
credit facilities the right to accelerate the payment
obligations under these facilities. Any such acceleration would
be a default under the indentures governing our outstanding
notes, including the new notes. In addition, if any of our
parent companies were to default on their debt obligations and
that default were to result in a change of control of any of
them (whether through a bankruptcy, receivership or other
reorganization, or otherwise), such a change of control could
result in an event of default under the Charter Operating credit
facilities and our outstanding notes and require a change of
control repurchase offer under the notes and our and our parent
companies outstanding notes. See Risks
Related to the Exchange Offer and the Notes We may
not have the ability to raise the funds necessary to fulfill our
obligations under the notes following a change of control, which
would place us in default under the indenture governing the
notes.
Furthermore, the Charter Operating credit facilities provide
that an event of default would occur if certain of Charter
Operatings parent companies have indebtedness in excess of
$500 million aggregate principal amount which remains
undefeased three months prior to its final maturity. Our and our
parent company indebtedness that may be subject to this
provision includes indebtedness that matures in 2010 and 2011.
Our and our parent companies inability to refinance or
repay our and our parent companies indebtedness would
result in a default under the Charter Operating credit
facilities.
The agreements and instruments governing our and our
parent companies debt contain restrictions and limitations
that could significantly affect our ability to operate our
business, as well as significantly affect our and our parent
companies liquidity, and adversely affect you, as the
holders of the notes.
The Charter Operating credit facilities and the indentures
governing our and our parent companies debt contain, and
the indenture governing the notes contains, a number of
significant covenants that could adversely affect the holders of
the notes and our ability to operate our business, as well as
significantly affect our and our parent companies
liquidity, and therefore could adversely affect our results of
operations. These covenants will restrict, among other things,
our and our parent companies ability to:
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|
incur additional debt; |
|
|
|
repurchase or redeem equity interests and debt; |
|
|
|
make certain investments or acquisitions; |
|
|
|
pay dividends or make other distributions; |
|
|
|
dispose of assets or merge; |
|
|
|
enter into related party transactions; and |
|
|
|
grant liens and pledge assets. |
16
Furthermore, Charter Operatings credit facilities require
our subsidiaries to, among other things, maintain specified
financial ratios, meet specified financial tests and provide
annual audited financial statements, with an unqualified opinion
from our independent auditors. See Description of Other
Indebtedness for a summary of our outstanding indebtedness
and a description of our credit facilities and other
indebtedness and for details on our debt covenants and future
liquidity. Charter Operatings ability to comply with these
provisions may be affected by events beyond our control.
The breach of any covenants or obligations in our or our parent
companies foregoing indentures or credit facilities, not
otherwise waived or amended, could result in a default under the
applicable debt agreement or instrument and could trigger
acceleration of the related debt, which in turn could trigger
defaults under other agreements governing our and our parent
companies long-term indebtedness. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources. In addition, the secured lenders under
the Charter Operating credit facilities and the holders of the
Charter Operating senior second-lien notes could foreclose on
their collateral, which includes equity interests in our
subsidiaries, and exercise other rights of secured creditors.
Any default under those credit facilities or the indentures
governing the notes or our or our parent companies notes
could adversely affect our growth, our financial condition and
our results of operations and our ability to make payments on
the notes, our other notes, Charter Operatings credit
facilities and other debt of our parent companies. See
Description of Other Indebtedness for a summary of
outstanding indebtedness and a description of credit facilities
and other indebtedness.
We may not generate (or, in general, we and our parent
companies, may not have available to the applicable obligor)
sufficient cash flow or have access to additional external
liquidity sources to fund our capital expenditures, ongoing
operations and our and our parent companies debt
obligations, including our payment obligations under the notes,
which could have a material adverse effect on you as the holder
of the notes.
Our ability to service our and our parent companies debt
(including payments on the notes) and to fund our planned
capital expenditures and ongoing operations will depend on both
our ability to generate cash flow and our and our parent
companies access to additional external liquidity sources,
and in general our and our parent companies ability to
provide (by dividend or otherwise), such funds to the applicable
issuer of the debt obligation. Our ability to generate cash flow
is dependent on many factors, including:
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our future operating performance; |
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the demand for our products and services; |
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general economic conditions and conditions affecting customer
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competition and our ability to stabilize customer
losses; and |
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legal and regulatory factors affecting our business. |
Some of these factors are beyond our control. If we and our
parent companies are unable to generate sufficient cash flow
and/or access additional external liquidity sources, we and our
parent companies may not be able to service and repay our and
our parent companies debt, operate our business, respond
to competitive challenges or fund our and our parent
companies other liquidity and capital needs. Although
CCH II and CCH II Capital sold $450 million
principal amount of the new notes in January 2006, you should
not assume that we or our parent companies will be able to
access additional sources of external liquidity on similar
terms, if at all. We believe that cash flows from operating
activities and amounts available under our credit facilities
will not be sufficient to fund our operations and satisfy our
and our parent companies interest payment and principal
repayment obligations in 2009 and beyond. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and
Capital Resources.
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We may not be able to access funds under our credit
facilities if we fail to satisfy the covenant restrictions in
the credit facilities, which could adversely affect our
financial condition and our ability to conduct our
business.
We have historically relied on access to credit facilities in
order to fund operations and to service our and our parent
companies debt, and we expect such reliance to continue in
the future. Our total potential borrowing availability under the
Charter Operating credit facilities was approximately
$904 million as of March 31, 2006, although the actual
availability at that time was only $516 million because of
limits imposed by covenant restrictions. However, pro forma for
the completion of the credit facility refinancing (see
Recent Events Credit Facility
Refinancing), our potential availability under our credit
facilities as of March 31, 2006 would have been
approximately $1.3 billion, although actual availability of
$516 million would remain unchanged because of limits
imposed by covenant restrictions.
An event of default under the credit facilities or indentures,
if not waived, could result in the acceleration of those debt
obligations and, consequently, our and our parent
companies other debt obligations. Such acceleration could
result in exercise of remedies by our creditors and could force
us to seek the protection of the bankruptcy laws, which could
materially adversely impact our ability to operate our business
and to make payments under our debt instruments. In addition, an
event of default under the credit facilities, such as the
failure to maintain the applicable required financial ratios,
would prevent additional borrowing under our credit facilities,
which could materially adversely affect our ability to operate
our business and to make payments under our and our parent
companies debt instruments.
Because of our holding company structure, the notes will
be structurally subordinated in right of payment to all
liabilities of our subsidiaries. Restrictions in our
subsidiaries debt instruments limit their ability to
provide funds to us.
Our sole assets are our equity interests in our subsidiaries.
Our operating subsidiaries are separate and distinct legal
entities and are not obligated to make funds available to us for
payment on the notes or other obligations in the form of loans,
distributions or otherwise. Our subsidiaries ability to
make distributions to us is subject to their compliance with the
terms of their credit facilities and indentures. Our direct or
indirect subsidiaries include the borrowers and guarantors under
the Charter Operating credit facilities. Three of our
subsidiaries are also obligors under other senior high yield
notes. The notes are structurally subordinated in right of
payment to all of the debt and other liabilities of our
subsidiaries. As of March 31, 2006, our total debt was
$10.7 billion, of which $8.7 billion was structurally
senior to the CCH II notes.
In the event of bankruptcy, liquidation or dissolution of one or
more of our subsidiaries, that subsidiarys 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 us as an equity holder or
otherwise. In that event:
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the lenders under Charter Operatings credit facilities and
the holders of our subsidiaries other debt instruments
will have the right to be paid in full before us from any of our
subsidiaries assets; and |
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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 the
notes. See Certain Relationships and Related
Transactions Transactions Arising Out of Our
Organizational Structure and Mr. Allens Investment in
Charter and Its Subsidiaries Equity Put
Rights CC VIII. |
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In addition, the notes are unsecured and therefore will be
effectively subordinated in right of payment to all existing and
future secured debt we may incur to the extent of the value of
the assets securing such debt. See Description of Other
Indebtedness for a summary of our outstanding indebtedness
and a description of the Charter Operating credit facilities and
other indebtedness.
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Under certain circumstances, federal and state laws may
allow courts to avoid or subordinate claims with respect to the
notes.
Under the federal Bankruptcy Code and comparable provisions of
state fraudulent transfer laws, a court could void claims with
respect to the notes, or subordinate them, if, among other
things, CCH II, at the time it issued the notes:
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received less than reasonably equivalent value or fair
consideration for the notes; and |
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was insolvent or rendered insolvent by reason of the incurrence; |
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was engaged in a business or transaction for which its remaining
assets constituted an unreasonably small capital; or |
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intended to incur, or believed that it would incur, debts beyond
its ability to pay such debts as they became due. |
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, CCH II 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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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
became absolute and mature; or |
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it could not pay its debts as they became due. |
In addition, if there were to be a bankruptcy of Charter or its
subsidiaries, creditors of our parent companies may attempt to
make claims against us and our subsidiaries, which (if
successful) could have an adverse effect on the noteholders and
their recoveries in any bankruptcy proceeding.
Paul G. Allen and his affiliates are not obligated to
purchase equity from, contribute to or loan funds to us or any
of our parent companies.
Paul G. Allen and his affiliates are not obligated to purchase
equity from, contribute to or loan funds to us or any of our
parent companies.
Risks Related to Our Business
We operate in a very competitive business environment,
which affects our ability to attract and retain customers and
can adversely affect our business and operations. We have lost a
significant number of video customers to direct broadcast
satellite competition and further loss of customers could have a
material negative impact on our business.
The industry in which we operate is highly competitive and has
become more so in recent years. In some instances, we compete
against companies with fewer regulatory burdens, easier access
to financing, greater personnel resources, greater brand name
recognition and long-established relationships with regulatory
authorities and customers. Increasing consolidation in the cable
industry and the repeal of certain ownership rules may provide
additional benefits to certain of our competitors, either
through access to financing, resources or efficiencies of scale.
Our principal competitor for video services throughout our
territory is direct broadcast satellite television services,
also known as (DBS). Competition from DBS, including
intensive marketing efforts and aggressive pricing has had an
adverse impact on our ability to retain customers. DBS has grown
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rapidly over the last several years and continues to do so. The
cable industry, including us, has lost a significant number of
subscribers to DBS competition, and we face serious challenges
in this area in the future. We believe that competition from DBS
service providers may present greater challenges in areas of
lower population density, and that our systems service a higher
concentration of such areas than those of other major cable
service providers.
Local telephone companies and electric utilities can offer video
and other services in competition with us and they increasingly
may do so in the future. Certain telephone companies have begun
more extensive deployment of fiber in their networks that enable
them to begin providing video services, as well as telephone and
high bandwidth Internet access services, to residential and
business customers and they are now offering such service in
limited areas. Some of these telephone companies have obtained,
and are now seeking, franchises or operating authorizations that
are less burdensome than existing Charter franchises.
The subscription television industry also faces competition from
free broadcast television and from other communications and
entertainment media. Further loss of customers to DBS or other
alternative video and Internet services could have a material
negative impact on the value of our business and its performance.
With respect to our Internet access services, we face
competition, including intensive marketing efforts and
aggressive pricing, from telephone companies and other providers
of digital subscriber line technology, also known as
(DSL) and
dial-up.
DSL service is competitive with high-speed Internet service over
cable systems. In addition, DBS providers have entered into
joint marketing arrangements with Internet access providers to
offer bundled video and Internet service, which competes with
our ability to provide bundled services to our customers.
Moreover, as we expand our telephone offerings, we will face
considerable competition from established telephone companies
and other carriers, including Voice Over Internet Protocol
(VOIP) providers.
In order to attract new customers, from time to time we make
promotional offers, including offers of temporarily
reduced-price or free service. These promotional programs result
in significant advertising, programming and operating expenses,
and also require us to make capital expenditures to acquire
additional digital set-top terminals. Customers who subscribe to
our services as a result of these offerings may not remain
customers for any significant period of time following the end
of the promotional period. A failure to retain existing
customers and customers added through promotional offerings or
to collect the amounts they owe us could have a material adverse
effect on our business and financial results.
Mergers, joint ventures and alliances among franchised, wireless
or private cable operators, satellite television providers,
local exchange carriers and others, may provide additional
benefits to some of our competitors, either through access to
financing, resources or efficiencies of scale, or the ability to
provide multiple services in direct competition with us.
We cannot assure you that our cable systems will allow us to
compete effectively. Additionally, as we expand our offerings to
include other telecommunications services, and to introduce new
and enhanced services, we will be subject to competition from
other providers of the services we offer. We cannot predict the
extent to which competition may affect our business and
operations in the future. See Business
Competition.
We have a history of net losses and expect to continue to
experience net losses. Consequently, we may not have the ability
to finance future operations.
We have had a history of net losses and expect to continue to
report net losses for the foreseeable future. Our net losses are
principally attributable to insufficient revenue to cover the
combination of operating costs and interest costs because of our
debt and the depreciation expenses that we incur resulting from
the capital investments we have made in our cable properties. We
expect that these expenses will remain significant, and we
expect to continue to report net losses for the foreseeable
future. We reported losses before cumulative effect of
accounting change of $15 million, $2.7 billion,
$425 million, $133 million
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and $228 million for the year ended December 31, 2003,
2004 and 2005 and the three months ended March 31, 2005 and
2006, respectively. Continued losses would reduce our cash
available from operations to service our indebtedness, as well
as limit our ability to finance our operations.
We may not have the ability to pass our increasing
programming costs on to our customers, which would adversely
affect our cash flow and operating margins.
Programming has been, and is expected to continue to be, our
largest operating expense item. In recent years, the cable
industry has experienced a rapid escalation in the cost of
programming, particularly sports programming. We expect
programming costs to continue to increase because of a variety
of factors, including inflationary or negotiated annual
increases, additional programming being provided to customers
and increased costs to purchase programming. The inability to
fully pass these programming cost increases on to our customers
has had an adverse impact on our cash flow and operating
margins. As measured by programming costs, and excluding premium
services (substantially all of which were renegotiated and
renewed in 2003), as of March 31, 2006, approximately 12%
of our current programming contracts were expired, and
approximately another 6% were scheduled to expire at or before
the end of 2006. There can be no assurance that these agreements
will be renewed on favorable or comparable terms. Our
programming costs increased by approximately 9% in the three
months ended March 31, 2006 compared to the corresponding
period in 2005. We expect our programming costs in 2006 to
continue to increase at a higher rate than in 2005. To the
extent that we are unable to reach agreement with certain
programmers on terms that we believe are reasonable we may be
forced to remove such programming channels from our line-up,
which could result in a further loss of customers.
If our required capital expenditures exceed our
projections, we may not have sufficient funding, which could
adversely affect our growth, financial condition and results of
operations.
During the three months ended March 31, 2006, we spent
approximately $241 million on capital expenditures. During
2006, we expect capital expenditures to be approximately
$1.0 billion to $1.1 billion. The actual amount of our
capital expenditures depends on the level of growth in
high-speed Internet and telephone customers and in the delivery
of other advanced services, as well as the cost of introducing
any new services. We may need additional capital if there is
accelerated growth in high-speed Internet customers, telephone
customers or in the delivery of other advanced services. If we
cannot obtain such capital from increases in our cash flow from
operating activities, additional borrowings or other sources,
our growth, financial condition and results of operations could
suffer materially.
Our inability to respond to technological developments and
meet customer demand for new products and services could limit
our ability to compete effectively.
Our business is characterized by rapid technological change and
the introduction of new products and services. We cannot assure
you that we will be able to fund the capital expenditures
necessary to keep pace with unanticipated technological
developments, or that we will successfully anticipate the demand
of our customers for products and services requiring new
technology. Our inability to maintain and expand our upgraded
systems and provide advanced services in a timely manner, or to
anticipate the demands of the marketplace, could materially
adversely affect our ability to attract and retain customers.
Consequently, our growth, financial condition and results of
operations could suffer materially.
Malicious and abusive Internet practices could impair our
high-speed Internet services.
Our high-speed Internet customers utilize our network to access
the Internet and, as a consequence, we or they may become victim
to common malicious and abusive Internet activities, such as
unsolicited mass advertising (i.e., spam) and
dissemination of viruses, worms and other destructive or
disruptive software. These activities could have adverse
consequences on our network and our customers, including
degradation of service, excessive call volume to call centers
and damage to our or our customers equipment and data.
Significant incidents could lead to customer dissatisfaction
and, ultimately, loss of customers or revenue, in addition to
increased costs to us to service our customers and protect our
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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.
Risks Related to Mr. Allens 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 subsidiarys 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
the notes and our and our parent companies indebtedness,
including borrowings under the Charter Operating credit
facilities. See Risks Related to the Exchange
Offer and the Notes We may not have the ability to
raise the funds necessary to fulfill our obligations under the
notes following a change of control, which would place us in
default under the indenture governing the notes.
Mr. Allen indirectly controls us and may have
interests that conflict with your interests.
Mr. Allen has the ability to control us. Through his
control as of March 31, 2006 of approximately 90% of the
voting power of the capital stock of our manager, Charter,
Mr. Allen is entitled to elect all but one of
Charters board members and effectively has the voting
power to elect the remaining board member as well.
Mr. Allen thus has the ability to control fundamental
corporate transactions requiring equity holder approval,
including, but not limited to, the election of all of
Charters 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. Allens control over our management and affairs
could create conflicts of interest if he is faced with decisions
that could have different implications for him, us and the
holders of the notes. 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
arms-length negotiations. Consequently, such agreements
may be less favorable to us than agreements that we could
otherwise have entered into with unaffiliated third parties. See
Certain Relationships and Related Transactions.
We are not permitted to engage in any business activity
other than the cable transmission of video, audio and data
unless Mr. Allen authorizes us to pursue that particular
business activity, which could adversely affect our ability to
offer new products and services outside of the cable
transmission business and to enter into new businesses, and
could adversely affect our growth, financial condition and
results of operations.
Charters certificate of incorporation and Charter
Holdcos limited liability company agreement provide that
Charter and Charter Holdco and their subsidiaries, including us,
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
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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. Allens services could adversely
affect our ability to manage our business.
Mr. Allen is Chairman of Charters board of directors
and provides strategic guidance and other services to Charter.
If Charter were to lose his services, our growth, financial
condition and results of operations could be adversely impacted.
Risks Related to Regulatory and Legislative Matters
Our business is subject to extensive governmental
legislation and regulation, which could adversely affect our
business.
Regulation of the cable industry has increased cable
operators administrative and operational expenses and
limited their revenues. Cable operators are subject to, among
other things:
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rules governing the provision of cable equipment and
compatibility with new digital technologies; |
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rules and regulations relating to subscriber privacy; |
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limited rate regulation; |
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requirements governing when a cable system must carry a
particular broadcast station and when it must first obtain
consent to carry a broadcast station; |
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rules for franchise renewals and transfers; and |
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other requirements covering a variety of operational areas such
as equal employment opportunity, technical standards and
customer service requirements. |
Additionally, many aspects of these regulations are currently
the subject of judicial proceedings and administrative or
legislative proposals. There are also ongoing efforts to amend
or expand the federal, state and local regulation of some of our
cable systems, which may compound the regulatory risks we
already face. Certain states and localities are considering new
telecommunications taxes that could increase operating expenses.
Our cable systems are operated under franchises that are
subject to non-renewal or termination. The failure to renew a
franchise in one or more key markets could adversely affect our
business.
Our cable systems generally operate pursuant to franchises,
permits and similar authorizations issued by a state or local
governmental authority controlling the public
rights-of-way. Many
franchises establish comprehensive facilities and service
requirements, as well as specific customer service standards and
monetary penalties for non-compliance. In many cases, franchises
are terminable if the franchisee fails to comply with
significant provisions set forth in the franchise agreement
governing system operations. Franchises are generally granted
for fixed terms and must be periodically renewed. Local
franchising authorities may resist granting a renewal if either
past performance or the prospective operating proposal is
considered inadequate. Franchise authorities often demand
concessions or other commitments as a condition to renewal. In
some instances, franchises have not been renewed at expiration,
and we have operated and are operating under either temporary
operating agreements or without a license while negotiating
renewal terms with the local franchising authorities.
Approximately 11% of our franchises, covering approximately 12%
of our analog video customers, were expired as of March 31,
2006. Approximately 6% of additional franchises, covering
approximately an additional 7% of our analog video customers,
will expire on or before December 31, 2006, if not renewed
prior to expiration.
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We cannot assure you that we will be able to comply with all
significant provisions of our franchise agreements and certain
of our franchisors have from time to time alleged that we have
not complied with these agreements. Additionally, although
historically we have renewed our franchises without incurring
significant costs, we cannot assure you that we will be able to
renew, or to renew as favorably, our franchises in the future. A
termination of or a sustained failure to renew a franchise in
one or more key markets could adversely affect our business in
the affected geographic area.
Our cable systems are operated under franchises that are
non-exclusive. Accordingly, local franchising authorities can
grant additional franchises and create competition in market
areas where none existed previously, resulting in overbuilds,
which could adversely affect results of operations.
Our cable systems are operated under non-exclusive franchises
granted by local franchising authorities. Consequently, local
franchising authorities can grant additional franchises to
competitors in the same geographic area or operate their own
cable systems. In addition, certain telephone companies are
seeking authority to operate in local communities without first
obtaining a local franchise. As a result, competing operators
may build systems in areas in which we hold franchises. In some
cases municipal utilities may legally compete with us without
obtaining a franchise from the local franchising authority.
Different legislative proposals have been introduced in the
United States Congress and in some state legislatures that would
greatly streamline cable franchising. This legislation is
intended to facilitate entry by new competitors, particularly
local telephone companies. Such legislation has passed in a
number of states in which we have operations and one of these
newly enacted statutes is subject to court challenge. Although
various legislative proposals provide some regulatory relief for
incumbent cable operators, these proposals are generally viewed
as being more favorable to new entrants due to a number of
varying factors including efforts to withhold streamlined cable
franchising from incumbents until after the expiration of their
existing franchises. To the extent incumbent cable operators are
not able to avail themselves of this streamlined franchising
process, such operators may continue to be subject to more
onerous franchise requirements at the local level than new
entrants. The Federal Communications Commission
(FCC) recently initiated a proceeding to determine
whether local franchising authorities are impeding the
deployment of competitive cable services through unreasonable
franchising requirements and whether such impediments should be
preempted. At this time, we are not able to determine what
impact such proceeding may have on us.
The existence of more than one cable system operating in the
same territory is referred to as an overbuild. These overbuilds
could adversely affect our growth, financial condition and
results of operations by creating or increasing competition. As
of March 31, 2006, we are aware of overbuild situations
impacting approximately 6% of our estimated homes passed, and
potential overbuild situations in areas servicing approximately
an additional 4% of our estimated homes passed. Additional
overbuild situations may occur in other systems.
Local franchise authorities have the ability to impose
additional regulatory constraints on our business, which could
further increase our expenses.
In addition to the franchise agreement, cable authorities in
some jurisdictions have adopted cable regulatory ordinances that
further regulate the operation of cable systems. This additional
regulation increases the cost of operating our business. We
cannot assure you that the local franchising authorities will
not impose new and more restrictive requirements. Local
franchising authorities also have the power to reduce rates and
order refunds on the rates charged for basic services.
Further regulation of the cable industry could cause us to
delay or cancel service or programming enhancements or impair
our ability to raise rates to cover our increasing costs,
resulting in increased losses.
Currently, rate regulation is strictly limited to the basic
service tier and associated equipment and installation
activities. However, the FCC and the U.S. Congress continue
to be concerned that cable rate increases are exceeding
inflation. It is possible that either the FCC or the
U.S. Congress will again restrict the ability of cable
system operators to implement rate increases. Should this occur,
it would impede our
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ability to raise our rates. If we are unable to raise our rates
in response to increasing costs, our losses would increase.
There has been considerable legislative and regulatory interest
in requiring cable operators to offer historically bundled
programming services on an á la carte basis or to at least
offer a separately available child-friendly Family
Tier. It is possible that new marketing restrictions could
be adopted in the future. Such restrictions could adversely
affect our operations.
Actions by pole owners might subject us to significantly
increased pole attachment costs.
Pole attachments are cable wires that are attached to poles.
Cable system attachments to public utility poles historically
have been regulated at the federal or state level, generally
resulting in favorable pole attachment rates for attachments
used to provide cable service. The FCC clarified that a cable
operators favorable pole rates are not endangered by the
provision of Internet access, and that approach ultimately was
upheld by the Supreme Court of the United States. Despite the
existing regulatory regime, utility pole owners in many areas
are attempting to raise pole attachment fees and impose
additional costs on cable operators and others. In addition, the
favorable pole attachment rates afforded cable operators under
federal law can be increased by utility companies if the
operator provides telecommunications services, as well as cable
service, over cable wires attached to utility poles. Any
significant increased costs could have a material adverse impact
on our profitability and discourage system upgrades and the
introduction of new products and services.
We may be required to provide access to our networks to
other Internet service providers, which could significantly
increase our competition and adversely affect our ability to
provide new products and services.
A number of companies, including independent Internet service
providers, or ISPs, have requested local authorities and the FCC
to require cable operators to provide non-discriminatory access
to cables broadband infrastructure, so that these
companies may deliver Internet services directly to customers
over cable facilities. In a June 2005 ruling, commonly referred
to as Brand X, the Supreme Court upheld an FCC decision
(and overruled a conflicting Ninth Circuit opinion) making it
much less likely that any nondiscriminatory open
access requirements (which are generally associated with
common carrier regulation of telecommunications
services) will be imposed on the cable industry by local,
state or federal authorities. The Supreme Court held that the
FCC was correct in classifying cable provided Internet service
as an information service, rather than a
telecommunications service. This favorable
regulatory classification limits the ability of various
governmental authorities to impose open access requirements on
cable-provided Internet service. Given how recently Brand X
was decided, however, the nature of any legislative or
regulatory response remains uncertain. The imposition of open
access requirements could materially affect our business.
If we were required to allocate a portion of our bandwidth
capacity to other Internet service providers, we believe that it
would impair our ability to use our bandwidth in ways that would
generate maximum revenues.
Changes in channel carriage regulations could impose
significant additional costs on us.
Cable operators also face significant regulation of their
channel carriage. They currently can be required to devote
substantial capacity to the carriage of programming that they
would not carry voluntarily, including certain local broadcast
signals, local public, educational and government access
programming, and unaffiliated commercial leased access
programming. This carriage burden could increase in the future,
particularly if cable systems were required to carry both the
analog and digital versions of local broadcast signals (dual
carriage) or to carry multiple program streams included with a
single digital broadcast transmission (multicast carriage).
Additional government-mandated broadcast carriage obligations
could disrupt existing programming commitments, interfere with
our preferred use of limited channel capacity and limit our
ability to offer services that would maximize customer appeal
and revenue potential. Although the FCC issued a decision in
February 2005, confirming an earlier ruling against mandating
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either dual carriage or multicast carriage, that decision has
been appealed. In addition, the FCC could reverse its own ruling
or Congress could legislate additional carriage obligations.
Offering voice communications service may subject us to
additional regulatory burdens, causing us to incur additional
costs.
In 2002, we began to offer voice communications services on a
limited basis over our broadband network. We continue to explore
development and deployment of Voice over Internet Protocol or
VoIP services. The regulatory requirements applicable to VoIP
service are unclear although the FCC has declared that certain
VoIP services are not subject to traditional state public
utility regulation. The full extent of the FCC preemption of
VoIP services is not yet clear. Expanding our offering of these
services may require us to obtain certain authorizations,
including federal, state and local licenses. We may not be able
to obtain such authorizations in a timely manner, or conditions
could be imposed upon such licenses or authorizations that may
not be favorable to us. Furthermore, telecommunications
companies generally are subject to significant regulation,
including payments to the Federal Universal Service Fund and the
intercarrier compensation regime. In addition, pole attachment
rates are higher for providers of telecommunications services
than for providers of cable service. If there were to be a final
legal determination by the FCC, a state Public Utility
Commission, or appropriate court that VoIP services are subject
to these higher rates, our pole attachment costs could increase
significantly, which could adversely affect our financial
condition and results of operations.
Risks Related to the Exchange Offer and the New Notes
There is currently no public market for the new notes, and
an active trading market may not develop for the new notes. The
failure of a market to develop for the new notes could adversely
affect the liquidity and value of the new notes.
The new notes will be new securities for which there is
currently no public market. Further, although we intend to apply
for the new notes to be eligible for trading in the
PORTALsm
Market, we do not intend to apply for listing of the new notes,
on any securities exchange or for quotation of the new notes on
any automated dealer quotation system. Accordingly,
notwithstanding any existing market for the 2003 notes, a market
may not develop for the new notes, and if a market does develop,
it may not be sufficiently liquid for your purposes. If an
active, liquid market does not develop for the new notes, the
market price and liquidity of the new notes may be adversely
affected.
The liquidity of the trading market, if any, and future trading
prices of the new notes will depend on many factors, including,
among other things, prevailing interest rates, our operating
results, financial performance and prospects, the market for
similar securities and the overall securities market, and may be
adversely affected by unfavorable changes in these factors. The
market for the new notes may be subject to disruptions that
could have a negative effect on the holders of the new notes,
regardless of our operating results, financial performance or
prospects.
We may not have the ability to raise the funds necessary
to fulfill our obligations under the new notes following a
change of control, which would place us in default under the
indenture governing the new notes.
Under the indenture governing the new notes, upon the occurrence
of specified change of control events, we will be required to
offer to repurchase all of the outstanding new notes. However,
we may not have sufficient funds at the time of the change of
control event to make the required repurchases of the new notes.
In addition, a change of control would require the repayment of
borrowings under credit facilities and publicly held debt of our
subsidiaries and our parent companies. Our failure to make or
complete an offer to repurchase the new notes would place us in
default under the indenture governing the new notes.
26
If we do not fulfill our obligations to you under the new
notes, you will not have any recourse against Charter, Charter
Holdco, CCHC, Charter Holdings, CIH, CCH I and Mr. Allen or
their affiliates.
None of our direct or indirect equity holders, directors,
officers, employees or affiliates, including, without
limitation, Charter, Charter Holdco, CCHC, Charter Holdings,
CIH, CCH I and Mr. Allen, will be an obligor or
guarantor under the new notes. The indenture governing the new
notes expressly provides that these parties will not have any
liability for our obligations under the new notes or the
indenture governing the new notes. By accepting the new notes,
you waive and release all such liability as consideration for
issuance of the new notes. If we do not fulfill our obligations
to you under the new notes, you will have no recourse against
any of our direct or indirect equity holders, directors,
officers, employees or affiliates including, without limitation,
Charter, Charter Holdco, CCHC, Charter Holdings, CIH, CCH I
and Mr. Allen.
If you do not exchange your original notes for new notes,
you will continue to have restrictions on your ability to resell
them.
The original notes were not registered under the Securities Act
of 1933 or under the securities laws of any state and may not be
resold, offered for resale or otherwise transferred unless they
are subsequently registered or resold pursuant to an exemption
from the registration requirements of the Securities Act of 1933
and applicable state securities laws. If you do not exchange
your original notes for new notes pursuant to the exchange
offer, you will not be able to resell, offer to resell or
otherwise transfer the original notes unless they are registered
under the Securities Act of 1933 or unless you resell them,
offer to resell them or otherwise transfer them under an
exemption from the registration requirements of, or in a
transaction not subject to, the Securities Act of 1933. In
addition, once the exchange offer has terminated, we will no
longer be under an obligation to register the original notes
under the Securities Act of 1933 except in the limited
circumstances provided in the registration rights agreement. In
addition, to the extent that original notes are tendered for
exchange and accepted in the exchange offer, any trading market
for the untendered and tendered but unaccepted original notes
could be adversely affected.
27
USE OF PROCEEDS
This exchange offer is intended to satisfy our obligations under
the exchange and registration rights agreement that was executed
in connection with the sale of the original notes. We will not
receive any proceeds from the exchange offer. You will receive,
in exchange for the original notes tendered by you and accepted
by us in the exchange offer, new notes in the same principal
amount. The original notes surrendered in exchange for the new
notes will be retired and will not result in any increase in our
outstanding debt. Any tendered-but-unaccepted original notes
will be returned to you and will remain outstanding.
28
CAPITALIZATION
The following table sets forth our capitalization as of
March 31, 2006, on a consolidated basis.
The following information should be read in conjunction with
Selected Historical Consolidated Financial Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the historical
consolidated financial statements and related notes included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
As of | |
|
|
March 31, | |
|
|
2006 | |
|
|
| |
|
|
Actual | |
|
|
| |
|
|
(dollars in | |
|
|
millions, | |
|
|
unaudited) | |
Cash and cash equivalents
|
|
$ |
26 |
|
|
|
|
|
Long-Term Debt:
|
|
|
|
|
|
CCH II:
|
|
|
|
|
|
|
10.250% senior notes due 2010
|
|
$ |
2,041 |
|
|
CCO Holdings:
|
|
|
|
|
|
|
83/4
% senior notes due 2013
|
|
|
795 |
|
|
|
Senior floating rate notes due 2010
|
|
|
550 |
|
|
Charter Operating:
|
|
|
|
|
|
|
8.000% senior second lien notes due 2012
|
|
|
1,100 |
|
|
|
83/8
% senior second lien notes due 2014
|
|
|
770 |
|
|
Renaissance:
|
|
|
|
|
|
|
10.000% senior discount notes due 2008
|
|
|
78 |
|
|
Credit Facilities:
|
|
|
|
|
|
|
Charter Operating(a)
|
|
|
5,386 |
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
10,720 |
|
|
|
|
|
Loan Payable Related Party
|
|
|
129 |
|
|
|
|
|
Minority Interest(b)
|
|
|
626 |
|
|
|
|
|
Members Equity
|
|
|
3,042 |
|
|
|
|
|
Total Capitalization
|
|
$ |
14,517 |
|
|
|
|
|
|
|
|
(a) |
As of March 31, 2006, our potential availability under our
credit facilities totaled approximately $904 million,
although the actual availability at that time was only
$516 million because of limits imposed by covenant
restrictions. However, pro forma for the completion of the
credit facility refinancing (see Recent
Events Credit Facility Refinancing), our
potential availability under our credit facilities as of
March 31, 2006 would have been approximately
$1.3 billion, although actual availability of
$516 million would remain unchanged because of limits
imposed by covenant restrictions. |
|
|
(b) |
Minority interest consists of preferred membership interests in
CC VIII. This preferred interest arises from approximately
$630 million of preferred membership units issued by CC
VIII in connection with an acquisition in February 2000 and was
the subject of a dispute between Charter and Mr. Allen,
Charters Chairman and controlling shareholder that was
settled October 31, 2005. See Certain Relationships
and Related Transactions Transactions Arising Out of
Our Organizational Structure and Mr. Allens
Investment in Charter and Its Subsidiaries Equity
Put Rights CC VIII. |
29
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial
statements are based on the historical consolidated financial
statements of CCH II, adjusted on a pro forma basis to
reflect the following transactions as if they occurred on
January 1, 2005 for the unaudited pro forma consolidated
statement of operations:
(1) the repayment in February 2005 of $530 million of
borrowings under the Charter Operating revolving credit facility
with net proceeds from the issuance and sale of the CCO Holdings
senior floating rate notes in December 2004, which were
included in our cash balance at December 31, 2004;
(2) the redemption of all of CC V Holdings, LLCs
outstanding 11.875% senior discount notes due 2008 with
cash on hand in March 2005;
(3) the issuance and sale of $300 million of
83/4
% CCO Holdings senior notes in August 2005; and
(4) the issuance and sale of $450 million of original
notes in January 2006 and the use of such proceeds to pay down
credit facilities.
The unaudited pro forma adjustments are based on information
available to us as of the date of this prospectus and certain
assumptions that we believe are reasonable under the
circumstances. The Unaudited Pro Forma Consolidated Financial
Statements required allocation of certain revenues and expenses
and such information has been presented for comparative purposes
and is not intended to provide any indication of what our actual
financial position or results of operations would have been had
the transactions described above been completed on the dates
indicated or to project our results of operations for any future
date.
The unaudited pro forma balance sheet and statement of
operations as of and for the three months ended March 31,
2006 is not provided as pro forma adjustments are not
significant for that period.
30
CCH II, LLC
Unaudited Pro Forma Consolidated Statement of Operations
For the Three Months Ended March 31, 2005
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing | |
|
|
|
|
Historical | |
|
Transactions(a) | |
|
Pro Forma | |
|
|
| |
|
| |
|
| |
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video
|
|
$ |
842 |
|
|
$ |
|
|
|
$ |
842 |
|
|
High-speed Internet
|
|
|
215 |
|
|
|
|
|
|
|
215 |
|
|
Telephone
|
|
|
6 |
|
|
|
|
|
|
|
6 |
|
|
Advertising sales
|
|
|
64 |
|
|
|
|
|
|
|
64 |
|
|
Commercial
|
|
|
65 |
|
|
|
|
|
|
|
65 |
|
|
Other
|
|
|
79 |
|
|
|
|
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,271 |
|
|
|
|
|
|
|
1,271 |
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (excluding depreciation and amortization)
|
|
|
559 |
|
|
|
|
|
|
|
559 |
|
|
Selling, general and administrative
|
|
|
241 |
|
|
|
|
|
|
|
241 |
|
|
Depreciation and amortization
|
|
|
381 |
|
|
|
|
|
|
|
381 |
|
|
Asset impairment charges
|
|
|
31 |
|
|
|
|
|
|
|
31 |
|
|
Other operating expenses, net
|
|
|
8 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,220 |
|
|
|
|
|
|
|
1,220 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
51 |
|
|
|
|
|
|
|
51 |
|
Interest expense, net
|
|
|
(198 |
) |
|
|
(5 |
) |
|
|
(203 |
) |
Other income, net
|
|
|
20 |
|
|
|
5 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(127 |
) |
|
|
|
|
|
|
(127 |
) |
Income tax expense
|
|
|
(6 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of accounting change
|
|
$ |
(133 |
) |
|
$ |
|
|
|
$ |
(133 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents adjustment to interest expense associated with the
completion of the financing transactions discussed in the pro
forma assumptions (in millions): |
|
|
|
|
|
|
|
|
|
Interest on $450 million of CCH II 10.250% senior
notes issued in January 2006
|
|
$ |
11 |
|
|
|
|
|
Amortization of deferred financing costs
|
|
|
1 |
|
|
|
|
|
Amortization of discount
|
|
|
1 |
|
|
|
|
|
Less Historical interest expense for Charter
Operatings revolving credit facilities
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
Interest on $300 million of CCO Holdings
83/4
% senior notes issued in August 2005
|
|
|
|
|
|
|
7 |
|
Historical interest expense on Charter Operatings
revolving credit facility repaid with cash on hand in February
2005
|
|
|
|
|
|
|
(3 |
) |
Historical interest expense on the CCV Holdings, LLC 8.75%
senior discount notes repaid with cash on hand in March 2005
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
Net increase in interest expense for other financing transactions
|
|
|
|
|
|
$ |
5 |
|
|
|
|
|
|
|
|
Adjustment to other income, net represents the elimination of
losses related to the redemption of CC V Holdings, LLC
11.875% notes due 2008.
31
CCH II, LLC
Unaudited Pro Forma Consolidated Statement of Operations
For the Year Ended December 31, 2005
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing | |
|
|
|
|
Historical | |
|
Transactions(a) | |
|
Pro Forma | |
|
|
| |
|
| |
|
| |
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video
|
|
$ |
3,401 |
|
|
$ |
|
|
|
$ |
3,401 |
|
|
High-speed Internet
|
|
|
908 |
|
|
|
|
|
|
|
908 |
|
|
Telephone
|
|
|
36 |
|
|
|
|
|
|
|
36 |
|
|
Advertising sales
|
|
|
294 |
|
|
|
|
|
|
|
294 |
|
|
Commercial
|
|
|
279 |
|
|
|
|
|
|
|
279 |
|
|
Other
|
|
|
336 |
|
|
|
|
|
|
|
336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
5,254 |
|
|
|
|
|
|
|
5,254 |
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (excluding depreciation and amortization)
|
|
|
2,293 |
|
|
|
|
|
|
|
2,293 |
|
|
Selling, general and administrative
|
|
|
1,048 |
|
|
|
|
|
|
|
1,048 |
|
|
Depreciation and amortization
|
|
|
1,499 |
|
|
|
|
|
|
|
1,499 |
|
|
Asset impairment charges
|
|
|
39 |
|
|
|
|
|
|
|
39 |
|
|
Other operating expenses, net
|
|
|
32 |
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,911 |
|
|
|
|
|
|
|
4,911 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
343 |
|
|
|
|
|
|
|
343 |
|
Interest expense, net
|
|
|
(858 |
) |
|
|
(29 |
) |
|
|
(887 |
) |
Other income, net
|
|
|
99 |
|
|
|
5 |
|
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(416 |
) |
|
|
(24 |
) |
|
|
(440 |
) |
Income tax expense
|
|
|
(9 |
) |
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of accounting change
|
|
$ |
(425 |
) |
|
$ |
(24 |
) |
|
$ |
(449 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents adjustment to interest expense associated with the
completion of the financing transactions discussed in the pro
forma assumptions (in millions): |
|
|
|
|
|
|
|
|
|
Interest on $450 million of CCH II 10.250% senior
notes issued in January 2006
|
|
$ |
46 |
|
|
|
|
|
Amortization of deferred financing costs
|
|
|
2 |
|
|
|
|
|
Amortization of discount
|
|
|
2 |
|
|
|
|
|
Less Historical interest expense for Charter
Operatings revolving credit facilities
|
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
Interest on $300 million of CCO Holdings
83/4
% senior notes issued in August 2005
|
|
|
16 |
|
|
|
|
|
Amortization of deferred financing costs
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
Historical interest expense on Charter Operatings
revolving credit facility repaid with cash on hand in February
2005
|
|
|
|
|
|
|
(3 |
) |
Historical interest expense on the CCV Holdings, LLC 8.75%
senior discount notes repaid with cash on hand in March 2005
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
Net increase in interest expense for other financing transactions
|
|
|
|
|
|
$ |
29 |
|
|
|
|
|
|
|
|
Adjustment to other income, net represents the elimination of
losses related to the redemption of CC V Holdings, LLC
11.875% notes due 2008.
32
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
In March 2003, CCH II was formed. CCH II is a holding
company whose primary assets are equity interests in our cable
operating subsidiaries. Charter Holdings entered into a series
of transactions and contributions which had the effect of
(i) creating CCH II, CCH II Capital, CCH I,
our direct parent, and our subsidiary, CCO Holdings; and
(ii) combining and contributing all of Charter
Holdings interest in cable operations not previously owned
by Charter Operating to Charter Operating. These transactions
were accounted for as a reorganization of entities under common
control. Accordingly, the financial information for CCH II
combines the historical financial condition, cash flows and
results of operations of Charter Operating, and the operations
of subsidiaries contributed by Charter Holdings for all periods
presented.
The following table presents summary financial and other data
for CCH II and its subsidiaries and has been derived from
the audited consolidated financial statements of CCH II and
its subsidiaries for the five years ended December 31, 2005
and the unaudited consolidated financial statements of
CCH II and its subsidiaries for the three months ended
March 31, 2005 and 2006. The following information should
be read in conjunction with Managements Discussion
and Analysis of Financial Condition and Results of
Operations and the historical consolidated financial
statements and related notes included elsewhere in this
prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Year Ended December 31, | |
|
Ended March 31, | |
|
|
| |
|
| |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(dollars in millions) | |
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
3,807 |
|
|
$ |
4,566 |
|
|
$ |
4,819 |
|
|
$ |
4,977 |
|
|
$ |
5,254 |
|
|
$ |
1,271 |
|
|
$ |
1,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (excluding depreciation and amortization)
|
|
|
1,486 |
|
|
|
1,807 |
|
|
|
1,952 |
|
|
|
2,080 |
|
|
|
2,293 |
|
|
|
559 |
|
|
|
626 |
|
|
Selling, general and administrative
|
|
|
821 |
|
|
|
968 |
|
|
|
944 |
|
|
|
1,002 |
|
|
|
1,048 |
|
|
|
241 |
|
|
|
281 |
|
|
Depreciation and amortization
|
|
|
2,683 |
|
|
|
1,436 |
|
|
|
1,453 |
|
|
|
1,495 |
|
|
|
1,499 |
|
|
|
381 |
|
|
|
358 |
|
|
Impairment of franchises
|
|
|
|
|
|
|
4,638 |
|
|
|
|
|
|
|
2,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 |
|
|
|
31 |
|
|
|
99 |
|
|
Other operating (income) expenses, net
|
|
|
28 |
|
|
|
39 |
|
|
|
(46 |
) |
|
|
13 |
|
|
|
32 |
|
|
|
8 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,018 |
|
|
|
8,888 |
|
|
|
4,303 |
|
|
|
7,023 |
|
|
|
4,911 |
|
|
|
1,220 |
|
|
|
1,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(1,211 |
) |
|
|
(4,322 |
) |
|
|
516 |
|
|
|
(2,046 |
) |
|
|
343 |
|
|
|
51 |
|
|
|
7 |
|
Interest expense, net
|
|
|
(525 |
) |
|
|
(512 |
) |
|
|
(545 |
) |
|
|
(726 |
) |
|
|
(858 |
) |
|
|
(198 |
) |
|
|
(239 |
) |
Other income (expense), net
|
|
|
(118 |
) |
|
|
(128 |
) |
|
|
27 |
|
|
|
71 |
|
|
|
99 |
|
|
|
20 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and cumulative effect of accounting
change
|
|
|
(1,854 |
) |
|
|
(4,962 |
) |
|
|
(2 |
) |
|
|
(2,701 |
) |
|
|
(416 |
) |
|
|
(127 |
) |
|
|
(226 |
) |
Income tax benefit (expense)
|
|
|
27 |
|
|
|
216 |
|
|
|
(13 |
) |
|
|
35 |
|
|
|
(9 |
) |
|
|
(6 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of accounting change
|
|
|
(1,827 |
) |
|
|
(4,746 |
) |
|
|
(15 |
) |
|
|
(2,666 |
) |
|
|
(425 |
) |
|
|
(133 |
) |
|
|
(228 |
) |
Cumulative effect of accounting change, net of tax
|
|
|
(24 |
) |
|
|
(540 |
) |
|
|
|
|
|
|
(840 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(1,851 |
) |
|
$ |
(5,286 |
) |
|
$ |
(15 |
) |
|
$ |
(3,506 |
) |
|
$ |
(425 |
) |
|
$ |
(133 |
) |
|
$ |
(228 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of earnings to cover fixed charges(a)
|
|
|
NA |
|
|
|
NA |
|
|
|
1.05 |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
NA |
|
|
|
Deficiencies of earnings to cover fixed charges(a)
|
|
$ |
1,838 |
|
|
$ |
4,946 |
|
|
|
NA |
|
|
$ |
2,721 |
|
|
$ |
449 |
|
|
$ |
124 |
|
|
$ |
222 |
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Year Ended December 31, | |
|
Ended March 31, | |
|
|
| |
|
| |
|
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(dollars in millions) | |
Balance Sheet Data (end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
|
|
|
$ |
310 |
|
|
$ |
85 |
|
|
$ |
546 |
|
|
$ |
3 |
|
|
$ |
26 |
|
|
$ |
26 |
|
Total assets
|
|
|
26,091 |
|
|
|
21,984 |
|
|
|
21,009 |
|
|
|
16,979 |
|
|
|
16,101 |
|
|
|
16,351 |
|
|
|
15,889 |
|
Long-term debt
|
|
|
6,961 |
|
|
|
8,066 |
|
|
|
9,557 |
|
|
|
9,895 |
|
|
|
10,624 |
|
|
|
9,626 |
|
|
|
10,720 |
|
Loans payable related party
|
|
|
366 |
|
|
|
133 |
|
|
|
37 |
|
|
|
29 |
|
|
|
22 |
|
|
|
161 |
|
|
|
129 |
|
Minority interest(b)
|
|
|
680 |
|
|
|
693 |
|
|
|
719 |
|
|
|
656 |
|
|
|
622 |
|
|
|
659 |
|
|
|
626 |
|
Members equity
|
|
|
15,940 |
|
|
|
11,040 |
|
|
|
8,951 |
|
|
|
4,913 |
|
|
|
3,402 |
|
|
|
4,403 |
|
|
|
3,042 |
|
|
|
|
|
(a) |
|
Earnings include net loss plus fixed charges. Fixed charges
consist of interest expense and an estimated interest component
of rent expense. |
|
|
(b) |
|
Minority interest represents the preferred membership interests
in CC VIII. This preferred interest arises from approximately
$630 million of preferred membership units issued by CC
VIII in connection with an acquisition in February 2000 and was
the subject of a dispute between Charter and Mr. Allen,
Charters Chairman and controlling shareholder that was
settled October 31, 2005. See Certain Relationships
and Related Transactions Transactions Arising Out of
Our Organizational Structure and Mr. Allens
Investment in Charter and Its Subsidiaries Equity
Put Rights CC VIII. |
|
34
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to Risk Factors and
Disclosure 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 CCH II and its subsidiaries as of and for the
years ended December 31, 2005, 2004 and 2003 and the
unaudited consolidated financial statements of CCH II and
its subsidiaries as of and for the three months ended
March 31, 2006.
CCH II is a holding company whose primary assets are equity
interests in our cable operating subsidiaries. CCH II was
formed in March 2003 and is a direct subsidiary of CCH I,
which is an indirect subsidiary of Charter Holdings. Charter
Holdings is an indirect subsidiary of Charter. See
Summary Organizational Structure. Our
parent companies are CCH I, CIH, Charter
Holdings, CCHC, Charter Holdco and Charter. We,
us and our refer to CCH II and its
subsidiaries.
CCH II is the sole owner of CCO Holdings, which in
turn is the sole owner of Charter Operating. In June and July
2003, Charter Holdings entered into a series of transactions and
contributions which had the effect of (i) creating
CCH II, CCH II Capital, CCH I, our direct parent, and
our subsidiary, CCO Holdings and (ii) combining and
contributing all of Charter Holdings interest in cable
operations not previously owned by Charter Operating to Charter
Operating. This transaction was accounted for as a
reorganization of entities under common control. Accordingly,
the historical financial condition and results of operations of
CCH II combine the historical financial condition and
results of operations of Charter Operating, and the operations
of subsidiaries contributed by Charter Holdings, for all periods
presented.
Introduction
We and our parent companies continue to pursue opportunities to
improve our and our parent companies liquidity. Our and
our parent companies efforts in this regard have resulted
in the completion of a number of transactions in 2005 and 2006,
as follows:
|
|
|
|
|
|
the April 2006 refinancing of our existing credit facilities
(see Liquidity and Capital
Resources Recent Refinancing Transactions); |
|
|
|
|
|
the January 2006 sale by us of an additional $450 million
principal amount of our 10.250% senior notes due 2010; |
|
|
|
|
the September 2005 exchange by our direct and indirect parent
companies, Charter Holdings, CCH I and CIH, of
approximately $6.8 billion in total principal amount of
outstanding debt securities of Charter Holdings in a private
placement for new debt securities; |
|
|
|
the August 2005 sale by our subsidiaries, CCO Holdings and
CCO Holdings Capital Corp., of $300 million of
83/4
% senior notes due 2013; |
|
|
|
the March and June 2005 issuance of $333 million of Charter
Operating notes in exchange for $346 million of Charter
Holdings notes; |
|
|
|
the repurchase during 2005 of $136 million of
Charters 4.75% convertible senior notes due 2006 leaving
$20 million in principal amount outstanding; and |
|
|
|
the March 2005 redemption of all of CC V Holdings,
LLCs outstanding 11.875% senior discount notes due
2008 at a total cost of $122 million; |
During the years 1999 through 2001, we grew significantly,
principally through acquisitions of other cable businesses
financed by debt and, to a lesser extent, equity. We have no
current plans to pursue any significant acquisitions. However,
we may pursue exchanges of non-strategic assets or divestitures,
such as the sale of cable systems to Atlantic Broadband Finance,
LLC. We therefore do not believe that our historical growth
rates are accurate indicators of future growth.
The industrys and our most significant operational
challenges include competition from DBS providers and DSL
service providers. See Business
Competition. We believe that competition from
35
DBS has resulted in net analog video customer losses and
decreased growth rates for digital video customers. Competition
from DSL providers combined with limited opportunities to expand
our customer base now that approximately 35% of our analog video
customers subscribe to our high-speed Internet services has
resulted in decreased growth rates for high-speed Internet
customers. In the recent past, we have grown revenues by
offsetting video customer losses with price increases and sales
of incremental advanced services such as high-speed Internet,
video on demand, digital video recorders and high definition
television. We expect to continue to grow revenues through price
increases and through continued growth in high-speed Internet
and incremental new services including telephone, high
definition television, VOD and DVR service.
Historically, our ability to fund operations and investing
activities has depended on our continued access to credit under
our credit facilities. We expect we will continue to borrow
under our credit facilities from time to time to fund cash
needs. The occurrence of an event of default under our credit
facilities could result in borrowings from these facilities
being unavailable to us and could, in the event of a payment
default or acceleration, trigger events of default under our
outstanding notes and would have a material adverse effect on
us. Pro Forma for the completion of the credit facility
refinancing discussed above, no indebtedness under our credit
facilities is scheduled to mature during the remainder of 2006.
See Liquidity and Capital Resources.
Overview of Operations
Approximately 87% and 86% of our revenues for the three months
ended March 31, 2006 and year ended December 31, 2005,
respectively, are attributable to monthly subscription fees
charged to customers for our video, high-speed Internet,
telephone and commercial services provided by our cable systems.
Generally, these customer subscriptions may be discontinued by
the customer at any time. The remaining 13% and 14% of revenue
for the three months ended March 31, 2006 and year ended
December 31, 2005, respectively, is derived primarily from
advertising revenues, franchise fee revenues, which are
collected by us but then paid to local franchising authorities,
pay-per-view and VOD programming where users are charged a fee
for individual programs viewed, installation or reconnection
fees charged to customers to commence or reinstate service, and
commissions related to the sale of merchandise by home shopping
services. We have increased revenues during the past three
years, primarily through the sale of digital video and
high-speed Internet services to new and existing customers and
price increases on video services offset in part by dispositions
of systems. Going forward, our goal is to increase revenues by
offsetting video customer losses with price increases, sales of
incremental advanced services such as telephone, high-speed
Internet, video on demand, digital video recorders and high
definition television. See Business Sales and
Marketing for more details.
Our success in our efforts to grow revenues and improve margins
will be impacted by our ability to compete against companies
with easier access to financing, greater personnel resources,
greater brand name recognition, long-established relationships
with regulatory authorities and customers, and, often fewer
regulatory burdens. Additionally, controlling our cost of
operations is critical, particularly cable programming costs,
which have historically increased at rates in excess of
inflation and are expected to continue to increase. See
Business Programming for more details.
We are attempting to control our costs of operations by
maintaining strict controls on expenses. More specifically, we
are focused on managing our workforce to control cost increases
and improve productivity, and leveraging our size in purchasing
activities.
Our expenses primarily consist of operating costs, selling,
general and administrative expenses, depreciation and
amortization expense and interest expense. Operating costs
primarily include programming costs, the cost of our workforce,
cable service related expenses, advertising sales costs,
franchise fees and expenses related to customer billings. For
the three months ended March 31, 2006 and 2005, our income
from operations, which includes depreciation and amortization
expense and asset impairment charges but excludes interest
expense, was $7 million and $51 million, respectively.
We had operating margins of 1% and 4% for the three months ended
March 31, 2006 and 2005, respectively. The decrease in
income from operations and operating margins for the three
months ended March 31, 2006 compared to
36
2005 was principally due to an increase in operating costs and
asset impairment charges of $68 million. Our loss from
operations decreased from $2.0 billion for year ended
December 31, 2004 to income of $343 million for the
year ended December 31, 2005. We had a positive operating
margin (defined as income (loss) from operations divided by
revenues) of 7% and a negative operating margin of 41% for the
years ended December 31, 2005 and 2004, respectively. The
improvement from a loss from operations and negative operating
margin to income from operations and positive operating margin
for the year end December 31, 2005 is principally due to
the impairment of franchises of $2.4 billion recorded in
the third quarter of 2004 which did not recur in 2005. For the
year ended December 31, 2003, income from operations was
$516 million and for the year ended December 31, 2004,
our loss from operations was $2.0 billion. We had a
negative operating margin of 41% for the year ended
December 31, 2004, whereas for the year ending
December 31, 2003, we had positive operating margin of 11%.
The decline in income from operations and operating margin for
the year end December 31, 2004 is principally due to the
impairment of franchises of $2.4 billion recorded in the
third quarter of 2004. The year ended December 31, 2004
also includes a gain on the sale of certain cable systems to
Atlantic Broadband Finance, LLC which is substantially offset by
an increase in option compensation expense and special charges
when compared to the year ended December 31, 2003. Although
we do not expect charges for impairment in the future of
comparable magnitude, potential charges could occur due to
changes in market conditions.
We have a history of net losses. Further, we expect to continue
to report net losses for the foreseeable future. Our net losses
are principally attributable to insufficient revenue to cover
the combination of operating costs and interest costs we incur
because of our debt and the depreciation expenses that we incur
resulting from the capital investments we have made in our cable
properties. We expect that these expenses will remain
significant, and we therefore expect to continue to report net
losses for the foreseeable future.
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
Charters board of directors and the Audit Committee has
reviewed the following disclosure. We consider the following
policies to be the most critical in understanding the estimates,
assumptions and judgments that are involved in preparing our
financial statements and the uncertainties that could affect our
results of operations, financial condition and cash flows:
|
|
|
|
|
Capitalization of labor and overhead costs; |
|
|
|
Useful lives of property, plant and equipment; |
|
|
|
Impairment of property, plant, and equipment, franchises, and
goodwill; |
|
|
|
Income taxes; and |
|
|
|
Litigation. |
In addition, there are other items within our financial
statements that require estimates or judgment but are not deemed
critical, such as the allowance for doubtful accounts, but
changes in judgment, or estimates in these other items could
also have a material impact on our financial statements.
|
|
|
Capitalization of labor and overhead costs |
The cable industry is capital intensive, and a large portion of
our resources are spent on capital activities associated with
extending, rebuilding, and upgrading our cable network. As of
March 31, 2006 and December 31, 2005 and 2004, the net
carrying amount of our property, plant and equipment (consisting
primarily of cable network assets) was approximately
$5.4 billion (representing 34% of total assets),
$5.8 billion (representing 36% of total assets) and
$6.1 billion (representing 36% of total assets),
respectively. Total capital expenditures for the three months
ended March 31, 2006 and the years ended
37
December 31, 2005, 2004 and 2003 were approximately
$241 million, $1.1 billion, $893 million and
$804 million, respectively.
Costs associated with network construction, initial customer
installations (including initial installations of new or
advanced services), installation refurbishments and the addition
of network equipment necessary to provide new or advanced
services are capitalized. While our capitalization is based on
specific activities, once capitalized we track these costs by
fixed asset category at the cable system level and not on a
specific asset basis. Costs capitalized as part of initial
customer installations include materials, direct labor, and
certain indirect costs (overhead). These indirect
costs are associated with the activities of personnel who assist
in connecting and activating the new service and consist of
compensation and overhead costs associated with these support
functions. The costs of disconnecting service at a
customers dwelling or reconnecting service to a previously
installed dwelling are charged to operating expense in the
period incurred. Costs for repairs and maintenance are charged
to operating expense as incurred, while equipment replacement
and betterments, including replacement of cable drops from the
pole to the dwelling, are capitalized.
We make judgments regarding the installation and construction
activities to be capitalized. We capitalize direct labor and
overhead using standards developed from actual costs and
applicable operational data. We calculate standards for items
such as the labor rates, overhead rates and the actual amount of
time required to perform a capitalizable activity. For example,
the standard amounts of time required to perform capitalizable
activities are based on studies of the time required to perform
such activities. Overhead rates are established based on an
analysis of the nature of costs incurred in support of
capitalizable activities and a determination of the portion of
costs that is directly attributable to capitalizable activities.
The impact of changes that resulted from these studies were not
significant in the periods presented.
Labor costs directly associated with capital projects are
capitalized. We capitalize direct labor costs associated with
personnel based upon the specific time devoted to network
construction and customer installation activities. Capitalizable
activities performed in connection with customer installations
include such activities as:
|
|
|
|
|
Dispatching a truck roll to the customers
dwelling for service connection; |
|
|
|
Verification of serviceability to the customers dwelling
(i.e., determining whether the customers 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 customers network
connection by initiating test signals downstream from the
headend to the customers digital set-top terminal. |
Judgment is required to determine the extent to which overhead
is incurred as a result of specific capital activities, and
therefore should be capitalized. The primary costs that are
included in the determination of the overhead rate are
(i) employee benefits and payroll taxes associated with
capitalized direct labor, (ii) direct variable costs
associated with capitalizable activities, consisting primarily
of installation and construction vehicle costs, (iii) the
cost of support personnel, such as dispatch, that directly
assist with capitalizable installation activities, and
(iv) indirect costs directly attributable to capitalizable
activities.
While we believe our existing capitalization policies are
appropriate, a significant change in the nature or extent of our
system activities could affect managements 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
38
direct labor and overhead of $46 million,
$190 million, $164 million and $174 million,
respectively, for the three months ended March 31, 2006 and
the years ended December 31, 2005, 2004 and 2003.
Capitalized internal direct labor and overhead costs have
increased in 2005 as a result of the use of more internal labor
for capitalizable installations rather than third party
contractors.
|
|
|
Useful lives of property, plant and equipment |
We evaluate the appropriateness of estimated useful lives
assigned to our property, plant and equipment, based on annual
analyses of such useful lives, and revise such lives to the
extent warranted by changing facts and circumstances. Any
changes in estimated useful lives as a result of these analyses,
which were not significant in the periods presented, will be
reflected prospectively beginning in the period in which the
study is completed. The effect of a one-year decrease in the
weighted average remaining useful life of our property, plant
and equipment would be an increase in depreciation expense for
the year ended December 31, 2005 of approximately
$232 million. The effect of a one-year increase in the
weighted average useful life of our property, plant and
equipment would be a decrease in depreciation expense for the
year ended December 31, 2005 of approximately
$172 million.
Depreciation expense related to property, plant and equipment
totaled $357 million, $1.5 billion, $1.5 billion
and $1.5 billion, representing approximately 26%, 31%, 21%
and 34% of costs and expenses, for the three months ended
March 31, 2006 and the years ended December 31, 2005,
2004 and 2003, respectively. Depreciation is recorded using the
straight-line composite method over managements 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 March 31, 2006, December 31, 2005 and
2004 was approximately $9.3 billion (representing 58% of
total assets), $9.8 billion (representing 61% of total
assets) and $9.9 billion (representing 58% of total
assets), respectively. Furthermore, our noncurrent assets
include approximately $52 million of goodwill.
We adopted SFAS No. 142, Goodwill and Other
Intangible Assets, on January 1,
2002. SFAS No. 142 requires that franchise
intangible assets that meet specified indefinite-life criteria
no longer be amortized against earnings, but instead must be
tested for impairment annually based on valuations, or more
frequently as warranted by events or changes in circumstances.
In determining whether our franchises have an indefinite-life,
we considered the exclusivity of the franchise, the expected
costs of franchise renewals, and the technological state of the
associated cable systems with a view to whether or not we are in
compliance with any technology upgrading requirements. We have
concluded that as of March 31, 2006, December 31,
2005, 2004 and 2003 more than 99% of our franchises qualify for
indefinite-life treatment under SFAS No. 142, and that
less than one percent of our franchises do not qualify for
indefinite-life treatment due to technological or operational
factors that limit their lives. Costs of finite-lived
franchises, along with costs associated with franchise renewals,
are amortized on a straight-line basis over 10 years, which
represents managements best estimate of the average
remaining useful lives of such franchises. Franchise
amortization expense was approximately $0, $4 million,
$4 million and $9 million for the three months ended
March 31, 2006 and the years ended December 31, 2005,
2004 and 2003, respectively. We expect that amortization expense
on franchise assets will be approximately $2 million
annually for each of the next five years. Actual amortization
expense in future
39
periods could differ from these estimates as a result of new
intangible asset acquisitions or divestitures, changes in useful
lives and other relevant factors. Our goodwill is also deemed to
have an indefinite life under SFAS No. 142.
SFAS No. 144, Accounting for Impairment or Disposal
of Long-Lived Assets, requires that we evaluate the
recoverability of our property, plant and equipment and
franchise assets which did not qualify for indefinite-life
treatment under SFAS No. 142 upon the occurrence of
events or changes in circumstances which indicate that the
carrying amount of an asset may not be recoverable. Such events
or changes in circumstances could include such factors as the
impairment of our indefinite-life franchises under
SFAS No. 142, changes in technological advances,
fluctuations in the fair value of such assets, adverse changes
in relationships with local franchise authorities, adverse
changes in market conditions or a deterioration of operating
results. Under SFAS No. 144, a long-lived asset is
deemed impaired when the carrying amount of the asset exceeds
the projected undiscounted future cash flows associated with the
asset. No impairments of long-lived assets were recorded in the
three months ended March 31, 2006 and the years ended
December 31, 2005, 2004 or 2003, however, approximately
$99 million and $39 million of impairment on assets
held for sale was recorded for the three months ended
March 31, 2006 and the year ended December 31, 2005.
We were also required to evaluate the recoverability of our
indefinite-life franchises, as well as goodwill, as of
January 1, 2002 upon adoption of SFAS No. 142,
and on an annual basis or more frequently as deemed necessary.
Under both SFAS No. 144 and SFAS No. 142, if
an asset is determined to be impaired, it is required to be
written down to its estimated fair market value. We determine
fair market value based on estimated discounted future cash
flows, using reasonable and appropriate assumptions that are
consistent with internal forecasts. Our assumptions include
these and other factors: penetration rates for analog and
digital video, high-speed Internet and telephone, revenue growth
rates, expected operating margins and capital expenditures.
Considerable management judgment is necessary to estimate future
cash flows, and such estimates include inherent uncertainties,
including those relating to the timing and amount of future cash
flows and the discount rate used in the calculation.
Based on the guidance prescribed in Emerging Issues Task Force
(EITF) Issue No. 02-7, Unit of Accounting
for Testing of Impairment of Indefinite-Lived Intangible
Assets, franchises were aggregated into essentially
inseparable asset groups to conduct the valuations. The asset
groups generally represent geographic clustering of our cable
systems into groups by which such systems are managed.
Management believes such groupings represent the highest and
best use of those assets.
Our valuations, which are based on the present value of
projected after tax cash flows, result in a value of property,
plant and equipment, franchises, customer relationships and our
total entity value. The value of goodwill is the difference
between the total entity value and amounts assigned to the other
assets. The use of different valuation assumptions or
definitions of franchises or customer relationships, such as our
inclusion of the value of selling additional services to our
current customers within customer relationships versus
franchises, could significantly impact our valuations and any
resulting impairment.
Franchises, for valuation purposes, are defined as the future
economic benefits of the right to solicit and service potential
customers (customer marketing rights), and the right to deploy
and market new services such as interactivity and telephone to
the potential customers (service marketing rights). Fair value
is determined based on estimated discounted future cash flows
using assumptions consistent with internal forecasts. The
franchise after-tax cash flow is calculated as the after-tax
cash flow generated by the potential customers obtained and the
new services added to those customers in future periods. The sum
of the present value of the franchises after-tax cash flow
in years 1 through 10 and the continuing value of the
after-tax cash flow beyond year 10 yields the fair value of
the franchise. Prior to the adoption of EITF
Topic D-108,
Use of the Residual Method to Value Acquired Assets Other
than Goodwill, discussed below, we followed a residual
method of valuing our franchise assets, which had the effect of
including goodwill with the franchise assets.
We follow the guidance of EITF
Issue 02-17,
Recognition of Customer Relationship Intangible Assets
Acquired in a Business Combination, in valuing customer
relationships. Customer relationships, for
40
valuation purposes, represent the value of the business
relationship with our existing customers and are calculated by
projecting future after-tax cash flows from these customers
including the right to deploy and market additional services
such as interactivity and telephone to these customers. The
present value of these after-tax cash flows yields the fair
value of the customer relationships. Substantially all our
acquisitions occurred prior to January 1, 2002. We did not
record any value associated with the customer relationship
intangibles related to those acquisitions. For acquisitions
subsequent to January 1, 2002, we did assign a value to the
customer relationship intangible, which is amortized over its
estimated useful life.
In September 2004, EITF Topic D-108, Use of the Residual
Method to Value Acquired Assets Other than Goodwill, was
issued, which requires the direct method of separately valuing
all intangible assets and does not permit goodwill to be
included in franchise assets. We performed an impairment
assessment as of September 30, 2004, and adopted Topic
D-108 in that assessment resulting in a total franchise
impairment of approximately $3.3 billion. We recorded a
cumulative effect of accounting change of $840 million
(approximately $875 million before tax effects of
$16 million and minority interest effects of
$19 million) for the year ended December 31, 2004
representing the portion of our total franchise impairment
attributable to no longer including goodwill with franchise
assets. The remaining $2.4 billion of the total franchise
impairment was attributable to the use of lower projected growth
rates and the resulting revised estimates of future cash flows
in our valuation and was recorded as impairment of franchises in
our consolidated statements of operations for the year ended
December 31, 2004. Sustained analog video customer losses
by us and our industry peers in the third quarter of 2004
primarily as a result of increased competition from DBS
providers and decreased growth rates in our and our industry
peers high speed Internet customers in the third quarter
of 2004, in part as a result of increased competition from DSL
providers, led us to lower our projected growth rates and
accordingly revise our estimates of future cash flows from those
used at October 1, 2003. See Business
Competition.
The valuation completed at October 1, 2003 showed franchise
values in excess of book value and thus resulted in no
impairment.
The valuations used in our impairment assessments involve
numerous assumptions as noted above. While economic conditions,
applicable at the time of the valuation, indicate the
combination of assumptions utilized in the valuations are
reasonable, as market conditions change so will the assumptions
with a resulting impact on the valuation and consequently the
potential impairment charge.
Sensitivity Analysis. The effect on franchise
values as of October 1, 2005 of the indicated
increase/decrease in the selected assumptions is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage/ | |
|
|
|
|
Percentage Point | |
|
Impairment Charge | |
Assumption |
|
Change | |
|
Increase/(Decrease) | |
|
|
| |
|
| |
|
|
|
|
(dollars in millions) | |
Annual Operating Cash Flow(1)
|
|
|
+/-5% |
|
|
$ |
1,200/ |
|
|
$ |
(1,200 |
) |
Long-Term Growth Rate(2)
|
|
|
+/-1pts |
(3) |
|
|
1,700/ |
|
|
|
(1,300 |
) |
Discount Rate
|
|
|
+/-0.5pts |
(3) |
|
|
(1,300)/ |
|
|
|
1,500 |
|
|
|
(1) |
Operating Cash Flow is defined as revenues less operating
expenses and selling, general and administrative expenses. |
|
(2) |
Long-Term Growth Rate is the rate of cash flow growth beyond
year ten. |
|
(3) |
A percentage point change of one point equates to 100 basis
points. |
All operations are held through Charter Holdco and its direct
and indirect subsidiaries, including us. Charter Holdco and the
majority of its subsidiaries are not subject to income tax.
However, certain of these subsidiaries are corporations and are
subject to income tax. All of the taxable income, gains, losses,
deductions and credits of Charter Holdco are passed through to
its members: Charter, CII and Vulcan
41
Cable III Inc. Charter is responsible for its share of
taxable income or loss of Charter Holdco allocated to it in
accordance with the Charter Holdco limited liability company
agreement (LLC Agreement) and partnership tax rules
and regulations.
The LLC Agreement provides for certain special allocations of
net tax profits and net tax losses (such net tax profits and net
tax losses being determined under the applicable federal income
tax rules for determining capital accounts). Under the LLC
Agreement, through the end of 2003, net tax losses of Charter
Holdco that would otherwise have been allocated to Charter based
generally on its percentage ownership of outstanding common
units were allocated instead to membership units held by Vulcan
Cable III Inc. and CII (the Special Loss
Allocations) to the extent of their respective capital
account balances. After 2003, under the LLC Agreement, net tax
losses of Charter Holdco are allocated to Charter, Vulcan
Cable III Inc. and CII based generally on their respective
percentage ownership of outstanding common units to the extent
of their respective capital account balances. Allocations of net
tax losses in excess of the members aggregate capital
account balances are allocated under the rules governing
Regulatory Allocations, as described below. Subject to the
Curative Allocation Provisions described below, the LLC
Agreement further provides that, beginning at the time Charter
Holdco generates net tax profits, the net tax profits that would
otherwise have been allocated to Charter based generally on its
percentage ownership of outstanding common membership units will
instead generally be allocated to Vulcan Cable III Inc. and
CII (the Special Profit Allocations). The Special
Profit Allocations to Vulcan Cable III Inc. and CII will
generally continue until the cumulative amount of the Special
Profit Allocations offsets the cumulative amount of the Special
Loss Allocations. The amount and timing of the Special Profit
Allocations are subject to the potential application of, and
interaction with, the Curative Allocation Provisions described
in the following paragraph. The LLC Agreement generally provides
that any additional net tax profits are to be allocated among
the members of Charter Holdco based generally on their
respective percentage ownership of Charter Holdco common
membership units.
Because the respective capital account balance of each of Vulcan
Cable III Inc. and CII was reduced to zero by
December 31, 2002, certain net tax losses of Charter Holdco
that were to be allocated for 2002, 2003, 2004 and 2005, to
Vulcan Cable III Inc. and CII instead have been allocated
to Charter (the Regulatory Allocations). As a result
of the allocation of net tax losses to Charter in 2005,
Charters capital account balance was reduced to zero
during 2005. The LLC Agreement provides that once the capital
account balances of all members have been reduced to zero, net
tax losses are to be allocated to Charter, Vulcan Cable III
Inc. and CII based generally on their respective percentage
ownership of outstanding common units. Such allocations are also
considered to be Regulatory Allocations. The LLC Agreement
further provides that, to the extent possible, the effect of the
Regulatory Allocations is to be offset over time pursuant to
certain curative allocation provisions (the Curative
Allocation Provisions) so that, after certain offsetting
adjustments are made, each members capital account balance
is equal to the capital account balance such member would have
had if the Regulatory Allocations had not been part of the LLC
Agreement. The cumulative amount of the actual tax losses
allocated to Charter as a result of the Regulatory Allocations
through the year ended December 31, 2005 is approximately
$4.1 billion.
As a result of the Special Loss Allocations and the Regulatory
Allocations referred to above (and their interaction with the
allocations related to assets contributed to Charter Holdco with
differences between book and tax basis), the cumulative amount
of losses of Charter Holdco allocated to Vulcan Cable III
Inc. and CII is in excess of the amount that would have been
allocated to such entities if the losses of Charter Holdco had
been allocated among its members in proportion to their
respective percentage ownership of Charter Holdco common
membership units. The cumulative amount of such excess losses
was approximately $977 million through December 31,
2005.
In certain situations, the Special Loss Allocations, Special
Profit Allocations, Regulatory Allocations and Curative
Allocation Provisions described above could result in Charter
paying taxes in an amount that is more or less than if Charter
Holdco had allocated net tax profits and net tax losses among
its members based generally on the number of common membership
units owned by such members. This could occur due to differences
in (i) the character of the allocated income (e.g.,
ordinary versus capital), (ii) the allocated amount and
timing of tax depreciation and tax amortization expense due to
the application of
42
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 III Inc. and CII may exchange some or all of their
membership units in Charter Holdco for Charters
Class B common stock, be merged with Charter, or be
acquired by Charter in a non-taxable reorganization. If such an
exchange were to take place prior to the date that the Special
Profit Allocation provisions had fully offset the Special Loss
Allocations, Vulcan Cable III Inc. and CII could elect to
cause Charter Holdco to make the remaining Special Profit
Allocations to Vulcan Cable III Inc. and CII immediately
prior to the consummation of the exchange. In the event Vulcan
Cable III Inc. and CII choose not to make such election or
to the extent such allocations are not possible, Charter would
then be allocated tax profits attributable to the membership
units received in such exchange pursuant to the Special Profit
Allocation provisions. Mr. Allen has generally agreed to
reimburse Charter for any incremental income taxes that Charter
would owe as a result of such an exchange and any resulting
future Special Profit Allocations to Charter. The ability of
Charter to utilize net operating loss carryforwards is
potentially subject to certain limitations (see Risk
Factors Risks Related to Mr. Allens
Controlling Position). 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. Charters ability to make such income
tax payments, if any, will depend on its liquidity or its
ability to raise additional capital and/or on receipt of
payments or distributions from Charter Holdco and its
subsidiaries, including us.
As of March 31, 2006 and December 31, 2005 and 2004,
we have recorded net deferred income tax liabilities of
$213 million, $213 million and $208 million,
respectively. Additionally, as of March 31, 2006 and
December 31, 2005 and 2004, we have deferred tax assets of
$86 million, $86 million and $103 million,
respectively, which primarily relate to tax net operating loss
carryforwards of certain of our indirect corporate subsidiaries.
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 $51 million, $51 million and
$71 million at March 31, 2006 and December 31,
2005 and 2004, respectively.
We are currently under examination by the Internal Revenue
Service for the tax years ending December 31, 2002 and
2003. Our results (excluding our indirect corporate
subsidiaries) for these years are subject to this examination.
Management does not expect the results of this examination to
have a material adverse effect on our consolidated financial
condition, results of operations or our liquidity, including our
ability to comply with our debt covenants.
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 managements
best estimate of the probable cost of ultimate resolution of the
matter and is revised accordingly as facts and circumstances
change and, ultimately when the matter is brought to closure. We
have established reserves for certain
43
matters and if any of these matters are resolved unfavorably
resulting in payment obligations in excess of managements
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
|
|
|
Three Months Ended March 31, 2006 Compared to Three
Months Ended March 31, 2005 |
The following table sets forth the percentages of revenues that
items in the accompanying condensed consolidated statements of
operations constituted for the periods presented (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Revenues
|
|
$ |
1,374 |
|
|
|
100 |
% |
|
$ |
1,271 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (excluding depreciation and amortization)
|
|
|
626 |
|
|
|
46 |
% |
|
|
559 |
|
|
|
44 |
% |
|
Selling, general and administrative
|
|
|
281 |
|
|
|
20 |
% |
|
|
241 |
|
|
|
19 |
% |
|
Depreciation and amortization
|
|
|
358 |
|
|
|
26 |
% |
|
|
381 |
|
|
|
30 |
% |
|
Asset impairment charges
|
|
|
99 |
|
|
|
7 |
% |
|
|
31 |
|
|
|
2 |
% |
|
Other operating expenses, net
|
|
|
3 |
|
|
|
|
|
|
|
8 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,367 |
|
|
|
99 |
% |
|
|
1,220 |
|
|
|
96 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
7 |
|
|
|
1 |
% |
|
|
51 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(239 |
) |
|
|
|
|
|
|
(198 |
) |
|
|
|
|
|
Other income, net
|
|
|
6 |
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(233 |
) |
|
|
|
|
|
|
(178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(226 |
) |
|
|
|
|
|
|
(127 |
) |
|
|
|
|
Income tax expense
|
|
|
(2 |
) |
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(228 |
) |
|
|
|
|
|
$ |
(133 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues. The overall increase in revenues in 2006
compared to 2005 is principally the result of an increase of
344,000 high-speed Internet customers and 171,800 digital video
customers, as well as price increases for video and high-speed
Internet services, and is offset partially by a decrease of
70,900 analog video customers. Our goal is to increase revenues
by improving customer service, which we believe will stabilize
our analog video customer base, implementing price increases on
certain services and packages and increasing the number of
customers who purchase high-speed Internet services, digital
video and advanced products and services such as telephone,
video on demand (VOD), high definition television
and digital video recorder service.
Average monthly revenue per analog video customer increased to
$77.64 for the three months ended March 31, 2006 from
$70.75 for the three months ended March 31, 2005 primarily
as a result of incremental revenues from advanced services and
price increases. Average monthly revenue per analog video
customer represents total quarterly revenue, divided by three,
divided by the average number of analog video customers during
the respective period.
44
Revenues by service offering were as follows (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2006 over 2005 | |
|
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% | |
|
|
Revenues | |
|
Revenues | |
|
Revenues | |
|
Revenues | |
|
Change | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Video
|
|
$ |
869 |
|
|
|
63 |
% |
|
$ |
842 |
|
|
|
66 |
% |
|
$ |
27 |
|
|
|
3 |
% |
High-speed Internet
|
|
|
254 |
|
|
|
18 |
% |
|
|
215 |
|
|
|
17 |
% |
|
|
39 |
|
|
|
18 |
% |
Telephone
|
|
|
20 |
|
|
|
2 |
% |
|
|
6 |
|
|
|
1 |
% |
|
|
14 |
|
|
|
233 |
% |
Advertising sales
|
|
|
70 |
|
|
|
5 |
% |
|
|
64 |
|
|
|
5 |
% |
|
|
6 |
|
|
|
9 |
% |
Commercial
|
|
|
76 |
|
|
|
6 |
% |
|
|
65 |
|
|
|
5 |
% |
|
|
11 |
|
|
|
17 |
% |
Other
|
|
|
85 |
|
|
|
6 |
% |
|
|
79 |
|
|
|
6 |
% |
|
|
6 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,374 |
|
|
|
100 |
% |
|
$ |
1,271 |
|
|
|
100 |
% |
|
$ |
103 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video revenues consist primarily of revenues from analog and
digital video services provided to our non-commercial customers.
Approximately $27 million of the increase was the result of
price increases and incremental video revenues from existing
customers and approximately $11 million was the result of
an increase in digital video customers. The increases were
offset by decreases of approximately $11 million related to
a decrease in analog video customers.
Approximately $38 million of the increase in revenues from
high-speed Internet services provided to our non-commercial
customers related to the increase in the average number of
customers receiving high-speed Internet services, whereas
approximately $1 million related to the increase in average
price of the service.
Revenues from telephone services increased primarily as a result
of an increase of 135,800 telephone customers in 2006.
Advertising sales revenues consist primarily of revenues from
commercial advertising customers, programmers and other vendors.
Advertising sales revenues increased primarily as a result of an
increase in local advertising sales and a one-time ad buy by a
programmer offset by a decline in national advertising sales.
For the three months ended March 31, 2006 and 2005, we
received $6 million and $3 million, respectively, in
advertising sales revenues from programmers.
Commercial revenues consist primarily of revenues from cable
video and high-speed Internet services to our commercial
customers. Commercial revenues increased primarily as a result
of an increase in commercial high-speed Internet revenues.
Other revenues consist of revenues from franchise fees,
telephone revenue, equipment rental, customer installations,
home shopping, dial-up Internet service, late payment fees, wire
maintenance fees and other miscellaneous revenues. For each of
the three months ended March 31, 2006 and 2005, franchise
fees represented approximately 53% of total other revenues. The
increase in other revenues was primarily the result of an
increase in franchise fees of $4 million, installation
revenue of $1 million and wire maintenance fees of
$1 million.
45
Operating Expenses. Programming costs included in
the accompanying condensed consolidated statements of operations
were $391 million and $358 million, representing 62%
and 64% of total operating expenses for the three months ended
March 31, 2006 and 2005, respectively. Key expense
components as a percentage of revenues were as follows (dollars
in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2006 over 2005 | |
|
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% | |
|
|
Expenses | |
|
Revenues | |
|
Expenses | |
|
Revenues | |
|
Change | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Programming
|
|
$ |
391 |
|
|
|
29 |
% |
|
$ |
358 |
|
|
|
28 |
% |
|
$ |
33 |
|
|
|
9 |
% |
Service
|
|
|
209 |
|
|
|
15 |
% |
|
|
176 |
|
|
|
14 |
% |
|
|
33 |
|
|
|
19 |
% |
Advertising sales
|
|
|
26 |
|
|
|
2 |
% |
|
|
25 |
|
|
|
2 |
% |
|
|
1 |
|
|
|
4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
626 |
|
|
|
46 |
% |
|
$ |
559 |
|
|
|
44 |
% |
|
$ |
67 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Programming costs consist primarily of costs paid to programmers
for analog, premium, digital channels, VOD and pay-per-view
programming. The increase in programming costs was primarily a
result of rate increases. Programming costs were offset by the
amortization of payments received from programmers in support of
launches of new channels of $4 million and $9 million
for the three months ended March 31, 2006 and 2005,
respectively.
Our cable programming costs have increased in every year we have
operated in excess of customary inflationary and cost-of-living
increases. We expect them to continue to increase due to a
variety of factors, including annual increases imposed by
programmers and additional programming being provided to
customers as a result of system rebuilds and bandwidth
reallocation, both of which increase channel capacity. In 2006,
we expect programming costs to increase at a higher rate than in
2005. These costs will be determined in part on the outcome of
programming negotiations in 2006 and will likely be subject to
offsetting events or otherwise affected by factors similar to
the ones mentioned in the preceding paragraph. Our increasing
programming costs have resulted in declining operating margins
for our video services because we have been unable to pass on
all cost increases to our customers. We expect to partially
offset any resulting margin compression from our traditional
video services with revenue from advanced video services,
increased telephone revenues, high-speed Internet revenues,
advertising revenues and commercial service revenues.
Service costs consist primarily of service personnel salaries
and benefits, franchise fees, system utilities, costs of
providing high-speed Internet service, maintenance and pole rent
expense. The increase in service costs resulted primarily from
increased labor and maintenance costs to support improved
service levels and our advanced products of $12 million,
increased costs of providing high-speed Internet and telephone
service of $9 million, higher fuel and utility prices of
$4 million and franchise fees of $3 million.
Advertising sales expenses consist of costs related to
traditional advertising services provided to advertising
customers, including salaries, benefits and commissions.
Advertising sales expenses increased primarily as a result of
increased salary, benefit and commission costs.
Selling, General and Administrative Expenses. Key
components of expense as a percentage of revenues were as
follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2006 over 2005 | |
|
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% | |
|
|
Expenses | |
|
Revenues | |
|
Expenses | |
|
Revenues | |
|
Change | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
General and administrative
|
|
$ |
243 |
|
|
|
17 |
% |
|
$ |
206 |
|
|
|
16 |
% |
|
$ |
37 |
|
|
|
18 |
% |
Marketing
|
|
|
38 |
|
|
|
3 |
% |
|
|
35 |
|
|
|
3 |
% |
|
|
3 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
281 |
|
|
|
20 |
% |
|
$ |
241 |
|
|
|
19 |
% |
|
$ |
40 |
|
|
|
17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses consist primarily of
salaries and benefits, rent expense, billing costs, customer
care center costs, internal network costs, bad debt expense and
property taxes. The
46
increase in general and administrative expenses resulted
primarily from a rise in salaries and benefits of
$26 million and increases in customer care center costs of
$4 million related to investments to improve customer
service levels, consulting services of $2 million, billing
costs of $2 million, property and casualty insurance of
$2 million and property taxes of $1 million.
Marketing expenses increased as a result of an increased
investment in targeted marketing campaigns.
Depreciation and Amortization. Depreciation and
amortization expense decreased by $23 million for the three
months ended March 31, 2006 compared to the three months
ended March 31, 2005. The decrease in depreciation was the
result of assets becoming fully depreciated offset by an
increase in capital expenditures.
Asset Impairment Charges. Asset impairment charges
for the three months ended March 31, 2006 and 2005
represent the write-down of assets related to cable asset sales
to fair value less costs to sell. See Note 3 to the
condensed consolidated financial statements.
Other Operating Expenses, Net. Other operating
expenses decreased $5 million as a result of a
$4 million decrease in losses on sales of assets and a
$1 million decrease in special charges.
Interest Expense, Net. Net interest expense
increased by $41 million, or 21%, for the three months
ended March 31, 2006 compared to the three months ended
March 31, 2005. The increase in net interest expense was a
result of an increase in our average borrowing rate from 7.82%
in the first quarter of 2005 to 8.57% in the first quarter of
2006 and an increase of $912 million in average debt
outstanding from $9.8 billion for the first quarter of 2005
compared to $10.7 billion for the first quarter of 2006.
Other Income, Net. Other income decreased
$14 million primarily as a result of a $19 million
decrease in net gains on derivative instruments and hedging
activities as a result of decreases in gains on interest rate
agreements that do not qualify for hedge accounting under
Statement of Financial Accounting Standards (SFAS)
No. 133, Accounting for Derivative Instruments and
Hedging Activities. Other income in 2005 also included net
losses on extinguishment of debt of $5 million which did
not recur in 2006. See Note 6 to the condensed consolidated
financial statements. Other income also includes the 2%
accretion of the preferred membership interests in our indirect
subsidiary, CC VIII, and the pro rata share of the profits and
losses of CC VIII.
Income Tax Expense. Income tax expense was
recognized through increases in deferred tax liabilities and
current federal and state income tax expenses of certain of our
indirect corporate subsidiaries.
Net Loss. Net loss increased by $95 million,
or 71%, for the three months ended March 31, 2006 compared
to the three months ended March 31, 2005 as a result of the
factors described above.
47
Year Ended December 31, 2005, December 31, 2004 and
December 31, 2003
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Revenues
|
|
$ |
5,254 |
|
|
|
100 |
% |
|
$ |
4,977 |
|
|
|
100 |
% |
|
$ |
4,819 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (excluding depreciation and amortization)
|
|
|
2,293 |
|
|
|
44 |
% |
|
|
2,080 |
|
|
|
42 |
% |
|
|
1,952 |
|
|
|
40 |
% |
|
Selling, general and administrative
|
|
|
1,048 |
|
|
|
20 |
% |
|
|
1,002 |
|
|
|
20 |
% |
|
|
944 |
|
|
|
20 |
% |
|
Depreciation and amortization
|
|
|
1,499 |
|
|
|
28 |
% |
|
|
1,495 |
|
|
|
30 |
% |
|
|
1,453 |
|
|
|
30 |
% |
|
Impairment of franchises
|
|
|
|
|
|
|
|
|
|
|
2,433 |
|
|
|
49 |
% |
|
|
|
|
|
|
|
|
|
Asset impairment charges
|
|
|
39 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating (income) expenses, net
|
|
|
32 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
(46 |
) |
|
|
(1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,911 |
|
|
|
93 |
% |
|
|
7,023 |
|
|
|
141 |
% |
|
|
4,303 |
|
|
|
89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
343 |
|
|
|
7 |
% |
|
|
(2,046 |
) |
|
|
(41 |
)% |
|
|
516 |
|
|
|
11 |
% |
Interest expense, net
|
|
|
(858 |
) |
|
|
|
|
|
|
(726 |
) |
|
|
|
|
|
|
(545 |
) |
|
|
|
|
Other income, net
|
|
|
99 |
|
|
|
|
|
|
|
71 |
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and cumulative effect of accounting
change
|
|
|
(416 |
) |
|
|
|
|
|
|
(2,701 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
Income tax (expense) benefit
|
|
|
(9 |
) |
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of accounting change
|
|
|
(425 |
) |
|
|
|
|
|
|
(2,666 |
) |
|
|
|
|
|
|
(15 |
) |
|
|
|
|
Cumulative effect of accounting change, net of tax
|
|
|
|
|
|
|
|
|
|
|
(840 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(425 |
) |
|
|
|
|
|
$ |
(3,506 |
) |
|
|
|
|
|
$ |
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004
Revenues. The overall increase in revenues in 2005
compared to 2004 is principally the result of an increase of
312,000 and 121,900 high-speed Internet customers and digital
video customers, respectively, as well as price increases for
video and high-speed Internet services, and is offset partially
by a decrease of 107,000 analog video customers and
$12 million of credits issued to hurricane Katrina and Rita
impacted customers related to service outages. We have restored
service to the impacted areas. Included in the reduction in
analog video customers and reducing the increase in digital
video and high-speed Internet customers are 26,800 analog video
customers, 12,000 digital video customers and 600 high-speed
Internet customers sold in the cable system sales in Texas and
West Virginia, which closed in July 2005. The cable system sales
to Atlantic Broadband Finance, LLC, which closed in March and
April 2004 and the cable system sales in Texas and West
Virginia, which closed in July 2005 (collectively referred to in
this section as the Systems Sales) reduced the
increase in revenues by approximately $38 million. Our goal
is to increase revenues by improving customer service which we
believe will stabilize our analog video customer base and
increase the number of our customers who purchase bundled
services including high-speed Internet, digital video and
telephone services, in addition to VOD, high-definition
television and DVR services. In addition, we intend to increase
revenues by expanding marketing of our services to our
commercial customers.
Average monthly revenue per analog video customer increased from
$68.02 for the year ended December 31, 2004 to $73.68 for
the year ended December 31, 2005 primarily as a result of
price
48
increases and incremental revenues from advanced services.
Average monthly revenue per analog video customer represents
total annual revenue, divided by twelve, divided by the average
number of analog video customers during the respective period.
Revenues by service offering were as follows (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2005 over 2004 | |
|
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% | |
|
|
Revenues | |
|
Revenues | |
|
Revenues | |
|
Revenues | |
|
Change | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Video
|
|
$ |
3,401 |
|
|
|
65 |
% |
|
$ |
3,373 |
|
|
|
68 |
% |
|
$ |
28 |
|
|
|
1 |
% |
High-speed Internet
|
|
|
908 |
|
|
|
17 |
% |
|
|
741 |
|
|
|
15 |
% |
|
|
167 |
|
|
|
23 |
% |
Telephone
|
|
|
36 |
|
|
|
1 |
% |
|
|
18 |
|
|
|
|
|
|
|
18 |
|
|
|
100 |
% |
Advertising sales
|
|
|
294 |
|
|
|
6 |
% |
|
|
289 |
|
|
|
6 |
% |
|
|
5 |
|
|
|
2 |
% |
Commercial
|
|
|
279 |
|
|
|
5 |
% |
|
|
238 |
|
|
|
5 |
% |
|
|
41 |
|
|
|
17 |
% |
Other
|
|
|
336 |
|
|
|
6 |
% |
|
|
318 |
|
|
|
6 |
% |
|
|
18 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,254 |
|
|
|
100 |
% |
|
$ |
4,977 |
|
|
|
100 |
% |
|
$ |
277 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video revenues consist primarily of revenues from analog and
digital video services provided to our non-commercial customers.
Approximately $108 million of the increase in video
revenues was the result of price increases and incremental video
revenues from existing customers and approximately
$17 million was the result of an increase in digital video
customers. The increases were offset by decreases of
approximately $59 million related to a decrease in analog
video customers, approximately $29 million resulting from
the System Sales and approximately $9 million of credits
issued to hurricanes Katrina and Rita impacted customers related
to service outages.
Approximately $138 million of the increase in revenues from
high-speed Internet services provided to our non-commercial
customers related to the increase in the average number of
customers receiving high-speed Internet services, whereas
approximately $35 million related to the increase in
average price of the service. The increase was offset by
approximately $3 million of credits issued to hurricanes
Katrina and Rita impacted customers related to service outages
and $3 million resulting from the System Sales.
Revenues from telephone services increased primarily as a result
of an increase of 76,100 telephone customers in 2005.
Advertising sales revenues consist primarily of revenues from
commercial advertising customers, programmers and other vendors.
Advertising sales revenues increased primarily as a result of an
increase in local advertising sales and offset by a decline in
national advertising sales. In addition, the increase was offset
by a decrease of $1 million as a result of the System
Sales. For the years ended December 31, 2005 and 2004, we
received $15 million and $16 million, respectively, in
advertising sales revenues from programmers.
Commercial revenues consist primarily of revenues from cable
video and high-speed Internet services provided to our
commercial customers. Commercial revenues increased primarily as
a result of an increase in commercial high-speed Internet
revenues. The increase was reduced by approximately
$3 million as a result of the System Sales.
Other revenues consist of revenues from franchise fees,
equipment rental, customer installations, home shopping,
dial-up Internet
service, late payment fees, wire maintenance fees and other
miscellaneous revenues. For the years ended December 31,
2005 and 2004, franchise fees represented approximately 54% and
52%, respectively, of total other revenues. The increase in
other revenues was primarily the result of an increase in
franchise fees of $14 million and installation revenue of
$8 million offset by a decrease of $2 million in
equipment rental and $2 million in processing fees. In
addition, other revenues were offset by approximately
$2 million as a result of the System Sales.
49
Operating expenses. The overall increase in
operating expenses was reduced by approximately $15 million
as a result of the System Sales. Programming costs were
$1.4 billion and $1.3 billion, representing 62% and
63% of total operating expenses for the years ended
December 31, 2005 and 2004, respectively. Key expense
components as a percentage of revenues were as follows (dollars
in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2005 over 2004 | |
|
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% | |
|
|
Expenses | |
|
Revenues | |
|
Expenses | |
|
Revenues | |
|
Change | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Programming
|
|
$ |
1,417 |
|
|
|
27 |
% |
|
$ |
1,319 |
|
|
|
27 |
% |
|
$ |
98 |
|
|
|
7 |
% |
Service
|
|
|
775 |
|
|
|
15 |
% |
|
|
663 |
|
|
|
13 |
% |
|
|
112 |
|
|
|
17 |
% |
Advertising sales
|
|
|
101 |
|
|
|
2 |
% |
|
|
98 |
|
|
|
2 |
% |
|
|
3 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,293 |
|
|
|
44 |
% |
|
$ |
2,080 |
|
|
|
42 |
% |
|
$ |
213 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Programming costs consist primarily of costs paid to programmers
for analog, premium, digital channels and pay-per-view
programming. The increase in programming was a result of price
increases, particularly in sports programming, partially offset
by a decrease in analog video customers. Additionally, the
increase in programming costs was reduced by $11 million as
a result of the Systems Sales. Programming costs were offset by
the amortization of payments received from programmers in
support of launches of new channels of $42 million and
$62 million for the year ended December 31, 2005 and
2004, respectively. Programming costs for the year ended
December 31, 2004 also include a $5 million reduction
related to the settlement of a dispute with TechTV, Inc., a
related party. See Note 21 to the consolidated financial
statements included elsewhere in this prospectus.
Our cable programming costs have increased in every year we have
operated in excess of customary inflationary and
cost-of-living
increases. We expect them to continue to increase due to a
variety of factors, including annual increases imposed by
programmers and additional programming being provided to
customers as a result of system rebuilds and bandwidth
reallocation, both of which increase channel capacity. In 2006,
we expect programming costs to increase at a higher rate than in
2005. These costs will be determined in part on the outcome of
programming negotiations in 2006 and will likely be subject to
offsetting events or otherwise affected by factors similar to
the ones mentioned in the preceding paragraph. Our increasing
programming costs have resulted in declining operating margins
for our video services because we have been unable to pass on
cost increases to our customers. We expect to partially offset
any resulting margin compression from our traditional video
services with revenue from advanced video services, increased
telephone revenues, high-speed Internet revenues, advertising
revenues and commercial service revenues.
Service costs consist primarily of service personnel salaries
and benefits, franchise fees, system utilities, cost of
providing high-speed Internet and telephone service, maintenance
and pole rental expense. The increase in service costs resulted
primarily from increased labor and maintenance costs to support
improved service levels and our advanced products, increased
costs of providing high-speed Internet and telephone service as
a result of the increase in these customers and higher fuel
prices. The increase in service costs was reduced by
$4 million as a result of the System Sales. Advertising
sales expenses consist of costs related to traditional
advertising services provided to advertising customers,
including salaries, benefits and commissions. Advertising sales
expenses increased primarily as a result of increased salary,
benefit and commission costs.
50
Selling, general and administrative expenses. The
overall increase in selling, general and administrative expenses
was reduced by $6 million as a result of the System Sales.
Key components of expense as a percentage of revenues were as
follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2005 over 2004 | |
|
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% | |
|
|
Expenses | |
|
Revenues | |
|
Expenses | |
|
Revenues | |
|
Change | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
General and administrative
|
|
$ |
903 |
|
|
|
17 |
% |
|
$ |
880 |
|
|
|
18 |
% |
|
$ |
23 |
|
|
|
3 |
% |
Marketing
|
|
|
145 |
|
|
|
3 |
% |
|
|
122 |
|
|
|
2 |
% |
|
|
23 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,048 |
|
|
|
20 |
% |
|
$ |
1,002 |
|
|
|
20 |
% |
|
$ |
46 |
|
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses consist primarily of
salaries and benefits, rent expense, billing costs, call center
costs, internal network costs, bad debt expense and property
taxes. The increase in general and administrative expenses
resulted primarily from increases in salaries and benefits of
$26 million and professional fees associated with
consulting services of $18 million both related to
investments to improve service levels in our customer care
centers as well as an increase of $13 million in legal and
other professional fees offset by decreases in bad debt expense
of $17 million related to a reduction in the use of
discounted pricing, property taxes of $6 million, property
and casualty insurance of $6 million and the System Sales
of $6 million.
Marketing expenses increased as a result of an increased
investment in targeted marketing campaigns.
Depreciation and amortization. Depreciation and
amortization expense increased by $4 million in 2005. The
increase in depreciation is related to an increase in capital
expenditures, which was partially offset by lower depreciation
as the result of the Systems Sales and certain assets becoming
fully depreciated.
Impairment of franchises. We performed an
impairment assessment during the third quarter of 2004. The use
of lower projected growth rates and the resulting revised
estimates of future cash flows in our valuation, primarily as a
result of increased competition, led to the recognition of a
$2.4 billion impairment charge for the year ended
December 31, 2004. Our annual assessment in 2005 did not
result in an impairment.
Asset impairment charges. Asset impairment charges
for the year ended December 31, 2005 represent the
write-down of assets related to cable asset sales to fair value
less costs to sell. See Note 4 to the consolidated
financial statements included elsewhere in this prospectus.
Other operating (income) expenses, net. Other
operating expenses increased $19 million primarily as a
result of a $19 million hurricane asset retirement loss
recorded in 2005 associated with the write-off of the net book
value of assets destroyed by hurricanes Katrina and Rita. This
was coupled with a decrease in gain on sale of assets of
$92 million primarily as a result of the gain realized on
the sale of systems to Atlantic Broadband Finance, LLC which
closed in 2004. This was offset by a decrease in special charges
of $97 million primarily as a result of a decrease in
severance and related costs of our management reduction and
realignment in 2004, litigation costs and costs incurred as part
of a settlement of the consolidated federal class actions, state
derivative actions and federal derivative actions.
Interest expense, net. Net interest expense
increased by $132 million, or 18%, for the year ended
December 31, 2005 compared to the year ended
December 31, 2004. The increase in net interest expense was
a result of an increase in our average borrowing rate from 7.38%
in the year ended December 31, 2004 to 8.03% in the year
ended December 31, 2005 and an increase of
$753 million in average debt outstanding from
$9.4 billion in 2004 to $10.1 billion in 2005.
Other income, net. Other income increased
$28 million primarily as a result of a gain realized on an
exchange of our interest in an equity investee for an investment
in a larger enterprise which did not occur in 2004 partially
offset by a decrease in gains on derivative instruments and
hedging activities as a result of
51
decreases in gains on interest rate agreements that do not
qualify for hedge accounting under SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities. Other income in 2005 also included losses
related to the redemption of our subsidiarys CC V
Holdings, LLC, 11.875% notes due 2008. Other income in 2004
included the write-off of deferred financing fees and third
party costs related to the Charter Operating refinancing in
April 2004. Other income also includes the 2% accretion of the
preferred membership interests in our indirect subsidiary, CC
VIII, and the pro rate share of the profits and losses of CC
VIII.
Income tax benefit (expense). Income tax expense
for the year ended December 31, 2005 was recognized through
increases in deferred tax liabilities and current federal and
state income tax expenses of certain of our indirect corporate
subsidiaries. Income tax benefit for the year ended
December 31, 2004 was directly related to the impairment of
franchises. The deferred tax liabilities of our indirect
corporate subsidiaries decreased as a result of the write-down
of franchise assets for financial statement purposes. We do not
expect to recognize a similar benefit associated with the
impairment of franchises in future periods. However, the actual
tax provision calculations in future periods will be the result
of current and future temporary differences, as well as future
operating results.
Cumulative effect of accounting change, net of
tax. Cumulative effect of accounting change of
$840 million (net of minority interest effects of
$19 million and tax effects of $16 million) in 2004
represents the impairment charge recorded as a result of our
adoption of Topic D-108.
Net loss. Net loss decreased by $3.1 billion
in 2005 compared to 2004 as a result of the factors described
above. The impact to net loss in 2005 of the asset impairment
charges and extinguishment of debt was to increase net loss by
approximately $45 million. The impact to net loss in 2004
of the impairment of franchises and cumulative effect of
accounting change was to increase net loss by approximately
$3.0 billion.
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003
Revenues. The
overall increase in revenues in 2004 compared to 2003 is
principally the result of an increase of 318,800 and 2,800
high-speed Internet customers and digital video customers,
respectively, as well as price increases for video and
high-speed Internet services, and is offset partially by a
decrease of 439,800 analog video customers. Included in the
reduction in analog video customers and reducing the increase in
digital video and high-speed Internet customers are 230,800
analog video customers, 83,300 digital video customers and
37,800 high-speed Internet customers sold in the cable system
sales to Atlantic Broadband Finance, LLC, which closed in March
and April 2004 (collectively, with the cable system sale to
WaveDivision Holdings, LLC in October 2003, referred to in this
section as the System Sales). The System Sales
reduced the increase in revenues by $160 million.
Average monthly revenue per analog video customer increased from
$61.92 for the year ended December 31, 2003 to $68.02 for
the year ended December 31, 2004 primarily as a result of
price increases and incremental revenues from advanced services.
Average monthly revenue per analog video customer represents
total annual revenue, divided by twelve, divided by the average
number of analog video customers during the respective period.
52
Revenues by service offering were as follows (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2004 over 2003 | |
|
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% | |
|
|
Revenues | |
|
Revenues | |
|
Revenues | |
|
Revenues | |
|
Change | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Video
|
|
$ |
3,373 |
|
|
|
68 |
% |
|
$ |
3,461 |
|
|
|
72 |
% |
|
$ |
(88 |
) |
|
|
(3 |
)% |
High-speed Internet
|
|
|
741 |
|
|
|
15 |
% |
|
|
556 |
|
|
|
12 |
% |
|
|
185 |
|
|
|
33 |
% |
Telephone
|
|
|
18 |
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
4 |
|
|
|
29 |
% |
Advertising sales
|
|
|
289 |
|
|
|
6 |
% |
|
|
263 |
|
|
|
5 |
% |
|
|
26 |
|
|
|
10 |
% |
Commercial
|
|
|
238 |
|
|
|
5 |
% |
|
|
204 |
|
|
|
4 |
% |
|
|
34 |
|
|
|
17 |
% |
Other
|
|
|
318 |
|
|
|
6 |
% |
|
|
321 |
|
|
|
7 |
% |
|
|
(3 |
) |
|
|
(1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,977 |
|
|
|
100 |
% |
|
$ |
4,819 |
|
|
|
100 |
% |
|
$ |
158 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video revenues consist primarily of revenues from analog and
digital video services provided to our non-commercial customers.
Approximately $116 million of the decrease in video
revenues was the result of the System Sales and approximately an
additional $65 million related to a decline in analog video
customers. These decreases were offset by increases of
approximately $66 million resulting from price increases
and incremental video revenues from existing customers and
approximately $27 million resulting from an increase in
digital video customers.
Approximately $163 million of the increase in revenues from
high-speed Internet services provided to our non-commercial
customers related to the increase in the average number of
customers receiving high-speed Internet services, whereas
approximately $35 million related to the increase in
average price of the service. The increase in high-speed
Internet revenues was reduced by approximately $12 million
as a result of the System Sales.
Revenues from telephone services increased primarily as a result
of an increase of 20,500 telephone customers.
Advertising sales revenues consist primarily of revenues from
commercial advertising customers, programmers and other vendors.
Advertising sales increased primarily as a result of an increase
in national advertising campaigns and election related
advertising. The increase was offset by a decrease of
$7 million as a result of the System Sales. For the years
ended December 31, 2004 and 2003, we received
$16 million and $15 million, respectively, in
advertising revenue from programmers.
Commercial revenues consist primarily of revenues from cable
video and high-speed Internet services to our commercial
customers. Commercial revenues increased primarily as a result
of an increase in commercial high-speed Internet revenues. The
increase was reduced by approximately $14 million as a
result of the System Sales.
Other revenues consist of revenues from franchise fees,
equipment rental, customer installations, home shopping,
dial-up Internet
service, late payment fees, wire maintenance fees and other
miscellaneous revenues. For the year ended December 31,
2004 and 2003, franchise fees represented approximately 52% and
50%, respectively, of total other revenues. Approximately
$11 million of the decrease in other revenues was the
result of the System Sales offset by an increase in home
shopping and infomercial revenue.
Operating expenses. The overall increase in
operating expenses was reduced by approximately $59 million
as a result of the System Sales. Programming costs were
$1.3 billion and $1.2 billion,
53
representing 63% and 64% of total operating expenses for the
years ended December 31, 2004 and 2003, respectively. Key
expense components as a percentage of revenues were as follows
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2004 over 2003 | |
|
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% | |
|
|
Expenses | |
|
Revenues | |
|
Expenses | |
|
Revenues | |
|
Change | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Programming
|
|
$ |
1,319 |
|
|
|
27 |
% |
|
$ |
1,249 |
|
|
|
26 |
% |
|
$ |
70 |
|
|
|
6 |
% |
Service
|
|
|
663 |
|
|
|
13 |
% |
|
|
615 |
|
|
|
12 |
% |
|
|
48 |
|
|
|
8 |
% |
Advertising sales
|
|
|
98 |
|
|
|
2 |
% |
|
|
88 |
|
|
|
2 |
% |
|
|
10 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,080 |
|
|
|
42 |
% |
|
$ |
1,952 |
|
|
|
40 |
% |
|
$ |
128 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Programming costs consist primarily of costs paid to programmers
for analog, premium and digital channels and pay-per-view
programming. The increase in programming costs was a result of
price increases, particularly in sports programming, an
increased number of channels carried on our systems, and an
increase in digital video customers, partially offset by a
decrease in analog video customers. Additionally, the increase
in programming costs was reduced by $42 million as a result
of the System Sales. Programming costs were offset by the
amortization of payments received from programmers in support of
launches of new channels of $62 million and
$64 million for the years ended December 31, 2004 and
2003, respectively. Programming costs for the year ended
December 31, 2004 also include a $5 million reduction
related to the settlement of a dispute with TechTV, Inc., a
related party. See Note 21 to the consolidated financial
statements included elsewhere in this prospectus.
Service costs consist primarily of service personnel salaries
and benefits, franchise fees, system utilities, Internet service
provider fees, maintenance and pole rental expense. The increase
in service costs resulted primarily from additional activity
associated with ongoing infrastructure maintenance. The increase
in service costs was reduced by $15 million as a result of
the System Sales. Advertising sales expenses consist of costs
related to traditional advertising services provided to
advertising customers, including salaries, benefits and
commissions. Advertising sales expenses increased primarily as a
result of increased salary, benefit and commission costs. The
increase in advertising sales expenses was reduced by
$2 million as a result of the System Sales.
Selling, general and administrative expenses. The
overall increase in selling, general and administrative expenses
was reduced by $22 million as a result of the System Sales.
Key components of expense as a percentage of revenues were as
follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
2004 over 2003 | |
|
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% | |
|
|
Expenses | |
|
Revenues | |
|
Expenses | |
|
Revenues | |
|
Change | |
|
Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
General and administrative
|
|
$ |
880 |
|
|
|
18 |
% |
|
$ |
837 |
|
|
|
18 |
% |
|
$ |
43 |
|
|
|
5 |
% |
Marketing
|
|
|
122 |
|
|
|
2 |
% |
|
|
107 |
|
|
|
2 |
% |
|
|
15 |
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,002 |
|
|
|
20 |
% |
|
$ |
944 |
|
|
|
20 |
% |
|
$ |
58 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses consist primarily of
salaries and benefits, rent expense, billing costs, call center
costs, internal network costs, bad debt expense and property
taxes. The increase in general and administrative expenses
resulted primarily from increases in costs associated with our
commercial business of $21 million, third party call center
costs resulting from increased emphasis on customer service of
$10 million, bad debt expense of $10 million and costs
associated with salaries and benefits of $6 million.
Marketing expenses increased as a result of an increased
investment in marketing and branding campaigns.
54
Depreciation and amortization. Depreciation and
amortization expense increased by $42 million, or 3%. The
increase in depreciation related to an increase in capital
expenditures, which was partially offset by lower depreciation
as the result of the System Sales.
Impairment of franchises. We performed an
impairment assessment during the third quarter of 2004. The use
of lower projected growth rates and the resulting revised
estimates of future cash flows in our valuation, primarily as a
result of increased competition, led to the recognition of a
$2.4 billion impairment charge for the year ended
December 31, 2004.
Other operating (income) expenses, net. Other
operating income decreased $59 million primarily as a
result of an increase in special charges of $83 million
related to severance and related costs of our management
reduction and realignment in 2004, litigation costs and costs
incurred as part of a settlement of the consolidated federal
class actions, state derivative actions and federal derivative
actions. This was coupled with a decrease of $67 million in
the settlement of estimated liabilities recorded in connection
with prior business combinations, which based on current facts
and circumstances, are no longer required. This was offset by an
increase of $91 million in gain on sale of assets as a
result of the gain realized on the sale of systems to Atlantic
Broadband Finance, LLC which closed in 2004.
Interest expense, net. Net interest expense
increased by $181 million, or 33%, from $545 million
for the year ended December 31, 2003 to $726 million
for the year ended December 31, 2004. The increase in net
interest expense was a result of an increase in our average
borrowing rate from 6.00% in the year ended December 31,
2003 to 7.38% in the year ended December 31, 2004 coupled
with an increase of $509 million in average debt
outstanding from $8.9 billion in 2003 to $9.4 billion
in 2004.
Other income, net. Other income increased
$44 million primarily as a result of an increase in net
gains on derivative instruments and hedging activities as a
result of increases in gains on interest rate agreements that do
not qualify for hedge accounting under SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities. Other income in 2004 included the write-off of
deferred financing fees and third party costs related to the
Charter Operating refinancing in April 2004 which did not occur
in 2003. Other income also includes the 2% accretion of the
preferred membership interests in our indirect subsidiary, CC
VIII, and the pro rata share of the profits and losses of CC
VIII.
Income tax benefit (expense). The income tax
benefit for the year ended December 31, 2004 was directly
related to the impairment of franchises. The deferred tax
liabilities of our indirect corporate subsidiaries decreased as
a result of the write-down of franchise assets for financial
statement purposes. We do not expect to recognize a similar
benefit associated with the impairment of franchises in future
periods. However, the actual tax provision calculations in
future periods will be the result of current and future
temporary differences, as well as future operating results.
The income tax expense recognized in the year ended
December 31, 2003 represents increases in the deferred tax
liabilities and current federal and state income tax expenses of
certain of our indirect corporate subsidiaries.
Cumulative effect of accounting change, net of
tax. Cumulative effect of accounting change of
$840 million (net of minority interest effects of
$19 million and tax effects of $16 million) in 2004
represents the impairment charge recorded as a result of our
adoption of EITF Topic D-108.
Net loss. Net loss increased by $3.5 billion
from $15 million in 2003 to $3.5 billion in 2004 as a
result of the factors described above. The impact to net loss in
2004 of the impairment of franchises and cumulative effect of
accounting change was to increase net loss by approximately
$3.0 billion. The impact to net loss in 2003 of the gain on
sale of systems and unfavorable contracts and settlements, net
of income tax impacts, was to decrease net loss by
$93 million.
55
Liquidity and Capital Resources
This section contains a discussion of our liquidity and capital
resources, including a discussion of our cash position, sources
and uses of cash, access to credit facilities and other
financing sources, historical financing activities, cash needs,
capital expenditures and outstanding debt.
|
|
|
Recent Financing Transactions |
On January 30, 2006, CCH II and CCH II Capital
issued $450 million of the original notes, the proceeds of
which were provided, directly or indirectly, to Charter
Operating, which used such funds to reduce borrowings, but not
commitments, under the revolving portion of its credit
facilities.
In April 2006, Charter Operating completed a $6.85 billion
refinancing of its credit facilities including a new
$350 million revolving/term facility (which converts to a
term loan in one year), a $5.0 billion term loan due in
2013 and certain amendments to the existing $1.5 billion
revolving credit facility. In addition, the refinancing reduced
margins on Eurodollar rate Term A & B loans to 2.625% from a
weighted average of 3.15% previously and margins on base rate
term loans to 1.625% from a weighted average of 2.15%
previously. Concurrent with this refinancing, the CCO Holdings
bridge loan was terminated.
Our long-term financing as of March 31, 2006 consists of
$5.4 billion of credit facility debt and $5.3 billion
accreted value of high-yield notes. Pro forma for the completion
of the credit facility refinancing discussed above, none of our
debt matures in the remainder of 2006, and in 2007 and 2008,
$25 million and $128 million mature, respectively. In
2009 and beyond, significant additional amounts will become due
under our remaining long-term debt obligations.
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,
equity contributions from our parent companies, sales of assets,
issuances of debt securities and cash on hand. However, the mix
of funding sources changes from period to period. For the three
months ended March 31, 2006, we generated $239 million
of net cash flows from operating activities after paying cash
interest of $214 million. In addition, we used
approximately $241 million for purchases of property, plant
and equipment. Finally, we had net cash flows from financing
activities of $60 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 our credit facilities, our and our parent
companies access to the debt markets, the timing of
possible asset sales and our ability to generate cash flows from
operating activities. We continue to explore asset dispositions
as one of several possible actions that we could take in the
future to improve our liquidity, but we do not presently
consider future asset sales as a significant source of liquidity.
We expect that cash on hand, cash flows from operating
activities, proceeds from sale of assets and the amounts
available under our credit facilities will be adequate to meet
our and our parent companies cash needs through 2007. We
believe that cash flows from operating activities and amounts
available under our credit facilities may not be sufficient to
fund our operations and satisfy our and our parent
companies interest and principal repayment obligations in
2008 and will not be sufficient to fund such needs in 2009 and
beyond. We have been advised that Charter continues to work with
its financial advisors in its approach to addressing liquidity,
debt maturities and our overall balance sheet leverage.
Our ability to operate depends upon, among other things, our
continued access to capital, including credit under the Charter
Operating credit facilities. The Charter Operating credit
facilities, along with our indentures, contain certain
restrictive covenants, some of which require us to maintain
specified financial ratios and meet financial tests and to
provide annual audited financial statements with an unqualified
opinion from our independent auditors. As of March 31,
2006, we are in compliance with the covenants under our
indentures and credit facilities, and we expect to remain in
compliance with those covenants for
56
the next twelve months. As of March 31, 2006, our potential
availability under our credit facilities totaled approximately
$904 million, although the actual availability at that time
was only $516 million because of limits imposed by covenant
restrictions. However, pro forma for the completion of the
credit facility refinancing (see Recent
Events Credit Facility Refinancing), our
potential availability under our credit facilities as of
March 31, 2006 would have been approximately
$1.3 billion, although actual availability of
$516 million would remain unchanged because of limits
imposed by covenant restrictions. Continued access to our credit
facilities is subject to our remaining in compliance with the
covenants, including covenants tied to our operating
performance. If any events of non-compliance occur, funding
under the credit facilities may not be available and defaults on
some or potentially all of our debt obligations could occur. An
event of default under any of our debt instruments could result
in the acceleration of our payment obligations under that debt
and, under certain circumstances, in cross-defaults under our
other debt obligations, which could have a material adverse
effect on our consolidated financial condition and results of
operations. See Risk Factors Risks Related to
Significant Indebtedness of Us and Our Subsidiaries
Charter Operating may not be able to access funds under its
credit facilities if it fails to satisfy the covenant
restrictions in its credit facilities, which could adversely
affect our financial condition and our ability to conduct our
business.
|
|
|
Parent Company Debt Obligations |
Any financial or liquidity problems of our parent companies
could cause serious disruption to our business and have a
material adverse effect on our business and results of
operations. A failure by Charter Holdings, CIH or CCH I to
satisfy their debt payment obligations or a bankruptcy filing
with respect to Charter Holdings, CIH or CCH I would give
the lenders under our credit facilities the right to accelerate
the payment obligations under these facilities. Any such
acceleration would be a default under the indenture governing
our notes. On a consolidated basis, our parent companies have a
significant level of debt, which, including our debt, totaled
approximately $19.5 billion as of March 31, 2006, as
discussed below.
Charters ability to make interest payments on its
convertible senior notes, and, in 2006 and 2009, to repay the
outstanding principal of its convertible senior notes of
$20 million and $863 million, respectively, will
depend on its ability to raise additional capital and/or on
receipt of payments or distributions from Charter Holdco and its
subsidiaries. As of March 31, 2006, Charter Holdco was owed
$24 million in intercompany loans from its subsidiaries,
which were available to pay interest and principal on
Charters convertible senior notes. In addition, Charter
has $99 million of governmental securities pledged as
security for the next four scheduled semi-annual interest
payments on Charters 5.875% convertible senior notes.
As of March 31, 2006, Charter Holdings, CIH and CCH I
had approximately $7.8 billion principal amount of
high-yield notes outstanding with approximately
$105 million, $0, $684 million and $7.0 billion
maturing in 2007, 2008, 2009 and thereafter, respectively.
Charter, Charter Holdings, CIH and CCH I will need to raise
additional capital or receive distributions or payments from us
in order to satisfy their debt obligations. However, because of
their significant indebtedness, our ability and the ability of
our parent companies to raise additional capital at reasonable
rates or at all is uncertain. During the three months ended
March 31, 2006, we distributed $26 million of cash to
our parent company.
Distributions by Charters subsidiaries to a parent company
(including Charter, CCHC, Charter Holdco, Charter Holdings, CIH
and CCH I) for payment of principal on parent company notes
are restricted under the indentures governing the CIH notes, CCH
I notes, CCH II notes, CCO Holdings notes and Charter Operating
notes unless there is no default, each applicable
subsidiarys leverage ratio test is met at the time of such
distribution and, in the case of Charters convertible
senior notes, other specified tests are met. For the quarter
ended March 31, 2006, there was no default under any of
these indentures and the other specified tests were met.
However, certain of our subsidiaries did not meet their
respective leverage ratio tests based on March 31, 2006
financial results. As a result, distributions from certain of
our subsidiaries to their parent companies have been restricted
and will continue to be restricted until those tests are met.
Distributions by Charter Operating for payment of principal on
parent company notes are further restricted by the covenants in
the credit facilities.
57
Distributions by CIH, CCH I, CCH II, CCO Holdings and
Charter Operating to a parent company for payment of parent
company interest are permitted if there is no default under the
aforementioned indentures. However, distributions for payment of
interest on Charters convertible senior notes are further
limited to when each applicable subsidiarys leverage ratio
test is met and other specified tests are met. There can be no
assurance that they will satisfy these tests at the time of such
distribution.
|
|
|
Specific Limitations at Charter Holdings |
The indentures governing the Charter Holdings notes permit
Charter Holdings to make distributions to Charter Holdco for
payment of interest or principal on Charters 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 March 31, 2006, there was no default
under Charter Holdings indentures and the other specified
tests were met. However, Charter Holdings did not meet the
leverage ratio test of 8.75 to 1.0 based on March 31, 2006
financial results. As a result, distributions from Charter
Holdings to Charter or Charter Holdco have been restricted and
will continue to be restricted until that test is met. During
this restriction period, in which distributions are restricted,
the indentures governing the Charter Holdings notes permit
Charter Holdings and its subsidiaries to make specified
investments (that are not restricted payments) in Charter Holdco
or Charter up to an amount determined by a formula, as long as
there is no default under the indentures.
Our 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 at a parent company level, the proceeds of which
could be loaned or contributed to us; |
|
|
|
|
issuing debt securities that may have structural or other
priority over our existing notes; |
|
|
|
further reducing our expenses and capital expenditures, which
may impair our ability to increase revenue; |
|
|
|
selling assets; or |
|
|
|
requesting waivers or amendments with respect to our credit
facilities, the availability and terms of which would be subject
to market conditions. |
If the above strategies are not successful, we could be forced
to restructure our obligations or seek protection under the
bankruptcy laws. In addition, if we find it necessary to engage
in a recapitalization or other similar transaction, our
noteholders might not receive principal and interest payments to
which they are contractually entitled.
In February and March 2006, we signed three separate definitive
agreements to sell certain cable television systems serving a
total of approximately 360,000 analog video customers in
West Virginia, Virginia, Illinois, Kentucky, Nevada, Colorado,
New Mexico and Utah for a total of approximately
$971 million. As of March 31, 2006, those cable
systems met the criteria for assets held for sale under SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.
As such, the assets were written down to fair value less
estimated costs to sell resulting in asset impairment charges
during the three months ended March 31, 2006 of
approximately $99 million.
58
In July 2005, we closed the sale of certain cable systems in
Texas and West Virginia and closed the sale of an additional
cable system in Nebraska in October 2005 for a total sales price
of approximately $37 million, representing a total of
33,000 analog video customers.
In January 2006, we closed the purchase of certain cable systems
in Minnesota from Seren Innovations, Inc. We acquired
approximately 17,500 analog video customers, 8,000 digital video
customers, 13,200 high-speed Internet customers and 14,500
telephone customers for a total purchase price of approximately
$42 million.
|
|
|
Summary of Outstanding Contractual Obligations |
The following table summarizes our payment obligations as of
December 31, 2005 under our long-term debt and certain
other contractual obligations and commitments (dollars in
millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments by Period | |
|
|
|
|
| |
|
|
|
|
Less than | |
|
1-3 | |
|
3-5 | |
|
More than | |
|
|
Total | |
|
1 Year | |
|
Years | |
|
Years | |
|
5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt Principal Payments(1)
|
|
$ |
10,629 |
|
|
$ |
30 |
|
|
$ |
1,024 |
|
|
$ |
4,142 |
|
|
$ |
5,433 |
|
Long-Term Debt Interest Payments(2)
|
|
|
4,231 |
|
|
|
746 |
|
|
|
1,478 |
|
|
|
1,396 |
|
|
|
611 |
|
Payments on Interest Rate Instruments(3)
|
|
|
18 |
|
|
|
8 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
Capital and Operating Lease Obligations(1)
|
|
|
94 |
|
|
|
20 |
|
|
|
27 |
|
|
|
23 |
|
|
|
24 |
|
Programming Minimum Commitments(4)
|
|
|
1,253 |
|
|
|
342 |
|
|
|
678 |
|
|
|
233 |
|
|
|
|
|
Other(5)
|
|
|
301 |
|
|
|
146 |
|
|
|
70 |
|
|
|
42 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
16,526 |
|
|
$ |
1,292 |
|
|
$ |
3,287 |
|
|
$ |
5,836 |
|
|
$ |
6,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The table presents maturities of long-term debt outstanding as
of December 31, 2005. Refer to Description of Other
Indebtedness and Notes 9 and 22 to our
December 31, 2005 consolidated financial statements
included in this prospectus for a description of our long-term
debt and other contractual obligations and commitments. |
|
(2) |
Interest payments on variable debt are estimated using amounts
outstanding at December 31, 2005 and the average implied
forward London Interbank Offering Rate (LIBOR) rates
applicable for the quarter during the interest rate reset based
on the yield curve in effect at December 31, 2005. Actual
interest payments will differ based on actual LIBOR rates and
actual amounts outstanding for applicable periods. |
|
(3) |
Represents amounts we will be required to pay under our interest
rate hedge agreements estimated using the average implied
forward LIBOR rates applicable for the quarter during the
interest rate reset based on the yield curve in effect at
December 31, 2005. |
|
(4) |
We pay programming fees under multi-year contracts ranging from
three to ten years typically based on a flat fee per customer,
which may be fixed for the term or may in some cases, escalate
over the term. Programming costs included in the accompanying
statements of operations were approximately $1.4 billion,
$1.3 billion and $1.2 billion for the years ended
December 31, 2005, 2004 and 2003, respectively. Certain of
our programming agreements are based on a flat fee per month or
have guaranteed minimum payments. The table sets forth the
aggregate guaranteed minimum commitments under our programming
contracts. |
|
(5) |
Other represents other guaranteed minimum
commitments, which consist primarily of commitments to our
billing services vendors. |
59
The following items are not included in the contractual
obligations table because the obligations are not fixed and/or
determinable due to various factors discussed below. However, we
incur these costs as part of our operations:
|
|
|
|
|
We also rent utility poles used in our operations. Generally,
pole rentals are cancelable on short notice, but we anticipate
that such rentals will recur. Rent expense incurred for pole
rental attachments for the years ended December 31, 2005,
2004 and 2003, was $46 million, $43 million and
$40 million, respectively. |
|
|
|
We pay franchise fees under multi-year franchise agreements
based on a percentage of revenues earned from video service per
year. We also pay other franchise related costs, such as public
education grants under multi-year agreements. Franchise fees and
other franchise-related costs included in the accompanying
statements of operations were $170 million,
$164 million and $162 million for the years ended
December 31, 2005, 2004 and 2003, respectively. |
|
|
|
We also have $165 million in letters of credit, primarily
to our various workers compensation, property casualty and
general liability carriers as collateral for reimbursement of
claims. These letters of credit reduce the amount we may borrow
under our credit facilities. |
|
|
|
Historical Operating, Financing and Investing
Activities |
We held $26 million in cash and cash equivalents as of
March 31, 2006 compared to $3 million as of
December 31, 2005. For the three months ended
March 31, 2006, we generated $239 million of net cash
flows from operating activities after paying cash interest of
$214 million. In addition, we used approximately
$241 million for purchases of property, plant and
equipment. Finally, we had net cash flows from financing
activities of $60 million.
Operating Activities. Net cash provided by
operating activities increased $52 million, or 28%, from
$187 million for the three months ended March 31,
2005 to $239 million for the three months ended
March 31, 2006. For the three months ended
March 31, 2006, net cash provided by operating activities
increased primarily as a result of changes in operating assets
and liabilities that provided $90 million more cash during the
three months ended March 31, 2006 than the
corresponding period in 2005 offset with an increase in cash
interest expense of $39 million over the corresponding
prior period.
Net cash provided by operating activities decreased
$125 million, or 12%, from $1.0 billion for the year
ended December 31, 2004 to $884 million for the year
ended December 31, 2005. For the year ended
December 31, 2005, net cash provided by operating
activities decreased primarily as a result of an increase in
cash interest expense of $128 million over the
corresponding prior period.
Net cash provided by operating activities decreased
$312 million, or 24%, from $1.3 billion for the year
ended December 31, 2003 to $1.0 billion for the year
ended December 31, 2004. For the year ended
December 31, 2004, net cash provided by operating
activities decreased primarily as a result of changes in
operating assets and liabilities that used $114 million
more cash during the year ended December 31, 2004 than the
corresponding period in 2003 and an increase in cash interest
expense of $192 million over the corresponding prior
period. The change in operating assets and liabilities is
primarily the result of the benefit in the year ended
December 31, 2003 from collection of receivables from
programmers related to network launches, while accounts
receivable remained essentially flat in the year ended
December 31, 2004.
Investing Activities. Net cash used by investing
activities for the three months ended March 31, 2006 and
2005 was $276 million and $190 million, respectively.
Investing activities used $86 million more cash during the
three months ended March 31, 2006 than the corresponding
period in 2005 primarily as a result of increased cash used for
capital expenditures in 2006 coupled with cash used for the
purchase of cable systems discussed above.
Net cash used in investing activities for the years ended
December 31, 2005 and 2004 was $1.0 billion and
$191 million, respectively. Investing activities used
$827 million more cash during the year ended
December 31, 2005 than the corresponding period in 2004
primarily as a result of cash provided by
60
proceeds from the sale of certain cable systems to Atlantic
Broadband Finance, LLC in 2004 which did not recur in 2005
combined with increased cash used for capital expenditures.
Net cash used in investing activities for the years ended
December 31, 2004 and 2003 was $191 million and
$757 million, respectively. Investing activities used
$566 million less cash during the year ended
December 31, 2004 than the corresponding period in 2003
primarily as a result of cash provided by proceeds from the sale
of certain cable systems to Atlantic Broadband Finance, LLC
offset by increased cash used for capital expenditures.
Financing Activities. Net cash provided by
financing activities was $60 million for the three months
ended March 31, 2006 and net cash used in financing
activities was $517 million for the three months ended
March 31, 2005. The increase in cash provided during the
three months ended March 31, 2006 as compared to the
corresponding period in 2005, was primarily the result of
proceeds from the issuance of debt.
Net cash used in financing activities was $409 million and
$357 million for the years ended December 31, 2005 and
2004, respectively. The increase in cash used during the year
ended December 31, 2005, as compared to the corresponding
period in 2004, was primarily the result of an increase in
distributions offset by a decrease in payments for debt issuance
costs.
Net cash used in financing activities for the year ended
December 31, 2004 and 2003 was $357 million and
$789 million, respectively. The decrease in cash used
during the year ended December 31, 2004, as compared to the
corresponding period in 2003, was primarily the result of an
increase in borrowings of long-term debt and proceeds from
issuance of debt reduced by repayments of long-term debt.
We have significant ongoing capital expenditure requirements.
Capital expenditures were $241 million, $211 million,
$1.1 billion, $893 million and $804 million for
the three months ended March 31, 2006 and 2005 and the
years ended December 31, 2005, 2004 and 2003, respectively.
Capital expenditures increased as a result of increased spending
on customer premise equipment as a result of increases in
digital video,
high-speed Internet and
telephone customers. 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 three months
ended March 31, 2006 and 2005 and the years ended
December 31, 2005, 2004 and 2003, our liabilities related
to capital expenditures decreased $7 million, increased
$16 million and $13 million and decreased
$33 million and $41 million, respectively.
The increase in capital expenditures for 2005 compared to 2004
is the result of expected increases in scalable infrastructure
costs related to telephone services, deployment of advanced
digital set-top terminals and capital expenditures to replace
plant and equipment destroyed by hurricanes Katrina and Rita.
During 2006, we expect capital expenditures to be approximately
$1.0 billion to $1.1 billion. We expect that the
nature of these expenditures will continue to be composed
primarily of purchases of customer premise equipment related to
telephone and other advanced services, support capital and for
scalable infrastructure costs. We expect to fund capital
expenditures for 2006 primarily from cash flows from operating
activities, proceeds from asset sales and borrowings under our
credit facilities.
We have adopted capital expenditure disclosure guidance, which
was developed by eleven publicly traded cable system operators,
including Charter, with the support of the National
Cable & Telecommunications Association
(NCTA). The disclosure is intended to provide more
consistency in the reporting of operating statistics in capital
expenditures and customers among peer companies in the cable
industry. These disclosure guidelines are not required
disclosure under generally accepted accounting principles
(GAAP), nor do they impact our accounting for
capital expenditures under GAAP.
61
The following table presents our major capital expenditures
categories in accordance with NCTA disclosure guidelines for the
three months ended March 31, 2006 and 2005 and the years
ended December 31, 2005, 2004 and 2003 (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the | |
|
|
|
|
|
|
|
|
Three Months | |
|
|
|
|
Ended | |
|
For the Years Ended | |
|
|
March 31, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2006 | |
|
2005 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Customer premise equipment(a)
|
|
$ |
130 |
|
|
$ |
86 |
|
|
$ |
434 |
|
|
$ |
451 |
|
|
$ |
380 |
|
Scalable infrastructure(b)
|
|
|
34 |
|
|
|
42 |
|
|
|
174 |
|
|
|
108 |
|
|
|
66 |
|
Line extensions(c)
|
|
|
26 |
|
|
|
29 |
|
|
|
134 |
|
|
|
131 |
|
|
|
130 |
|
Upgrade/ Rebuild(d)
|
|
|
9 |
|
|
|
10 |
|
|
|
49 |
|
|
|
49 |
|
|
|
132 |
|
Support capital(e)
|
|
|
42 |
|
|
|
44 |
|
|
|
297 |
|
|
|
154 |
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$ |
241 |
|
|
$ |
211 |
|
|
$ |
1,088 |
|
|
$ |
893 |
|
|
$ |
804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 51 and customer
premise equipment (e.g., set-top terminals and cable modems,
etc.). |
|
(b) |
Scalable infrastructure includes costs, not related to customer
premise equipment or our network, to secure growth of new
customers, revenue units and additional bandwidth revenues or
provide service enhancements (e.g., headend equipment). |
|
(c) |
Line extensions include network costs associated with entering
new service areas (e.g., fiber/coaxial cable, amplifiers,
electronic equipment, make-ready and design engineering). |
|
(d) |
Upgrade/rebuild includes costs to modify or replace existing
fiber/coaxial cable networks, including betterments. |
|
(e) |
Support capital includes costs associated with the replacement
or enhancement of non-network assets due to technological and
physical obsolescence (e.g., non-network equipment, land,
buildings and vehicles). |
Interest Rate Risk
We are exposed to various market risks, including fluctuations
in interest rates. We use interest rate risk management
derivative instruments, such as interest rate swap agreements
and interest rate collar agreements (collectively referred to
herein as interest rate agreements) as required under the terms
of the credit facilities of our subsidiaries. Our policy is to
manage interest costs using a mix of fixed and variable rate
debt. Using interest rate swap agreements, we agree to exchange,
at specified intervals through 2007, the difference between
fixed and variable interest amounts calculated by reference to
an agreed-upon notional principal amount. Interest rate collar
agreements are used to limit our exposure to, and to derive
benefits from, interest rate fluctuations on variable rate debt
to within a certain range of rates. Interest rate risk
management agreements are not held or issued for speculative or
trading purposes.
As of March 31, 2006 and December 31, 2005, our
long-term debt totaled approximately $10.7 billion and
$10.6 billion, respectively. This debt was comprised of
approximately $5.4 billion and $5.7 billion of credit
facility debt and $5.3 billion and $4.9 billion
accreted amount of high-yield notes, respectively.
As of March 31, 2006 and December 31, 2005, the
weighted average interest rate on the credit facility debt was
approximately 8.1% and 7.8%, respectively, and the weighted
average interest rate on our high-yield notes was approximately
9.2% and 9.0%, respectively, resulting in a blended weighted
average interest rate of 8.6% and 8.3%, respectively. The
interest rate on approximately 61% and 58% of the total
principal amount of our debt was effectively fixed, including
the effects of our interest rate hedge agreements as of
March 31, 2006 and December 31, 2005, respectively.
The fair value of our high-yield notes was $5.3 billion and
$4.8 billion at March 31, 2006 and December 31,
2005, respectively. The fair
62
value of our credit facilities was $5.4 billion and
$5.7 billion at March 31, 2006 and December 31,
2005, respectively. The fair value of high-yield notes is based
on quoted market prices and the fair value of the credit
facilities is based on dealer quotations.
We do not hold or issue derivative instruments for trading
purposes. We do, however, have certain interest rate derivative
instruments that have been designated as cash flow hedging
instruments. Such 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 three months ended March 31, 2006 and 2005 and the
years ended December 31, 2005, 2004 and 2003, other income
includes gains of $2 million, $1 million,
$3 million, $4 million and $8 million,
respectively, which represent cash flow hedge ineffectiveness on
interest rate hedge agreements arising from differences between
the critical terms of the agreements and the related hedged
obligations. Changes in the fair value of interest rate
agreements designated as hedging instruments of the variability
of cash flows associated with floating-rate debt obligations
that meet the effectiveness criteria of SFAS No. 133
are reported in accumulated other comprehensive loss. For the
three months ended March 31, 2006 and 2005 and the years
ended December 31, 2005, 2004 and 2003, a loss of
$1 million and gains of $9 million, $16 million,
$42 million and $48 million, respectively, related to
derivative instruments designated as cash flow hedges, was
recorded in accumulated other comprehensive loss. The amounts
are subsequently reclassified into interest expense as a yield
adjustment in the same period in which the related interest on
the floating-rate debt obligations affects earnings (losses).
Certain interest rate derivative instruments are not designated
as hedges as they do not meet the effectiveness criteria
specified by SFAS No. 133. However, management
believes such instruments are closely correlated with the
respective debt, thus managing associated risk. Interest rate
derivative instruments not designated as hedges are marked to
fair value, with the impact recorded as other income in our
statements of operations. For the three months ended
March 31, 2006 and 2005 and the years ended
December 31, 2005, 2004 and 2003, other income includes
gains of $6 million, $26 million, $47 million,
$65 million and $57 million, respectively, for
interest rate derivative instruments not designated as hedges.
The table set forth below summarizes the fair values and
contract terms of financial instruments subject to interest rate
risk maintained by us as of December 31, 2005 (dollars in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
Total | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate
|
|
$ |
|
|
|
$ |
|
|
|
$ |
114 |
|
|
$ |
|
|
|
$ |
1,601 |
|
|
$ |
2,633 |
|
|
$ |
4,348 |
|
|
$ |
4,289 |
|
|
|
Average Interest Rate
|
|
|
|
|
|
|
|
|
|
|
10.00 |
% |
|
|
|
|
|
|
10.25 |
% |
|
|
8.33 |
% |
|
|
9.08 |
% |
|
|
|
|
|
Variable Rate
|
|
$ |
30 |
|
|
$ |
280 |
|
|
$ |
630 |
|
|
$ |
779 |
|
|
$ |
1,762 |
|
|
$ |
2,800 |
|
|
$ |
6,281 |
|
|
$ |
6,256 |
|
|
|
Average Interest Rate
|
|
|
7.94 |
% |
|
|
7.67 |
% |
|
|
7.67 |
% |
|
|
7.74 |
% |
|
|
8.14 |
% |
|
|
8.07 |
% |
|
|
7.99 |
% |
|
|
|
|
Interest Rate Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable to Fixed Swaps
|
|
$ |
873 |
|
|
$ |
975 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,848 |
|
|
$ |
4 |
|
|
|
Average Pay Rate
|
|
|
8.23 |
% |
|
|
8.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.11 |
% |
|
|
|
|
|
|
Average Receive Rate
|
|
|
7.83 |
% |
|
|
7.77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.80 |
% |
|
|
|
|
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 London Interbank Offering Rate
(LIBOR) rates for the year of maturity based on the yield
curve in effect at December 31, 2005.
63
At March 31, 2006 and December 31, 2005, we had
outstanding $1.8 billion and $1.8 billion and
$20 million and $20 million, respectively, in notional
amounts of interest rate swaps and collars, respectively. The
notional amounts of interest rate instruments do not represent
amounts exchanged by the parties and, thus, are not a measure of
exposure to credit loss. The amounts exchanged are determined by
reference to the notional amount and the other terms of the
contracts.
Recently Issued Accounting Standards
In November 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 153, Exchanges
of Non-monetary Assets An Amendment of APB
No. 29. This statement eliminates the exception to fair
value for exchanges of similar productive assets and replaces it
with a general exception for exchange transactions that do not
have commercial substance that is, transactions that
are not expected to result in significant changes in the cash
flows of the reporting entity. We adopted this pronouncement
effective April 1, 2005. The exchange transaction discussed
in Note 3 to our consolidated financial statements included
elsewhere in this prospectus, was accounted for under this
standard.
In December 2004, the FASB issued the revised
SFAS No. 123, Share-Based Payment, which
addresses the accounting for share-based payment transactions in
which a company receives employee services in exchange for
(a) equity instruments of that company or
(b) liabilities that are based on the fair value of the
companys equity instruments or that may be settled by the
issuance of such equity instruments. This statement was
effective for us beginning January 1, 2006. Because we
adopted the fair value recognition provisions of
SFAS No. 123 on January 1, 2003, we do not expect
this revised standard to have a material impact on our financial
statements.
In March 2005, the FASB issued FASB Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations.
This interpretation clarifies that the term conditional
asset retirement obligation as used in FASB Statement
No. 143, Accounting for Asset Retirement Obligations,
refers to a legal obligation to perform an asset retirement
activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the
control of the entity. This pronouncement is effective for
fiscal years ending after December 15, 2005. The adoption
of this interpretation did not have a material impact on our
financial statements.
We do not believe that any other recently issued, but not yet
effective accounting pronouncements, if adopted, would have a
material effect on our accompanying financial statements.
64
BUSINESS
Overview
CCH II is a broadband communications company operating in
the United States, with approximately 6.20 million
customers at March 31, 2006. CCH II Capital Corp. is a
wholly-owned subsidiary of CCH II and was formed and exists
solely as a co-issuer of the public debt issued with
CCH II. CCH II is a direct subsidiary of CCH I,
which is an indirect subsidiary of Charter Holdings. Charter
Holdings is an indirect subsidiary of Charter. Through our
broadband network of coaxial and fiber optic cable, we offer our
customers traditional cable video programming (analog and
digital, which we refer to as video service),
high-speed Internet access, advanced broadband cable services
(such as video on demand (VOD), high definition
television service and interactive television) and, in some of
our markets, telephone service. See Business
Products and Services for further description of these
terms, including customers.
At March 31, 2006, we served approximately
5.91 million analog video customers, of which approximately
2.87 million were also digital video customers. We also
served approximately 2.32 million high-speed Internet
customers (including approximately 266,900 who received only
high-speed Internet services). We also provided telephone
service to approximately 191,100 customers (including
approximately 20,800 who received telephone service only).
At March 31, 2006, our investment in cable properties,
long-term debt and total members equity was
$14.7 billion, $10.7 billion and $3.0 billion,
respectively. Our working capital deficit was $38 million
at March 31, 2006. For the three months ended
March 31, 2006, our revenues and net loss were
approximately $1.4 billion and $228 million,
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 costs and interest costs we incur
because of our debt and the depreciation expenses that we incur
resulting from the capital investments we have made in our cable
properties. We expect that these expenses will remain
significant, and we therefore expect to continue to report net
losses for the foreseeable future.
We are wholly owned by our parent company, CCH I, and
indirectly owned by Charter. Charter was organized as a Delaware
corporation in 1999 and completed an initial public offering of
its Class A common stock in November 1999. Charter is a
holding company whose principal assets are, for accounting
purposes, an approximate 48% equity interest and a 100% voting
interest in Charter Holdco, the direct parent of CCHC.
Charters only business is to act as the sole manager of
Charter Holdco and its subsidiaries. As sole manager, Charter
controls the affairs of Charter Holdco and most of its
subsidiaries. As sole manager, Charter controls the affairs of
Charter Holdco and most of its subsidiaries, including us.
Certain of our subsidiaries commenced operations under the
Charter Communications name in 1994, and our growth
through 2001 was primarily due to acquisitions and business
combinations. We do not expect to make any significant
acquisitions in the foreseeable future, but plan to evaluate
opportunities to consolidate our operations through exchanges of
cable systems with other cable operators, as they arise. We may
also sell certain assets from time to time. Paul G. Allen owns
approximately 45% of Charter Holdco through affiliated entities.
His membership units are convertible at any time for shares of
Charters Class A common stock on a one-for-one basis.
Paul G. Allen controls Charter with an as-converted common
equity interest of 49% and a voting control interest of 90% as
of December 31, 2005.
Business Strategy
Our strategy is to leverage the capacity and the capabilities of
our broadband network to become the premier provider of in-home
entertainment and communications services in the communities we
serve. By offering excellent value and variety to our customers
through creative product bundles, strategic pricing and
packaging of all our products and services, our goal is to
increase profitable revenues that will enable us to maximize
return on our invested capital.
65
Building on the foundation established throughout 2005, in 2006,
we will strive toward:
|
|
|
|
|
improving the
end-to-end customer
experience and increasing customer loyalty; |
|
|
|
growing sales and retention for all our products and
services; and |
|
|
|
driving operating and capital effectiveness. |
Providing superior customer service is an essential element of
our fundamental business strategy. We strive to continually
improve the end-to-end
customer experience and increase customer loyalty by effectively
managing our customer care contact centers in alignment with
technical operations. We are seeking to instill a
customer-service-oriented culture throughout the organization
and will continue to focus on excellence by pursuing further
improvements in customer service, technical operations, sales
and marketing.
We are dedicated to fostering strong relationships and making
not only financial investments, but the investment of time and
effort to strengthen the communities we serve. We have developed
programs and initiatives that provide valuable television time
to groups and organizations over our cable networks.
Providing desirable products and services and investing in
profitable marketing programs are major components of our sales
strategy. Bundling services, combining two or more services for
one discounted price, is fundamental to our marketing strategy.
We believe that combining our products into bundled offerings
provides value to our customers that distinguishes us from the
competition. We believe bundled offerings increase penetration
of all our products and services and improves customer retention
and perception. Through targeted marketing of bundled services,
we will pursue growth in our customer base and improvements in
customer satisfaction. Targeted marketing also promotes the
appropriate matching of services with customer needs leading to
improved retention of existing customers and lower bad debt
expense.
Expanding telephone service to additional markets and achieving
increased telephone service penetration will be a high priority
in 2006 and will be important to revenue growth. We plan to add
enhancements to our high-speed Internet service to provide
customers the best possible Internet experience. Our digital
video platform enables us to provide customers advanced video
products and services such as VOD, high-definition television
and digital video recorder (DVR) service. We will
also continue to explore additional product and service
offerings to complement and enhance our existing offerings and
generate profitable revenue growth.
In addition to the focus on our primary residential customer
base, we will strive to expand the marketing of our video and
high-speed Internet services to the business community and
introduce telephone service, which we believe has growth
potential.
|
|
|
Operating and Capital Effectiveness |
We plan to further capitalize on initiatives launched during
2005 to continue to drive operating and capital effectiveness.
Specifically, additional improvements in work force management
will enhance the efficient operation of our customer care
centers and technical operations functions. We will continue to
place the highest priority for capital spending on
revenue-generating initiatives such as telephone deployment.
With over 92% of our homes passed having bandwidth of 550
megahertz or higher, we believe our broadband network provides
the infrastructure to deliver the products and services
todays consumer desires. See Our Network
Technology. In 2005 we invested in programs and
initiatives to improve all aspects of operations, and going
forward we will seek to capitalize on that solid foundation. We
plan to
66
leverage both our broadband network and prior investments in
operational efficiencies to generate profitable revenue growth.
Through our targeted marketing strategy, we plan to meet the
needs of our current customers and potential customers with
desirable, value-based offerings. We will seek to capitalize on
the capabilities of our broadband network in order to bring
innovative products and services to the marketplace. Our
employees are dedicated to our customer-first philosophy, and we
will strive to support their continued professional growth and
development, providing the right tools and training necessary to
accomplish our goals. We believe our strategy differentiates us
from the competition and plan to enhance our ability to continue
to grow our broadband operations in the communities we serve.
We and our parent companies continue to pursue opportunities to
improve our and our parent companies liquidity. Our and
our parent companies efforts in this regard have resulted
in the completion of a number of transactions in 2005 and 2006,
as follows:
|
|
|
|
|
|
the April 2006 refinancing of our existing credit facilities
(see Managements Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources Recent Financing
Transactions); |
|
|
|
|
|
the January 2006 sale by us of an additional $450 million
principal amount of original notes due 2010; |
|
|
|
|
the September 2005 exchange by our direct and indirect parent
companies, Charter Holdings, CCH I and CIH, of
approximately $6.8 billion in total principal amount of
outstanding debt securities of Charter Holdings in a private
placement for new debt securities; |
|
|
|
the August 2005 sale by our subsidiaries, CCO Holdings and
CCO Holdings Capital Corp., of $300 million of
83/4
% senior notes due 2013; |
|
|
|
the March and June 2005 issuance of $333 million of Charter
Operating notes in exchange for $346 million of Charter
Holdings notes; |
|
|
|
the repurchase during 2005 of $136 million of
Charters 4.75% convertible senior notes due 2006
leaving $20 million in principal amount outstanding; and |
|
|
|
the March 2005 redemption of all of CC V Holdings,
LLCs outstanding 11.875% senior discount notes due
2008 at a total cost of $122 million. |
Charter Background
In 1998, Mr. Allen acquired approximately 99% of the
non-voting economic interests in Marcus Cable, which owned
various operating subsidiaries that served approximately
1.1 million customers. Thereafter, in December 1998,
Mr. Allen acquired, through a series of transactions,
approximately 94% of the equity interests of CII, which
controlled various operating subsidiaries that serviced
approximately 1.2 million customers.
In March and April of 1999, Mr. Allen acquired the
remaining interests in Marcus Cable and, through a series of
transactions, combined the Marcus companies with the Charter
companies. As a consequence, the former operating subsidiaries
of Marcus Cable and all of the cable systems they owned came
under the ownership of Charter Holdings.
In July 1999, Charter was formed as a wholly owned subsidiary of
CII, and in November 1999, Charter completed its initial public
offering.
During 1999 and 2000, Charter completed 16 cable system
acquisitions for a total purchase price of $14.7 billion
including $9.1 billion in cash, $3.3 billion of
assumed debt, $1.9 billion of equity interests issued and
Charter cable systems valued at $420 million. These
transactions resulted in a net total increase of approximately
3.9 million customers as of their respective dates of
acquisition.
67
In February 2001, Charter entered into several agreements with
AT&T Broadband, LLC involving several strategic cable system
transactions that resulted in a net addition of customers for
our systems. In the AT&T transactions, which closed in June
2001, Charter acquired cable systems from AT&T Broadband
serving approximately 551,000 customers for a total of
$1.74 billion consisting of $1.71 billion in cash and
a Charter cable system valued at $25 million. In 2001,
Charter also acquired all of the outstanding stock of
Cable USA, Inc. and the assets of certain of its related
affiliates in exchange for consideration valued at
$100 million (consisting of Series A preferred stock
with a face amount of $55 million and the remainder in cash
and assumed debt).
During 2002, Charter purchased additional cable systems in
Illinois serving approximately 28,000 customers, for a total
cash purchase price of approximately $63 million.
In 2003 and 2004, Charter sold certain non-core cable systems
serving approximately 264,100 customers in Florida,
Pennsylvania, Maryland, Delaware, West Virginia and Washington
for an aggregate consideration of approximately
$826 million.
Products and Services
We offer our customers traditional cable video programming
(analog and digital) and in some areas advanced broadband
services such as high definition television, VOD and interactive
television as well as high-speed Internet services. We sell our
video programming and high-speed Internet services on a
subscription basis, with prices and related charges, that vary
primarily based on the types of service selected, whether the
services are sold as a bundle versus on an
á la carte basis, and the equipment necessary
to receive the services, with some variation in prices depending
on geographic location. In addition, we offer telephone service
to a portion of our homes passed.
The following table summarizes our customer statistics for
analog and digital video, residential high-speed Internet, and
residential telephone as of March 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate as of | |
|
|
| |
|
|
March 31, | |
|
March 31, | |
|
|
2006(a) | |
|
2005(a) | |
|
|
| |
|
| |
Cable Video Services:
|
|
|
|
|
|
|
|
|
|
Analog Video:
|
|
|
|
|
|
|
|
|
|
|
Residential (non-bulk) analog video customers(b)
|
|
|
5,640,200 |
|
|
|
5,732,600 |
|
|
|
Multi-dwelling (bulk) and commercial unit customers(c)
|
|
|
273,700 |
|
|
|
252,200 |
|
|
|
|
|
|
|
|
|
|
|
Total analog video customers(b)(c)
|
|
|
5,913,900 |
|
|
|
5,984,800 |
|
|
|
|
|
|
|
|
|
Digital Video:
|
|
|
|
|
|
|
|
|
|
|
Digital video customers(d)
|
|
|
2,866,400 |
|
|
|
2,694,600 |
|
Non-Video Cable Services:
|
|
|
|
|
|
|
|
|
|
|
Residential high-speed Internet customers(e)
|
|
|
2,322,400 |
|
|
|
1,978,400 |
|
|
|
Residential telephone customers(f)
|
|
|
191,100 |
|
|
|
55,300 |
|
Included in the 70,900 net loss of analog video customers
is approximately 15,800 of net losses related to systems
impacted by hurricanes Katrina and Rita.
After giving effect to the acquisition of cable systems in
January 2006 and the sale of certain non-strategic cable systems
in July 2005, March 31, 2005 analog video customers,
digital video customers, high-speed Internet customers and
telephone customers would have been 5,974,600, 2,690,300,
1,990,200 and 70,300, 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 March 31, 2006 and 2005, customers
include approximately 48,500 and 43,100 persons whose
accounts were over 60 days past due in payment,
approximately 11,900 and 7,000 persons whose accounts were
over |
|
68
|
|
|
|
|
|
90 days past due in payment and approximately 7,800 and
3,600 of which were over 120 days past due in payment,
respectively. |
|
|
|
(b) |
|
Analog video customers include all customers who
receive video services (including those who also purchase
high-speed Internet and telephone services) but excludes
approximately 287,700 and 241,700 customers at March 31,
2006 and 2005, respectively, who receive high-speed Internet
service only or telephone service only and who are only counted
as high-speed Internet customers or telephone customers. |
|
|
(c) |
|
Included within video customers are those in
commercial and multi-dwelling structures, which are calculated
on an equivalent bulk unit (EBU) basis. EBU is
calculated for a system by dividing the bulk price charged to
accounts in an area by the most prevalent price charged to
non-bulk residential customers in that market for the comparable
tier of service. The EBU method of estimating analog video
customers is consistent with the methodology used in determining
costs paid to programmers and has been used consistently. As we
increase our effective analog prices to residential customers
without a corresponding increase in the prices charged to
commercial service or multi-dwelling customers, our EBU count
will decline even if there is no real loss in commercial service
or multi-dwelling customers. |
|
|
(d) |
|
Digital video customers include all households that
have one or more digital set-top terminals. Included in
digital video customers on March 31, 2006 and
2005 are approximately 8,500 and 10,000 customers,
respectively, that receive digital video service directly
through satellite transmission. |
|
|
(e) |
|
Residential high-speed Internet customers represent
those customers who subscribe to our high-speed Internet service. |
|
(f) |
|
Residential telephone customers include all
households receiving telephone service. |
Video Services
Our video service offerings include the following:
|
|
|
|
|
Basic Analog Video. All of our video customers
receive a package of basic programming which generally consists
of local broadcast television, local community programming,
including governmental and public access, and limited
satellite-delivered or non-broadcast channels, such as weather,
shopping and religious services. Our basic channel
line-up generally has
between 15 and 30 channels. |
|
|
|
Expanded Basic Video. This expanded programming
level includes a package of satellite-delivered or non-broadcast
channels and generally has between 30 and 50 channels in
addition to the basic channel line-up. |
|
|
|
Premium Channels. These channels provide
commercial-free movies, sports and other special event
entertainment programming. Although we offer subscriptions to
premium channels on an individual basis, we offer an increasing
number of premium channel packages and we offer premium channels
with our advanced services. |
|
|
|
Pay-Per-View. These channels allow customers to
pay on a per event basis to view a single showing of a recently
released movie, a one-time special sporting event, music concert
or similar event on a commercial-free basis. |
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Digital Video. We offer digital video service to
our customers in several different service combination packages.
All of our digital packages include a digital set-top terminal,
an interactive electronic programming guide, an expanded menu of
pay-per-view channels and the option to also receive digital
packages which range from 8 to 30 additional video
channels. We also offer our customers certain digital packages
with one or more premium channels that give customers access to
several different versions of the same premium channel. Some
digital tier packages focus on the interests of a particular
customer demographic and emphasize, for example, sports, movies,
family or ethnic programming. In addition to video programming,
digital video service enables customers |
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to receive our advanced services such as VOD and high definition
television. Other digital packages bundle digital television
with our advanced services, such as high-speed Internet services. |
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Video On Demand and Subscription Video on Demand.
We offer VOD service, which allows customers to access hundreds
of movies and other programming at any time with digital picture
quality. In some systems we also offer subscription VOD
(SVOD) for a monthly fee or included in a
digital tier premium channel subscription. |
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High Definition Television. High definition
television offers our digital customers video programming at a
higher resolution than the standard analog or digital video
image. |
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Digital Video Recorder. DVR service enables
customers to digitally record programming and to pause and
rewind live programming. |
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High-Speed Internet Services |
We offer high-speed Internet services to our residential and
commercial customers primarily via cable modems attached to
personal computers. We generally offer our high-speed Internet
service as Charter High-Speed
Internettm.
We also offer traditional
dial-up Internet access
in a very limited number of our markets.
We ended the first quarter of 2006 with 20% penetration of
high-speed Internet homes passed, up from 18% penetration of
high-speed Internet homes passed at March 31, 2005. This
gave us an annual percentage increase in high-speed Internet
customers of 17% and an increase in high-speed Internet revenues
of 18% in the three months ended March 31, 2006 compared to the
three months ended March 31, 2005.
We provide voice communications services using voice over
Internet protocol, or VoIP, to transmit digital
voice signals over our systems. At March 31, 2006,
telephone service was available to approximately
3.9 million homes passed, and we were marketing to
approximately 80% of those homes. We will continue to prepare
additional markets for telephone launches in 2006 and expect to
have 6 to 8 million homes passed by the end of 2006.
We offer integrated network solutions to commercial and
institutional customers. These solutions include high-speed
Internet and video services. In addition, we offer high-speed
Internet services to small businesses. We will continue to
expand the marketing of our video and high-speed Internet
services to the business community and intend to introduce
telephone services.
We receive revenues from the sale of local advertising on
satellite-delivered networks such as
MTV®,
CNN®
and
ESPN®.
In any particular market, we generally insert local advertising
on up to 48 channels. We also provide cross-channel
advertising to some programmers.
From time to time, certain of our vendors, including programmers
and equipment vendors, have purchased advertising from us. For
the three months ended March 31, 2006 and the years ending
December 31, 2005, 2004 and 2003, we had advertising
revenues from programmers of approximately $6 million,
$15 million, $16 million and $15 million,
respectively. These revenues resulted from purchases at market
rates pursuant to binding agreements.
Pricing of Our Products and Services
Our revenues are derived principally from the monthly fees our
customers pay for the services we offer. A one-time installation
fee, which is sometimes waived or discounted during certain
promotional
70
periods, is charged to new customers. The prices we charge vary
based on the level of service the customer chooses and the
geographic market. Most of our pricing is reviewed and adjusted
on an annual basis.
In accordance with the Federal Communications Commissions
(FCC) rules, the prices we charge for cable-related
equipment, such as set-top terminals and remote control devices,
and for installation services are based on actual costs plus a
permitted rate of return.
Although our cable service offerings vary across the markets we
serve because of various factors including competition and
regulatory factors, our services, when offered on a stand-alone
basis, are typically offered at monthly price ranges, excluding
franchise fees and other taxes, as follows:
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Price Range as of | |
Service |
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March 31, 2006 | |
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| |
Analog video packages
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$ |
6.75 - $ 58.00 |
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Premium channels
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$ |
10.00 - $ 15.00 |
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Pay-per-view events
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$ |
2.99 - $179.00 |
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Digital video packages (including high-speed Internet service
for higher tiers)
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$ |
34.00 - $114.98 |
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High-speed Internet service
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$ |
21.95 - $ 59.99 |
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Video on demand (per selection)
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$ |
0.99 - $ 29.99 |
|
High definition television
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$ |
3.00 - $ 10.99 |
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Digital video recorder (DVR)
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$ |
9.99 - $ 14.99 |
|
In addition, from time to time we offer free service or
reduced-price service during promotional periods in order to
attract new customers. There is no assurance that these
customers will remain as customers when the period of free
service expires.
Our Network Technology
The following table sets forth the technological capacity of our
systems as of March 31, 2006 based on a percentage of homes
passed:
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Less than | |
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Two-way | |
550 megahertz | |
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550 megahertz | |
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750 megahertz | |
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860/870 megahertz | |
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Enabled | |
| |
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| |
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| |
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| |
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| |
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8 |
% |
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5 |
% |
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40 |
% |
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47 |
% |
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87 |
% |
Approximately 92% of our homes passed are served by systems that
have bandwidth of 550 megahertz or greater. This bandwidth
capacity enables us to offer digital television, high-speed
Internet services and other advanced services. It also enables
us to offer up to 82 analog channels, and even more
channels when our bandwidth is used for digital signal
transmissions. Our increased bandwidth also permits two-way
communication for Internet access, interactive services and
telephone services.
We have reduced the number of headends that serve our customers
from 1,138 at January 1, 2001 to 720 at March 31,
2006. Because headends are the control centers of a cable
system, where incoming signals are amplified, converted,
processed and combined for transmission to the customer,
reducing the number of headends reduces related equipment,
service personnel and maintenance expenditures. We believe that
the headend consolidation, together with our other upgrades,
allows us to provide enhanced picture quality and greater system
reliability. As of March 31, 2006, approximately 86% of our
customers were served by headends serving at least 10,000
customers.
As of March 31, 2006, our cable systems consisted of
approximately 222,600 strand miles, including approximately
58,900 strand miles of fiber optic cable, passing approximately
12.6 million households and serving approximately
6.2 million customers.
We adopted the hybrid fiber coaxial cable (HFC)
architecture as the standard for our systems upgrades. HFC
architecture combines the use of fiber optic cable with coaxial
cable. Fiber optic cable is a communication medium that uses
glass fibers to transmit signals over long distances with
minimum signal loss or distortion. Fiber optic cable has
excellent broadband frequency characteristics, noise immunity and
71
physical durability and can carry hundreds of video, data and
voice channels over extended distances. Coaxial cable is less
expensive but requires a more extensive signal amplification in
order to obtain the desired transmission levels for delivering
channels. In most systems, we deliver our signals via fiber
optic cable from the headend to a group of nodes, and use
coaxial cable to deliver the signal from individual nodes to the
homes passed served by that node. Our system design enables a
maximum of 500 homes passed to be served by a single node.
Currently, our average node serves approximately 385 homes
passed. Our system design provides for six strands of fiber to
each node, with two strands activated and four strands reserved
for spares and future services. The design also provides reserve
capacity for the addition of future services.
The primary advantages of HFC architecture over traditional
coaxial-only cable networks include:
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increased bandwidth capacity, for more channels and other
services; |
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dedicated bandwidth for two-way services, which avoids reverse
signal interference problems that can occur with two-way
communication capability; and |
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improved picture quality and service reliability. |
We currently maintain a national network operations center to
monitor our data networks and to further our strategy of
providing high quality service. Centralized monitoring is
increasingly important as we increase the number of high-speed
Internet customers utilizing two-way high-speed Internet
service. Our local dispatch centers focus primarily on
monitoring the HFC plant.
Management of Our Systems
Many of the functions associated with our financial and
administrative management are centralized, including accounting,
cash management, billing, finance and acquisitions, payroll,
accounts payable and benefits administration, information system
design and support, internal audit, purchasing, customer care,
marketing, programming contract administration and Internet
service, network and circuits administration. We operate with
four divisions. Each division is supported by operational,
financial, customer care, marketing and engineering functions.
Customer Care
Our customer care centers are managed centrally by Corporate
Vice Presidents of Customer Care. This team oversees and
administers the deployment and execution of care strategies and
initiatives on a company-wide basis. We have 36 customer service
locations, including 14 regional contact centers that serve our
customers. This reflects a substantial consolidation of our
customer care facilities. We believe that this consolidation
will continue to allow us to improve the consistency of our
service delivery and customer satisfaction.
Specifically, through this consolidation, we are now able to
service our customers 24 hours a day, seven days a week and
utilize technologically advanced equipment that we believe
enhances interactions with our customers through more
intelligent call routing, data management, and forecasting and
scheduling capabilities. We believe this consolidation also
allows us to more effectively provide our customer care
specialists with ongoing training intended to improve complaint
resolution, equipment troubleshooting, sales of new and
additional services, and customer retention.
We believe that, despite our consolidation, we still need to
make improvements in the area of customer care, and that this
has, in part, led to a continued loss of customers. Accordingly,
we have begun an internal operational improvement initiative
aimed at helping us gain new customers and retain existing
customers, which is focused on customer care, among other areas.
We have increased our efforts to focus management attention on
instilling a customer service oriented culture throughout the
company and to give those areas of our operations increased
priority of resources for staffing levels, training budgets and
financial incentives for employee performance in those areas.
72
In a further effort to better serve our customers, we have also
entered into outsource partnership agreements with multiple
outsource providers. We believe the establishment of these
relationships expands our ability to achieve our service
objectives and increases our ability to support marketing
activities by providing additional capacity available to support
customer inquiries.
We also utilize our website to enhance customer care by enabling
customers to view and pay their bills online, obtain useful
information and perform various equipment troubleshooting
procedures. We also offer chat and email functionality on-line
to our customers.
Sales and Marketing
Our marketing infrastructure is intended to promote interaction,
information flow and sharing of best practices between our
corporate office and our field offices, which make local
decisions as to when and how marketing programs will be
implemented. In 2005, our primary strategic direction was
focused on eliminating aggressive promotional pricing and
implementing targeted marketing programs designed to offer the
optimal combination of products to the most appropriate
consumers to accelerate the growth of profitable revenues.
In 2005, we increased our targeted marketing efforts and related
expenditures, the long-term objective of which is to increase
revenues through deeper market penetration of all of our
services. Marketing expenditures increased 9% to $38
million for the three months ended March 31, 2006, as
compared to the three months ended March 31, 2005.
Marketing expenditures increased 19% over the year ended
December 31, 2004 to $145 million for the year ended
December 31, 2005. We will continue to invest in targeted
marketing efforts in 2006.
We monitor customer perception, competition, pricing and product
preferences, among other factors, to increase our responsiveness
to our customers. Our coordinated marketing strategies include
door-to-door
solicitation, telemarketing, media advertising,
e-marketing, direct
mail solicitation and retail locations. In 2005, we increased
our focus on marketing and selling our services through consumer
electronics retailers and other retailers that sell televisions
or cable modems.
Programming
We believe that offering a wide variety of programming is an
important factor that influences a customers decision to
subscribe to and retain our cable services. We rely on market
research, customer demographics and local programming
preferences to determine channel offerings in each of our
markets. We obtain basic and premium programming from a number
of suppliers, usually pursuant to a written contract. Our
programming contracts generally continue for a fixed period of
time, usually from three to ten years, and are subject to
negotiated renewal. Some program suppliers offer financial
incentives to support the launch of a channel and/or ongoing
marketing support. We also negotiate volume discount pricing
structures. Programming costs are usually payable each month
based on calculations performed by us and are subject to audits
by the programmers.
Programming is usually made available to us for a license fee,
which is generally paid based on the number of customers to whom
we make such programming available. Such license fees may
include volume discounts available for higher
numbers of customers, as well as discounts for channel placement
or service penetration. Some channels are available without cost
to us for a limited period of time, after which we pay for the
programming. For home shopping channels, we receive a percentage
of the revenue attributable to our customers purchases.
Our cable programming costs have increased, in every year we
have operated, in excess of customary inflationary and
cost-of-living type
increases. We expect them to continue to increase due to a
variety of factors, including annual increases imposed by
programmers and additional programming being provided to
73
customers as a result of system rebuilds and bandwidth
reallocation, both of which increase channel capacity. In
particular, sports programming costs have increased
significantly over the past several years. In addition,
contracts to purchase sports programming sometimes provide for
optional additional programming to be available on a surcharge
basis during the term of the contract.
Over the past several years, we have not been able to increase
prices sufficiently to offset increased programming costs and
with the impact of competition and other marketplace factors, we
will not be able to do so in the foreseeable future. In order to
maintain or mitigate reductions of margins despite increasing
programming costs, we plan to continue to migrate certain
program services from our analog level of service to our digital
tiers. As we migrate our programming to our digital tier
packages, certain programming that was previously available to
all of our customers via an analog signal, may be part of an
elective digital tier package. As a result, the customer base
upon which we pay programming fees will proportionately
decrease, and the overall expense for providing that service
would likewise decrease. Reductions in the size of certain
programming customer bases may result in the loss of specific
volume discount benefits.
As measured by programming costs, and excluding premium services
(substantially all of which were renegotiated and renewed in
2003), as of March 31, 2006 approximately 12% of our
current programming contracts were expired, and approximately
another 6% are scheduled to expire by the end of 2006. We plan
to seek to renegotiate the terms of our agreements with certain
programmers as these agreements come due for renewal. There can
be no assurance that these agreements will be renewed on
favorable or comparable terms. To the extent that we are unable
to reach agreement with certain programmers on terms that we
believe are reasonable, we may be forced to remove such
programming channels from our line-up, which may result in a
loss of customers. In addition, our inability to fully pass
these programming cost increases on to our customers has had an
adverse impact on our cash flow and operating margins.
Franchises
As of March 31, 2006, our systems operated pursuant to a
total of approximately 4,100 franchises, permits and similar
authorizations issued by local and state governmental
authorities. Each franchise, permit or similar authorization is
awarded by a governmental authority and such governmental
authority often must approve a transfer to another party. Most
franchises are subject to termination proceedings in the event
of a material breach. In addition, most franchises require us to
pay the granting authority a franchise fee of up to 5.0% of
revenues as defined in the various agreements, which is the
maximum amount that may be charged under the applicable federal
law. We are entitled to and generally do pass this fee through
to the customer.
Prior to the scheduled expiration of most franchises, we
initiate renewal proceedings with the granting authorities. This
process usually takes three years but can take a longer period
of time. The Communications Act of 1934, as amended (the
Communications Act), which is the primary federal statute
regulating interstate communications, provides for an orderly
franchise renewal process in which granting authorities may not
unreasonably withhold renewals. In connection with the franchise
renewal process, many governmental authorities require the cable
operator to make certain commitments. Historically we have been
able to renew our franchises without incurring significant
costs, although any particular franchise may not be renewed on
commercially favorable terms or otherwise. Our failure to obtain
renewals of our franchises, especially those in the major
metropolitan areas where we have the most customers, could have
a material adverse effect on our consolidated financial
condition, results of operations or our liquidity, including our
ability to comply with our debt covenants. Approximately 11% of
our franchises, covering approximately 12% of our analog video
customers, were expired as of March 31, 2006. Approximately
6% of additional franchises, covering approximately 7% of
additional analog video customers, will expire on or before
December 31, 2006, if not renewed prior to expiration. We
expect to renew substantially all of these franchises.
Different legislative proposals have been introduced in the
United States Congress and in some state legislatures that would
greatly streamline cable franchising. This legislation is
intended to facilitate entry
74
by new competitors, particularly local telephone companies. Such
legislation has passed in a number of states in which we have
operations and one of these newly enacted statutes is subject to
court challenge. Although various legislative proposals provide
some regulatory relief for incumbent cable operators, these
proposals are generally viewed as being more favorable to new
entrants due to a number of varying factors including efforts to
withhold streamlined cable franchising from incumbents until
after the expiration of their existing franchises and the
potential for new entrants to serve only higher-income areas of
a particular community. To the extent incumbent cable operators
are not able to avail themselves of this streamlined franchising
process, such operators may continue to be subject to more
onerous franchise requirements at the local level than new
entrants. The FCC recently initiated a proceeding to determine
whether local franchising authorities are impeding the
deployment of competitive cable services through unreasonable
franchising requirements and whether any such impediments should
be preempted. At this time, we are not able to determine what
impact such proceeding may have on us.
Competition
We face competition in the areas of price, service offerings,
and service reliability. We compete with other providers of
television signals and other sources of home entertainment. In
addition, as we continue to expand into additional services such
as high-speed Internet access and telephone, we face competition
from other providers of each type of service. We operate in a
very competitive business environment, which can adversely
affect our business and operations.
In terms of competition for customers, we view ourselves as a
member of the broadband communications industry, which
encompasses multi-channel video for television and related
broadband services, such as high-speed Internet, telephone and
other interactive video services. In the broadband industry, our
principal competitor for video services throughout our territory
is direct broadcast satellite (DBS), our principal
competitor for data services is digital subscriber line
(DSL) provided by telephone companies and our
principal competitors for telephone services are established
telephone companies and other carriers, including VoIP
providers. Based on telephone companies entry into video
service and the upgrade of their networks, they will likely
increasingly become an even more significant competitor for both
data and video services. We do not consider other cable
operators to be significant
one-on-one competitors
in the market overall, as traditional overbuilds are infrequent
and spotty geographically (although in any particular market, a
cable operator overbuilder would likely be a significant
competitor at the local level). As of March 31, 2006, we
are aware of traditional overbuild situations in service areas
covering approximately 6% of our total homes passed and
potential overbuilds in areas servicing approximately an
additional 4% of our total homes passed.
Although cable operators tend not to be direct competitors for
customers, their relative size may affect the competitive
landscape in terms of how a cable company competes against
non-cable competitors in the marketplace as well as in
relationships with vendors who deal with cable operators. For
example, a larger cable operator might have better access to and
pricing for the multiple types of services cable companies
offer. Also, a larger entity might have different access to
financial resources and acquisition opportunities.
Our key competitors include:
Direct broadcast satellite is a significant competitor to cable
systems. The DBS industry has grown rapidly over the last
several years and now serves more than 27 million
subscribers nationwide. DBS service allows the subscriber to
receive video services directly via satellite using a relatively
small dish antenna. EchoStar and DirecTV both have entered into
joint marketing agreements with major telecommunications
companies to offer bundled packages combining phone, data and
video services.
Video compression technology and high powered satellites allow
DBS providers to offer more than 200 digital channels from a
single satellite, thereby surpassing the typical analog cable
system. In 2005, major DBS competitors offered a greater variety
of channel packages, and were especially competitive at the
lower end pricing, such as a monthly price of approximately $35
for 60 channels compared to approximately $45 for the
closest comparable package in most of our markets. In addition,
while we
75
continue to believe that the initial investment by a DBS
customer exceeds that of a cable customer, the initial equipment
cost for DBS has decreased substantially, as the DBS providers
have aggressively marketed offers to new customers of incentives
for discounted or free equipment, installation and multiple
units. DBS providers are able to offer service nationwide and
are able to establish a national image and branding with
standardized offerings, which together with their ability to
avoid franchise fees of up to 5% of revenues and property tax,
leads to greater efficiencies and lower costs in the lower tiers
of service. We believe that cable-delivered VOD and SVOD service
are superior to DBS service because cable headends can store
thousands of titles which customers can access and control
independently, whereas DBS technology can only make available a
much smaller number of titles with DVR-like customer control. We
also believe that our higher tier products, particularly our
bundled premium packages, are price-competitive with DBS
packages and that many consumers prefer our ability to
economically bundle video packages with data packages. Further,
cable providers have the potential in some areas to provide a
more complete whole house communications package
when combining video, high-speed Internet and telephone
services. We believe that this ability to bundle, combined with
the introduction of more new products that DBS cannot readily
offer (local high definition television and local interactive
television) differentiates us from DBS competitors and could
enable us to win back some of our former customers who migrated
to satellite. However, joint marketing arrangements between DBS
providers and telecommunications carriers allow similar bundling
of services in certain areas and DBS providers are making
investments to offer more high definition programming including
local high definition programming. Competition from DBS service
providers may also present greater challenges in areas of lower
population density, and we believe that our systems serve a
higher concentration of such areas than those of other major
cable service providers.
DBS providers have made attempts at widespread deployment of
high-speed Internet access services via satellite but those
services have been technically constrained and of limited
appeal. DBS providers continue to explore options, such as
combining satellite communications with terrestrial wireless
networks, to provide high-speed Internet and other services. DBS
providers have entered into joint marketing arrangements with
telecommunications carriers allowing them to offer terrestrial
DSL services in many markets.
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DSL and Other Broadband Services |
DSL service allows Internet access to subscribers at data
transmission speeds greater than those available over
conventional telephone lines. DSL service therefore is
competitive with high-speed Internet access over cable systems.
Most telephone companies which already have plant, an existing
customer base, and other operational functions in place (such
as, billing, service personnel, etc.) offer DSL service. DSL
actively markets its service and many providers have offered
promotional pricing with a one-year service agreement. The FCC
has determined that DSL service is an information
service, and based on that classification removed DSL
service from many traditional telecommunications regulations.
Legislative action and the FCCs decisions and policies in
this area are subject to change. We expect DSL to remain a
significant competitor to our data services, particularly as we
enter the telephone business and telephone companies
aggressively bundle DSL with telephone service to discourage
customers from switching. In addition, the continuing deployment
of fiber by telephone companies into their networks will enable
them to provide higher bandwidth Internet service than provided
over traditional DSL lines.
DSL and other forms of high-speed Internet access provide
competition to our high-speed Internet service. For example, as
discussed above, satellite-based delivery options are in
development. In addition, local wireless Internet services have
recently begun to operate in many markets using available
unlicensed radio spectrum. This service option, popularly known
as wi-fi, offers another alternative to cable-based
Internet access.
High-speed Internet access facilitates the streaming of video
into homes and businesses. As the quality and availability of
video streaming over the Internet improves, video streaming
likely will compete with the traditional delivery of video
programming services over cable systems. It is possible that
programming suppliers will consider bypassing cable operators
and market their services directly to the consumer through video
streaming over the Internet.
76
We believe that pricing for residential and commercial Internet
services on our system is generally comparable to that for
similar DSL services and that some residential customers prefer
our ability to bundle Internet services with video services.
However, DSL providers may currently be in a better position to
offer data services to businesses since their networks tend to
be more complete in commercial areas. They also have the ability
to bundle telephone with Internet services for a higher
percentage of their customers, and that ability is appealing to
many consumers. Joint marketing arrangements between DSL
providers and DBS providers may allow some additional bundling
of services. Moreover, major telephone companies, such as
AT&T and Verizon, are now deploying fiber deep into their
networks that enables them in some areas to offer high bandwidth
video services over their networks, in addition to established
voice and Internet services.
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Telephone Companies and Utilities |
The competitive environment has been significantly affected by
technological developments and regulatory changes enacted under
the 1996 Telecom Act, which amended the Communications Act and
which is designed to enhance competition in the cable television
and local telephone markets. Federal cross-ownership
restrictions historically limited entry by local telephone
companies into the cable business. The 1996 Telecom Act modified
this cross-ownership restriction, making it possible for local
exchange carriers, who have considerable resources, to provide a
wide variety of video services competitive with services offered
by cable systems.
Telephone companies already provide facilities for the
transmission and distribution of voice and data services,
including Internet services, in competition with our existing or
potential interactive services ventures and businesses.
Telephone companies can lawfully enter the cable television
business and some telephone companies have been extensively
deploying fiber in their networks, which enables them to provide
video services, as well as telephone and Internet access
service. At least one major telephone company plans to provide
Internet protocol video over its upgraded network and contends
that its use of this technology should allow it to provide video
service without a cable franchise as required under
Title VI of the Communications Act. Telephone companies
deploying fiber more extensively are already providing video
services in some communities. Although telephone companies have
obtained franchises or alternative authorizations in some areas
and are seeking them in others, they are attempting through
various means (including federal and state legislation and
through FCC rulemaking) to weaken or streamline the franchising
requirements applicable to them. If telephone companies are
successful in avoiding or weakening the franchise and other
regulatory requirements that are applicable to cable operators
like us, their competitive posture would be enhanced. We cannot
predict the likelihood of success of the broadband services
offered by our competitors or the impact on us of such
competitive ventures. The large scale entry of major telephone
companies as direct competitors in the video marketplace could
adversely affect the profitability and valuation of established
cable systems.
We provide telephone service over our broadband communications
networks in a number of its service areas. We also provide
traditional circuit-switched phone service in a few communities.
In these areas, we compete directly with established telephone
companies and other carriers, including VoIP providers, for
voice service customers. As we expand our offerings to include
voice services, we will be subject to considerable competition
from telephone companies and other telecommunications providers.
The telecommunications industry is highly competitive and
includes competitors with greater financial and personnel
resources, who have brand name recognition and long-standing
relationships with regulatory authorities and customers.
Moreover, mergers, joint ventures and alliances among franchise,
wireless or private cable operators, local exchange carriers and
others may result in providers capable of offering cable
television, Internet, and telecommunications services in direct
competition with us. For example, major local exchange carriers
have entered into arrangements with EchoStar and DirecTV in
which they will market packages combining phone service, DSL and
DBS services.
Additionally, we are subject to competition from utilities which
possess fiber optic transmission lines capable of transmitting
signals with minimal signal distortion. Utilities are also
developing broadband over power line technology, which will
allow the provision of Internet and other broadband services to
homes and offices. Utilities have deployed broadband over power
line technology in a few limited markets.
77
Cable television has long competed with broadcast television,
which consists of television signals that the viewer is able to
receive without charge using an off-air antenna. The
extent of such competition is dependent upon the quality and
quantity of broadcast signals available through
off-air reception compared to the services provided
by the local cable system. Traditionally, cable television has
provided a higher picture quality and more channel offerings
than broadcast television. However, the recent licensing of
digital spectrum by the FCC will provide traditional
broadcasters with the ability to deliver high definition
television pictures and multiple digital-quality program
streams, as well as advanced digital services such as
subscription video and data transmission.
Cable systems are operated under non-exclusive franchises
granted by local authorities. More than one cable system may
legally be built in the same area. It is possible that a
franchising authority might grant a second franchise to another
cable operator and that such a franchise might contain terms and
conditions more favorable than those afforded us. In addition,
entities willing to establish an open video system, under which
they offer unaffiliated programmers non-discriminatory access to
a portion of the systems cable system, may be able to
avoid local franchising requirements. Well financed businesses
from outside the cable industry, such as public utilities that
already possess fiber optic and other transmission lines in the
areas they serve, may over time become competitors. There are a
number of cities that have constructed their own cable systems,
in a manner similar to city-provided utility services. There
also has been interest in traditional overbuilds by private
companies. Constructing a competing cable system is a capital
intensive process which involves a high degree of risk. We
believe that in order to be successful, a competitors
overbuild would need to be able to serve the homes and
businesses in the overbuilt area on a more cost-effective basis
than we can. Any such overbuild operation would require either
significant access to capital or access to facilities already in
place that are capable of delivering cable television
programming.
As of March 31, 2006, we are aware of overbuild situations
impacting approximately 6% of our total homes passed and
potential overbuild situations in areas servicing approximately
an additional 4% of our total homes passed. Additional overbuild
situations may occur in other systems.
Private Cable
Additional competition is posed by satellite master antenna
television systems, or SMATV systems, serving multiple dwelling
units, or MDUs, such as condominiums, apartment complexes, and
private residential communities. These private cable systems may
enter into exclusive agreements with such MDUs, which may
preclude operators of franchise systems from serving residents
of such private complexes. Private cable systems can offer both
improved reception of local television stations and many of the
same satellite-delivered program services that are offered by
cable systems. SMATV systems currently benefit from operating
advantages not available to franchised cable systems, including
fewer regulatory burdens and no requirement to service low
density or economically depressed communities. Exemption from
regulation may provide a competitive advantage to certain of our
current and potential competitors.
Wireless Distribution
Cable systems also compete with wireless program distribution
services such as multi-channel multipoint distribution systems
or wireless cable, known as MMDS, which uses
low-power microwave frequencies to transmit television
programming
over-the-air to paying
customers. MMDS services, however, require unobstructed
line of sight transmission paths and MMDS ventures
have been quite limited to date.
The FCC completed its auction of Multichannel Video
Distribution & Data Service (MVDDS)
licenses. MVDDS is a new terrestrial video and data fixed
wireless service that the FCC hopes will spur competition in the
cable and DBS industries.
78
Properties
Our principal physical assets consist of cable distribution
plant and equipment, including signal receiving, encoding and
decoding devices, headend reception facilities, distribution
systems and customer drop equipment for each of our cable
systems.
Our cable plant and related equipment are generally attached to
utility poles under pole rental agreements with local public
utilities and telephone companies, and in certain locations are
buried in underground ducts or trenches. We own or lease real
property for signal reception sites and own most of our service
vehicles.
Historically, our subsidiaries have owned the real property and
buildings for our data centers, customer contact centers and our
divisional administrative offices. Since early 2003 we have
reduced our total real estate portfolio square footage by
approximately 17% and have decreased our operating annual lease
costs by approximately 30%. In addition, Charter has sold
$15 million worth of surplus land and buildings. We plan to
continue to reduce costs and excess capacity in this area
through consolidation of sites within our system footprints. Our
subsidiaries generally have leased space for business offices
throughout our operating divisions. Our headend and tower
locations are located on owned or leased parcels of land, and we
generally own the towers on which our equipment is located.
Charter Holdco owns the real property and building for our
principal executive offices.
The physical components of our cable systems require maintenance
as well as periodic upgrades to support the new services and
products we introduce. See Business Our
Network Technology. We believe that our properties are
generally in good operating condition and are suitable for our
business operations.
Employees
As of March 31, 2006, we had approximately
16,500 full-time equivalent employees, and our parent
companies employed approximately
600 full-time
employees to manage our operations. At March 31, 2006,
approximately 100 of our employees were represented by
collective bargaining agreements. We have never experienced a
work stoppage.
The corporate office, which includes employees of Charter and
Charter Holdco, is responsible for coordinating and overseeing
our operations. The corporate office performs certain financial
and administrative functions on a centralized basis such as
accounting, taxes, billing, finance and acquisitions, payroll
and benefit administration, information system design and
support, internal audit, purchasing, customer care, marketing
and programming contract administration and oversight and
coordination of external auditors and consultants and related
professional fees. The corporate office performs these services
on a cost reimbursement basis pursuant to a management services
agreement. See Certain Relationships and Related
Transactions Transactions Arising Out of Our
Organizational Structure and Mr. Allens Investment in
Charter and Its Subsidiaries Intercompany Management
Arrangements and Mutual Services
Agreements.
Legal Proceedings
We are a party to lawsuits and claims that have arisen in the
ordinary course of conducting our business. In the opinion of
management, after taking into account recorded liabilities, the
outcome of these other lawsuits and claims are not expected to
have a material adverse effect on our consolidated financial
condition, results of operations or our liquidity.
79
REGULATION AND LEGISLATION
The following summary addresses the key regulatory and
legislative developments affecting the cable industry. Cable
system operations are extensively regulated by the FCC, some
state governments and most local governments. A failure to
comply with these regulations could subject us to substantial
penalties. Our business can be dramatically impacted by changes
to the existing regulatory framework, whether triggered by
legislative, administrative, or judicial rulings. Congress and
the FCC have expressed a particular interest in increasing
competition in the communications field generally and in the
cable television field specifically. The 1996 Telecom Act, which
amended the Communications Act, altered the regulatory structure
governing the nations communications providers. It removed
barriers to competition in both the cable television market and
the local telephone market. At the same time, the FCC has
pursued spectrum licensing options designed to increase
competition to the cable industry by wireless multichannel video
programming distributors. We could be materially disadvantaged
in the future if we are subject to new regulations that do not
equally impact our key competitors.
Congress and the FCC have frequently revisited the subject of
communications regulation, and they are likely to do so in the
future. For example, under the Communications Act, the FCC can
establish rules necessary to provide diversity of
information sources when cable systems with at least 36
channels are available to 70% of U.S. homes and 70% of
those homes subscribe to cable service. The FCC has concluded
that cable systems with at least 36 channels are available to
70% of U.S. homes and is now exploring whether the second
part of the test has been met. In addition, franchise agreements
with local governments must be periodically renewed, and new
operating terms may be imposed. Future legislative, regulatory,
or judicial changes could adversely affect our operations. We
can provide no assurance that the already extensive regulation
of our business will not be expanded in the future.
The cable industry has operated under a federal rate regulation
regime for more than a decade. The regulations currently
restrict the prices that cable systems charge for the minimum
level of video programming service, referred to as basic
service, and associated equipment. All other cable
offerings are now universally exempt from rate regulation.
Although basic rate regulation operates pursuant to a federal
formula, local governments, commonly referred to as local
franchising authorities, are primarily responsible for
administering this regulation. The majority of our local
franchising authorities have never been certified to regulate
basic cable rates, but they retain the right to do so (and order
rate reductions and refunds), except in those specific
communities facing effective competition, as defined
under federal law. With increased DBS competition, our systems
are increasingly likely to satisfy the effective competition
standard. We have already secured FCC recognition of effective
competition, and been rate deregulated, in many of our
communities.
There have been frequent calls to impose expanded rate
regulation on the cable industry. Confronted with rapidly
increasing cable programming costs, it is possible that Congress
may adopt new constraints on the retail pricing or packaging of
cable programming. For example, there has been considerable
legislative and regulatory interest in requiring cable offers to
offer historically bundled programming services on an
á la carte basis or to at least offer a separately
available child-friendly Family Tier. Such
constraints could adversely affect our operations.
Federal rate regulations generally require cable operators to
allow subscribers to purchase premium or pay-per-view services
without the necessity of subscribing to any tier of service,
other than the basic service tier. The applicability of this
rule in certain situations remains unclear, and adverse
decisions by the FCC could affect our pricing and packaging of
services. As we attempt to respond to a changing marketplace
with competitive pricing practices, such as targeted promotions
and discounts, we may face additional legal restraints and
challenges that impede our ability to compete.
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Must Carry/Retransmission Consent |
There are two alternative legal methods for carriage of local
broadcast television stations on cable systems. Federal law
currently includes must carry regulations, which
require cable systems to carry certain local broadcast
television stations that the cable operator would not select
voluntarily. Alternatively, federal law includes
retransmission consent regulations, by which popular
commercial television stations can prohibit cable carriage
unless the cable operator first negotiates for
retransmission consent, which may be conditioned on
significant payments or other concessions. Either option has a
potentially adverse effect on our business. The burden
associated with must carry could increase significantly if cable
systems were required to simultaneously carry both the analog
and digital signals of each television station (dual carriage),
as the broadcast industry transitions from an analog to a
digital format.
The burden could also increase significantly if cable systems
become required to carry multiple program streams included
within a single digital broadcast transmission (multicast
carriage). Additional government-mandated broadcast carriage
obligations could disrupt existing programming commitments,
interfere with our preferred use of limited channel capacity and
limit our ability to offer services that would maximize customer
appeal and revenue potential. Although the FCC issued a decision
in 2005 confirming an earlier ruling against mandating either
dual carriage or multicast carriage, that decision has been
appealed. In addition, the FCC could reverse its own ruling or
Congress could legislate additional carriage obligations. The
President has signed into law legislation establishing February
2009 as the deadline to complete the broadcast transition to
digital spectrum and to reclaim analog spectrum. Cable operators
may need to take additional operational steps at that time to
ensure that customers not otherwise equipped to receive digital
programming, retain access to broadcast programming.
Local franchise agreements often require cable operators to set
aside certain channels for public, educational and governmental
access programming. Federal law also requires cable systems to
designate a portion of their channel capacity for commercial
leased access by unaffiliated third parties. Increased activity
in this area could further burden the channel capacity of our
cable systems.
The Communications Act and the FCCs program
access rules generally prevent satellite video programmers
affiliated with cable operators from favoring cable operators
over competing multichannel video distributors, such as DBS, and
limit the ability of such programmers to offer exclusive
programming arrangements to cable operators. The FCC has
extended the exclusivity restrictions through October 2007.
Given the heightened competition and media consolidation that
Charter faces, it is possible that we will find it increasingly
difficult to gain access to popular programming at favorable
terms. Such difficulty could adversely impact our business.
Federal regulation of the communications field traditionally
included a host of ownership restrictions, which limited the
size of certain media entities and restricted their ability to
enter into competing enterprises. Through a series of
legislative, regulatory, and judicial actions, most of these
restrictions recently were eliminated or substantially relaxed.
For example, historic restrictions on local exchange carriers
offering cable service within their telephone service area, as
well as those prohibiting broadcast stations from owning cable
systems within their broadcast service area, no longer exist.
Changes in this regulatory area, including some still subject to
judicial review, could alter the business landscape in which we
operate, as formidable new competitors (including electric
utilities, local exchange carriers, and broadcast/media
companies) may increasingly choose to offer cable services.
The FCC previously adopted regulations precluding any cable
operator from serving more than 30% of all domestic multichannel
video subscribers and from devoting more than 40% of the
activated channel capacity of any cable system to the carriage
of affiliated national video programming services. These cable
81
ownership restrictions were invalidated by the courts, and the
FCC is now considering adoption of replacement regulations.
Over the past several years, proposals have been advanced at the
FCC and Congress that would require cable operators offering
Internet service to provide non-discriminatory access to its
network to competing Internet service providers. In a 2005
ruling, commonly referred to as Brand X, the Supreme
Court upheld an FCC decision making it less likely that any
non-discriminatory open access requirements (which
are generally associated with common carrier regulation of
telecommunications services) will be imposed on the
cable industry by local, state or federal authorities. The
Supreme Court held that the FCC was correct in classifying
cable-provided Internet service as an information
service, rather than a telecommunications
service. This favorable regulatory classification limits
the ability of various governmental authorities to impose open
access requirements on cable-provided Internet service.
The FCCs classification also means that it likely will not
regulate Internet service as much as cable or telecommunications
services. However, the FCC has set a deadline for broadband
providers to accommodate law enforcement wiretaps and could
impose further regulations in the future. The FCC also issued a
non-binding policy statement in 2005 establishing four basic
principles that the FCC says will inform its ongoing
policymaking activities regarding broadband-related Internet
services. Those principles state that consumers are entitled to
access the lawful Internet content of their choice, consumers
are entitled to run applications and services of their choice,
subject to the needs of law enforcement, consumers are entitled
to connect their choice of legal devices that do not harm the
network, and consumers are entitled to competition among network
providers, application and service providers and content
providers. It is unclear what, if any, additional regulations
the FCC might impose on our Internet service, and what, if any,
impact, such regulations might have on our business.
As the Internet has matured, it has become the subject of
increasing regulatory interest. Congress and federal regulators
have adopted a wide range of measures directly or potentially
affecting Internet use, including, for example, consumer
privacy, copyright protections, (which afford copyright owners
certain rights against us that could adversely affect our
relationship with a customer accused of violating copyright
laws), defamation liability, taxation, obscenity, and
unsolicited commercial
e-mail. State and local
governmental organizations have also adopted Internet-related
regulations. These various governmental jurisdictions are also
considering additional regulations in these and other areas,
such as pricing, service and product quality, and intellectual
property ownership. The adoption of new Internet regulations or
the adaptation of existing laws to the Internet could adversely
affect our business.
The 1996 Telecom Act, which amended the Communications Act,
created a more favorable regulatory environment for us to
provide telecommunications services. In particular, it limited
the regulatory role of local franchising authorities and
established requirements ensuring that we could interconnect
with other telephone companies to provide a viable service. Many
implementation details remain unresolved, and there are
substantial regulatory changes being considered that could
impact, in both positive and negative ways, our primary
telecommunications competitors and our own entry into the field
of phone service. The FCC and state regulatory authorities are
considering, for example, whether common carrier regulation
traditionally applied to incumbent local exchange carriers
should be modified. The FCC has concluded that alternative voice
technologies, like certain types of VoIP, should be regulated
only at the federal level, rather than by individual states. A
legal challenge to that FCC decision is pending. While the
FCCs decision appears to be a positive development for
VoIP offerings, it is unclear whether and how the FCC will apply
certain types of common carrier regulations, such as
intercarrier compensations and universal service obligations to
alternative voice technology. The FCC has already determined
that providers of phone services using Internet Protocol
technology must comply with traditional 911 emergency service
obligations (E911) and it has extended requirements
for accommodat-
82
ing law enforcement wiretaps to such providers. It is unclear
how these regulatory matters ultimately will be resolved and how
they will affect our potential expansion into phone service.
The Communications Act requires most utilities to provide cable
systems with access to poles and conduits and simultaneously
subjects the rates charged for this access to either federal or
state regulation. The Act specifies that significantly higher
rates apply if the cable plant is providing telecommunications
service, as well as traditional cable service. The FCC has
clarified that a cable operators favorable pole rates are
not endangered by the provision of Internet access, and that
determination was upheld by the United States Supreme Court. It
remains possible that the underlying pole attachment formula, or
its application to Internet and telecommunications offerings,
will be modified in a manner that substantially increases our
pole attachment costs.
The FCC has undertaken several steps to promote competition in
the delivery of cable equipment and compatibility with new
digital technology. The FCC has expressly ruled that cable
customers must be allowed to purchase set-top terminals from
third parties and established a multi-year
phase-in during which
security functions (which would remain in the operators
exclusive control) would be unbundled from the basic converter
functions, which could then be provided by third party vendors.
The first phase of implementation has already passed. A
prohibition on cable operators leasing digital set-top terminals
that integrate security and basic navigation functions is
currently scheduled to go into effect as of July 1, 2007.
We are among the cable operators challenging that prohibition in
court.
The FCC has adopted rules implementing an agreement between
major cable operators and manufacturers of consumer electronics
on plug and play specifications for one-way digital
televisions. The rules require cable operators to provide
CableCard security modules and support to customer
owned digital televisions and similar devices equipped with
built-in set-top terminal functionality. Cable operators must
support basic home recording rights and copy protection rules
for digital programming content. The FCCs plug and play
rules are under appeal, although the appeal has been stayed
pending FCC reconsideration.
The FCC is conducting additional related rulemakings, and the
cable and consumer electronics industries are currently
negotiating an agreement that would establish additional
specifications for two-way digital televisions. Congress is also
considering companion broadcast flag legislation to
provide copy protection for digital broadcast signals. It is
unclear how this process will develop and how it will affect our
offering of cable equipment and our relationship with our
customers.
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Other Communications Act Provisions and FCC Regulatory
Matters |
In addition to the Communications Act provisions and FCC
regulations noted above, there are other statutory provisions
and FCC regulations affecting our business. The Communications
Act, for example, includes cable-specific privacy obligations.
The Act carefully limits our ability to collect and disclose
personal information.
FCC regulations include a variety of additional areas,
including, among other things: (1) equal employment
opportunity obligations; (2) customer service standards;
(3) technical service standards; (4) mandatory
blackouts of certain network, syndicated and sports programming;
(5) restrictions on political advertising;
(6) restrictions on advertising in childrens
programming; (7) restrictions on origination cablecasting;
(8) restrictions on carriage of lottery programming;
(9) sponsorship identification obligations;
(10) closed captioning of video programming;
(11) licensing of systems and facilities;
(12) maintenance of public files; and (13) emergency
alert systems.
It is possible that Congress or the FCC will expand or modify
its regulation of cable systems in the future, and we cannot
predict at this time how that might impact our business. For
example, there have been recent discussions about imposing
indecency restrictions directly on cable programming.
83
Cable systems are subject to federal copyright licensing
covering carriage of television and radio broadcast signals. The
possible modification or elimination of this compulsory
copyright license is the subject of continuing legislative
review and could adversely affect our ability to obtain desired
broadcast programming. Moreover, the Copyright Office has not
yet provided any guidance as to how the compulsory copyright
license should apply to newly offered digital broadcast signals.
Copyright clearances for non-broadcast programming services are
arranged through private negotiations. Cable operators also must
obtain music rights for locally originated programming and
advertising from the major music performing rights
organizations. These licensing fees have been the source of
litigation in the past, and we cannot predict with certainty
whether license fee disputes may arise in the future.
Cable systems generally are operated pursuant to nonexclusive
franchises granted by a municipality or other state or local
government entity in order to cross public
rights-of-way. Cable
franchises generally are granted for fixed terms and in many
cases include monetary penalties for noncompliance and may be
terminable if the franchisee fails to comply with material
provisions.
The specific terms and conditions of cable franchises vary
materially between jurisdictions. Each franchise generally
contains provisions governing cable operations, franchise fees,
system construction, maintenance, technical performance, and
customer service standards. A number of states subject cable
systems to the jurisdiction of centralized state government
agencies, such as public utility commissions. Although local
franchising authorities have considerable discretion in
establishing franchise terms, there are certain federal
protections. For example, federal law caps local franchise fees
and includes renewal procedures designed to protect incumbent
franchisees from arbitrary denials of renewal. Even if a
franchise is renewed, however, the local franchising authority
may seek to impose new and more onerous requirements as a
condition of renewal. Similarly, if a local franchising
authoritys consent is required for the purchase or sale of
a cable system, the local franchising authority may attempt to
impose more burdensome requirements as a condition for providing
its consent.
Different legislative proposals have been introduced in the
United States Congress and in some state legislatures that would
greatly streamline cable franchising. This legislation is
intended to facilitate entry by new competitors, particularly
local telephone companies. Such legislation has already passed
in a number of states in which we have operations and one of
these newly enacted statutes is subject to court challenge.
Although various legislative proposals provide some regulatory
relief for incumbent cable operators, these proposals are
generally viewed as being more favorable to new entrants due to
a number of varying factors, including efforts to withhold
streamlined cable franchising from incumbents until after the
expiration of their existing franchises and the potential for
new entrants to serve only higher-income areas of a particular
community. To the extent incumbent cable operators are not able
to avail themselves of this streamlined franchising process,
such operators may continue to be subject to more onerous
franchise requirements at the local level than new entrants. The
FCC recently initiated a proceeding to determine whether local
franchising authorities are impeding the deployment of
competitive cable services through unreasonable franchising
requirements and whether such impediments should be preempted.
At this time, we are not able to determine what impact such
proceeding may have on us.
84
MANAGEMENT
Directors
CCH II is a holding company with no operations. CCH II
Capital is a direct, wholly owned finance subsidiary of
CCH II that exists solely for the purpose of serving as
co-obligor of the original notes and the new notes. Neither
CCH II nor CCH II Capital has any employees. We and
our direct and indirect subsidiaries are managed by Charter. See
Certain Relationships and Related Transactions
Transactions Arising Out of Our Organizational Structure and
Mr. Allens Investment in Charter and Its
Subsidiaries Intercompany Management
Arrangements.
Neil Smit is the sole director of CCH II Capital.
The persons listed below are directors of Charter or CCH II
Capital as indicated.
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Directors |
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Position(s) |
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Paul G. Allen
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Chairman of the board of directors |
W. Lance Conn
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Director of Charter |
Nathaniel A. Davis
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Director of Charter |
Jonathan L. Dolgen
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Director of Charter |
Rajive Johri
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Director of Charter |
Robert P. May
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Director of Charter |
David C. Merritt
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Director of Charter |
Marc B. Nathanson
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|
Director of Charter |
Jo Allen Patton
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Director of Charter |
Neil Smit
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Director of Charter, CCH II Capital, President and Chief
Executive Officer of Charter and Charter Holdco |
John H. Tory
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Director of Charter |
Larry W. Wangberg
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Director of Charter |
The following sets forth certain biographical information with
respect to the directors listed above.
Paul G. Allen, 53, has been Chairman of
Charters board of directors since July 1999, and Chairman
of the board of directors of CII (a predecessor to, and
currently an affiliate of, Charter) since December 1998.
Mr. Allen co-founded Microsoft Corporation with Bill Gates
in 1976 and remained the companys chief technologist until
he left Microsoft Corporation in 1983. Mr. Allen is the
founder and chairman of Vulcan Inc., a multibillion dollar
investment portfolio that includes large stakes in DreamWorks
Animation SKG, Digeo, Oxygen Media, real estate and more than 40
other technology, media and content companies. In 2004,
Mr. Allen funded SpaceShipOne, the first privately-funded
effort to successfully put a civilian in suborbital space and
winner of the Ansari X-Prize competition. Mr. Allen also
owns the Seattle Seahawks NFL and Portland Trail Blazers NBA
franchises. In addition, Mr. Allen is a director of Vulcan
Programming Inc., Vulcan Ventures, Vulcan Inc., Vulcan
Cable III Inc., numerous privately held companies and,
until its sale in May 2004 to an unrelated third party, TechTV
L.L.C.
W. Lance Conn, 37, was elected to the board
of directors of Charter in September 2004. Since July 2004,
Mr. Conn has served as Executive Vice President, Investment
Management for Vulcan Inc., the investment and project
management company that oversees a diverse multi-billion dollar
portfolio of investments by Paul G. Allen. Prior to joining
Vulcan Inc., Mr. Conn was employed by America Online, Inc.,
an interactive online services company, from March 1996 to May
2003. From 1997 to 2000, Mr. Conn served in various senior
business development roles at America Online. In 2000,
Mr. Conn began supervising all of America Onlines
European investments, alliances and business initiatives. In
2002, he became Senior Vice President of America Online
U.S. where he led a company-wide effort to restructure and
optimize America Onlines operations. From September 1994
until February 1996, Mr. Conn was an attorney with the Shaw
Pittman law firm in Washington, D.C. Mr. Conn holds a
J.D.
85
degree from the University of Virginia, a M.A. degree in history
from the University of Mississippi and an A.B. degree in history
from Princeton University.
Nathaniel A. Davis, 52, was elected to the board
of directors of Charter on August 23, 2005. Since June
2003, Mr. Davis has been Managing Director and owner of
RANND Advisory Group, a technology Consulting Group, which
advises venture capital, telecom and other technology related
firms. From January 2000 through May of 2003, he was President
and Chief Operating Officer of XO Communication, Inc. XO
Communications filed a petition to reorganize under
Chapter 11 of the Bankruptcy Code in June 2002 and
completed its restructuring and emerged from Chapter 11 in
January 2003. From October 1998 to December 1999 he was
Executive Vice President, Network and Technical Services of
Nextel Communications, Inc. Prior to that, he worked for MCI
Communications from 1982 until 1998 in a number of positions,
including as Chief Financial Officer of MCIT from November 1996
until October 1998. Prior to that, Mr. Davis served in a
variety of roles that include Senior Vice President of Network
Operations, Chief Operating Officer of MCImetro, Senior Vice
President of Finance and Vice President of Systems Development.
Mr. Davis holds a B.S. degree from Stevens Institute of
Technology, an M.S. degree from Moore School of Engineering and
an M.B.A. degree from the Wharton School at the University of
Pennsylvania. He is a member of the boards of XM Satellite Radio
Holdings, Inc. and of Mutual of America Capital Management
Corporation.
Jonathan L. Dolgen, 60, was elected to the board
of directors of Charter in October 2004. Since July 2004,
Mr. Dolgen has also been a Senior Advisor to
Viacom Inc. (Old Viacom), a worldwide
entertainment and media company, where he provided advisory
services to the Chief Executive Officer of Old Viacom, or
others designated by him, on an as requested basis. Effective
December 31, 2005, Old Viacom was separated into two
publicly traded companies, Viacom Inc.
(New Viacom) and CBS Corporation. Since
the separation of Old Viacom, Mr. Dolgen provides advisory
services to the Chief Executive Officer of New Viacom, or
others designated by him, on an as requested basis. Since July
2004, Mr. Dolgen has been a private investor and since
September 2004, Mr. Dolgen has been a principal of Wood
River Ventures, LLC, a private
start-up entity that
seeks investment and other opportunities primarily in the media
sector. Mr. Dolgen is also a member of the board of
directors of Expedia, Inc. From April 1994 to July 2004,
Mr. Dolgen served as Chairman and Chief Executive Officer
of the Viacom Entertainment Group, a unit of Old Viacom, where
he oversaw various operations of Old Viacoms
businesses, which during 2003 and 2004 primarily included the
operations engaged in motion picture production and
distribution, television production and distribution, regional
theme parks, theatrical exhibition and publishing. As a result
of the separation of Old Viacom, Old Viacoms motion
picture production and distribution and theatrical exhibition
businesses became part of New Viacoms businesses, and the
remainder of Old Viacoms businesses overseen by
Mr. Dolgen remained with CBS Corporation. Mr. Dolgen
began his career in the entertainment industry in 1976, and
until joining the Viacom Entertainment Group, served in
executive positions at Columbia Pictures Industries, Inc.,
Twentieth Century Fox and Fox, Inc., and Sony Pictures
Entertainment. Mr. Dolgen holds a B.S. degree from Cornell
University and a J.D. degree from New York University.
Rajive Johri, 56, was elected to the board of
directors of Charter on April 18, 2006. Since September
2005, Mr. Johri has served as President of the First National
Credit Cards Center for First National Bank of Omaha. From
August 2004 to September 2005, he served as Executive Consultant
for Park Li Group in New York, NY. Prior to that, Mr. Johri
served as Executive Vice President, Marketing for J.P. Morgan
Chase Bank from September 1999 until August 2004. From 1985 to
1999, Mr. Johri was employed by Citibank N.A. in a number of
management positions. Mr. Johri received a bachelors of
technology degree in Mechanical Engineering from Indian
Institute of Technology in New Delhi, India and a M.B.A. degree
in Marketing and Finance from Indian Institute of Management in
Calcutta, India.
Robert P. May, 57, was elected to Charters
board of directors in October 2004 and was Charters
Interim President and Chief Executive Officer from January until
August 2005. Mr. May was named Chief Executive Officer and
a director of Calpine Corporation, a power company, in December
2005. Calpine filed for Chapter 11 bankruptcy
reorganization in December 2005. He served on the board of
directors of HealthSouth Corporation, a national provider of
healthcare services, from October 2002 until October 2005, and
was its Chairman from July 2004 until October 2005. Mr. May
also served as
86
HealthSouth Corporations Interim Chief Executive Officer
from March 2003 until May 2004, and as Interim President of its
Outpatient and Diagnostic Division from August 2003 to January
2004. Since March 2001, Mr. May has been a private investor
and principal of RPM Systems, which provides strategic business
consulting services. From March 1999 to March 2001, Mr. May
served on the board of directors and was Chief Executive of PNV
Inc., a national telecommunications company. Prior to his
employment at PNV Inc., Mr. May was Chief Operating Officer
and a member of the board of directors of Cablevision Systems
Corporation from October 1996 to February 1998, and from 1973 to
1993 he held several senior executive positions with Federal
Express Corporation, including President, Business Logistics
Services. Mr. May was educated at Curry College and Boston
College and attended Harvard Business Schools Program for
Management Development. He is a member of Deutsche Bank of
Americas Advisory Board.
David C. Merritt, 51, was elected to the board of
directors of Charter in July 2003, and was also appointed as
Chairman of Charters Audit Committee at that time. Since
October 2003, Mr. Merritt has been a Managing Director of
Salem Partners, LLC, an investment banking firm. He was a
Managing Director in the Entertainment Media Advisory Group at
Gerard Klauer Mattison & Co., Inc., a company that
provided financial advisory services to the entertainment and
media industries from January 2001 through April 2003. From July
1999 to November 2000, he served as Chief Financial Officer of
CKE Associates, Ltd., a privately held company with interests in
talent management, film production, television production, music
and news media. He also served as a director of Laser-Pacific
Media Corporation from January 2001 until October 2003 and
served as Chairman of its audit committee. In December 2003, he
became a director of Outdoor Channel Holdings, Inc. and serves
as Chairman of its audit committee. Mr. Merritt joined KPMG
in 1975 and served in a variety of capacities during his years
with the firm, including national partner in charge of the media
and entertainment practice. Mr. Merritt was an audit and
consulting partner of KPMG for 14 years. In February 2006,
Mr. Merritt became a director of Calpine Corporation.
Mr. Merritt holds a B.S. degree in business and accounting
from California State University Northridge.
Marc B. Nathanson, 61, has been a director of
Charter since January 2000 and serves as Vice Chairman of
Charters board of directors, a non-executive position.
Mr. Nathanson is the Chairman of Mapleton Investments LLC,
an investment vehicle formed in 1999. He also founded and served
as Chairman and Chief Executive Officer of Falcon Holding Group,
Inc., a cable operator, and its predecessors, from 1975 until
1999. He served as Chairman and Chief Executive Officer of
Enstar Communications Corporation, a cable operator, from 1988
until November 1999. Prior to 1975, Mr. Nathanson held
executive positions with Teleprompter Corporation, Warner Cable
and Cypress Communications Corporation. In 1995, he was
appointed by the President of the United States to the
Broadcasting Board of Governors, and from 1998 through September
2002, served as its Chairman. Mr. Nathanson holds a B.A.
degree in mass communications from the University of Denver and
a M.A. degree in political science from University of
California/ Santa Barbara.
Jo Allen Patton, 48, has been a director of
Charter since April 2004. Ms. Patton joined Vulcan Inc. as
Vice President in 1993, and since that time she has served as an
officer and director of many affiliates of Mr. Allen,
including her current position as President and Chief Executive
Officer of Vulcan Inc. since July 2001. Ms. Patton is also
President of Vulcan Productions, an independent feature film and
documentary production company, Vice Chair of First &
Goal, Inc., which developed and operated the Seattle Seahawks
NFL stadium, and serves as Executive Director of the six Paul G.
Allen Foundations. Ms. Patton is a co-founder of the
Experience Music Project museum, as well as the Science Fiction
Museum and Hall of Fame. Ms. Patton is the sister of
Mr. Allen.
Neil Smit, 47, was elected a director and
President and Chief Executive Officer of Charter on
August 22, 2005. He has served as sole director of
CCH II Capital since January 2006. He had previously worked
at Time Warner, Inc. since 2000, most recently serving as the
President of Time Warners America Online Access Business.
He also served at America Online (AOL) as Executive
Vice President, Member Development, Senior Vice President of
AOLs product and programming team, Chief Operating Officer
of AOL Local, Chief Operating Officer of MapQuest. Prior to that
he was a Regional President with Nabisco and was with Pillsbury
in a number of management positions. Mr. Smit has a B.S.
degree from Duke
87
University and a M.S. degree with a focus in international
business from Tufts Universitys Fletcher School of Law and
Diplomacy.
John H. Tory, 51, has been a director of Charter
since December 2001. Mr. Tory served as the Chief Executive
Officer of Rogers Cable Inc., Canadas largest broadband
cable operator, from 1999 until 2003. From 1995 to 1999,
Mr. Tory was President and Chief Executive Officer of
Rogers Media Inc., a broadcasting and publishing company. Prior
to joining Rogers, Mr. Tory was a Managing Partner and
member of the executive committee at Tory Tory
DesLauriers & Binnington, one of Canadas largest
law firms. Mr. Tory serves on the board of directors of
Rogers Telecommunications Limited and Cara Operations Limited
and is Chairman of Cara Operations Audit Committee.
Mr. Tory was educated at University of Toronto Schools,
Trinity College (University of Toronto) and Osgoode Hall Law
School. Effective September 18, 2004, Mr. Tory was
elected Leader of the Ontario Progressive Conservative Party. On
March 17, 2005, he was elected a Member of the Provincial
Parliament and on March 29, 2005, became the Leader of Her
Majestys Loyal Opposition.
Larry W. Wangberg, 63, has been a director of
Charter since January 2002. Since July 2002, Mr. Wangberg
has been an independent business consultant. From August 1997 to
May 2004, Mr. Wangberg was a director of TechTV L.L.C., a
cable television network controlled by Paul Allen. He also
served as its Chairman and Chief Executive Officer from August
1997 through July 2002. In May 2004, TechTV L.L.C. was sold to
an unrelated party. Prior to joining TechTV L.L.C.,
Mr. Wangberg was Chairman and Chief Executive Officer of
StarSight Telecast Inc., an interactive navigation and program
guide company which later merged with Gemstar International,
from 1994 to 1997. Mr. Wangberg was Chairman and Chief
Executive Officer of Times Mirror Cable Television and Senior
Vice President of its corporate parent, Times Mirror Co., from
1983 to 1994. He currently serves on the boards of Autodesk Inc.
and ADC Telecommunications, Inc. Mr. Wangberg holds a B.S.
degree in mechanical engineering and a M.S. degree in industrial
engineering, both from the University of Minnesota.
Board of Directors and Committees of the Board of
Directors
Charters board of directors meets regularly throughout the
year on a set schedule. The board may also hold special meetings
and act by written consent from time to time if necessary.
Meetings of the independent members of the board occur from time
to time. Management is not present at these meetings.
Charters board of directors delegates authority to act
with respect to certain matters to board committees whose
members are appointed by the board. As of December 31, 2005
the following were the committees of Charters board of
directors: Audit Committee, Financing Committee, Compensation
Committee, Executive Committee, Strategic Planning Committee,
and a Special Committee for matters related to the CC VIII
put dispute.
Charters Audit Committee, which has a written charter
approved by the board, consists of Nathaniel Davis, Rajive Johri
and David Merritt, all of whom are believed to be independent in
accordance with the applicable corporate governance listing
standards of the NASDAQ National Market. Charters board of
directors has determined that, in its judgment, David Merritt is
an audit committee financial expert within the meaning of the
applicable federal regulations.
Director Compensation
Each non-employee member of Charters board receives an
annual retainer of $40,000 in cash plus restricted stock,
vesting one year after the date of grant, with a value on the
date of grant of $50,000. In addition, Charters Audit
Committee chair receives $25,000 per year, and the chair of
each other committee receives $10,000 per year. Prior to
February 22, 2005, all committee members also received
$1,000 for attendance at each committee meeting. Beginning on
February 22, 2005 each director also receives $1,000 for
telephonic attendance at each meeting of the full board and
$2,000 for in-person attendance. Each director of Charter is
entitled to reimbursement for costs incurred in connection with
attendance at board and committee meetings. Vulcan has informed
us that, in accordance with its internal
88
policy, Mr. Conn turns over to Vulcan all cash compensation
he receives for his participation on Charters board of
directors or committees thereof.
Directors who were employees did not receive additional
compensation in 2004 or 2005. Messrs. Vogel and Smit, who
were Charters President and Chief Executive Officer in
2005, were the only directors who were also employees during
2005. Mr. May, who was our Interim President and Chief Executive
Officer from January 2005 until August 2005, was not an
employee. However, he received fees and a bonus pursuant to an
agreement. See Employment Arrangements.
Charters Bylaws provide that all directors are entitled to
indemnification to the maximum extent permitted by law from and
against any claims, damages, liabilities, losses, costs or
expenses incurred in connection with or arising out of the
performance by them of their duties for Charter or its
subsidiaries.
Executive Officers
The following persons are executive officers of Charter and
other than Mr. Allen, also hold similar positions with
Charter Holdco, Charter Holdings, CCH II, CCH II Capital
and Charter Operating:
|
|
|
Executive Officers |
|
Position |
|
|
|
Paul G. Allen
|
|
Chairman of Charters Board of Directors |
Neil Smit
|
|
President and Chief Executive Officer |
Michael J. Lovett
|
|
Executive Vice President and Chief Operating Officer |
Jeffrey T. Fisher
|
|
Executive Vice President and Chief Financial Officer |
Grier C. Raclin
|
|
Executive Vice President, General Counsel and Corporate Secretary |
Robert A. Quigley
|
|
Executive Vice President and Chief Marketing Officer |
Sue Ann R. Hamilton
|
|
Executive Vice President, Programming |
Lynne F. Ramsey
|
|
Senior Vice President, Human Resources |
Kevin D. Howard
|
|
Vice President and Chief Accounting Officer |
Information regarding our executive officers who do not serve as
directors is set forth below.
Michael J. Lovett, 44, Executive Vice President
and Chief Operating Officer. Mr. Lovett was promoted to his
current position in April 2005. Prior to that he served as
Executive Vice President, Operations and Customer Care from
September 2004 through March 2005, and as Senior Vice President,
Midwest Division Operations and as Senior Vice President of
Operations Support, since joining Charter in August 2003 until
September 2004. Mr. Lovett was Chief Operating Officer of
Voyant Technologies, Inc., a voice conferencing hardware/
software solutions provider, from December 2001 to August 2003.
From November 2000 to December 2001, he was Executive Vice
President of Operations for OneSecure, Inc., a startup company
delivering management/monitoring of firewalls and virtual
private networks. Prior to that, Mr. Lovett was Regional
Vice President at AT&T from June 1999 to November 2000 where
he was responsible for operations. Mr. Lovett was Senior
Vice President at Jones Intercable from October 1989 to June
1999 where he was responsible for operations in nine states.
Mr. Lovett began his career in cable television at Centel
Corporation where he held a number of positions. Mr. Lovett
serves on the Board of Directors for Conversant Communications
and Digeo, Inc.
Jeffrey T. Fisher, 43, Executive Vice President
and Chief Financial Officer. Mr. Fisher was appointed to
the position of Executive Vice President and Chief Financial
Officer, effective February 6, 2006. Prior to joining
Charter, Mr. Fisher was employed by Delta Airlines, Inc.
from 1998 to 2006 in a number of positions including Senior Vice
President Restructuring from September 2005 until
January 2006, President and General Manager of Delta Connection,
Inc. from January to September 2005, Chief Financial Officer of
Delta Connection from 2001 until January 2005, Vice President of
Finance, Marketing and Sales Controller of Delta Airlines in
2001 and Vice President of Financial Planning and Analysis of
Delta Airlines from 2000 to 2001. Delta Airlines filed a
petition under Chapter 11 of the Bankruptcy Code on
September 14, 2005. Mr. Fisher received a B.B.M.
degree from Embry Riddle University and a M.B.A. degree in
International Finance from University of Texas in Arlington,
Texas.
89
Grier C. Raclin, 53, Executive Vice President,
General Counsel and Corporate Secretary. Mr. Raclin joined
Charter in his current position in October 2005. Prior to
joining Charter, Mr. Raclin had served as the Chief Legal
Officer and Corporate Secretary of Savvis Communications
Corporation since January 2003. Prior to joining Savvis,
Mr. Raclin served as Executive Vice President, Chief
Administrative Officer, General Counsel and Corporate Secretary
from 2000 to 2002 and as Senior Vice President of Corporate
Affairs, General Counsel and Corporate Secretary from 1997 to
2000 of Global TeleSystems Inc. (GTS). In 2001, GTS
filed, in pre-arranged proceedings, a petition for
surseance(moratorium), offering a composition, in
The Netherlands and a petition under Chapter 11 of the
United States Bankruptcy Code, both in connection with the sale
of the company to KPNQwest. Prior to joining GTS,
Mr. Raclin was Vice-Chairman and a Managing Partner of
Gardner, Carton and Douglas in Washington, D.C.
Mr. Raclin earned a J.D. degree from Northwestern
University Law School, where he served on the Editorial Board of
the Northwestern University Law School Law Review, attended
business school at the University of Chicago Executive Program
and earned a B.S. degree from Northwestern University, where he
was a member of Phi Beta Kappa.
Robert A. Quigley, 62, Executive Vice
President and Chief Marketing Officer. Mr. Quigley joined
Charter in his current position in December 2005. Prior to
joining Charter, Mr. Quigley was President and CEO at
Quigley Consulting Group, LLC, a private consulting group, from
April 2005 to December 2005. From March 2004 to March 2005,
he was Executive Vice President of Sales and Marketing at
Cardean Education Group (formerly UNext com LLC), a private
online education company. From February 2000 to March 2004,
Mr. Quigley was Executive Vice President of America Online
and Chief Operating Officer of its Consumer Marketing division.
Prior to America Online, he was owner, President and CEO of
Wordsquare Publishing Co. from July 1994 to February 2000.
Mr. Quigley is a graduate of Wesleyan University with a
B.A. degree in history and is a member of the Direct Marketing
Association Board of Directors.
Sue Ann R. Hamilton, 45, Executive Vice President,
Programming. Ms. Hamilton joined Charter as Senior Vice
President of Programming in March 2003 and was promoted to her
current position in April 2005. From March 1999 to November
2002, Ms. Hamilton served as Vice President of Programming
for AT&T Broadband, L.L.C. Prior to that, from October 1993
to March 1999, Ms. Hamilton held numerous management
positions at AT&T Broadband, L.L.C. and Tele-Communications,
Inc. (TCI), which was acquired by AT&T Broadband, L.L.C. in
1999. Prior to her cable television career with TCI, she was a
partner with Kirkland & Ellis representing domestic and
international clients in complex commercial transactions and
securities matters. A magna cum laude graduate of Carleton
College in Northfield, Minnesota, Ms. Hamilton received a
J.D. degree from Stanford Law School, where she was Associate
Managing Editor of the Stanford Law Review and Editor of
the Stanford Journal of International Law.
Lynne F. Ramsey, 48, Senior Vice President, Human
Resources. Ms. Ramsey joined Charters Human Resources
group in March 2001 and served as Corporate Vice President,
Human Resources. She was promoted to her current position in
July 2004. Before joining Charter, Ms. Ramsey was Executive
Vice President of Human Resources for Broadband Infrastructure
Group from March 2000 through November 2000. From 1994 to 1999,
Ms. Ramsey served as Senior Vice President of Human
Resources for Firstar Bank, previously Mercantile Bank of
St. Louis. She served as Vice President of Human Resources
for United Postal Savings from 1982 through 1994, when it was
acquired by Mercantile Bank of St. Louis. Ms. Ramsey
received a bachelors degree in Education from Maryville
College and a masters degree in Human Resources Management
from Washington University.
Kevin D. Howard, 36, Vice President and Chief
Accounting Officer. Mr. Howard was promoted to his current
position in April 2006. Prior to that, he served as Vice
President of Finance from April 2003 until April 2006 and as
Director of Financial Reporting since joining Charter in April
2002. Mr. Howard began his career at Arthur Andersen LLP in
1993 where he held a number of positions in the audit division
prior to leaving in April 2002. Mr. Howard received a
B.S.B.A. degree in finance and economics from the University of
Missouri Columbia and is a certified public
accountant, certified managerial accountant and certified in
financial management.
90
Compensation Committee Interlocks and Insider
Participation
At the beginning of 2005, Mr. Lillis and Mr. Merritt
served as the Option Plan Committee which administered the 1999
Charter Communications Option Plan and the Charter
Communications, Inc. 2001 Stock Incentive Plan and the
Compensation Committee consisted of Messrs. Allen, Lillis
and Nathanson. The Option Plan Committee and the Compensation
Committee merged in February 2005 and the committee then
consisted of Messrs. Allen, Merritt and Nathanson. Mr. May
joined the committee in August 2005. The Compensation Committee
is currently comprised of Messrs. Allen, May, Merritt and
Nathanson.
No member of Charters Compensation Committee or its Option
Plan Committee was an officer or employee of Charter or any of
its subsidiaries during 2005, except for Mr. Allen who
served as a non-employee chairman of the Compensation Committee
and Mr. May who served in a non-employee capacity as
Interim President and Chief Executive Officer from January 2005
until August 2005. Mr. May joined the Compensation
Committee in August 2005 after his service as Interim President
and Chief Executive Officer. Also, Mr. Nathanson was an
officer of certain subsidiaries of Charter prior to their
acquisition by Charter in 1999 and held the title of Vice
Chairman of Charters board of directors, a non-executive,
non-salaried position in 2005. Mr. Allen is the 100% owner
and a director of Vulcan Inc. and certain of its affiliates,
which employs Mr. Conn and Ms. Patton as executive
officers. Mr. Allen also was a director of and indirectly
owned 98% of TechTV, of which Mr. Wangberg, one of
Charters directors, was a director until the sale of
TechTV to an unrelated third party in May 2004. Transactions
between Charter and members of the Compensation Committee are
more fully described in Director
Compensation and in Certain Relationships and
Related Transactions Other Miscellaneous
Relationships.
During 2005, (1) none of Charters executive officers
served on the compensation committee of any other company that
has an executive officer currently serving on Charters
board of directors, Compensation Committee or Option Plan
Committee and (2) none of Charters executive officers
served as a director of another entity, one of whose executive
officers served on the Compensation Committee or Option Plan
Committee, except for Carl Vogel who served as a director of
Digeo, Inc., an entity of which Paul Allen is a director and by
virtue of his position as Chairman of the board of directors of
Digeo, Inc. is also a non-employee executive officer.
Mr. Lovett was appointed a director of Digeo, Inc. in
December 2005.
91
Executive Compensation
Summary
Compensation Table
The following table sets forth information as of
December 31, 2005 regarding the compensation to those
executive officers listed below for services rendered for the
fiscal years ended December 31, 2003, 2004 and 2005. These
officers consist of three individuals who served as Chief
Executive Officer, and each of the other four most highly
compensated executive officers as of December 31, 2005.
Pursuant to a mutual services agreement, each of Charter and
Charter Holdco provides its personnel and services to the other,
including the knowledge and expertise of their respective
officers that are reasonably requested to manage Charter Holdco,
CIH, CCH I, CCH II and the cable systems owned by
their subsidiaries. See Certain Relationships and Related
Transactions Transactions Arising Out of Our
Organizational Structure and Mr. Allens Investment in
Charter and Its Subsidiaries Intercompany Management
Arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term | |
|
|
|
|
|
|
Annual Compensation | |
|
Compensation Award | |
|
|
|
|
|
|
| |
|
| |
|
|
|
|
|
|
|
|
Restricted | |
|
Securities | |
|
|
|
|
Year | |
|
|
|
Other Annual | |
|
Stock | |
|
Underlying | |
|
All Other | |
|
|
Ended | |
|
Salary | |
|
Bonus | |
|
Compensation | |
|
Awards | |
|
Options | |
|
Compensation | |
Name and Principal Position |
|
Dec. 31 | |
|
($) | |
|
($) | |
|
($) | |
|
($) | |
|
(#) | |
|
($)(1) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Neil Smit(2)
|
|
|
2005 |
|
|
|
415,385 |
|
|
|
1,200,000 |
(9) |
|
|
|
|
|
|
3,278,500 |
(21) |
|
|
3,333,333 |
|
|
|
23,236 |
(28) |
|
President and Chief |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive Officer |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert P. May(3)
|
|
|
2005 |
|
|
|
|
|
|
|
838,900 |
(10) |
|
|
1,360,239 |
(16) |
|
|
180,000 |
(22) |
|
|
|
|
|
|
|
|
|
Former Interim President |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
10,000 |
(16) |
|
|
50,000 |
(22) |
|
|
|
|
|
|
|
|
|
and Chief Executive Officer |
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carl E. Vogel(4)
|
|
|
2005 |
|
|
|
115,385 |
|
|
|
|
|
|
|
1,428 |
(17) |
|
|
|
|
|
|
|
|
|
|
1,697,451 |
(29) |
|
Former President and |
|
|
2004 |
|
|
|
1,038,462 |
|
|
|
500,000 |
(11) |
|
|
38,977 |
(17) |
|
|
4,729,400 |
(23) |
|
|
580,000 |
|
|
|
3,239 |
|
|
Chief Executive Officer |
|
|
2003 |
|
|
|
1,000,000 |
|
|
|
150,000 |
(12) |
|
|
40,345 |
(17) |
|
|
|
|
|
|
750,000 |
|
|
|
3,239 |
|
Michael J. Lovett(5)
|
|
|
2005 |
|
|
|
516,153 |
|
|
|
377,200 |
|
|
|
14,898 |
(18) |
|
|
265,980 |
(24) |
|
|
216,000 |
|
|
|
59,013 |
(30) |
|
Executive Vice President |
|
|
2004 |
|
|
|
291,346 |
|
|
|
241,888 |
|
|
|
7,797 |
(18) |
|
|
355,710 |
(24) |
|
|
172,000 |
|
|
|
6,994 |
|
|
and Chief Operating Officer |
|
|
2003 |
|
|
|
81,731 |
|
|
|
60,000 |
|
|
|
2,400 |
(18) |
|
|
|
|
|
|
100,000 |
|
|
|
1,592 |
|
Paul E. Martin(6)
|
|
|
2005 |
|
|
|
350,950 |
|
|
|
299,017 |
(13) |
|
|
|
|
|
|
52,650 |
(25) |
|
|
83,700 |
|
|
|
7,047 |
|
|
Former Senior Vice |
|
|
2004 |
|
|
|
193,173 |
|
|
|
25,000 |
(13) |
|
|
|
|
|
|
269,100 |
(25) |
|
|
77,500 |
|
|
|
6,530 |
|
|
President, Principal Accounting Officer and Corporate Controller |
|
|
2003 |
|
|
|
167,308 |
|
|
|
14,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,048 |
|
Wayne H. Davis(7)
|
|
|
2005 |
|
|
|
409,615 |
|
|
|
184,500 |
|
|
|
|
|
|
|
108,810 |
(26) |
|
|
145,800 |
|
|
|
3,527 |
|
|
Former Executive Vice |
|
|
2004 |
|
|
|
269,231 |
|
|
|
61,370 |
(14) |
|
|
|
|
|
|
435,635 |
(26) |
|
|
135,000 |
|
|
|
2,278 |
|
|
President and Chief Technical Officer |
|
|
2003 |
|
|
|
212,885 |
|
|
|
47,500 |
|
|
|
581 |
(19) |
|
|
|
|
|
|
225,000 |
|
|
|
436 |
|
Sue Ann R. Hamilton(8)
|
|
|
2005 |
|
|
|
362,700 |
|
|
|
152,438 |
|
|
|
|
|
|
|
107,838 |
(27) |
|
|
145,000 |
|
|
|
6,351 |
|
|
Executive Vice |
|
|
2004 |
|
|
|
346,000 |
|
|
|
13,045 |
|
|
|
|
|
|
|
245,575 |
(27) |
|
|
90,000 |
|
|
|
3,996 |
|
|
President Programming |
|
|
2003 |
|
|
|
225,000 |
|
|
|
231,250 |
(15) |
|
|
4,444 |
(20) |
|
|
|
|
|
|
200,000 |
|
|
|
1,710 |
|
|
|
|
|
(1) |
Except as noted in Notes 28 through 30 below, respectively,
these amounts consist of matching contributions under our 401(k)
plan, premiums for supplemental life insurance available to
executives, and long-term disability available to executives. |
|
|
(2) |
Mr. Smit joined Charter on August 2005 in his current
position. |
|
|
(3) |
Mr. May served as Interim President and Chief Executive
Officer from January 2005 through August 2005. |
|
|
(4) |
Mr. Vogel resigned from all of his positions with Charter
and its subsidiaries in January 2005. |
|
|
(5) |
Mr. Lovett joined Charter in August 2003 and was promoted
to his current position in April 2005. |
|
|
(6) |
Mr. Martin resigned from all of his positions with Charter
and its subsidiaries in April 2006. |
|
|
(7) |
Mr. Davis resigned from all of his positions with Charter
and its subsidiaries in March 2006. |
92
|
|
|
|
(8) |
Ms. Hamilton joined Charter in March 2003 and was promoted
to her current position in April 2005. |
|
|
(9) |
Pursuant to his employment agreement, Mr. Smit will receive
a minimum bonus of $1,200,000 for 2005. |
|
|
(10) |
This bonus was paid pursuant to Mr. Mays Executive
Services Agreement. See Employment Arrangements. |
|
(11) |
Mr. Vogels 2004 bonus was a mid-year discretionary
bonus. |
|
(12) |
Mr. Vogels 2003 bonus was determined in accordance
with the terms of his employment agreement. |
|
(13) |
Includes (i) for 2005, a bonus of $50,000 for his services
as Interim Co-Chief Financial Officer and a discretionary bonus
of $50,000 and (ii) for 2004, a SOX implementation bonus of
$25,000. |
|
(14) |
Mr. Davis 2004 bonus included a $50,000 discretionary
bonus. |
|
(15) |
Ms. Hamiltons 2003 bonus included a $150,000 signing
bonus. |
|
(16) |
Includes (i) for 2005, $1,177,885 as compensation for
services as Interim President and Chief Executive Officer
pursuant to his Executive Services Agreement (see
Employment Arrangements), $67,000 as compensation
for services as a director on Charters Board of Directors,
$15,717 attributed to personal use of the corporate airplane and
$99,637 for reimbursement for transportation and living expenses
pursuant to his Executive Services Agreement, and (ii) for
2004, compensation for services as a director on Charters
Board of Directors. |
|
(17) |
Includes (i) for 2005, $1,428 attributed to personal use of
the corporate airplane, (ii) for 2004, $28,977 attributed
to personal use of the corporate airplane and $10,000 for tax
advisory services, and (iii) for 2003, $30,345 attributed
to personal use of the corporate airplane and $10,000 for tax
advisory services. |
|
(18) |
Includes (i) for 2005, $7,698 attributed to personal use of
the corporate airplane and $7,200 for automobile allowance,
(ii) for 2004, $597 attributed to personal use of the
corporate airplane and $7,200 for automobile allowance and
(iii) for 2003, $2,400 for automobile allowance. |
|
(19) |
Amount attributed to personal use of the corporate airplane. |
|
(20) |
Amount attributed to personal use of the corporate airplane. |
|
(21) |
Pursuant to his employment agreement, Mr. Smit received
1,250,000 restricted shares in August 2005, which will vest on
the first anniversary of the grant date and 1,562,500
restricted shares in August 2005, which will vest over three
years in equal one-third installments. See Employment
Arrangements. At December 31, 2005, the value of all
of the named officers unvested restricted stock holdings
was $3,431,250, based on a per share market value (closing sale
price) of $1.22 for Charters Class A common stock on
December 31, 2005. |
|
(22) |
Includes (i) for 2005, 100,000 restricted shares granted in
April 2005 under our 2001 Stock Incentive Plan for
Mr. Mays services as Interim President and Chief
Executive Officer that vested upon his termination in that
position in August 2005 and 40,650 restricted shares granted in
October 2005 under our 2001 Stock Incentive Plan for
Mr. Mays annual director grant which vests on the
first anniversary of the grant date. At December 31, 2005,
the value of all of the named officers unvested restricted
stock holdings was $49,593, based on a per share market value
(closing sale price) of $1.22 for Charters Class A
common stock on December 31, 2005, and (ii) for 2004,
19,685 restricted shares granted in October 2004 under our 2001
Stock Incentive Plan for Mr. Mays annual director
grant, which vested on its first anniversary of the grant date
in October 2005. |
|
(23) |
Includes 340,000 performance shares granted in January 2004
under our Long-Term Incentive Program that were to vest on the
third anniversary of the grant date only if Charter meets
certain performance criteria. Also includes 680,000 restricted
shares issued in exchange for stock options held by the named
officer pursuant to the February 2004 option exchange program
described below, one half of which constituted performance
shares which were to vest on the third anniversary of the grant
date only if Charter meets certain performance criteria, and the
other half of which were to vest over three years in equal
one-third installments. Under the terms of the separation
agreement described below in Employment
Arrangements, his options and remaining restricted stock
vested until December 31, 2005, and all vested options are
exercisable until sixty (60) days thereafter. All |
93
|
|
|
performance shares were forfeited upon termination of
employment. All remaining unvested restricted stock and stock
options were cancelled on December 31, 2005. Therefore, at
December 31, 2005, the value of all of the named
officers unvested restricted stock holdings was $0, based
on a per share market value (closing sale price) of $1.22 for
Charters Class A common stock on December 31,
2005. |
|
(24) |
Includes (i) for 2005, 129,600 performance shares granted
in April 2005 under our Long-Term Incentive Program which will
vest on the third anniversary of the grant date only if Charter
meets certain performance criteria and 75,000 restricted shares
granted in April 2005 under the 2001 Stock Incentive Plan that
will vest on the third anniversary of the grant date, and
(ii) for 2004, 88,000 performance shares granted under our
Long-Term Incentive Program that will vest on the third
anniversary of the grant date only if Charter meets certain
performance criteria. At December 31, 2005, the value of
all of the named officers unvested restricted stock
holdings (including performance shares) was $356,972, based on a
per share market value (closing sale price) of $1.22 for
Charters Class A common stock on December 31,
2005. |
|
(25) |
Includes (i) for 2005, 40,500 performance shares granted
under our Long-Term Incentive Program that will vest on the
third anniversary of the grant date only if Charter meets
certain performance criteria, and (ii) for 2004, 37,500
performance shares granted in January 2004 under our Long-Term
Incentive Program which will vest on the third anniversary of
the grant date only if Charter meets certain performance
criteria and 17,214 restricted shares issued in exchange for
stock options held by the named officer pursuant to the February
2004 option exchange program described below, one half of which
constituted performance shares which will vest on the third
anniversary of the grant date only if Charter meets certain
performance criteria, and the other half of which will vest over
three years in equal one-third installments. At
December 31, 2005, the value of all of the named
officers unvested restricted stock holdings (including
performance shares) was $112,661, based on a per share market
value (closing sale price) of $1.22 for Charters
Class A common stock on December 31, 2005. |
|
(26) |
Includes (i) for 2005, 83,700 performance shares granted
under our Long-Term Incentive Program that will vest on the
third anniversary of the grant date only if Charter meets
certain performance criteria, and (ii) for 2004, 77,500
performance shares granted in January 2004 under our Long-Term
Incentive Program which will vest on the third anniversary of
the grant date only if Charter meets certain performance
criteria and 8,000 restricted shares issued in exchange for
stock options held by the named officer pursuant to the February
2004 option exchange program described below, one half of which
constituted performance shares which will vest on the third
anniversary of the grant date only if Charter meets certain
performance criteria, and the other half of which will vest over
three years in equal one-third installments. At
December 31, 2005, the value of all of the named
officers unvested restricted stock holdings (including
performance shares) was $204,797, based on a per share market
value (closing sale price) of $1.22 for Charters
Class A common stock on December 31, 2005. |
|
(27) |
These restricted shares consist of 83,700 and 47,500 performance
shares granted in 2005 and 2004, respectively, under our
Long-Term Incentive Program that will vest on the third
anniversary of the grant date only if Charter meets certain
performance criteria. At December 31, 2005, the value of
all of the named officers unvested restricted stock
holdings (including performance shares) was $160,064 based on a
per share market value (closing sale price) of $1.22 for
Charters Class A common stock on December 31,
2005. |
|
(28) |
In addition to items in Note 1 above, includes $19,697
attributed to reimbursement for taxes (on a grossed
up basis) paid in respect of prior reimbursements for
relocation expenses. |
|
(29) |
In addition to items in Note 1 above, includes accrued
vacation at time of termination and severance payments pursuant
to Mr. Vogels separation agreement (see
Employment Arrangements). |
|
(30) |
In addition to items in Note 1 above, includes $51,223
attributed to reimbursement for taxes (on a grossed
up basis) paid in respect of prior reimbursements for
relocation expenses. |
94
2005 Option Grants
The following table shows individual grants of options made to
individuals named in the Summary Compensation Table during 2005.
All such grants were made under the 2001 Stock Incentive Plan
and the exercise price was based upon the fair market value of
Charters Class A common stock on the respective grant
dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of | |
|
|
|
|
|
|
|
Potential Realizable Value at | |
|
|
Securities | |
|
% of Total | |
|
|
|
|
|
Assumed Annual Rate of | |
|
|
Underlying | |
|
Options | |
|
|
|
|
|
Stock Price Appreciation for | |
|
|
Options | |
|
Granted to | |
|
Exercise | |
|
|
|
Option Term(2) | |
|
|
Granted | |
|
Employees | |
|
Price | |
|
Expiration | |
|
| |
Name |
|
(#)(1) | |
|
in 2005 | |
|
($/Sh) | |
|
Date | |
|
5%($) | |
|
10%($) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Neil Smit
|
|
|
3,333,333 |
|
|
|
30.83 |
% |
|
$ |
1.18 |
|
|
|
8/22/2015 |
|
|
$ |
2,465,267 |
|
|
$ |
6,247,470 |
|
Robert P. May
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carl E. Vogel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Lovett
|
|
|
216,000 |
|
|
|
2.00 |
% |
|
|
1.30 |
|
|
|
4/26/2015 |
|
|
|
175,914 |
|
|
|
445,802 |
|
Paul E. Martin
|
|
|
83,700 |
|
|
|
0.77 |
% |
|
|
1.30 |
|
|
|
4/26/2015 |
|
|
|
68,430 |
|
|
|
173,415 |
|
Wayne H. Davis
|
|
|
145,800 |
|
|
|
1.35 |
% |
|
|
1.30 |
|
|
|
4/26/2015 |
|
|
|
118,742 |
|
|
|
300,916 |
|
Sue Ann R. Hamilton
|
|
|
97,200 |
|
|
|
0.90 |
% |
|
|
1.53 |
|
|
|
3/25/2015 |
|
|
|
93,221 |
|
|
|
236,240 |
|
|
|
|
47,800 |
|
|
|
0.44 |
% |
|
|
1.27 |
|
|
|
10/18/2015 |
|
|
|
38,208 |
|
|
|
96,826 |
|
|
|
(1) |
Options are transferable under limited conditions, primarily to
accommodate estate planning purposes. These options generally
vest in four equal installments commencing on the first
anniversary following the grant date. |
|
(2) |
This column shows the hypothetical gains on the options granted
based on assumed annual compound price appreciation of 5% and
10% over the full ten-year term of the options. The assumed
rates of 5% and 10% appreciation are mandated by the SEC and do
not represent our estimate or projection of future prices. |
|
|
|
2005 Aggregated Option Exercises and Option Value |
The following table sets forth, for the individuals named in the
Summary Compensation Table, (i) information concerning
options exercised during 2005, (ii) the number of shares of
Charters Class A common stock underlying unexercised
options at year-end 2005, and (iii) the value of
unexercised
in-the-money
options (i.e., the positive spread between the exercise price of
outstanding options and the market value of Charters
Class A common stock) on December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of | |
|
|
|
|
|
|
|
|
Securities Underlying | |
|
Value of Unexercised | |
|
|
Shares | |
|
|
|
Unexercised Options at | |
|
In-the-Money Options at | |
|
|
Acquired on | |
|
Value | |
|
December 31, 2005(#)(1) | |
|
December 31, 2005($)(2) | |
|
|
Exercise | |
|
Realized | |
|
| |
|
| |
Name |
|
(#) | |
|
($) | |
|
Exercisable | |
|
Unexercisable | |
|
Exercisable |
|
Unexercisable | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
| |
Neil Smit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,333,333 |
|
|
$ |
|
|
|
$ |
133,333 |
|
Robert P. May
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carl E. Vogel(3)
|
|
|
|
|
|
|
|
|
|
|
1,120,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Lovett
|
|
|
|
|
|
|
|
|
|
|
93,000 |
|
|
|
395,000 |
|
|
|
|
|
|
|
|
|
Paul E. Martin(4)
|
|
|
|
|
|
|
|
|
|
|
143,125 |
|
|
|
193,075 |
|
|
|
|
|
|
|
|
|
Wayne H. Davis(5)
|
|
|
|
|
|
|
|
|
|
|
176,250 |
|
|
|
379,550 |
|
|
|
|
|
|
|
|
|
Sue Ann R. Hamilton
|
|
|
|
|
|
|
|
|
|
|
122,500 |
|
|
|
312,500 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
Options granted prior to 2001 and under the 1999 Charter
Communications Option Plan, when vested, are exercisable for
membership units of Charter Holdco which are immediately
exchanged on a one-for-one basis for shares of Charters
Class A common stock upon exercise of the option. |
95
|
|
|
Options granted under the 2001 Stock Incentive Plan and after
2000 are exercisable for shares of Charters Class A
common stock. |
|
(2) |
Based on a per share market value (closing price) of $1.22 as of
December 31, 2005 for Charters Class A common
stock. |
|
(3) |
Mr. Vogels employment terminated on January 17,
2005. Under the terms of the separation agreement, his options
continued to vest until December 31, 2005, and all vested
options are exercisable until sixty (60) days thereafter. |
|
(4) |
Mr. Martins employment terminated on April 3,
2006. Under the terms of his January 9, 2006 retention
agreement, his options continue to vest until September 2,
2007 and all vested options are exercisable until sixty
(60) days thereafter. |
|
(5) |
Mr. Davis employment terminated on March 23,
2006. Under the terms of his separation agreement, his options
continue to vest until September 30, 2007 and all vested
options are exercisable until sixty (60) days thereafter. |
Long-Term Incentive Plans Awards in Last Fiscal
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future Payouts Under | |
|
|
|
|
|
|
Non-Stock Price-Based Plans | |
|
|
Number of | |
|
|
|
| |
|
|
Shares, Units or | |
|
Performance or Other Period | |
|
Threshold | |
|
Target | |
|
Maximum | |
Name |
|
Other Rights(#) | |
|
Until Maturation or Payout | |
|
(#) | |
|
(#) | |
|
(#) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Neil Smit
|
|
|
|
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert P. May
|
|
|
|
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
Carl E. Vogel
|
|
|
|
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Lovett
|
|
|
129,600 |
|
|
|
1 year performance cycle |
|
|
|
90,720 |
|
|
|
129,600 |
|
|
|
259,200 |
|
|
|
|
|
|
|
|
3 year vesting |
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul E. Martin
|
|
|
40,500 |
|
|
|
1 year performance cycle |
|
|
|
28,350 |
|
|
|
40,500 |
|
|
|
81,000 |
|
|
|
|
|
|
|
|
3 year vesting |
|
|
|
|
|
|
|
|
|
|
|
|
|
Wayne H. Davis
|
|
|
83,700 |
|
|
|
1 year performance cycle |
|
|
|
58,590 |
|
|
|
83,700 |
|
|
|
167,400 |
|
|
|
|
|
|
|
|
3 year vesting |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sue Ann R. Hamilton
|
|
|
83,700 |
|
|
|
1 year performance cycle |
|
|
|
58,590 |
|
|
|
83,700 |
|
|
|
167,400 |
|
|
|
|
|
|
|
|
3 year vesting |
|
|
|
|
|
|
|
|
|
|
|
|
|
Option/ Stock Incentive Plans
The Plans. Charter has granted stock options,
restricted stock and other incentive compensation under two
plans the 1999 Charter Communications Option Plan
and the 2001 Stock Incentive Plan. The 1999 Charter
Communications Option Plan provided for the grant of options to
purchase membership units in Charter Holdco to current and
prospective employees and consultants of Charter Holdco and its
affiliates and to Charters current and prospective
non-employee directors. Membership units received upon exercise
of any options are immediately exchanged for shares of
Charters Class A common stock on a one-for-one basis.
The 2001 Stock Incentive Plan provides for the grant of
non-qualified stock options, stock appreciation rights, dividend
equivalent rights, performance units and performance shares,
share awards, phantom stock and/or shares of restricted stock
(not to exceed 20,000,000 shares) as each term is defined
in the 2001 Stock Incentive Plan. Employees, officers,
consultants and directors of Charter and its subsidiaries and
affiliates are eligible to receive grants under the 2001 Stock
Incentive Plan. Generally, options expire 10 years from the
grant date. Unless sooner terminated by Charters board of
directors, the 2001 Stock Incentive Plan will terminate on
February 12, 2011, and no option or award can be granted
thereafter.
Together, the plans allow for the issuance of up to a total of
90,000,000 shares of Charters Class A common
stock (or units exchangeable for Charters Class A
common stock). Any shares covered by
96
options that are terminated under the 1999 Charter
Communications Option Plan will be transferred to the 2001 Stock
Incentive Plan, and no new options will be granted under the
1999 Charter Communications Option Plan. At December 31,
2005, 1,317,520 shares had been issued under the plans upon
exercise of options, 825,725 had been issued upon vesting of
restricted stock granted under the plans, and
4,252,570 shares were subject to future vesting under
restricted stock agreements. Of the remaining
83,604,185 shares covered by the plans, as of
December 31, 2005, 29,126,744 were subject to outstanding
options (34% of which were vested), and there were 11,719,032
performance shares granted under Charters Long-Term
Incentive Program as of December 31, 2005, to vest on the
third anniversary of the date of grant conditional upon
Charters performance against certain financial targets
approved by Charters board of directors at the time of the
award. As of December 31, 2005, 42,758,409 shares
remained available for future grants under the plans. As of
December 31, 2005, there were 5,341 participants in the
plans.
The plans authorize the repricing of options, which could
include reducing the exercise price per share of any outstanding
option, permitting the cancellation, forfeiture or tender of
outstanding options in exchange for other awards or for new
options with a lower exercise price per share, or repricing or
replacing any outstanding options by any other method.
Long-Term Incentive Plan. In January 2004, the
Compensation Committee of Charters board of directors
approved Charters Long-Term Incentive Program, or LTIP,
which is a program administered under the 2001 Stock Incentive
Plan. Under the LTIP, employees of Charter and its subsidiaries
whose pay classifications exceed a certain level are eligible to
receive stock options, and more senior level employees were
eligible to receive stock options and performance shares. The
stock options vest 25% on each of the first four anniversaries
of the date of grant. The performance shares vest on the third
anniversary of the date of grant shares at the end of a
three-year performance cycle and shares of Class A common
stock are issued, conditional upon Charters performance
against financial performance measures established by
Charters management and approved by its board of directors
or Compensation Committee as of the time of the award. Charter
granted 3.2 million performance shares in 2005 under this
program except that the 2005 performance share grants are based
on a one-year performance cycle. We recognized expense of
$1 million in the first three quarters of 2005. However, in
the fourth quarter of 2005, we reversed the entire
$1 million of expense based on our assessment of the
probability of achieving the financial performance measures
established by management and required to be met for the
performance shares to vest. In February 2006, Charters
Compensation Committee approved a modification to the financial
performance measures required to be met for the 2005 performance
shares to vest after which management believes that
approximately 2.5 million of the performance shares are
likely to vest. As such, expense of approximately
$3 million will be amortized over the remaining two year
service period.
The 2001 Stock Incentive Plan must be administered by, and
grants and awards to eligible individuals must be approved by
Charters board of directors or a committee thereof
consisting solely of nonemployee directors as defined in
Section 16b-3
under the Securities Exchange Act of 1934, as amended. The board
of directors or such committee determines the terms of each
stock option grant, restricted stock grant or other award at the
time of grant, including the exercise price to be paid for the
shares, the vesting schedule for each option, the price, if any,
to be paid by the grantee for the restricted stock, the
restrictions placed on the shares, and the time or times when
the restrictions will lapse. The board of directors or such
committee also has the power to accelerate the vesting of any
grant or extend the term thereof.
Upon a change of control of Charter, Charters board of
directors or the administering committee can shorten the
exercise period of any option, have the survivor or successor
entity assume the options with appropriate adjustments, or
cancel options and pay out in cash. If an optionees or
grantees employment is terminated without
cause or for good reason following a
change in control (as those terms are defined in the
plans), unless otherwise provided in an agreement, with respect
to such optionees or grantees awards under the
plans, all outstanding options will become immediately and fully
exercisable, all outstanding stock appreciation rights will
become immediately and fully exercisable, the restrictions on
the outstanding restricted stock will lapse, and all of the
outstanding performance shares will vest and the
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restrictions on all of the outstanding performance shares will
lapse as if all performance objectives had been satisfied at the
maximum level.
February 2004 Option Exchange. In January 2004,
Charter offered employees of Charter and its subsidiaries the
right to exchange all stock options (vested and unvested) under
the 1999 Charter Communications Option Plan and 2001 Stock
Incentive Plan that had an exercise price over $10 per
share for shares of restricted Charter Class A common stock
or, in some instances, cash. Based on a sliding exchange ratio,
which varied depending on the exercise price of an
employees outstanding options, if an employee would have
received more than 400 shares of restricted stock in
exchange for tendered options, Charter issued to that employee
shares of restricted stock in the exchange. If, based on the
exchange ratios, an employee would have received 400 or fewer
shares of restricted stock in exchange for tendered options,
Charter instead paid to the employee cash in an amount equal to
the number of shares the employee would have received multiplied
by $5.00. The offer applied to options to purchase a total of
22,929,573 shares of Charter Class A common stock, or
approximately 48% of our 47,882,365 total options (vested and
unvested) issued and outstanding as of December 31, 2003.
Participation by employees was voluntary. Non-employee members
of the board of directors of Charter or any of its subsidiaries
were not eligible to participate in the exchange offer.
In the closing of the exchange offer on February 20, 2004,
Charter accepted for cancellation eligible options to purchase
approximately 18,137,664 shares of Charters
Class A common stock. In exchange, Charter granted
approximately 1,966,686 shares of restricted stock,
including 460,777 performance shares to eligible employees of
the rank of senior vice president and above, and paid a total
cash amount of approximately $4 million (which amount
includes applicable withholding taxes) to those employees who
received cash rather than shares of restricted stock. The
restricted stock was granted on February 25, 2004.
Employees tendered approximately 79% of the options eligible to
be exchanged under the program.
The cost of the stock option exchange program was approximately
$10 million, with a 2004 cash compensation expense of
approximately $4 million and a non-cash compensation
expense of approximately $6 million to be expensed ratably
over the three-year vesting period of the restricted stock
issued in the exchange.
The participation of the Named Executive Officers in this
exchange offer is reflected in the following table:
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Stock at Time | |
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Exercise Price | |
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Exercise | |
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Option Term | |
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Options | |
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of Exchange | |
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at Time of | |
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Remaining at | |
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Date | |
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Exchanged | |
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Exchange ($) | |
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Date of Exchange | |
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Carl E. Vogel
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2/25/04 |
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3,400,000 |
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4.37 |
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13.68 |
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7 years 7 months |
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Former President and Chief |
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Executive Officer |
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Paul E. Martin
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2/25/04 |
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15,000 |
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4.37 |
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23.09 |
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7 years 0 months |
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Former Senior Vice President, |
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50,000 |
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4.37 |
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11.99 |
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7 years 7 months |
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Principal Accounting Officer |
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40,000 |
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4.37 |
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15.03 |
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6 years 3 months |
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and Corporate Controller |
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Wayne H. Davis
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2/25/04 |
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40,000 |
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4.37 |
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23.09 |
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7 years 0 months |
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Former Executive Vice |
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40,000 |
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4.37 |
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12.27 |
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7 years 11 months |
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President and Chief |
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Technical Officer |
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(1) |
On February 25, 2004, in exchange for 3,400,000 options
tendered, 340,000 performance shares were granted with a three
year performance cycle and three year vesting along with 340,000
restricted stock units with one-third of the shares vesting on
each of the first three anniversaries of the grant date. On the
grant date, the price of Charters common stock was $4.37. |
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(2) |
On February 25, 2004, in exchange for 105,000 options
tendered, 8,607 performance shares were granted with a three
year performance cycle and three year vesting along with 8,607
restricted stock |
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units with one-third of the shares vesting on each of the first
three anniversaries of the grant date. On the grant date, the
price of Charters common stock was $4.37. |
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(3) |
On February 25, 2004, in exchange for 80,000 options
tendered, 4,000 performance shares were granted with a
three year performance cycle and three year vesting along with
4,000 restricted stock units with one-third of the shares
vesting on each of the first three anniversaries of the grant
date. On the grant date, the price of Charters common
stock was $4.37. |
2005 Executive Cash Award Plan
In June 2005, Charter adopted the 2005 Executive Cash Award Plan
to provide additional incentive to, and retain the services of,
certain officers of Charter and its subsidiaries, to achieve the
highest level of individual performance and contribute to the
success of Charter. Eligible participants are employees of
Charter or any of its subsidiaries who have been recommended by
the Chief Executive Officer and designated and approved as Plan
participants by the Compensation Committee of Charters
board of directors. At the time the Plan was adopted, the
Interim Chief Executive Officer recommended and the Compensation
Committee designated and approved as Plan participants the
permanent President and Chief Executive Officer position,
Executive Vice President positions and selected Senior Vice
President positions.
The Plan provides that each participant be granted an award
which represents an opportunity to receive cash payments in
accordance with the Plan. An award will be credited in book
entry format to a participants account in an amount equal
to 100% of a participants base salary on the date of Plan
approval in 2005 and 20% of participants base salary in
each year 2006 through 2009, based on that participants
base salary as of May 1 of the applicable year. The Plan
awards will vest at the rate of 50% of the plan award balance at
the end of 2007 and 100% of the plan award balance at the end of
2009. Participants will be entitled to receive payment of the
vested portion of the award if the participant remains employed
by Charter continuously from the date of the participants
initial participation through the end of the calendar year in
which his or her award becomes vested, subject to payment of
pro-rated award balances to a participant who terminates due to
death or disability or in the event Charter elects to terminate
the Plan.
A participants eligibility for, and right to receive, any
payment under the Plan (except in the case of intervening death)
is conditioned upon the participant first executing and
delivering to Charter an agreement releasing and giving up all
claims that participant may have against Charter and related
parties arising out of or based upon any facts or conduct
occurring prior to the payment date, and containing additional
restrictions on post-employment use of confidential information,
non-competition and nonsolicitation and recruitment of customers
and employees.
Employment Arrangements and Related Agreements
Charter and Neil Smit entered into an agreement as of
August 9, 2005 whereby Mr. Smit will serve as
Charters President and Chief Executive Officer (the
Employment Agreement) for a term expiring on
December 31, 2008, and Charter may extend the agreement for
an additional two years by giving Mr. Smit written notice
of its intent to extend not less than six months prior to the
expiration of the contract (Mr. Smit has the right to
reject the extension within a certain time period as set forth
defined in the contract). Under the Employment Agreement,
Mr. Smit will receive a $1,200,000 base salary per year,
through the third anniversary of the agreement, and thereafter
$1,440,000 per year for the remainder of the Employment
Agreement. Mr. Smit shall be eligible to receive a
performance-based target bonus of 125% of annualized salary,
with a maximum bonus of 200% of annualized salary, as determined
by the Compensation Committee of Charters Board of
Directors. However, for 2005 only, he will receive a minimum
bonus of $1,200,000, provided that he is employed by Charter on
December 31, 2005. Under Charters Long-Term Incentive
Plan he will receive options to purchase 3,333,333 shares
of Charters Class A common stock, exercisable for
10 years, with annual vesting of one-third of the grant in
each of the three years from the employment date; a performance
share award for a maximum of 4,123,720 shares
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of Charters Class A common stock, to be earned during
a three-year performance cycle starting January 2006; and a
restricted stock award of 1,562,500 shares of
Charters Class A common stock, with annual vesting
over three years following employment date. In addition,
Mr. Smit will receive another restricted stock award for
1,250,000 shares of Charters Class A common
stock vesting on the first anniversary of employment date.
Mr. Smit will receive full reimbursement for his relocation
expenses and employee benefits consistent with those made
generally available to other senior executives. In the event
that Mr. Smit is terminated by Charter without
cause or for good reason termination, as
those terms are defined in the Employment Agreement, he will
receive the greater of two times base salary or salary through
the remainder to the term of the Employment Agreement; a pro
rata bonus for the year of termination; full vesting of options
and restricted shares; vesting of performance stock if targets
are achieved; and a lump sum payment equal to twelve months of
COBRA payments. The Employment Agreement contains non-compete
provisions from six months to two years, depending on the type
of termination. Charter will gross up federal taxes in the event
that Mr. Smit is subject to any additional tax under
Section 409A of the Internal Revenue Code.
Charter entered into an agreement with Mr. May, effective
January 17, 2005, whereby Mr. May served as
Charters Interim President and Chief Executive Officer
(the May Executive Services Agreement). Under the
May Executive Services Agreement, Mr. May received a
$1,250,000 base fee per year. Mr. May continued to receive
the compensation and reimbursement of expenses to which he was
entitled in his capacity as a member of Charters board of
directors. Mr. Mays employment agreement provided
that Charter would provide equity incentives commensurate with
his position and responsibilities, as determined by
Charters board of directors. Accordingly, Mr. May was
granted 100,000 shares of restricted stock under
Charters 2001 Stock Incentive Plan. The 100,000 restricted
shares vested on the date on which Mr. Mays interim
service as President and Chief Executive Officer terminated,
August 22, 2005. Mr. May served as an independent
contractor and was not entitled to any vacation or eligible to
participate in any employee benefit programs of Charter. Charter
reimbursed Mr. May for reasonable transportation costs from
Mr. Mays residence in Florida or other locations to
Charters offices and provided temporary living quarters or
reimbursed expenses related thereto. The May Executive Services
Agreement was terminated effective December 31, 2005 and
upon termination of the Agreement, Mr. May was eligible for
a bonus payment. On January 5, 2006, Charter paid him a
bonus of $750,000, with the possibility that such bonus would be
increased by an additional percentage. In February 2006,
Charters Compensation Committee approved an additional
bonus of approximately $88,900 for Mr. May.
Charter and Mr. Lovett entered into an employment
agreement, effective as of February 28, 2006 (the
Agreement), whereby Mr. Lovett will serve as
its Executive Vice President and Chief Operating Officer at a
salary of $700,000 per year which is to be reviewed
annually, and will perform such duties and responsibilities set
forth in the Agreement. The Agreement amends, supersedes and
replaces Mr. Lovetts prior employment agreement dated
March 31, 2005. The term of the Agreement is three years
from the effective date and will be reviewed and considered for
extension at 18-month
intervals during Mr. Lovetts employment. Under the
Agreement, Mr. Lovett will be entitled to receive cash
bonus payments in an amount per year targeted at 100% of salary
in accordance with the senior management plan and to participate
in all employee benefit plans as are offered to other senior
executives. Mr. Lovett will also receive a grant of 150,000
restricted shares of Charters Class A common stock on
the effective date of the Agreement, vesting in equal
installments over a three-year period from employment date; an
award of 300,000 restricted shares of Charters
Class A common stock on the first anniversary of the
Agreement, vesting in equal installments over a three-year
period; an award of options to purchase 432,000 shares
of Charters Class A common stock under terms of
Charters 2001 Stock Incentive Plan on the effective date
of the Employment Agreement; an award of options to
purchase 864,000 shares of Charters Class A
common stock under the terms of the 2001 Stock Incentive Plan on
the first anniversary of the Agreement; an award of 259,200
performance shares under the 2001 Stock Incentive Plan on the
effective date of the Agreement and will be eligible to earn
these shares over a performance cycle from January 2006 to
December 2006; and an award of 518,400 performance shares under
the 2001 Stock Incentive
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Plan on the first anniversary of the Agreement and will be
eligible to earn these shares over a three-year performance
cycle January 2007-December 2009.
If terminated other than for cause, as such term is
defined in the Agreement, prior to March 31, 2007,
Mr. Lovett will receive relocation expenses to the city of
his choice in the 48 contiguous states in accordance with
Charters relocation policy. In the event that
Mr. Lovett is terminated by Charter without
cause, for good reason or by
Mr. Lovett within 60 days following a change in
control, as those terms are defined in the employment
agreement, Mr. Lovett will receive his salary for the
remainder of the term of the Agreement; a pro rata bonus for the
year of termination; and the immediate vesting of options,
restricted stock and performance shares. The Agreement also
contains a two-year non-solicitation clause.
As of January 20, 2006, Charter entered into an employment
agreement with Mr. Fisher, Executive Vice President and
Chief Executive Officer (the Employment Agreement).
The Employment Agreement provides that Mr. Fisher will
serve in an executive capacity as its Executive Vice President
at a salary of $500,000, to perform such executive, managerial
and administrative duties as are assigned or delegated by
President and/or Chief Executive Officer, including but not
limited to serving as Chief Financial Officer. The term of the
Employment Agreement is two years from the effective date. Under
the Employment Agreement, Mr. Fisher will receive a signing
bonus of $100,000 and he shall be eligible to receive a
performance-based target bonus of up to 70% of salary and to
participate in the Long-Term Incentive Plan and to receive such
other employee benefits as are available to other senior
executives. Mr. Fisher will participate in the 2005
Executive Cash Award Plan commencing in 2006 and, in addition,
Charter will provide the same additional benefit to
Mr. Fisher that he would have been entitled to receive
under the Cash Award Plan if he had participated in the Plan at
the time of the inception of the Plan in 2005. He will also
receive a grant of 50,000 restricted shares of Charters
Class A common stock, vesting in equal installments over a
three-year period from employment date; an award of options to
purchase 1,000,000 shares of Charters
Class A common stock under terms of the Stock Incentive
Plan on the effective date of the Employment Agreement; and in
the first quarter of 2006, an award of additional options to
purchase 145,800 shares of Charters Class A
common stock under the stock incentive plan. Those options shall
vest in equal installments over a four-year time period from the
grant date. In addition, in the first quarter of 2006, he will
receive 83,700 performance shares under the Stock Incentive Plan
and will be eligible to earn these shares over a three-year
performance cycle from January 2006 to December 2008.
Mr. Fisher will receive relocation assistance pursuant to
Charters executive homeowner relocation plan and the costs
for temporary housing. In the event that Mr. Fisher is
terminated by Charter without cause or for
good reason, as those terms are defined in the
Employment Agreement, Mr. Fisher will receive his salary
for the remainder of the term of the agreement or twelve
months salary, whichever is greater; a pro rata bonus for
the year of termination; a lump sum payment equal to payments
due under COBRA for the greater of twelve months or the number
of full months remaining in the term of the agreement; and the
vesting of options and restricted stock for as long as severance
payments are made. The Employment Agreement contains a one-year
non-compete provision (or until the end of the term of the
agreement, if longer) and a two-year non-solicitation clause.
Until his employment terminated on March 23, 2006, Wayne
Davis was employed as Executive Vice President and Chief
Technical Officer. On April 5, 2006, Charter entered into
an agreement with Mr. Davis governing the terms and
conditions of his resignation as an officer and employee of the
Company, effective March 23, 2006 (the Separation
Agreement). Under the terms of the Separation Agreement,
Mr. Davis will receive the amount of base salary,
calculated at an annual rate of $450,000 from March 23,
2006 until September 30, 2007, (the Separation
Term), which will be paid over the remainder of the
Separation Term in equal bi-weekly installments on the
Companys regular pay days for executives. These payments
will be made in accordance with 409A of the Internal Revenue
Code. Mr. Davis will be eligible for a prorated amount of
incentive compensation for 2006 based on the period from
January 1, 2006 and his termination date of March 23,
2006. This amount will be payable no later than April 1,
2007. Mr. Davis will receive a lump sum payment equal to 18
times the monthly cost, at the
101
time of termination, for paid coverage for health, dental and
vision benefits under COBRA. Any stock options and restricted
stock previously granted to Mr. Davis will continue to vest
during the remainder of the Separation Term. Mr. Davis
agreed to abide by the non-disparagement provision in the
Separation Agreement and released the Company from any claims
arising out of or based upon any facts occurring prior to the
date of the Separation Agreement. Mr. Davis has also agreed
that he will continue to be bound by the non-competition,
non-interference and non-disclosure provisions contained in his
September 7, 2005 Employment Agreement.
On April 5, 2006, Charter entered into a consulting
agreement with Wayne H. Davis governing the terms and conditions
for his services as an independent consultant to the Company,
effective March 23, 2006 (the Consulting
Agreement). Mr. Davis will serve as an independent
consultant for the Company providing such professional,
executive and administrative duties, directives and assignments
as may reasonable by assigned to him by the Chief Executive
Officer, Chief Operating Officer or his designee, from
March 24, 2006 until April 28, 2006 or such later date
designated by Charter (the Consulting Period).
Mr. Davis will receive $45,000 in return for his services
through April 28, 2006, which will be paid on the regular
Charter pay period for executives following April 28, 2006.
If Charter requests Mr. Davis services after
April 28, 2006, Mr. Davis will be paid at a rate of
$1,730 per day for each worked thereafter, which he will
receive on the next regular Charter pay period for executives
immediately following the last day of service.
Mr. Davis payments as an independent consultant are
separate from the payments he will receive pursuant to his
separation agreement. During the Consulting Period,
Mr. Davis will be reimbursed for reasonable expenses
incurred at the Companys request in connection with his
consulting activities, including but not limited to reasonable
travel, lodging and entertainment expenses. Since Mr. Davis
will not be an employee of the Company, he agrees that he will
not be eligible for programs applicable to an employee of the
Company, such as incentive, bonus and benefit plans, vacation,
sick or paid leave, 401(k) etc. Mr. Davis agrees that the
confidentiality and non-disclosure obligations contained in his
separation and employment agreements will extend during his
Consulting Period.
On September 7, 2005, Charter entered into an employment
agreement with Wayne Davis, then Executive Vice President and
Chief Technical Officer. The agreement provides that
Mr. Davis shall be employed in an executive capacity to
perform such duties as are assigned or delegated by the
President and Chief Executive Officer or the designee thereof,
at a salary of $450,000. The term of this agreement is two years
from the date of the agreement. Mr. Davis shall be eligible
to participate in Charters Long-Term Incentive Plan, Stock
Option Plan and to receive such employee benefits as are
available to other senior executives. In the event that he is
terminated by Charter without cause or for
good reason, as those terms are defined in the
agreement, he will receive his salary for the remainder of the
term of the agreement or twelve months salary, whichever
is greater; a pro rata bonus for the year of termination; a lump
sum payment equal to payments due under COBRA for the greater of
twelve months or the number of full months remaining in the term
of the agreement; and the vesting of options and restricted
stock for as long as severance payments are made. The agreement
contains one-year, non-compete provisions (or until the end of
the term of the agreement, if longer) in a Competitive Business,
as such term is defined in the agreements, and two-year
non-solicitation clauses.
Until his resignation in April 2006, Paul Martin was employed as
Senior Vice President, Principal Accounting Officer and
Corporate Controller. Upon resignation, the termination terms of
his retention agreement went into effect. Effective
January 9, 2006, Charter entered into a retention agreement
with Mr. Martin, then Senior Vice President, Principal
Accounting Officer and Corporate Controller, in which
Mr. Martin agreed to remain as Interim Chief Financial
Officer until at least March 31, 2006 or such time as
Charter reassigns or terminates his employment, whichever occurs
first (Termination Date). On the Termination Date,
Charter paid Mr. Martin a special retention bonus in a lump
sum of $116,200. This special retention bonus is in addition to
any amounts due to Mr. Martin under the 2005 Executive
Bonus Plan and to any other severance amounts, set forth below.
Mr. Martin will not participate in any executive incentive
or bonus plan for 2006 unless otherwise agreed to by the
parties. In addition, pursuant to this agreement, Charter will
treat (a) any termination of Mr. Martins
employment by Charter without Cause, and other than due to Death
or Disability, as such terms are defined in his
previously-executed
102
Employment Agreement, after January 1, 2006, and
(b) any termination by Mr. Martin of his employment
for any reason after April 1, 2006 (including voluntary
resignation), as if his employment terminated without Cause and
Charter will pay as severance to Mr. Martin an amount
calculated pursuant to his Employment Agreement on the basis of
his base salary as Controller and without regard to any
additional compensation he had been receiving as Interim Chief
Financial Officer. He will also receive three months of
outplacement assistance at a level and from a provider selected
by Charter in its sole discretion.
On September 2, 2005, Charter entered into an employment
agreement with Mr. Martin. The agreement provides that
Mr. Martin shall be employed in an executive capacity to
perform such duties as are assigned or delegated by the
President and Chief Executive Officer or the designee thereof,
at a salary of $240,625. The term of this agreement is two years
from the date of the agreement. Mr. Martin shall be
eligible to participate in Charters Long-Term Incentive
Plan, Stock Option Plan and to receive such employee benefits as
are available to other senior executives. In the event that he
is terminated by Charter without cause or for
good reason, as those terms are defined in the
agreement, he will receive his salary for the remainder of the
term of the agreement or twelve months salary, whichever
is greater; a pro rata bonus for the year of termination; a lump
sum payment equal to payments due under COBRA for the greater of
twelve months or the number of full months remaining in the term
of the agreement; and the vesting of options and restricted
stock for as long as severance payments are made. The agreement
contains one-year, non-compete provisions (or until the end of
the term of the agreement, if longer) in a Competitive Business,
as such term is defined in the agreements, and two-year
non-solicitation clauses.
Effective April 15, 2005, Charter also entered into an
agreement governing the terms of the service of Mr. Martin
as Interim Chief Financial Officer. Under the terms of the
agreement, Mr. Martin will receive approximately $13,700
each month for his service in the capacity of Interim Chief
Financial Officer until a permanent Chief Financial Officer is
employed. Under the agreement, Mr. Martin will also be
eligible to receive an additional bonus opportunity of up to
approximately $13,600 per month served as Interim Chief
Financial Officer, payable in accordance with Charters
2005 Executive Bonus Plan. The amounts payable to
Mr. Martin under the agreement are in addition to all other
amounts Mr. Martin receives for his services in his
capacity as Senior Vice President, Principal Accounting Officer
and Corporate Controller. In addition, Mr. Martin received
an additional special bonus of $50,000 for his service as
Interim co-Chief
Financial Officer prior to April 15, 2005. This amount is
in addition to the bonus agreed upon in 2004 for his service in
that capacity through March 31, 2005.
On October 31, 2005, Charter entered into an employment
agreement with Ms. Hamilton, Executive Vice President,
Programming. The agreement provides that Ms. Hamilton shall
be employed in an executive capacity to perform such duties as
are assigned or delegated by the President and Chief Executive
Officer or the designee thereof, at a salary of $371,800. The
term of this agreement is two years from the date of the
agreement. She shall be eligible to participate in
Charters incentive bonus plan that applies to senior
executives, Stock Option Plan and to receive such employee
benefits as are available to other senior executives. In the
event that Ms. Hamilton is terminated by Charter without
cause or for good reason, as those terms
are defined in the employment agreement, Hamilton will receive
her salary for the remainder of the term of the agreement or
twelve months salary, whichever is greater; a pro
rata bonus for the year of termination; a lump sum payment equal
to payments due under COBRA for the greater of twelve months or
the number of full months remaining in the term of the
agreement; and the vesting of options and restricted stock for
as long as severance payments are made. The employment agreement
contains a one-year
non-compete provision (or until the end of the term of the
agreement, if longer) in a Competitive Business, as such term is
defined in the agreements, and two-year non-solicitation clauses.
On November 14, 2005, Charter executed an employment
agreement with Mr. Raclin, effective as of October 10,
2005. The agreement provides that Mr. Raclin shall be
employed in an executive capacity as Executive Vice President
and General Counsel with management responsibility for
Charters legal affairs, governmental affairs, compliance
and regulatory functions and to perform such other legal,
executive, managerial and administrative duties as are assigned
or delegated by the Chief Executive Officer or the
103
equivalent position, at a salary of $425,000, to be reviewed on
an annual basis. The agreement also provides for a one time
signing bonus of $200,000, the grant of 50,000 restricted shares
of Charters Class A common stock, an option to
purchase 100,000 shares of Charters Class A
common stock under the 2001 Stock Incentive Plan, an option to
purchase 145,800 shares of Charters Class A
common stock under the Long-Term Incentive portion of the 2001
Stock Incentive Plan, and 62,775 performance shares under the
2001 Stock Incentive Plan. He shall be eligible to participate
in the incentive bonus plan, the 2005 Executive Cash Award Plan
and to receive such other employee benefits as are available to
other senior executives. The term of this agreement is
two years from the effective date of the agreement. In the
event that Mr. Raclin is terminated by Charter without
cause or by Mr. Raclin for good
reason, as those terms are defined in the employment
agreement, Mr. Raclin will receive (a) if such termination
occurs before the first scheduled payout of the executive cash
award plan (unless that failure is due to his failure to execute
the required related agreement) or at any time within one year
after a change of control as defined in the agreement, two
(2) times his salary or (b) if such termination occurs
at any other time, his salary for the remainder of the term of
the agreement or twelve months salary, whichever is
greater; a pro rata bonus for the year of termination; a lump
sum payment equal to payments due under COBRA for the greater of
twelve months or the number of full months remaining in the
term of the agreement; and the vesting of options and restricted
stock for as long as severance payments are made. The employment
agreement contains a
one-year non-compete
provision (or until the end of the term of the agreement, if
longer) in a Competitive Business, as such term is defined in
the agreement, and a two-year non-solicitation clause.
Mr. Raclin is entitled to relocation assistance pursuant to
Charters executive homeowner relocation plan and the costs
for temporary housing until he consummates the purchase of a
home in the St. Louis area or August 16, 2006,
whichever occurs first.
On December 9, 2005, Charter executed an employment
agreement with Mr. Quigley. The agreement provides that
Mr. Quigley shall be employed in an executive capacity to
perform such executive, managerial and administrative duties as
are assigned or delegated by the President and Chief Executive
Officer or the designee thereof, at a salary of $450,000. He
shall be eligible to participate in the incentive bonus plan,
stock option plan and to receive such other employee benefits as
are available to other senior executives. The term of this
agreement is two years from the effective date of the agreement.
In the event that Mr. Quigley is terminated by Charter
without cause or by Mr. Quigley for good
reason, as those terms are defined in the employment
agreement, Mr. Quigley will receive his salary for the
remainder of the term of the agreement or twelve months
salary, whichever is greater; a pro rata bonus for the year of
termination; a lump sum payment equal to payments due under
COBRA for the greater of twelve months or the number of full
months remaining in the term of the agreement; and the vesting
of options and restricted stock for as long as severance
payments are made. The employment agreement contains a one-year
non-compete provision (or until the end of the term of the
agreement, if longer) in a Competitive Business, as such term is
defined in the agreements, and two-year non-solicitation
clauses. In addition, at the time of his employment, Charter
agreed to pay him a signing bonus of $200,000 deferred until
January 2006; grant options to purchase 145,800 shares of
Charters Class A common stock under our 2001 Stock
Incentive Plan; 83,700 performance shares under our 2001 Stock
Incentive Plan; and 50,000 shares of restricted stock which
will vest over a three year period.
Until his resignation in January 2005, Mr. Vogel was
employed as President and Chief Executive Officer, earning a
base annual salary of $1,000,000 and was eligible to receive an
annual bonus of up to $500,000, a portion of which was based on
personal performance goals and a portion of which was based on
company performance measured against criteria established by the
board of directors of Charter with Mr. Vogel. Pursuant to
his employment agreement, Mr. Vogel was granted 3,400,000
options to purchase Charters Class A common stock and
50,000 shares of restricted stock under our 2001 Stock
Incentive Plan. In the February 2004 option exchange,
Mr. Vogel exchanged his 3,400,000 options for
340,000 shares of restricted stock and 340,000 performance
shares. Mr. Vogels initial 50,000 restricted shares
vested 25% on the grant date, with the remainder vesting in 36
equal monthly installments beginning December 2002. The
340,000 shares of restricted stock were to vest over a
three-year period, with one-third of the shares vesting on each
of the first three anniversaries of the grant date. The 340,000
performance shares were to vest at the end of a three-year
period if certain financial criteria were met.
104
Mr. Vogels agreement provided that, if Mr. Vogel
is terminated without cause or if Mr. Vogel terminated the
agreement for good reason, he is entitled to his aggregate base
salary due during the remainder of the term and full prorated
benefits and bonus for the year in which termination occurs.
Mr. Vogels agreement included a covenant not to
compete for the balance of the initial term or any renewal term,
but no more than one year in the event of termination without
cause or by Mr. Vogel with good reason.
Mr. Vogels agreement entitled him to participate in
any disability insurance, pensions or other benefit plans
afforded to employees generally or to our executives, including
our LTIP. We agreed to reimburse Mr. Vogel annually for the
cost of term life insurance in the amount of $5 million,
although he declined this reimbursement in 2003, 2004 and 2005.
Mr. Vogel was entitled to reimbursement of fees and dues
for his membership in a country club of his choice, which he
declined in 2003, 2004 and 2005, and reimbursement for up to
$10,000 per year for tax, legal and financial planning
services. His agreement also provided for a car and associated
expenses for Mr. Vogels use. Mr. Vogels
agreement provided for automatic one-year renewals and also
provided that we would cause him to be elected to our board of
directors without any additional compensation.
In February 2005, Charter entered into an agreement with
Mr. Vogel setting forth the terms of his resignation. Under
the terms of the agreement, Mr. Vogel received in February
2005 all accrued and unpaid base salary and vacation pay through
the date of resignation and a lump sum payment equal to the
remainder of his base salary during 2005 (totaling $953,425). In
addition, he received a lump sum cash payment of approximately
$358,000 in January 2006, which represented the agreed-upon
payment of $500,000 reduced to the extent of compensation
attributable to certain competitive activities.
Mr. Vogel continued to receive certain health benefits
during 2005 and will receive COBRA premiums for such health
insurance coverage for 18 months thereafter. All of his
outstanding stock options, as well as his restricted stock
granted in 2004 (excluding 340,000 shares of restricted
stock granted as performance units, which were
automatically forfeited), continued to vest through
December 31, 2005. In addition, one-half of the remaining
unvested portion of his 2001 restricted stock grant vested upon
the effectiveness of the agreement and the other half was
forfeited. Mr. Vogel has 60 days after
December 31, 2005 to exercise any outstanding vested stock
options. Under the agreement, Mr. Vogel waived any further
right to any bonus or incentive plan participation and provided
certain releases of claims against Charter and its subsidiaries
from any claims arising out of or based upon any facts occurring
prior to the date of the agreement, but Charter will continue to
provide Mr. Vogel certain indemnification rights and to
include Mr. Vogel in its director and officer liability
insurance for a period of six years. Charter and its
subsidiaries also agreed to provide releases of certain claims
against Mr. Vogel with certain exceptions reserved.
Mr. Vogel has also agreed, with limited exceptions that he
will continue to be bound by the covenant not to compete,
confidentiality and non-disparagement provisions contained in
his 2001 employment agreement.
In addition to the indemnification provisions which apply to all
employees under our bylaws, Mr. Vogels agreement
provides that we will indemnify and hold him harmless to the
maximum extent permitted by law from and against any claims,
damages, liabilities, losses, costs or expenses in connection
with or arising out of the performance by him of his duties. The
above agreement also contains confidentiality and
non-solicitation provisions.
We have established separation guidelines which generally apply
to all employees in situations where management determines that
an employee is entitled to severance benefits. Severance
benefits are granted solely in managements discretion and
are not an employee entitlement or guaranteed benefit. The
guidelines provide that persons employed at the level of Senior
Vice President may be eligible to receive between six and
fifteen months of severance benefits. Currently, all Executive
Vice Presidents have employment agreements with Charter which
provide for specific separation arrangements ranging from the
payment of twelve to twenty-four months of severance benefits.
Separation benefits are contingent upon the signing of a
separation agreement containing certain provisions including a
release of all claims against us. Severance amounts paid under
these guidelines are distinct and separate from any one-time,
special or enhanced severance programs that may be approved by
us from time to time.
105
Our senior executives are eligible to receive bonuses according
to our 2005 Executive Bonus Plan. Under this plan, our executive
officers and certain other management and professional employees
are eligible to receive an annual bonus. Each participating
employee would receive his or her target bonus if Charter (or
such employees division) meets specified performance
measures for revenues, operating cash flow, un-levered free cash
flow and customer satisfaction.
Limitation of Directors Liability and Indemnification
Matters
Charters certificate of incorporation limits the liability
of directors to the maximum extent permitted by Delaware law.
The Delaware General Corporation Law provides that a corporation
may eliminate or limit the personal liability of a director for
monetary damages for breach of fiduciary duty as a director,
except for liability for:
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(1) any breach of the directors duty of loyalty to
the corporation and its shareholders; |
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(2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; |
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(3) unlawful payments of dividends or unlawful stock
purchases or redemptions; or |
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(4) any transaction from which the director derived an
improper personal benefit. |
Charters bylaws provide that we will indemnify all persons
whom we may indemnify pursuant thereto to the fullest extent
permitted by law.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or
persons controlling us pursuant to the foregoing provisions, we
have been informed that in the opinion of the SEC, such
indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Charter has reimbursed certain of its current and former
directors, officers and employees in connection with their
defense in certain legal actions. See Certain
Relationships and Related Transactions Other
Miscellaneous Relationships Indemnification
Advances.
106
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding
beneficial ownership of Charters Class A common stock
(Class A common stock) as of April 30,
2006 by:
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each current director of CCH II or Charter; |
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the current chief executive officer and individuals named in the
Summary Compensation Table; |
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all persons currently serving as directors and officers of
CCH II or Charter, as a group; and |
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each person known by us to own beneficially 5% or more of
Charters outstanding Class A common stock as of
April 30, 2006. |
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With respect to the percentage of voting power set forth in the
following table:
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each holder of Charters Class A common stock is
entitled to one vote per share; and |
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each holder of Charters Class B common stock
(Class B common stock) is entitled to
(i) ten votes per share of Charters Class B
common stock held by such holder and its affiliates and
(ii) ten votes per share of Charters Class B
Common Stock for which membership units in Charter Holdco held
by such holder and its affiliates are exchangeable. |
The 50,000 shares of Charters Class B common
stock owned by Mr. Allen represents 100% of Charters
outstanding Class B common stock.
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Class A | |
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Shares | |
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Unvested | |
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Receivable | |
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Number of | |
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Restricted | |
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on Exercise | |
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Class B | |
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Class A | |
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Class A | |
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of Vested | |
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Shares | |
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% of Class A | |
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Shares | |
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Shares | |
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Options or | |
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Number of | |
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Issuable upon | |
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Shares | |
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% of | |
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(Voting and | |
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(Voting | |
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Other | |
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Class B | |
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Exchange or | |
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(Voting and | |
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Voting | |
Name and Address of |
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Investment | |
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Power | |
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Convertible | |
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Shares | |
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Conversion of | |
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Investment | |
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Power | |
Beneficial Owner |
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Power)(1) | |
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Only)(2) | |
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Securities(3) | |
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Owned | |
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Units(4) | |
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Power)(4)(5) | |
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(5)(6) | |
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Paul G. Allen(7)
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29,126,463 |
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39,063 |
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10,000 |
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50,000 |
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364,955,344 |
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49.05 |
% |
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89.99 |
% |
Charter Investment, Inc.(8)
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248,642,171 |
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36.18 |
% |
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* |
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Vulcan Cable III Inc.(9)
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116,313,173 |
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20.96 |
% |
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* |
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Neil Smit
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2,812,500 |
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* |
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* |
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Robert P. May
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119,685 |
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40,650 |
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* |
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* |
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W. Lance Conn
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19,231 |
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32,072 |
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* |
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* |
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Nathaniel A. Davis
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43,215 |
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* |
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* |
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Jonathan L. Dolgen
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19,685 |
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40,650 |
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* |
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* |
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Rajive Johri
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18,137 |
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* |
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* |
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David C. Merritt
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25,705 |
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39,063 |
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* |
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* |
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Jo Allen Patton
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51,300 |
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14,744 |
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* |
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* |
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Marc B. Nathanson
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425,705 |
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39,063 |
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50,000 |
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* |
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* |
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John H. Tory
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30,005 |
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39,063 |
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40,000 |
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* |
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* |
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Larry W. Wangberg
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28,705 |
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39,063 |
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40,000 |
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* |
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* |
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Michael J. Lovett
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32,500 |
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200,000 |
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169,500 |
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* |
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* |
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Sue Ann Hamilton
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219,300 |
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* |
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* |
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All current directors and executive officers as a group
(19 persons)
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29,880,175 |
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3,548,266 |
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608,725 |
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50,000 |
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364,955,344 |
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49.62 |
% |
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90.09 |
% |
Carl E. Vogel(10)
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158,126 |
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* |
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* |
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Wayne H. Davis(11)
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1,642 |
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1,333 |
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302,700 |
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* |
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* |
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Paul E. Martin(12)
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9,659 |
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2,869 |
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214,675 |
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* |
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* |
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Steelhead Partners(13)
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37,621,030 |
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8.58 |
% |
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* |
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107
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Class A | |
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Shares | |
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Unvested | |
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Receivable | |
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Number of | |
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Restricted | |
|
on Exercise | |
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Class B | |
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|
Class A | |
|
Class A | |
|
of Vested | |
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Shares | |
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% of Class A | |
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|
Shares | |
|
Shares | |
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Options or | |
|
Number of | |
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Issuable upon | |
|
Shares | |
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% of | |
|
|
(Voting and | |
|
(Voting | |
|
Other | |
|
Class B | |
|
Exchange or | |
|
(Voting and | |
|
Voting | |
Name and Address of |
|
Investment | |
|
Power | |
|
Convertible | |
|
Shares | |
|
Conversion of | |
|
Investment | |
|
Power | |
Beneficial Owner |
|
Power)(1) | |
|
Only)(2) | |
|
Securities(3) | |
|
Owned | |
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Units(4) | |
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Power)(4)(5) | |
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(5)(6) | |
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J-K Navigator Fund, L.P.(13)
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22,067,209 |
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5.03 |
% |
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* |
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James Michael Johnston(13)
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30,284,630 |
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6.91 |
% |
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* |
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Brian Katz Klein(13)
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30,284,630 |
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6.91 |
% |
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* |
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FMR Corp.(14)
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52,487,788 |
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11.97 |
% |
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1.37 |
% |
Fidelity Management & Research Company(14)
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14,961,471 |
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31,231,402 |
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9.83 |
% |
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1.20 |
% |
Edward C. Johnson 3d(14)
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52,487,788 |
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11.97 |
% |
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1.37 |
% |
Kingdon Capital Management, LLC(15)
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24,236,312 |
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5.53 |
% |
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* |
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Wellington Management Company, LLP(16)
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21,985,377 |
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|
|
|
|
|
|
|
|
|
|
|
5.01 |
% |
|
|
* |
|
|
* Less than 1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
(1) |
Includes shares for which the named person has sole voting and
investment power; or shared voting and investment power with a
spouse. Does not include shares that may be acquired through
exercise of options. |
|
|
(2) |
Includes unvested shares of restricted stock issued under the
Charter Communications, Inc. 2001 Stock Incentive Plan
(including those issued in the February 2004 option exchange for
those eligible employees who elected to participate), as to
which the applicable director or employee has sole voting power
but not investment power. Excludes certain performance units
granted under the Charter 2001 Stock Incentive Plan with respect
to which shares will not be issued until the third anniversary
of the grant date and then only if Charter meets certain
performance criteria (and which consequently do not provide the
holder with any voting rights). |
|
|
|
(3) |
Includes shares of Charters Class A common stock
issuable (a) upon exercise of options that have vested or
will vest on or before June 30, 2006 under the 1999 Charter
Communications Option Plan and the 2001 Stock Incentive Plan or
(b) upon conversion of other convertible securities. |
|
|
|
|
(4) |
Beneficial ownership is determined in accordance with
Rule 13d-3 under
the Exchange Act. The beneficial owners at April 30, 2006
of Charters Class B common stock, Charter Holdco
membership units and convertible senior notes of Charter are
deemed to be beneficial owners of an equal number of shares of
Charters Class A common stock because such holdings
are either convertible into Charters Class A shares
(in the case of Charters Class B shares and
convertible senior notes) or exchangeable (directly or
indirectly) for Charters Class A shares (in the case
of the membership units) on a one-for-one basis. Unless
otherwise noted, the named holders have sole investment and
voting power with respect to the shares listed as beneficially
owned. As a result of the settlement of the CC VIII dispute,
Mr. Allen received an accreting note exchangeable as of
April 30, 2006 for 25,823,313 Charter Holdco units. See
Certain Relationships and Related Transactions
Transactions Arising Out of Our Organizational Structure and
Mr. Allens Investment in Charter Communications, Inc.
and Its Subsidiaries Equity Put Rights
CC VIII. |
|
|
|
(5) |
The calculation of this percentage assumes for each person that: |
|
|
|
|
|
|
438,472,605 shares of Charters Class A common
stock are issued and outstanding as of April 30, 2006; |
|
|
|
|
50,000 shares of Charters Class B common stock
held by Mr. Allen have been converted into shares of
Charters Class A common stock; |
|
|
|
the acquisition by such person of all shares of Charters
Class A common stock that such person or affiliates of such
person has the right to acquire upon exchange of membership
units in subsidiaries or conversion of Series A Convertible
Redeemable Preferred Stock or 5.875% or 4.75% convertible
senior notes; |
108
|
|
|
|
|
|
the acquisition by such person of all shares that may be
acquired upon exercise of options to purchase shares or
exchangeable membership units that have vested or will vest by
June 30, 2006; and |
|
|
|
|
that none of the other listed persons or entities has received
any shares of Charters Class A common stock that are
issuable to any of such persons pursuant to the exercise of
options or otherwise.
A person is deemed to have the right to acquire shares of
Charters Class A common stock with respect to options
vested under the 1999 Charter Communications Option Plan. When
vested, these options are exercisable for membership units of
Charter Holdco, which are immediately exchanged on a one-for-one
basis for shares of Charters Class A common stock. A
person is also deemed to have the right to acquire shares of
Charters Class A common stock issuable upon the
exercise of vested options under the 2001 Stock Incentive Plan. |
|
|
|
|
(6) |
The calculation of this percentage assumes that
Mr. Allens equity interests are retained in the form
that maximizes voting power (i.e., the 50,000 shares of
Charters Class B common stock held by Mr. Allen
have not been converted into shares of Charters
Class A common stock; that the membership units of Charter
Holdco owned by each of Vulcan Cable III Inc. and CII have
not been exchanged for shares of Charters Class A
common stock). |
|
|
(7) |
The total listed includes: |
|
|
|
|
|
|
248,642,171 membership units in Charter Holdco held by
CII; and |
|
|
|
|
|
116,313,173 membership units in Charter Holdco held by Vulcan
Cable III Inc.
The listed total includes 25,823,313 shares of
Charters Class A common stock issuable as of
April 30, 2006 upon exchange of units of Charter Holdco,
which are issuable to CII (which is owned by Mr. Allen) as
a consequence of the settlement of the CC VIII dispute. See
Certain Relationships and Related Transactions
Transactions Arising Out of Our Organizational Structure and
Mr. Allens Investment in Charter Communications, Inc.
and Its Subsidiaries Equity Put Rights
CC VIII. The address of this person is: 505 Fifth Avenue
South, Suite 900, Seattle, WA 98104. |
|
|
|
|
(8) |
Includes 248,642,171 membership units in Charter Holdco, which
are exchangeable for shares of Charters Class B
common stock on a one-for-one basis, which are convertible to
shares of Charters Class A common stock on a
one-for-one basis. The address of this person is: Charter Plaza,
12405 Powerscourt Drive, St. Louis, MO 63131. |
|
|
(9) |
Includes 116,313,173 membership units in Charter Holdco, which
are exchangeable for shares of Charters Class B
common stock on a one-for-one basis, which are convertible to
shares of Charters Class A common stock on a
one-for-one basis. The address of this person is: 505 Fifth
Avenue South, Suite 900, Seattle, WA 98104. |
|
|
(10) |
Mr. Vogel terminated his employment effective on
January 17, 2005. His stock options and restricted stock
shown in this table continued to vest until December 31,
2005, and his options will be exercisable for another
60 days thereafter. |
|
(11) |
Mr. Davis terminated his employment effective
March 23, 2006. His stock options and restricted stock
shown in this table continue to vest until September 30,
2007, and his options will be exercisable for another
60 days thereafter. |
|
|
(12) |
Mr. Martin terminated his employment effective April 3,
2006. His stock options and restricted stock shown in this table
continue to vest until September 2, 2007, and his options
will be exercisable for another 60 days thereafter. |
|
|
|
(13) |
The equity ownership reported in this table is based upon the
holders Form 13F filed with the SEC February 10,
2006. The business address of the reporting person is:
1301 First Avenue, Suite 201, Seattle, WA 98101.
Steelhead Partners, LLC acts as general partner of J-K Navigator
Fund, L.P., and J. Michael Johnston and Brian K. Klein act as
the member-managers of Steelhead Partners, LLC. Accordingly,
shares shown as beneficially held by Steelhead Partners, LLC,
Mr. Johnston and Mr. Klein include shares beneficially
held by J-K Navigator Fund, L.P. |
|
|
|
(14) |
The equity ownership reported in this table is based on the
holders Schedule 13G filed with the SEC on
February 14, 2006. The address of the person is:
82 Devonshire Street, Boston, |
|
109
|
|
|
|
Massachusetts 02109. Fidelity Management & Research
Company is a wholly-owned subsidiary of FMR Corp. and is the
beneficial owner of 46,192,873 shares as a result of acting
as investment adviser to various investment companies and
includes: 31,231,402 shares resulting from the assumed
conversion of 5.875% senior notes. Fidelity Management
Trust Company, a wholly-owned subsidiary of FMR Corp. and is a
beneficial owner of 3,066,115 shares as a result of acting
as investment adviser to various investment companies and
includes: 3,066,115 shares resulting from the assumed
conversion of 5.875% senior notes. Fidelity International
Limited (FIL), provides investment advisory and
management services to
non-U.S. investment
companies and certain institutional investors and is a
beneficial owner of 3,228,800 shares. FIL is a separate and
independent corporate entity from FMR Corp. Edward C. Johnson
3d, Chairman of FMR Corp. and FIL own shares of FIL voting stock
with the right to cast approximately 38% of the total votes of
FIL voting stock. Edward C. Johnson 3d, chairman of
FMR Corp., and FMR Corp. each has sole power to dispose of
52,487,788 shares. |
|
|
|
(15) |
The equity ownership in this table is based upon the
holders Schedule 13G filed with the SEC on
January 25, 2006. The address of the reporting person
is: 152 West 57th Street, 50th Floor, New
York, NY 10019. |
|
|
|
(16) |
The equity ownership reported in this table is based upon
holders Schedule 13G filed with the SEC
February 14, 2006. The address of the reporting person is:
75 State Street, Boston, MA 02109. Wellington Management
Company, LLC, in its capacity as investment adviser, may be
deemed to beneficially own 21,985,377 shares of the Issuer
which are held of record by clients of Wellington Management
Company, LLC. |
|
Securities Authorized for Issuance under Equity Compensation
Plans
The following information is provided as of December 31,
2005 with respect to equity compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
|
|
|
|
Average Exercise | |
|
|
|
|
Number of Securities | |
|
Price of | |
|
Number of Securities | |
|
|
to be Issued Upon | |
|
Outstanding | |
|
Remaining Available | |
|
|
Exercise of | |
|
Options, | |
|
for Future Issuance | |
|
|
Outstanding Options, | |
|
Warrants and | |
|
Under Equity | |
Plan Category |
|
Warrants and Rights | |
|
Rights | |
|
Compensation Plans | |
|
|
| |
|
| |
|
| |
Equity compensation plans approved by security holders
|
|
|
29,126,744 |
(1) |
|
$ |
4.47 |
|
|
|
42,758,409 |
|
Equity compensation plans not approved by security holders
|
|
|
289,268 |
(2) |
|
$ |
3.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
29,416,012 |
|
|
$ |
4.46 |
|
|
|
42,758,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
This total does not include 4,252,570 shares issued
pursuant to restricted stock grants made under our 2001 Stock
Incentive Plan, which were subject to vesting based on continued
employment or 11,258,256 performance shares issued under our
LTIP plan, which are subject to vesting based on continued
employment and Charters achievement of certain performance
criteria. |
|
(2) |
Includes shares of Charters Class A common stock to
be issued upon exercise of options granted pursuant to an
individual compensation agreement with a consultant. |
110
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following sets forth certain transactions in which we are
involved and in which the directors, executive officers and
affiliates of Charter or us have or may have a material
interest. The transactions fall generally into three broad
categories:
|
|
|
|
|
Transactions in which Mr. Allen has an interest that
arise directly out of Mr. Allens investment in
Charter and Charter Holdco. A large number of the
transactions described below arise out of Mr. Allens
direct and indirect (through CII or the Vulcan entities, each of
which Mr. Allen controls) investment in Charter and its
subsidiaries, as well as commitments made as consideration for
the investments themselves. |
|
|
|
Transactions with third party providers of products,
services and content in which Mr. Allen has or had a
material interest. Mr. Allen has had numerous
investments in the areas of technology and media. We have a
number of commercial relationships with third parties in which
Mr. Allen has or had an interest. |
|
|
|
Other Miscellaneous Transactions. We have a
limited number of transactions in which certain of the officers,
directors and principal shareholders of Charter and its
subsidiaries, other than Mr. Allen, have an interest. |
A number of our debt instruments and those of our subsidiaries
require delivery of fairness opinions for transactions with
Mr. Allen or his affiliates involving more than
$50 million. Such fairness opinions have been obtained
whenever required. All of our transactions with Mr. Allen
or his affiliates have been considered for approval either by
the board of directors of Charter or a committee of the board of
directors. All of our transactions with Mr. Allen or his
affiliates have been deemed by the board of directors or a
committee of the board of directors to be in our best interest.
Related party transactions are approved by Charters Audit
Committee or another independent body of the board of directors
in compliance with the listing requirements applicable to NASDAQ
National Market listed companies. Except where noted below, we
do not believe that these transactions present any unusual risks
for us that would not be present in any similar commercial
transaction.
The chart below summarizes certain information with respect to
these transactions. Additional information regarding these
transactions is provided following the chart.
|
|
|
|
|
Transaction |
|
Interested Related Party |
|
Description of Transaction |
|
|
|
|
|
Intercompany Management |
|
|
|
|
Arrangements |
|
Paul G. Allen |
|
Subsidiaries of Charter Holdings paid Charter approximately
$84 million, $90 million, $128 million and
$33 million for management services rendered in 2003, 2004
and 2005 and the three months ended March 31, 2006,
respectively. |
|
Mutual Services Agreement |
|
Paul G. Allen |
|
Charter paid Charter Holdco approximately $73 million,
$74 million, $89 million and $27 million for
services rendered in 2003, 2004 and 2005 and the three months
ended March 31, 2006, respectively. |
|
Previous Management |
|
|
|
|
Agreement |
|
Paul G. Allen |
|
No fees were paid in 2003, 2004, 2005 or 2006, although total
management fees accrued and payable to CII, exclusive of
interest, were approximately $14 million at
December 31, 2003, 2004, 2005 and March 31, 2006. |
111
|
|
|
|
|
Transaction |
|
Interested Related Party |
|
Description of Transaction |
|
|
|
|
|
|
Channel Access Agreement |
|
Paul G. Allen
W. Lance Conn
Jo Allen Patton |
|
At Vulcan Ventures request, we will provide Vulcan
Ventures with exclusive rights for carriage on eight of our
digital cable channels as partial consideration for a 1999
capital contribution of approximately $1.3 billion. |
|
Equity Put Rights |
|
Paul G. Allen |
|
Certain sellers of cable systems that we acquired were granted,
or previously had the right, as described below, to put to Paul
Allen equity in Charter and CC VIII, LLC issued to such
sellers in connection with such acquisitions. |
|
Previous Funding Commitment of Vulcan Inc. |
|
Paul G. Allen
W. Lance Conn
Jo Allen Patton |
|
Pursuant to a commitment letter dated April 14, 2003,
Vulcan Inc., which is an affiliate of Paul Allen, agreed to
lend, under certain circumstances, or cause an affiliate to lend
to Charter Holdings or any of its subsidiaries a total amount of
up to $300 million, which amount included a subfacility of
up to $100 million for the issuance of letters of credit.
In November 2003, the commitment was terminated. We incurred
expenses to Vulcan Inc. totaling $5 million in connection
with the commitment prior to termination. |
|
TechTV Carriage Agreement |
|
Paul G. Allen
W. Lance Conn
Jo Allen Patton
Larry W. Wangberg |
|
We recorded approximately $1 million, $5 million,
$1 million and $0.3 million from TechTV under the
affiliation agreement in 2003, 2004, 2005 and the three months
ended March 31, 2006, respectively, related to launch
incentives as a reduction of programming expense. |
|
Oxygen Media Corporation |
|
|
|
|
Carriage Agreement |
|
Paul G. Allen
W. Lance Conn
Jo Allen Patton |
|
We paid Oxygen Media approximately $9 million,
$13 million, $9 million and $2 million under a
carriage agreement in exchange for programming in 2003, 2004,
2005 and the three months ended March 31, 2006,
respectively. We recorded approximately $1 million,
$1 million, $0.1 million and $0 in 2003, 2004, 2005
and the three months ended March 31, 2006, respectively,
from Oxygen Media related to launch incentives as a reduction of
programming expense. We received 1 million shares of Oxygen
Preferred Stock with a liquidation preference of $33.10 per
share in March 2005. We recognized approximately
$9 million, $13 million, $2 million and $0 as a
reduction of programming expense in 2003, 2004, 2005 and the
three months ended March 31, 2006, respectively, in
recognition of the guaranteed value of the investment. |
|
Portland Trail Blazers Carriage |
|
|
|
|
Agreement |
|
Paul G. Allen |
|
We paid approximately $135,200, $96,100, $116,500 and $57,700
for rights to carry the cable broadcast of certain Trail Blazers
basketball games in 2003, 2004, 2005 and the three months ended
March 31, 2006, respectively. |
112
|
|
|
|
|
Transaction |
|
Interested Related Party |
|
Description of Transaction |
|
|
|
|
|
|
Digeo, Inc. Broadband Carriage |
|
|
|
|
Agreement |
|
Paul G. Allen
Carl E. Vogel
Jo Allen Patton
W. Lance Conn
Michael J. Lovett |
|
We paid Digeo approximately $4 million, $3 million,
$3 million and $1 million for customized development
of the i-channels and the local content tool kit in 2003, 2004,
2005 and for the three months ended March 31, 2006,
respectively. We entered into a license agreement in 2004 for
the Digeo software that runs DVR units purchased from a third
party. We paid approximately $0.5 million, $1 million
and $1 million in license and maintenance fees in 2004,
2005 and for the three months ended March 31, 2006
respectively. In 2004 we executed a purchase agreement for the
purchase of up to 70,000 DVR units and a related software
license agreement, both subject to satisfaction of certain
conditions. We paid approximately $0, $10 million and
$3 million in capital purchases in 2004, 2005 and for the
three months ended March 31, 2006 respectively. |
|
Viacom Networks |
|
Jonathan L. Dolgen |
|
We are party to certain affiliation agreements with networks of
New Viacom and CBS Corporation, pursuant to which they
provide Charter with programming for distribution via our cable
systems. For the years ended December 31, 2003, 2004 and
2005 and for the three months ended March 31, 2006, Charter
paid Old Viacom approximately $188 million,
$194 million, $201 million and $54 million
respectively, for programming, and Charter recorded as
receivables approximately $5 million, $8 million,
$15 million and $7 million from Old Viacom for
launch incentives and marketing support for the years ended
December 31, 2003, 2004 and 2005 and for the three months
ended March 31, 2006, respectively. |
|
Payment for relatives services
|
|
Carl E. Vogel |
|
Since June 2003, Mr. Vogels brother-in-law has
been an employee of Charter Holdco and has received a
salary commensurate with his position in the engineering
department. |
|
Radio advertising |
|
Marc B. Nathanson |
|
We believe that, through a third party advertising agency, we
have paid approximately $67,300, $49,300, $67,600 and $30,700 in
2003, 2004 and 2005 and for the three months ended
March 31, 2006, respectively, to Mapleton Communications,
an affiliate of Mapleton Investments, LLC. |
|
Enstar Limited Partnership |
|
|
|
|
Systems Purchase and |
|
|
|
|
Management Services |
|
Charter officers who were appointed by a Charter subsidiary (as
general partner) to serve as officers of Enstar limited
partnerships |
|
Certain of our subsidiaries purchased certain assets of the
Enstar Limited Partnerships for approximately $63 million
in 2002. We also earned approximately $469,300, $0, $0 and $0 in
2003, 2004 and 2005 and for the three months ended
March 31, 2006, respectively, by providing management
services to the Enstar Limited Partnerships. |
113
|
|
|
|
|
Transaction |
|
Interested Related Party |
|
Description of Transaction |
|
|
|
|
|
|
Indemnification Advances |
|
Directors and current and former officers named in certain legal
proceedings |
|
Charter reimbursed certain of its current and former directors
and executive officers a total of approximately $8 million,
$3 million, $16,200 and $200 for costs incurred in
connection with litigation matters in 2003, 2004 and 2005 and
for the three months ended March 31, 2006, respectively. |
The following sets forth additional information regarding the
transactions summarized above.
Transactions Arising Out of Our Organizational Structure and
Mr. Allens Investment in Charter Communications, Inc.
and Its Subsidiaries
As noted above, a number of our related party transactions arise
out of Mr. Allens investment in Charter and its
subsidiaries. Some of these transactions are with CII and Vulcan
Ventures (both owned 100% by Mr. Allen), Charter
(controlled by Mr. Allen) and Charter Holdco (approximately
55% owned by us and 45% owned by other affiliates of
Mr. Allen). See Summary Organizational
Structure for more information regarding the ownership by
Mr. Allen and certain of his affiliates.
|
|
|
Intercompany Management Arrangements |
Charter is a party to management arrangements with Charter
Holdco and certain of its subsidiaries. Under these agreements,
Charter provides management services for the cable systems owned
or operated by its subsidiaries. These management agreements
provide for reimbursement to Charter for all costs and expenses
incurred by it for activities relating to the ownership and
operation of the managed cable systems, including corporate
overhead, administration and salary expense.
The total amount paid by Charter Holdco and all of its
subsidiaries is limited to the amount necessary to reimburse
Charter for all of its expenses, costs, losses, liabilities and
damages paid or incurred by it in connection with the
performance of its services under the various management
agreements and in connection with its corporate overhead,
administration, salary expense and similar items. The expenses
subject to reimbursement include fees Charter is obligated to
pay under the mutual services agreement with CII. Payment of
management fees by Charters operating subsidiaries is
subject to certain restrictions under the credit facilities and
indentures of such subsidiaries and the indentures governing the
Charter Holdings public debt. If any portion of the management
fee due and payable is not paid, it is deferred by Charter and
accrued as a liability of such subsidiaries. Any deferred amount
of the management fee will bear interest at the rate of
10% per year, compounded annually, from the date it was due
and payable until the date it is paid. For the years ended
December 31, 2003, 2004 and 2005 and the three months ended
March 31, 2006, the subsidiaries of Charter Holdings paid
approximately $84 million, $90 million,
$128 million and $33 million, respectively, in
management fees to Charter.
|
|
|
Mutual Services Agreement |
Charter, Charter Holdco and CII are parties to a mutual services
agreement whereby each party shall provide rights and services
to the other parties as may be reasonably requested for the
management of the entities involved and their subsidiaries,
including the cable systems owned by their subsidiaries all on a
cost-reimbursement basis. The officers and employees of each
party are available to the other parties to provide these rights
and services, and all expenses and costs incurred in providing
these rights and services are paid by Charter. Each of the
parties will indemnify and hold harmless the other parties and
their directors, officers and employees from and against any and
all claims that may be made against any of them in connection
with the mutual services agreement except due to its or their
gross negligence or willful misconduct. The mutual services
agreement expires on November 12, 2009, and may be
terminated at any time by any party upon thirty days
written notice to the other. For the years ended
December 31, 2003, 2004 and 2005 and the three months ended
March 31, 2006, Charter paid approximately
$73 million, $74 million, $89 million and
$27 million, respectively, to Charter Holdco for services
rendered pursuant to the mutual services agreement. All such
amounts are reimbursable to Charter pursuant to a management
arrangement with our subsidiaries. See
Intercompany Management Arrangements. The
114
accounts and balances related to these services eliminate in
consolidation. CII no longer provides services pursuant to this
agreement.
|
|
|
Previous Management Agreement with Charter Investment,
Inc. |
Prior to November 12, 1999, CII provided management and
consulting services to our operating subsidiaries for a fee
equal to 3.5% of the gross revenues of the systems then owned,
plus reimbursement of expenses. The balance of management fees
payable under the previous management agreement was accrued with
payment at the discretion of CII with interest payable on unpaid
amounts. For the years ended December 31, 2003, 2004 and
2005, our subsidiaries did not pay any fees to CII to reduce
management fees payable. As of December 31, 2003, 2004 and
2005 and March 31, 2006, total management fees payable by
our subsidiaries to CII were approximately $14 million,
exclusive of any interest that may be charged and are included
in deferred management fees-related party on our consolidated
balance sheets.
|
|
|
Vulcan Ventures Channel Access Agreement |
Vulcan Ventures, an entity controlled by Mr. Allen,
Charter, CII and Charter Holdco are parties to an agreement
dated September 21, 1999 granting to Vulcan Ventures the
right to use up to eight of our digital cable channels as
partial consideration for a prior capital contribution of
$1.325 billion. Specifically, at Vulcan Ventures
request, we will provide Vulcan Ventures with exclusive rights
for carriage of up to eight digital cable television programming
services or channels on each of the digital cable systems with
local and to the extent available, national control of the
digital product owned, operated, controlled or managed by
Charter or its subsidiaries now or in the future of
550 megahertz or more. If the system offers digital
services but has less than 550 megahertz of capacity, then
the programming services will be equitably reduced. Upon request
of Vulcan Ventures, we will attempt to reach a comprehensive
programming agreement pursuant to which it will pay the
programmer, if possible, a fee per digital video customer. If
such fee arrangement is not achieved, then we and the programmer
shall enter into a standard programming agreement. The initial
term of the channel access agreement was 10 years, and the
term extends by one additional year (such that the remaining
term continues to be 10 years) on each anniversary date of
the agreement unless either party provides the other with notice
to the contrary at least 60 days prior to such anniversary
date. To date, Vulcan Ventures has not requested to use any of
these channels. However, in the future it is possible that
Vulcan Ventures could require us to carry programming that is
less profitable to us than the programming that we would
otherwise carry and our results would suffer accordingly.
CC VIII. As part of the acquisition of the cable
systems owned by Bresnan Communications Company Limited
Partnership in February 2000, CC VIII, Charters
indirect limited liability company subsidiary, issued, after
adjustments, 24,273,943 Class A preferred membership units
(collectively, the CC VIII interest) with a
value and an initial capital account of approximately
$630 million to certain sellers affiliated with AT&T
Broadband, subsequently owned by Comcast Corporation (the
Comcast sellers). Mr. Allen granted the Comcast
sellers the right to sell to him the CC VIII interest for
approximately $630 million plus 4.5% interest annually from
February 2000 (the Comcast put right). In April
2002, the Comcast sellers exercised the Comcast put right in
full, and this transaction was consummated on June 6, 2003.
Accordingly, Mr. Allen, indirectly through a company
controlled by him, CII, became the holder of the CC VIII
interest. In the event of a liquidation of CC VIII,
Mr. Allen would be entitled to a priority distribution with
respect to a 2% priority return (which will continue to
accrete). Any remaining distributions in liquidation would be
distributed to CC V Holdings, LLC and Mr. Allen in
proportion to CC V Holdings, LLCs capital account and
Mr. Allens capital account (which will equal the
initial capital account of the Comcast sellers of approximately
$630 million, increased or decreased by
Mr. Allens pro rata share of CC VIIIs
profits or losses (as computed for capital account purposes)
after June 6, 2003).
An issue arose as to whether the documentation for the Bresnan
transaction was correct and complete with regard to the ultimate
ownership of the CC VIII interest following consummation of
the Comcast put
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right. Thereafter, the board of directors of Charter formed a
Special Committee (comprised of Messrs. Merritt, Tory and
Wangberg) to investigate the matter and take any other
appropriate action on behalf of Charter with respect to this
matter. After conducting an investigation of the relevant facts
and circumstances, the Special Committee determined that a
scriveners error had occurred in February 2000
in connection with the preparation of the last-minute revisions
to the Bresnan transaction documents and that, as a result,
Charter should seek the reformation of the Charter Holdco
limited liability company agreement, or alternative relief, in
order to restore and ensure the obligation that the CC VIII
interest be automatically exchanged for Charter Holdco units.
The Special Committee further determined that, as part of such
contract reformation or alternative relief, Mr. Allen
should be required to contribute the CC VIII interest to
Charter Holdco in exchange for 24,273,943 Charter Holdco
membership units. The Special Committee also recommended to the
board of directors of Charter that, to the extent the contract
reformation is achieved, the board of directors should consider
whether the CC VIII interest should ultimately be held by
Charter Holdco or Charter Holdings or another entity owned
directly or indirectly by them.
Mr. Allen disagreed with the Special Committees
determinations described above and so notified the Special
Committee. Mr. Allen contended that the transaction was
accurately reflected in the transaction documentation and
contemporaneous and subsequent company public disclosures. The
Special Committee and Mr. Allen determined to utilize the
Delaware Court of Chancerys program for mediation of
complex business disputes in an effort to resolve the
CC VIII interest dispute.
As of October 31, 2005, Mr. Allen, the Special
Committee, Charter, Charter Holdco and certain of their
affiliates agreed to settle the dispute, and execute certain
permanent and irrevocable releases pursuant to the Settlement
Agreement and Mutual Release agreement dated October 31,
2005 (the Settlement). Pursuant to the Settlement,
CII has retained 30% of its CC VIII interest (the
Remaining Interests). The Remaining Interests are
subject to certain drag along, tag along and transfer
restrictions as detailed in the revised CC VIII Limited
Liability Company Agreement. CII transferred the other 70% of
the CC VIII interest directly and indirectly, through
Charter Holdco, to a newly formed entity, CCHC (a direct
subsidiary of Charter Holdco and the direct parent of Charter
Holdings). Of that other 70% of the CC VIII preferred
interests, 7.4% has been transferred by CII to CCHC for a
subordinated exchangeable note with an initial accreted value of
$48 million, accreting at 14%, compounded quarterly, with a
15-year maturity (the CCHC note). The remaining
62.6% has been transferred by CII to Charter Holdco, in
accordance with the terms of the settlement for no additional
monetary consideration. Charter Holdco contributed the 62.6%
interest to CCHC.
As part of the Settlement, CC VIII issued approximately
49 million additional Class B units to CC V in
consideration for prior capital contributions to CC VIII by
CC V, with respect to transactions that were unrelated to
the dispute in connection with CIIs membership units in
CC VIII. As a result, Mr. Allens pro rata share
of the profits and losses of CC VIII attributable to the
Remaining Interests is approximately 5.6%.
The CCHC note is exchangeable, at CIIs option, at any
time, for Charter Holdco Class A Common units at a rate
equal to the then accreted value, divided by $2.00 (the
Exchange Rate). Customary anti-dilution protections
have been provided that could cause future changes to the
Exchange Rate. Additionally, the Charter Holdco Class A
Common units received will be exchangeable by the holder into
Charter common stock in accordance with existing agreements
between CII, Charter and certain other parties signatory
thereto. Beginning February 28, 2009, if the closing price
of Charter common stock is at or above the Exchange Rate for a
certain period of time as specified in the Exchange Agreement,
Charter Holdco may require the exchange of the CCHC note for
Charter Holdco Class A Common units at the Exchange Rate.
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CCHC has the right to redeem the CCHC note under certain
circumstances, for cash in an amount equal to the then accreted
value, such amount, if redeemed prior to February 28, 2009,
would also include a make whole up to the accreted value through
February 28, 2009. CCHC must redeem the CCHC note at its
maturity for cash in an amount equal to the initial stated value
plus the accreted return through maturity.
The Board of Directors has determined that the transferred
CC VIII interests remain at CCHC.
Rifkin. On September 14, 1999, Mr. Allen
and Charter Holdco entered into a put agreement with certain
sellers of the Rifkin cable systems that received a portion of
their purchase price in the form of 3,006,202 Class A
preferred membership units of Charter Holdco. This put agreement
allowed these holders to compel Charter Holdco to redeem their
Class A preferred membership units at any time before
September 14, 2004 at $1.00 per unit, plus accretion
thereon at 8% per year from September 14, 1999.
Mr. Allen had guaranteed the redemption obligation of
Charter Holdco. These units were put to Charter Holdco for
redemption, and were redeemed on April 18, 2003 for a total
price of approximately $3.9 million.
Mr. Allen also was a party to a put agreement with certain
sellers of the Rifkin cable systems that received a portion of
their purchase price in the form of shares of Class A
common stock of Charter. Under this put agreement, such holders
have the right to sell to Mr. Allen any or all of such
shares of Charters Class A common stock at
$19 per share (subject to adjustments for stock splits,
reorganizations and similar events), plus interest at a rate of
4.5% per year, compounded annually from November 12,
1999. Approximately 4.6 million shares were put to
Mr. Allen under these agreements prior to their expiration
on November 12, 2003.
Falcon. Mr. Allen also was a party to a put
agreement with certain sellers of the Falcon cable systems
(including Mr. Nathanson, one of our directors) that
received a portion of their purchase price in the form of shares
of Class A common stock of Charter. Under the Falcon put
agreement, such holders had the right to sell to Mr. Allen
any or all shares of Class A common stock received in the
Falcon acquisition at $25.8548 per share (subject to
adjustments for stock splits, reorganizations and similar
events), plus interest at a rate of 4.5% per year,
compounded annually from November 12, 1999. Approximately
19.4 million shares were put to Mr. Allen under these
agreements prior to their expiration on November 12, 2003.
Helicon. In 1999 we purchased the Helicon cable
systems. As part of that purchase Mr. Allen entered into a
put agreement with a certain seller of the Helicon cable systems
that received a portion of the purchase price in the form of a
preferred membership interest in Charter Helicon LLC with a
redemption price of $25 million plus accrued interest.
Under the Helicon put agreement, such holder has the right to
sell to Mr. Allen any or all of the interest to
Mr. Allen prior to its mandatory redemption in cash on
July 30, 2009. On August 31, 2005, 40% of the
preferred membership interest was put to Mr. Allen. The
remaining 60% of the preferred interest in Charter Helicon LLC
remained subject to the put to Mr. Allen. Such preferred
interest was recorded in other long-term liabilities as of
December 31, 2004. On October 6, 2005, Charter
Helicon, LLC redeemed all of the preferred membership
interest for the redemption price of $25 million plus
accrued interest.
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Previous Funding Commitment of Vulcan Inc. |
Effective April 14, 2003, our subsidiary, Charter
Communications VII, LLC entered into a commitment letter with
Vulcan Inc., which is an affiliate of Paul Allen, under which
Vulcan Inc. agreed to lend, under certain circumstances, or
cause an affiliate to lend initially to Charter Communications
VII, LLC, or another subsidiary of Charter Holdings, up to
$300 million, which amount included a subfacility of up to
$100 million for the issuance of letters of credit. No
amounts were ever drawn under the commitment letter. In November
2003, the commitment was terminated. We incurred expenses to
Vulcan Inc. totaling $5 million in connection with the
commitment (including an extension fee) prior to termination.
Ms. Jo Allen Patton is a director and the President and
Chief Executive Officer of Vulcan Inc., and Mr. Lance Conn
is Executive Vice President of Vulcan Inc.
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Allocation of Business Opportunities with
Mr. Allen |
As described under Third Party Business
Relationships in which Mr. Allen has or had an
Interest in this section, Mr. Allen and a number of
his affiliates have interests in various entities that provide
services or programming to our subsidiaries. Given the diverse
nature of Mr. Allens investment activities and
interests, and to avoid the possibility of future disputes as to
potential business, Charter and Charter Holdco, under the terms
of their respective organizational documents, may not, and may
not allow their subsidiaries, to engage in any business
transaction outside the cable transmission business except for
the Digeo, Inc. joint venture; a joint venture to develop a
digital video recorder set-top terminal; an existing investment
in Cable Sports Southeast, LLC, a provider of regional sports
programming; as an owner of the business of Interactive
Broadcaster Services Corporation or, Chat TV, an investment in
@Security Broadband Corp., a company developing broadband
security applications; and incidental businesses engaged in as
of the closing of Charters initial public offering in
November 1999. This restriction will remain in effect until all
of the shares of Charters high-vote Class B
common stock have been converted into shares of Charters
Class A common stock due to Mr. Allens equity
ownership falling below specified thresholds.
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. In any such case, the restated certificate of
incorporation of Charter and the limited liability company
agreement of Charter Holdco would need to be amended accordingly
to modify the current restrictions on the ability of such
entities to engage in any business other than the cable
transmission business. The cable transmission business means the
business of transmitting video, audio, including telephone, and
data over cable systems owned, operated or managed by Charter,
Charter Holdco or any of their subsidiaries from time to time.
Under Delaware corporate law, each director of Charter,
including Mr. Allen, is generally required to present to
Charter, any opportunity he or she may have to acquire any cable
transmission business or any company whose principal business is
the ownership, operation or management of cable transmission
businesses, so that we may determine whether we wish to pursue
such opportunities. However, Mr. Allen and the other
directors generally will not have an obligation to present other
types of business opportunities to Charter and they may exploit
such opportunities for their own account.
Also, conflicts could arise with respect to the allocation of
corporate opportunities between us and Mr. Allen and his
affiliates in connection with his investments in businesses in
which we are permitted to engage under Charters restated
certificate of incorporation. Certain of the indentures of
Charter and its subsidiaries require the applicable issuer of
notes to obtain, under certain circumstances, approval of the
board of directors of Charter and, where a transaction or series
of related transactions is valued at or in excess of
$50 million, a fairness opinion with respect to
transactions in which Mr. Allen has an interest. Related
party transactions are approved by Charters Audit
Committee in compliance with the listing requirements applicable
to NASDAQ national market listed companies. We have not
instituted any other formal plan or arrangement to address
potential conflicts of interest.
The restrictive provisions of the organizational documents
described above may limit our ability to take advantage of
attractive business opportunities. Consequently, our ability to
offer new products and services outside of the cable
transmission business and enter into new businesses could be
adversely affected, resulting in an adverse effect on our
growth, financial condition and results of operations.
Third Party Business Relationships in Which Mr. Allen
has or had an Interest
As previously noted, Mr. Allen has and has had extensive
investments in the areas of media and technology. We have a
number of commercial relationships with third parties in which
Mr. Allen has an interest. Mr. Allen or his affiliates
own equity interests or warrants to purchase equity interests in
various entities with which we do business or which provide us
with products, services or programming. Mr. Allen owns 100%
of the equity of Vulcan Ventures Incorporated and Vulcan Inc.
and is the president of Vulcan Ventures. Ms. Jo Allen
Patton is a director and the President and Chief Executive
Officer of Vulcan Inc.
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and is a director and Vice President of Vulcan Ventures.
Mr. Lance Conn is Executive Vice President of Vulcan Inc.
and Vulcan Ventures. The various cable, media, Internet and
telephone companies in which Mr. Allen has invested may
mutually benefit one another. We can give no assurance, nor
should you expect, that any of these business relationships will
be successful, that we will realize any benefits from these
relationships or that we will enter into any business
relationships in the future with Mr. Allens
affiliated companies.
Mr. Allen and his affiliates have made, and in the future
likely will make, numerous investments outside of us and our
business. We cannot assure you that, in the event that we or any
of our subsidiaries enter into transactions in the future with
any affiliate of Mr. Allen, such transactions will be on
terms as favorable to us as terms we might have obtained from an
unrelated third party.
TechTV, Inc. (TechTV) operated a cable television
network that offered programming mostly related to technology.
Pursuant to an affiliation agreement that originated in 1998 and
that terminates in 2008, TechTV has provided us with programming
for distribution via our cable systems. The affiliation
agreement provides, among other things, that TechTV must offer
Charter Holdco certain terms and conditions that are no less
favorable in the affiliation agreement than are given to any
other distributor that serves the same number of or fewer TechTV
viewing customers. Additionally, pursuant to the affiliation
agreement, we were entitled to incentive payments for channel
launches through December 31, 2003.
In March 2004, Charter Holdco entered into agreements with
Vulcan Programming and TechTV, which provide for
(i) Charter Holdco and TechTV to amend the affiliation
agreement which, among other things, revises the description of
the TechTV network content, provides for Charter Holdco to waive
certain claims against TechTV relating to alleged breaches of
the affiliation agreement and provides for TechTV to make
payment of outstanding launch receivables due to Charter Holdco
under the affiliation agreement, (ii) Vulcan Programming to
pay approximately $10 million and purchase over a
24-month period, at
fair market rates, $2 million of advertising time across
various cable networks on Charter cable systems in consideration
of the agreements, obligations, releases and waivers under the
agreements and in settlement of the aforementioned claims and
(iii) TechTV to be a provider of content relating to
technology and video gaming for Charters interactive
television platforms through December 31, 2006 (exclusive
for the first year). For the years ended December 31, 2003,
2004 and 2005 and the three months ended March 31, 2006 we
recognized approximately $1 million, $5 million,
$1 million and $0.3 million respectively, of the
Vulcan Programming payment as an offset to programming expense.
We believe that Vulcan Programming, which is 100% owned by
Mr. Allen, owned an approximate 98% equity interest in
TechTV at the time Vulcan Programming sold TechTV to an
unrelated third party in May 2004.
Oxygen Media LLC (Oxygen) provides programming
content aimed at the female audience for distribution over cable
systems and satellite. On July 22, 2002, Charter Holdco
entered into a carriage agreement with Oxygen, whereby we agreed
to carry programming content from Oxygen. Under the carriage
agreement, we currently make Oxygen programming available to
approximately 5 million of our video customers. In August
2004, Charter Holdco and Oxygen entered into agreements that
amended and renewed the carriage agreement. The amendment to the
carriage agreement (a) revised the number of our customers
to which Oxygen programming must be carried and for which we
must pay, (b) released Charter Holdco from any claims
related to the failure to achieve distribution benchmarks under
the carriage agreement, (c) required Oxygen to make payment
on outstanding receivables for launch incentives due to us under
the carriage agreement; and (d) requires that Oxygen
provide its programming content to us on economic terms no less
favorable than Oxygen provides to any other cable or satellite
operator having fewer subscribers than us. The renewal of the
carriage agreement (a) extends the period that we will
carry Oxygen programming to our customers through
January 31, 2008, and (b) requires
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license fees to be paid based on customers receiving Oxygen
programming, rather than for specific customer benchmarks. For
the years ended December 31, 2003, 2004 and 2005 and the
three months ended March 31, 2006, we paid Oxygen
approximately $9 million, $13 million, $9 million
and $2 million, respectively, for programming content. In
addition, Oxygen pays us launch incentives for customers
launched after the first year of the term of the carriage
agreement up to a total of $4 million. We recorded
approximately $1 million, $1 million,
$0.1 million and $0 related to these launch incentives as a
reduction of programming expense for the years ended
December 31, 2003, 2004 and 2005 and the three months ended
March 31, 2006, respectively.
In August 2004, Charter Holdco and Oxygen amended an equity
issuance agreement to provide for the issuance of 1 million
shares of Oxygen Preferred Stock with a liquidation preference
of $33.10 per share plus accrued dividends to Charter
Holdco in place of the $34 million of unregistered shares
of Oxygen Media common stock required under the original equity
issuance agreement. Oxygen Media delivered these shares in March
2005. The preferred stock is convertible into common stock after
December 31, 2007 at a conversion ratio, the numerator of
which is the liquidation preference and the denominator which is
the fair market value per share of Oxygen Media common stock on
the conversion date.
We recognized the guaranteed value of the investment over the
life of the carriage agreement as a reduction of programming
expense. For the years ended December 31, 2003, 2004 and
2005 and the three months ended March 31, 2006, we recorded
approximately $9 million, $13 million, $2 million
and $0, respectively, as a reduction of programming expense. The
carrying value of our investment in Oxygen was approximately
$19 million, $32 million, $33 million and
$33 million as of December 31, 2003, 2004 and 2005 and
March 31, 2006, respectively.
As of December 31, 2005, through Vulcan Programming,
Mr. Allen owned an approximate 31% interest in Oxygen
assuming no exercises of outstanding warrants or conversion or
exchange of convertible or exchangeable securities. Ms. Jo
Allen Patton is a director and the President of Vulcan
Programming. Mr. Lance Conn is a Vice President of Vulcan
Programming. Marc Nathanson has an indirect beneficial interest
of less than 1% in Oxygen.
On October 7, 1996, the former owner of our Falcon cable
systems entered into a letter agreement and a cable television
agreement with Trail Blazers Inc. for the cable broadcast in the
metropolitan area surrounding Portland, Oregon of pre-season,
regular season and playoff basketball games of the Portland
Trail Blazers, a National Basketball Association basketball
team. Mr. Allen is the 100% owner of the Portland Trail
Blazers and Trail Blazers Inc. Under the letter agreement, Trail
Blazers Inc. was paid a fixed fee for each customer in areas
directly served by the Falcon cable systems. Under the cable
television agreement, we shared subscription revenues with Trail
Blazers Inc. For the years ended December 31, 2003, 2004
and 2005 and the three months ended March 31, 2006, we paid
approximately $135,200, $96,100, $116,500 and $57,700,
respectively, in connection with the cable broadcast of Portland
Trail Blazers basketball games under the October 1996 cable
television agreement and subsequent local cable distribution
agreements.
In March 2001, a subsidiary of CCH II, Charter
Communications Ventures, LLC (Charter Ventures) and
Vulcan Ventures Incorporated formed DBroadband Holdings, LLC for
the sole purpose of purchasing equity interests in Digeo, Inc.
(Digeo), an entity controlled by Paul Allen. In
connection with the execution of the broadband carriage
agreement, DBroadband Holdings, LLC purchased an equity interest
in Digeo funded by contributions from Vulcan Ventures
Incorporated. The equity interest is subject to a priority
return of capital to Vulcan Ventures up to the amount
contributed by Vulcan Ventures on Charter Ventures behalf.
After Vulcan Ventures recovers its amount contributed and any
cumulative loss allocations, Charter Ventures has a 100% profit
interest in DBroadband Holdings, LLC.
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Charter Ventures is not required to make any capital
contributions, including capital calls, to Digeo. DBroadband
Holdings, LLC is therefore not included in our consolidated
financial statements. Pursuant to an amended version of this
arrangement, in 2003, Vulcan Ventures contributed a total of
$29 million to Digeo, $7 million of which was
contributed on Charter Ventures behalf, subject to Vulcan
Ventures aforementioned priority return. Since the
formation of DBroadband Holdings, LLC, Vulcan Ventures has
contributed approximately $56 million on Charter
Ventures behalf.
On March 2, 2001, Charter Ventures entered into a broadband
carriage agreement with Digeo Interactive, LLC (Digeo
Interactive), a wholly owned subsidiary of Digeo. The
carriage agreement provided that Digeo Interactive would provide
to Charter a portal product, which would function as
the television-based Internet portal (the initial point of entry
to the Internet) for Charters customers who received
Internet access from Charter. The agreement term was for
25 years and Charter agreed to use the Digeo portal
exclusively for six years. Before the portal product was
delivered to Charter, Digeo terminated development of the portal
product.
On September 27, 2001, Charter and Digeo Interactive
amended the broadband carriage agreement. According to the
amendment, Digeo Interactive would provide to Charter the
content for enhanced Wink interactive television
services, known as Charter Interactive Channels
(i-channels).
In order to provide the
i-channels, Digeo
Interactive sublicensed certain Wink technologies to Charter.
Charter is entitled to share in the revenues generated by the
i-channels. Currently,
our digital video customers who receive
i-channels receive the
service at no additional charge.
On September 28, 2002, Charter entered into a second
amendment to its broadband carriage agreement with Digeo
Interactive. This amendment superseded the amendment of
September 27, 2001. It provided for the development by
Digeo Interactive of future features to be included in the Basic
i-TV service to be
provided by Digeo and for Digeos development of an
interactive toolkit to enable Charter to develop
interactive local content. Furthermore, Charter could request
that Digeo Interactive manage local content for a fee. The
amendment provided for Charter to pay for development of the
Basic i-TV service as
well as license fees for customers who would receive the
service, and for Charter and Digeo to split certain revenues
earned from the service. In 2003, 2004, 2005 and the three
months ended March 31, 2006, we paid Digeo Interactive
approximately $4 million, $3 million, $3 million
and $1 million respectively, for customized development of
the i-channels and the
local content tool kit. This amendment expired pursuant to its
terms on December 31, 2003. Digeo Interactive is continuing
to provide the Basic
i-TV service on a
month-to-month basis.
On 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. Under the license
agreement Digeo Interactive granted to Charter Holdco the right
to use Digeos proprietary software for the number of DVR
units that Charter deployed from a maximum of 10 headends
through year-end 2004. This maximum number of headends
restriction was expanded and eventually eliminated through
successive agreement amendments and the date for entering into
license agreements for units deployed was extended. The license
granted for each unit deployed under the agreement is valid for
five years. In addition, Charter will pay certain other fees
including a per-headend license fee and maintenance fees.
Maximum license and maintenance fees during the term of the
agreement are expected to be approximately $7 million. The
agreement includes an MFN clause pursuant to which
Charter is entitled to receive contract terms, considered on the
whole, and license fees, considered apart from other contract
terms, no less favorable than those accorded to any other Digeo
customer. Charter paid approximately $0.5 million,
$1 million and $1 million in license and maintenance
fees for the years ended December 31, 2004 and 2005 and the
three months ended March 31, 2006, respectively.
In April 2004, we launched DVR service (using units containing
the Digeo software) in our Rochester, Minnesota market using a
broadband media center that is an integrated set-top terminal
with a cable converter, DVR hard drive and connectivity to other
consumer electronics devices (such as stereos, MP3 players, and
digital cameras).
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In May 2004, Charter Holdco entered into a binding term sheet
with Digeo Interactive for the development, testing and purchase
of 70,000 Digeo PowerKey DVR units. The term sheet provided that
the parties would proceed in good faith to negotiate, prior to
year-end 2004, definitive agreements for the development,
testing and purchase of the DVR units and that the parties would
enter into a license agreement for Digeos proprietary
software on terms substantially similar to the terms of the
license agreement described above. In November 2004, Charter
Holdco and Digeo Interactive executed the license agreement and
in December 2004, the parties executed the purchase agreement,
each on terms substantially similar to the binding term sheet.
Total purchase price and license and maintenance fees during the
term of the definitive agreements are expected to be
approximately $41 million. The definitive agreements are
terminable at no penalty to Charter in certain circumstances. We
paid approximately $0, $10 million and $3 million in
capital purchases under this agreement for the years ended
December 31, 2004 and 2005 and the three months ended
March 31, 2006, respectively.
In late 2003, Microsoft filed suit against Digeo for
$9 million in a breach of contract action, involving an
agreement that Digeo and Microsoft had entered into in 2001.
Digeo informed Charter that it believed it had an
indemnification claim against Charter for half that amount.
Digeo settled with Microsoft agreeing to make a cash payment and
to purchase certain amounts of Microsoft software products and
consulting services through 2008. In consideration of Digeo
agreeing to release Charter from its potential claim against
Charter, after consultation with outside counsel Charter agreed,
in June 2005, to purchase a total of $2.3 million in
Microsoft consulting services through 2008, a portion of which
amounts Digeo has informed Charter will count against
Digeos purchase obligations with Microsoft.
In October 2005, Charter Holdco and Digeo Interactive entered
into a binding term sheet for the test market deployment of the
Moxi Entertainment Applications Pack (MEAP). The
MEAP is an addition to the Moxi Client Software and will contain
ten games (such as Video Poker and Blackjack), a photo
application and jukebox application. The term sheet is limited
to a test market application of approximately
14,000 subscribers and the aggregate value is not expected
to exceed $0.1 million. In the event the test market proves
successful, the companies will replace the term sheet with a
long form agreement including a planned roll-out across
additional markets. The term sheet expires on May 1, 2006.
We believe that Vulcan Ventures, an entity controlled by
Mr. Allen, owns an approximate 60% equity interest in
Digeo, Inc., on a fully-converted non-diluted basis.
Messrs. Allen and Conn and Ms. Patton are directors of
Digeo. Mr. Lovett is a director of Digeo since December
2005 and Mr. Vogel was a director of Digeo in 2004. During
2004 and 2005, Mr. Vogel held options to
purchase 10,000 shares of Digeo common stock.
Other Miscellaneous Relationships
Pursuant to certain affiliation agreements with networks of
New Viacom, including MTV, MTV2, Nickelodeon, VH1, TVLand,
CMT, Spike TV, Comedy Central and Viacom Digital Suite, and
stations and networks of CBS Corporation including
CBS-owned and operated broadcast stations, Showtime, The Movie
Channel, and Flix, New Viacom and CBS Corporation
provide Charter with programming for distribution via our cable
systems. The affiliation agreements provide for, among other
things, rates and terms of carriage, advertising on these
networks, which Charter can sell to local advertisers and
marketing support. For the years ended December 31, 2003,
2004 and 2005 and the three months ended March 31, 2006,
Charter paid Old Viacom approximately $188 million,
$194 million, $201 million and $54 million,
respectively, for programming. Charter recorded approximately
$5 million, $8 million, $15 million and
$7 million as receivables from Old Viacom networks
related to launch incentives for certain channels and marketing
support, respectively, for the years ended December 31,
2003, 2004 and 2005 and three months ended March 31, 2006.
From April 1994 to July 2004, Mr. Dolgen served as Chairman
and Chief Executive Officer of the Viacom Entertainment Group.
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Payments for Relatives Services |
Since June 2003, Mr. Vogels
brother-in-law has been
an employee of Charter Holdco and has received a salary
commensurate with his position in the engineering department.
We believe that, through a third party advertising agency, we
have paid approximately $67,300, $49,300, $67,600 and $30,700 in
2003, 2004 and 2005 and the three months ended March 31,
2006, respectively, to Mapleton Communications, an affiliate of
Mapleton Investments, LLC that owns radio stations in Oregon and
California. Mr. Nathanson is the Chairman and owner of
Mapleton Investments, LLC.
Enstar Cable Corporation, the manager of the Enstar limited
partnerships through a management agreement, engaged Charter
Holdco to manage the Enstar limited partnerships. Pursuant to
the management agreement, Charter Holdco provides management
services to the Enstar limited partnerships in exchange for
management fees. The Enstar limited partnerships also purchase
basic and premium programming for their systems at cost from
Charter Holdco. For the years ended December 31, 2003, 2004
and 2005 and the three months ended March 31, 2006, Charter
Holdco earned approximately $469,300, $0, $0 and $0,
respectively, by providing management services to the Enstar
limited partnerships. In September 2003 the Enstar limited
partnerships completed sales of all their remaining assets, and
as a result no further management fees were paid in 2004. In
November 2004, the Enstar limited partnerships were dissolved.
All of the executive officers of Charter (with the exception of
Mr. Allen), Charter Holdco and Charter Holdings acted as
officers of Enstar Communications Corporation.
Pursuant to Charters bylaws (and the employment agreements
of certain of our current and former officers), Charter is
obligated (subject to certain limitations) to indemnify and hold
harmless, to the fullest extent permitted by law, any officer,
director or employee against all expense, liability and loss
(including, among other things, attorneys fees) reasonably
incurred or suffered by such officer, director or employee as a
result of the fact that he or she is a party or is threatened to
be made a party or is otherwise involved in any action, suit or
proceeding by reason of the fact that he or she is or was a
director, officer or employee of Charter. In addition, Charter
is obligated to pay, as an advancement of its indemnification
obligation, the expenses (including attorneys fees)
incurred by any officer, director or employee in defending any
such action, suit or proceeding in advance of its final
disposition, subject to an obligation to repay those amounts
under certain circumstances. Pursuant to these indemnification
arrangements and as an advancement of costs, Charter has
reimbursed certain of its current and former directors and
executive officers a total of approximately $8 million,
$3 million, $16,200 and $200 in respect of invoices
received in 2003, 2004 and 2005 and the three months ended
March 31, 2006, respectively, in connection with their
defense of certain legal actions. These amounts were submitted
to Charters director and officer insurance carrier and
have been reimbursed consistent with the terms of the settlement
of the legal actions.
123
DESCRIPTION OF OTHER INDEBTEDNESS
The following description of indebtedness is qualified in its
entirety by reference to the relevant credit facilities,
indentures and related documents governing such indebtedness.
Description of Our Outstanding Debt
As of March 31, 2006 and December 31, 2005, our actual
total debt was approximately $10.7 billion and
$10.6 billion, respectively, as summarized below (dollars
in millions):
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Start Date for | |
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March 31, 2006 | |
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December 31, 2005 | |
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Cash Interest | |
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Interest |
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Long-Term Debt(b) |
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Dates |
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Notes | |
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Renaissance:
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10.000% senior discount notes due 2008
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$ |
77 |
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$ |
78 |
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$ |
114 |
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$ |
115 |
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4/15 & 10/15 |
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10/15/03 |
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4/15/08 |
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Charter Operating:
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Credit facilities
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5,386 |
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5,386 |
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5,731 |
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5,731 |
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8% senior second lien notes due 2012
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1,100 |
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1,100 |
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1,100 |
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1,100 |
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4/30 & 10/30 |
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4/30/12 |
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83/8
% senior second lien notes due 2014
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770 |
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770 |
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733 |
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733 |
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4/30 & 10/30 |
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4/30/14 |
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CCO Holdings:
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8.750% senior notes due 2013
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800 |
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795 |
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800 |
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794 |
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5/15 & 11/15 |
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11/15/13 |
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3/15, 6/15, |
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Senior floating rate notes due 2010
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550 |
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550 |
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550 |
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550 |
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9/15 & 12/15 |
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12/15/10 |
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CCH II:
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10.250% senior notes due 2010
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2,051 |
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2,041 |
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1,601 |
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1,601 |
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3/15 & 9/15 |
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9/15/10 |
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$ |
10,734 |
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$ |
10,720 |
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$ |
10,629 |
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$ |
10,624 |
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(a) |
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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. |
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(b) |
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In general, the obligors have the right to redeem all of the
notes set forth in the above table in whole or part at their
option, beginning at various times prior to their stated
maturity dates, subject to certain conditions, upon the payment
of the outstanding principal amount (plus a specified redemption
premium) and all accrued and unpaid interest. For additional
information, see Note 9 to our consolidated financial
statements included elsewhere in this prospectus. |
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As of March 31, 2006 and December 31, 2005, long-term
debt totaled approximately $10.7 billion and
$10.6 billion, respectively. This debt was comprised of
approximately $5.4 billion and $5.7 billion of credit
facility debt and $5.3 billion and $4.9 billion
accreted value of high-yield notes at March 31, 2006 and
December 31, 2005, respectively.
As of March 31, 2006 and December 31, 2005, the
weighted average interest rate on the credit facility debt was
approximately 8.1% and 7.8%, respectively, and the weighted
average interest rate on the high-yield notes was approximately
9.2% and 9.0%, respectively, resulting in a blended weighted
average interest rate of 8.6% and 8.3%, respectively. The
interest rate on approximately 61% and 58% of the total
principal amount of our debt was effectively fixed, including
the effects of our interest rate hedge agreements as of
March 31, 2006 and December 31, 2005, respectively.
The fair value of our high-yield notes was $5.3 billion and
$4.8 billion at March 31, 2006 and December 31,
2005, respectively. The fair value of our credit facility debt
was approximately $5.4 billion and $5.7 billion at
March 31, 2006 and December 31, 2005, respectively.
The fair value of high-yield notes is based on quoted market
prices, and the fair value of the credit facilities is based on
dealer quotations.
124
The following description is a summary of certain material
provisions of the amended and restated Charter Operating credit
facilities and our other notes and those of our subsidiaries
(collectively, 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.
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Charter Operating Credit Facilities
General |
The Charter Operating credit facilities were amended and
restated in April 2006, among other things, to defer maturities
and increase availability under these facilities.
The Charter Operating credit facilities provide borrowing
availability of up to $6.85 billion as follows:
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a term facility with a total principal amount of
$5.0 billion, which shall be repayable in 23 equal
quarterly installments aggregating in each loan year to 1% of
the original amount of the term facility, with the remaining
balance due at final maturity in 2013; |
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a revolving credit facility, in a total amount of
$1.5 billion, with a maturity date in 2010; and |
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a revolving credit facility (the R/T Facility), in a
total amount of $350.0 million, that converts to term loans
in April 2007, repayable on the same terms as the term facility
described above. |
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Amounts outstanding under the Charter Operating credit
facilities bear interest, at Charter Operatings election,
at a base rate or the Eurodollar rate, as defined, plus a margin
for Eurodollar loans of up to 3.00% for the revolving credit
facility and R/T Facility (until converted to term loans), and
up to 2.625% for the term facility and R/T loans after
converting to term loans, and for base rate loans of up to 2.00%
for the revolving credit facility and R/T Facility (until
converted to term loans), and up to 1.625% for the term facility
and R/T loans after converting to term loans. A quarterly
commitment fee of up to .75% is payable on the average daily
unborrowed balance of the revolving credit facility and, until
April 2007, the R/T Facility.
The obligations of our subsidiaries under the Charter Operating
credit facilities (the Obligations) are guaranteed
by Charter Operatings immediate parent company, CCO
Holdings, and the subsidiaries of Charter Operating, except for
immaterial subsidiaries and subsidiaries precluded from
guaranteeing by reason of the provisions of other indebtedness
to which they are subject (the non-guarantor
subsidiaries, primarily Renaissance and its subsidiaries).
The Obligations are also secured by (i) a lien on all of
the assets of Charter Operating and its subsidiaries (other than
assets of the non-guarantor subsidiaries), to the extent such
lien can be perfected under the Uniform Commercial Code by the
filing of a financing statement, and (ii) a pledge by CCO
Holdings of the equity interests owned by it in Charter
Operating or any of Charter Operatings subsidiaries, as
well as intercompany obligations owing to it by any of such
entities.
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Charter Operating Credit Facilities
Restrictive Covenants |
The Charter Operating credit facilities contain representations
and warranties, and affirmative and negative covenants customary
for financings of this type. The financial covenants measure
performance against standards set for leverage, debt service
coverage, and interest coverage, tested as of the end of each
quarter. The maximum allowable leverage ratio is 4.25 to 1.0 and
the minimum allowable interest coverage ratio (applicable to the
revolving credit facility and R/T Facility (until converted to
term loans) only) is 1.10 to 1.0. Additionally, the Charter
Operating credit facilities contain provisions requiring
mandatory loan prepayments when significant amounts of assets
are sold and the proceeds are not reinvested in assets useful in
the business of the borrower within a specified period.
The Charter Operating credit facilities permit Charter Operating
and its subsidiaries to make distributions to pay interest on
the CCO Holdings senior notes, the CCH II senior notes, the
CCH I senior notes, the CIH senior notes, the Charter
Holdings senior notes and the Charter convertible senior notes,
provided that, among other things, no default has occurred and
is continuing under the Charter
125
Operating credit facilities. The Charter Operating credit
facilities restrict the ability of Charter Operating and its
subsidiaries to make distributions for the purpose of repaying
indebtedness of their parent companies, except if certain
conditions are met, including the satisfaction of a 1.5 to 1.0
interest coverage ratio test and a minimum available liquidity
requirement of $250 million, except that such debt
repayments made with certain proceeds of asset sales not
increasing Charter Operatings leverage ratio are not
subject to the 1.5 to 1.0 interest coverage ratio test.
Conditions to future borrowings include absence of a default or
an event of default under the Charter Operating credit
facilities and the continued accuracy in all material respects
of the representations and warranties, including the absence
since December 31, 2005 of any event, development or
circumstance that has had or could reasonably be expected to
have a material adverse effect on our business.
The events of default under the Charter Operating credit
facilities include, among other things:
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(i) the failure to make payments when due or within the
applicable grace period, |
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(ii) the failure to comply with specified covenants,
including but not limited to a covenant to deliver audited
financial statements with an unqualified opinion from our
independent auditors, |
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(iii) the failure to pay or the occurrence of events that
cause or permit the acceleration of other indebtedness owing by
CCO Holdings, Charter Operating or Charter Operatings
subsidiaries in amounts in excess of $50 million in
aggregate principal amount, |
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(iv) the failure to pay or the occurrence of events that
result in the acceleration of other indebtedness owing by
certain of CCO Holdings direct and indirect parent
companies in amounts in excess of $200 million in aggregate
principal amount, |
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(v) Paul Allen and/or certain of his family members and/or
their exclusively owned entities (collectively, the Paul
Allen Group) ceasing to have the power, directly or
indirectly, to vote at least 35% of the ordinary voting power of
Charter Operating, |
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(vi) the consummation of any transaction resulting in any
person or group (other than the Paul Allen Group) having power,
directly or indirectly, to vote more than 35% of the ordinary
voting power of Charter Operating, unless the Paul Allen Group
holds a greater share of ordinary voting power of Charter
Operating, |
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(vii) certain of Charter Operatings indirect or
direct parent companies, Charter Operating or Charter
Operatings subsidiaries having indebtedness in excess of
$500 million aggregate principal amount (other than under
the Charter Operating credit facilities) which remains
undefeased three months prior to the final maturity of such
indebtedness, and |
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(viii) Charter Operating ceasing to be a wholly-owned
direct subsidiary of CCO Holdings, except in certain very
limited circumstances. |
Outstanding Notes
In January 2006, we issued $450 million total principal
amount of 10.250% senior notes due 2010. The notes offered
pursuant to this prospectus are being offered in exchange for
those notes. These notes have similar terms as the
10.250% senior notes due 2010 described below. For
additional information about these notes see Description
of Notes.
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Previously Issued 10.250% Senior Notes Due
2010 |
In September 2003, CCH II and CCH II Capital Corp.
jointly issued $1.6 billion total principal amount of
10.250% senior notes due 2010. The 10.250% senior notes due
2010 that were issued in September 2003 have terms identical to
those of the new notes, and, upon issuance, the new notes will
trade fungibly with the notes issued in 2003 and will bear the
same CUSIP number as those notes.
126
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Additional Terms of the CCH II Senior Notes |
The CCH II notes described above are general unsecured
obligations of CCH II and CCH II Capital Corp. They
rank equally with all other current or future unsubordinated
obligations of CCH II and CCH II Capital Corp. The
CCH II notes are structurally subordinated to all
obligations of subsidiaries of CCH II, including the CCO
Holdings notes, the Renaissance notes, the Charter Operating
notes and the Charter Operating credit facilities.
Interest on the CCH II notes accrues at 10.250% per
annum and is payable semi-annually in arrears on each March 15
and September 15, commencing on March 15, 2004.
At any time prior to September 15, 2006, in the event of a
qualified equity offering providing sufficient proceeds, the
issuers of the CCH II notes may redeem up to 35% of the
total principal amount of the CCH II notes on a pro rata
basis at a redemption price equal to 110.25% of the principal
amount of CCH II notes redeemed, plus any accrued and
unpaid interest.
On or after September 15, 2008, the issuers of the
CCH II notes may redeem all or a part of the notes at a
redemption price that declines ratably from the initial
redemption price of 105.125% to a redemption price on or after
September 15, 2009 of 100.0% of the principal amount of the
CCH II notes redeemed, plus, in each case, any accrued and
unpaid interest.
In the event of specified change of control events, CCH II
must offer to purchase the outstanding CCH II notes from
the holders at a purchase price equal to 101% of the total
principal amount of the notes, plus any accrued and unpaid
interest.
The indenture governing the CCH II notes contains
restrictive covenants that limit certain transactions or
activities by CCH II and its restricted subsidiaries,
including the covenants summarized below. Substantially all of
CCH IIs direct and indirect subsidiaries are
currently restricted subsidiaries.
The covenant in the indenture governing the CCH II notes
that restricts incurrence of debt and issuance of preferred
stock permits CCH II and its subsidiaries to incur or issue
specified amounts of debt or preferred stock, if, after giving
effect to the incurrence, CCH II could meet a leverage
ratio (ratio of consolidated debt to four times EBITDA from the
most recent fiscal quarter for which internal financial reports
are available) of 5.5 to 1.0.
In addition, regardless of whether the leverage ratio could be
met, so long as no default exists or would result from the
incurrence or issuance, CCH II and its restricted
subsidiaries are permitted to incur or issue:
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up to $9.75 billion of debt under credit facilities,
including debt under credit facilities outstanding on the issue
date of the CCH II notes, |
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up to $75 million of debt incurred to finance the purchase
or capital lease of new assets, |
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up to $300 million of additional debt for any
purpose, and |
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other items of indebtedness for specific purposes such as
intercompany debt, refinancing of existing debt, and interest
rate swaps to provide protection against fluctuation in interest
rates. |
The restricted subsidiaries of CCH II are generally not
permitted to issue debt securities contractually subordinated to
other debt of the issuing subsidiary or preferred stock, in
either case in any public or Rule 144A offering.
The CCH II indenture permits CCH II and its restricted
subsidiaries to incur debt under one category, and later
reclassify that debt into another category. Our and our
subsidiaries credit agreements generally impose more
restrictive limitations on incurring new debt than the
CCH II indenture, so we and our subsidiaries that are
subject to credit agreements are not permitted to utilize the
full debt incurrence that would otherwise be available under the
CCH II indenture covenants.
127
Generally, under the CCH II indenture, CCH II and its
restricted subsidiaries are permitted to pay dividends on equity
interests, repurchase interests, or make other specified
restricted payments only if CCH II can incur $1.00 of new
debt under the leverage ratio test, which requires that
CCH II meet a 5.5 to 1.0 leverage ratio after giving
effect to the transaction, and if no default exists or would
exist as a consequence of such incurrence. If those conditions
are met, restricted payments are permitted in a total amount of
up to 100% of CCH IIs consolidated EBITDA, as
defined, minus 1.3 times its consolidated interest expense, plus
100% of new cash and non-cash equity proceeds received by
CCH II and not allocated to the debt incurrence covenant,
all cumulatively from the fiscal quarter commenced July 1,
2003, plus $100 million.
In addition, CCH II may make distributions or restricted
payments, so long as no default exists or would be caused by
transactions:
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to repurchase management equity interests in amounts not to
exceed $10 million per fiscal year, |
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regardless of the existence of any default, to pay pass-through
tax liabilities in respect of ownership of equity interests in
CCH II or its restricted subsidiaries, |
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regardless of the existence of any default, to pay interest when
due on Charter Holdings notes, CIH notes and CCH I notes, |
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to purchase, redeem or refinance, so long as CCH II could
incur $1.00 of indebtedness under the 5.5 to 1.0 leverage ratio
test referred to above and there is no default, Charter Holdings
notes, CIH notes, CCH I notes, Charter convertible
notes, and other direct or indirect parent company notes, |
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to make distributions in connection with the private exchanges
pursuant to which the CCH II notes were issued, and |
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other specified restricted payments including merger fees up to
1.25% of the transaction value, repurchases using concurrent new
issuances, and certain dividends on existing subsidiary
preferred equity interests. |
The indenture governing the CCH II notes restricts
CCH II and its restricted subsidiaries from making
investments, except specified permitted investments, or creating
new unrestricted subsidiaries, if there is a default under the
indenture or if CCH II could not incur $1.00 of new debt
under the 5.5 to 1.0 leverage ratio test described above
after giving effect to the transaction.
Permitted investments include:
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investments by CCH II and its restricted subsidiaries in
CCH II and in other restricted subsidiaries, or entities
that become restricted subsidiaries as a result of the
investment, |
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investments aggregating up to 100% of new cash equity proceeds
received by CCH II since September 23, 2003 to the
extent the proceeds have not been allocated to the restricted
payments covenant described above, |
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investments resulting from the private exchanges pursuant to
which the CCH II notes were issued, |
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other investments up to $750 million outstanding at any
time, and |
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certain specified additional investments, such as investments in
customers and suppliers in the ordinary course of business and
investments received in connection with permitted asset sales. |
CCH II is not permitted to grant liens on its assets other
than specified permitted liens. Permitted liens include liens
securing debt and other obligations incurred under our
subsidiaries credit facilities, liens securing the
purchase price of new assets, and liens securing indebtedness up
to $50 million and other specified liens incurred in the
ordinary course of business. The lien covenant does not restrict
liens on assets of subsidiaries of CCH II.
128
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83/4% Senior
Notes due 2013 |
In November 2003 and August 2005, CCO Holdings and CCO Holdings
Capital Corp. jointly issued $500 million and
$300 million, respectively, total principal amount of
83/4
% senior notes due 2013.
Interest on the CCO Holdings senior notes accrues at
83/4
% per year and is payable semi-annually in arrears
on each May 15 and November 15.
At any time prior to November 15, 2006, the issuers of the
CCO Holdings senior notes may redeem up to 35% of the total
principal amount of the CCO Holdings senior notes to the extent
of public equity proceeds they have received on a pro rata basis
at a redemption price equal to 108.75% of the principal amount
of CCO Holdings senior notes redeemed, plus any accrued and
unpaid interest.
On or after November 15, 2008, the issuers of the CCO
Holdings senior notes may redeem all or a part of the notes at a
redemption price that declines ratably from the initial
redemption price of 104.375% to a redemption price on or after
November 15, 2011 of 100.0% of the principal amount of the
CCO Holdings senior notes redeemed, plus, in each case, any
accrued and unpaid interest.
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Senior Floating Rate Notes Due 2010 |
In December 2004, CCO Holdings and CCO Holdings Capital Corp.
jointly issued $550 million total principal amount of
senior floating rate notes due 2010.
The CCO Holdings senior floating rate notes have an annual
interest rate of LIBOR plus 4.125%, which resets and is payable
quarterly in arrears on each March 15, June 15,
September 15 and December 15.
At any time prior to December 15, 2006, CCO Holdings and
CCO Holdings Capital Corp. may redeem up to 35% of the notes in
an amount not to exceed the amount of proceeds of one or more
public equity offerings at a redemption price equal to 100% of
the principal amount, plus a premium equal to the interest rate
per annum applicable to the notes on the date notice of
redemption is given, plus accrued and unpaid interest, if any,
to the redemption date, provided that at least 65% of the
original aggregate principal amount of the notes issued remains
outstanding after the redemption.
CCO Holdings and CCO Holdings Capital Corp. may redeem the notes
in whole or in part at the issuers option from
December 15, 2006 until December 14, 2007 for 102% of
the principal amount, from December 15, 2007 until
December 14, 2008 for 101% of the principal amount and from
and after December 15, 2008, at par, in each case, plus
accrued and unpaid interest.
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Additional Terms of the CCO Holdings Senior Notes and
Senior Floating Rate Notes |
The CCO Holdings notes are general unsecured obligations of CCO
Holdings and CCO Holdings Capital Corp. They rank equally with
all other current or future unsubordinated obligations of CCO
Holdings and CCO Holdings Capital Corp. The CCO Holdings notes
are structurally subordinated to all obligations of subsidiaries
of CCO Holdings, including the Renaissance notes, the Charter
Operating notes and the Charter Operating credit facilities.
In the event of specified change of control events, CCO Holdings
must offer to purchase the outstanding CCO Holdings senior notes
from the holders at a purchase price equal to 101% of the total
principal amount of the notes, plus any accrued and unpaid
interest.
The indenture governing the CCO Holdings senior notes contains
restrictive covenants that limit certain transactions or
activities by CCO Holdings and its restricted subsidiaries,
including the covenants summarized below. Substantially all of
CCO Holdings direct and indirect subsidiaries are
currently restricted subsidiaries.
129
The covenant in the indenture governing the CCO Holdings senior
notes that restricts incurrence of debt and issuance of
preferred stock permits CCO Holdings and its subsidiaries to
incur or issue specified amounts of debt or preferred stock, if,
after giving pro forma effect to the incurrence or issuance, CCO
Holdings could meet a leverage ratio (ratio of consolidated debt
to four times EBITDA, as defined, from the most recent fiscal
quarter for which internal financial reports are available) of
4.5 to 1.0.
In addition, regardless of whether the leverage ratio could be
met, so long as no default exists or would result from the
incurrence or issuance, CCO Holdings and its restricted
subsidiaries are permitted to incur or issue:
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up to $9.75 billion of debt under credit facilities,
including debt under credit facilities outstanding on the issue
date of the CCO Holdings senior notes; |
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up to $75 million of debt incurred to finance the purchase
or capital lease of new assets; |
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up to $300 million of additional debt for any
purpose; and |
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other items of indebtedness for specific purposes such as
intercompany debt, refinancing of existing debt, and interest
rate swaps to provide protection against fluctuation in interest
rates. |
The restricted subsidiaries of CCO Holdings are generally not
permitted to issue debt securities contractually subordinated to
other debt of the issuing subsidiary or preferred stock, in
either case in any public or Rule 144A offering.
The CCO Holdings indenture permits CCO Holdings and its
restricted subsidiaries to incur debt under one category, and
later reclassify that debt into another category. The Charter
Operating credit facilities generally impose more restrictive
limitations on incurring new debt than CCO Holdings
indenture, so our subsidiaries that are subject to credit
facilities are not permitted to utilize the full debt incurrence
that would otherwise be available under the CCO Holdings
indenture covenants.
Generally, under CCO Holdings indenture:
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CCO Holdings and its restricted subsidiaries are permitted to
pay dividends on equity interests, repurchase interests, or make
other specified restricted payments only if CCO Holdings can
incur $1.00 of new debt under the leverage ratio test, which
requires that CCO Holdings meet a 4.5 to 1.0 leverage ratio
after giving effect to the transaction, and if no default exists
or would exist as a consequence of such incurrence. If those
conditions are met, restricted payments are permitted in a total
amount of up to 100% of CCO Holdings consolidated EBITDA,
as defined, minus 1.3 times its consolidated interest expense,
plus 100% of new cash and appraised non-cash equity proceeds
received by CCO Holdings and not allocated to the debt
incurrence covenant, all cumulatively from the fiscal quarter
commenced on October 1, 2003, plus $100 million. |
In addition, CCO Holdings may make distributions or restricted
payments, so long as no default exists or would be caused by the
transaction:
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to repurchase management equity interests in amounts not to
exceed $10 million per fiscal year; |
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to pay, regardless of the existence of any default, pass-through
tax liabilities in respect of ownership of equity interests in
Charter Holdings or its restricted subsidiaries; |
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to pay, regardless of the existence of any default, interest
when due on the Charter convertible notes, Charter Holdings
notes, CIH notes, CCH I notes and the CCH II notes; |
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to purchase, redeem or refinance Charter Holdings notes, CIH
notes, CCH I notes, CCH II notes, Charter notes, and
other direct or indirect parent company notes, so long as
CCO Holdings could incur $1.00 of indebtedness under the
4.5 to 1.0 leverage ratio test referred to above and there is no
default; or |
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to make other specified restricted payments including merger
fees up to 1.25% of the transaction value, repurchases using
concurrent new issuances, and certain dividends on existing
subsidiary preferred equity interests. |
The indenture governing the CCO Holdings senior notes restricts
CCO Holdings and its restricted subsidiaries from making
investments, except specified permitted investments, or creating
new unrestricted subsidiaries, if there is a default under the
indenture or if CCO Holdings could not incur $1.00 of new debt
under the 4.5 to 1.0 leverage ratio test described above after
giving effect to the transaction.
Permitted investments include:
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investments by CCO Holdings and its restricted subsidiaries in
CCO Holdings and in other restricted subsidiaries, or entities
that become restricted subsidiaries as a result of the
investment, |
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investments aggregating up to 100% of new cash equity proceeds
received by CCO Holdings since November 10, 2003 to the
extent the proceeds have not been allocated to the restricted
payments covenant described above, |
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other investments up to $750 million outstanding at any
time, and |
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certain specified additional investments, such as investments in
customers and suppliers in the ordinary course of business and
investments received in connection with permitted asset sales. |
CCO Holdings is not permitted to grant liens on its assets other
than specified permitted liens. Permitted liens include liens
securing debt and other obligations incurred under our
subsidiaries credit facilities, liens securing the
purchase price of new assets, liens securing indebtedness up to
$50 million and other specified liens incurred in the
ordinary course of business. The lien covenant does not restrict
liens on assets of subsidiaries of CCO Holdings.
CCO Holdings and CCO Holdings Capital, its co-issuer, are
generally not permitted to sell all or substantially all of
their assets or merge with or into other companies unless their
leverage ratio after any such transaction would be no greater
than their leverage ratio immediately prior to the transaction,
or unless CCO Holdings and its subsidiaries could incur $1.00 of
new debt under the 4.5 to 1.0 leverage ratio test described
above after giving effect to the transaction, no default exists,
and the surviving entity is a U.S. entity that assumes the
CCO Holdings senior notes.
CCO Holdings and its restricted subsidiaries may generally not
otherwise sell assets or, in the case of restricted
subsidiaries, issue equity interests, unless they receive
consideration at least equal to the fair market value of the
assets or equity interests, consisting of at least 75% in cash,
assumption of liabilities, securities converted into cash within
60 days or productive assets. CCO Holdings and its
restricted subsidiaries are then required within 365 days
after any asset sale either to commit to use the net cash
proceeds over a specified threshold to acquire assets, including
current assets, used or useful in their businesses or use the
net cash proceeds to repay debt, or to offer to repurchase the
CCO Holdings senior notes with any remaining proceeds.
CCO Holdings and its restricted subsidiaries may generally not
engage in sale and leaseback transactions unless, at the time of
the transaction, CCO Holdings could have incurred secured
indebtedness in an amount equal to the present value of the net
rental payments to be made under the lease, and the sale of the
assets and application of proceeds is permitted by the covenant
restricting asset sales.
CCO Holdings restricted subsidiaries may generally not
enter into restrictions on their ability to make dividends or
distributions or transfer assets to CCO Holdings on terms that
are materially more restrictive than those governing their debt,
lien, asset sale, lease and similar agreements existing when
they entered into the indenture, unless those restrictions are
on customary terms that will not materially impair CCO
Holdings ability to repay its notes.
The restricted subsidiaries of CCO Holdings are generally not
permitted to guarantee or pledge assets to secure debt of CCO
Holdings, unless the guarantying subsidiary issues a guarantee
of the notes of
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comparable priority and tenor, and waives any rights of
reimbursement, indemnity or subrogation arising from the
guarantee transaction for at least one year.
The indenture also restricts the ability of CCO Holdings and its
restricted subsidiaries to enter into certain transactions with
affiliates involving consideration in excess of $15 million
without a determination by the board of directors that the
transaction is on terms no less favorable than arms-length, or
transactions with affiliates involving over $50 million
without receiving an independent opinion as to the fairness of
the transaction to the holders of the CCO Holdings notes.
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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
83/8% senior
second-lien notes due 2014, for total gross proceeds of
$1.5 billion. In March and June 2005, Charter Operating
consummated exchange transactions with a small number of
institutional holders of Charter Holdings 8.25% senior
notes due 2007 pursuant to which Charter Operating issued, in
private placement transactions, approximately $333 million
principal amount of its
83/8
% senior second-lien notes due 2014 in exchange for
approximately $346 million of the Charter Holdings
8.25% senior notes due 2007. Interest on the Charter
Operating notes is payable semi-annually in arrears on each
April 30 and October 30.
The Charter Operating notes were sold in a private transaction
that was not subject to the registration requirements of the
Securities Act of 1933. The Charter Operating notes are not
expected to have the benefit of any exchange or other
registration rights, except in specified limited circumstances.
On the issue date of the Charter Operating notes, because of
restrictions contained in the Charter Holdings indentures, there
were no Charter Operating note guarantees, even though Charter
Operatings immediate parent, CCO Holdings, and
certain of our subsidiaries were obligors and/or guarantors
under the Charter Operating credit facilities. Upon the
occurrence of the guarantee and pledge date (generally, the
fifth business day after the Charter Holdings leverage ratio was
certified to be below 8.75 to 1.0), CCO Holdings and those
subsidiaries of Charter Operating that were then guarantors of,
or otherwise obligors with respect to, indebtedness under the
Charter Operating credit facilities and related obligations were
required to guarantee the Charter Operating notes. The note
guarantee of each such guarantor is:
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a senior obligation of such guarantor; |
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structurally senior to the outstanding senior notes of CCO
Holdings (except in the case of CCO Holdings note
guarantee, which is structurally pari passu with such
senior notes), the outstanding CCH II notes, the
outstanding CCH I notes, the outstanding CIH notes, the
outstanding Charter Holdings notes and the outstanding Charter
convertible senior notes (but subject to provisions in the
Charter Operating indenture that permit interest and, subject to
meeting the 4.25 to 1.0 leverage ratio test, principal payments
to be made thereon); and |
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senior in right of payment to any future subordinated
indebtedness of such guarantor. |
As a result of the above leverage ratio test being met,
CCO Holdings and certain of its subsidiaries provided the
additional guarantees described above during the first quarter
of 2005. All the subsidiaries of Charter Operating (except CCO
NR Sub, LLC, and certain other subsidiaries that are not deemed
material and are designated as nonrecourse subsidiaries under
the Charter Operating credit facilities) are restricted
subsidiaries of Charter Operating under the Charter Operating
notes. Unrestricted subsidiaries generally will not be subject
to the restrictive covenants in the Charter Operating indenture.
In the event of specified change of control events, Charter
Operating must offer to purchase the Charter Operating notes at
a purchase price equal to 101% of the total principal amount of
the Charter Operating notes repurchased plus any accrued and
unpaid interest thereon.
The limitations on incurrence of debt contained in the indenture
governing the Charter Operating notes permit Charter Operating
and its restricted subsidiaries that are guarantors of the
Charter Operating notes to incur additional debt or issue shares
of preferred stock if, after giving pro forma effect to the
incurrence, Charter Operating could meet a leverage ratio test
(ratio of consolidated debt to four times
132
EBITDA, as defined, from the most recent fiscal quarter for
which internal financial reports are available) of 4.25 to 1.0.
In addition, regardless of whether the leverage ratio test could
be met, so long as no default exists or would result from the
incurrence or issuance, Charter Operating and its restricted
subsidiaries are permitted to incur or issue:
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up to $6.8 billion of debt under credit facilities (but
such incurrence is permitted only by Charter Operating and its
restricted subsidiaries that are guarantors of the Charter
Operating notes, so long as there are such guarantors),
including debt under credit facilities outstanding on the issue
date of the Charter Operating notes; |
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up to $75 million of debt incurred to finance the purchase
or capital lease of assets; |
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up to $300 million of additional debt for any
purpose, and |
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other items of indebtedness for specific purposes such as
refinancing of existing debt and interest rate swaps to provide
protection against fluctuation in interest rates and, subject to
meeting the leverage ratio test, debt existing at the time of
acquisition of a restricted subsidiary. |
The indenture governing the Charter Operating notes permits
Charter Operating to incur debt under one of the categories
above, and later reclassify the debt into a different category.
The Charter Operating credit facilities generally impose more
restrictive limitations on incurring new debt than the Charter
Operating indenture, so our subsidiaries that are subject to the
Charter Operating credit facilities are not permitted to utilize
the full debt incurrence that would otherwise be available under
the Charter Operating indenture covenants.
Generally, under Charter Operatings indenture, Charter
Operating and its restricted subsidiaries are permitted to pay
dividends on equity interests, repurchase interests, or make
other specified restricted payments only if Charter Operating
could incur $1.00 of new debt under the leverage ratio test,
which requires that Charter Operating meet a 4.25 to 1.0
leverage ratio after giving effect to the transaction, and if no
default exists or would exist as a consequence of such
incurrence. If those conditions are met, restricted payments are
permitted in a total amount of up to 100% of Charter
Operatings consolidated EBITDA, as defined, minus 1.3
times its consolidated interest expense, plus 100% of new cash
and appraised non-cash equity proceeds received by Charter
Operating and not allocated to the debt incurrence covenant, all
cumulatively from the fiscal quarter commenced April 1,
2004, plus $100 million.
In addition, Charter Operating may make distributions or
restricted payments, so long as no default exists or would be
caused by the transaction:
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to repurchase management equity interests in amounts not to
exceed $10 million per fiscal year; |
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regardless of the existence of any default, to pay pass-through
tax liabilities in respect of ownership of equity interests in
Charter Operating or its restricted subsidiaries; |
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to pay, regardless of the existence of any default, interest
when due on the Charter convertible notes, the Charter Holdings
notes, the CIH notes, the CCH I notes, the CCH II
notes and the CCO Holdings notes; |
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to purchase, redeem or refinance the Charter Holdings notes, the
CIH notes, the CCH I notes, the CCH II notes, the
CCO Holdings notes, the Charter convertible notes, and
other direct or indirect parent company notes, so long as
Charter Operating could incur $1.00 of indebtedness under the
4.25 to 1.0 leverage ratio test referred to above and there is
no default, or |
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to make other specified restricted payments including merger
fees up to 1.25% of the transaction value, repurchases using
concurrent new issuances, and certain dividends on existing
subsidiary preferred equity interests. |
The indenture governing the Charter Operating notes restricts
Charter Operating and its restricted subsidiaries from making
investments, except specified permitted investments, or creating
new unrestricted
133
subsidiaries, if there is a default under the indenture or if
Charter Operating could not incur $1.00 of new debt under the
4.25 to 1.0 leverage ratio test described above after giving
effect to the transaction.
Permitted investments include:
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investments by Charter Operating and its restricted subsidiaries
in Charter Operating and in other restricted subsidiaries, or
entities that become restricted subsidiaries as a result of the
investment, |
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investments aggregating up to 100% of new cash equity proceeds
received by Charter Operating since April 27, 2004 to the
extent the proceeds have not been allocated to the restricted
payments covenant described above, |
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other investments up to $750 million outstanding at any
time, and |
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certain specified additional investments, such as investments in
customers and suppliers in the ordinary course of business and
investments received in connection with permitted asset sales. |
Charter Operating and its restricted subsidiaries are not
permitted to grant liens senior to the liens securing the
Charter Operating notes, other than permitted liens, on their
assets to secure indebtedness or other obligations, if, after
giving effect to such incurrence, the senior secured leverage
ratio (generally, the ratio of obligations secured by first
priority liens to four times EBITDA, as defined, from the most
recent fiscal quarter for which internal financial reports are
available) would exceed 3.75 to 1.0. Permitted liens include
liens securing indebtedness and other obligations under
permitted credit facilities, liens securing the purchase price
of new assets, liens securing indebtedness of up to
$50 million and other specified liens incurred in the
ordinary course of business.
Charter Operating and Charter Communications Operating Capital
Corp., its co-issuer, are generally not permitted to sell all or
substantially all of their assets or merge with or into other
companies unless their leverage ratio after any such transaction
would be no greater than their leverage ratio immediately prior
to the transaction, or unless Charter Operating and its
subsidiaries could incur $1.00 of new debt under the 4.25 to 1.0
leverage ratio test described above after giving effect to the
transaction, no default exists, and the surviving entity is a
U.S. entity that assumes the Charter Operating notes.
Charter Operating and its restricted subsidiaries generally may
not otherwise sell assets or, in the case of restricted
subsidiaries, issue equity interests, unless they receive
consideration at least equal to the fair market value of the
assets or equity interests, consisting of at least 75% in cash,
assumption of liabilities, securities converted into cash within
60 days or productive assets. Charter Operating and its
restricted subsidiaries are then required within 365 days
after any asset sale either to commit to use the net cash
proceeds over a specified threshold to acquire assets, including
current assets, used or useful in their businesses or use the
net cash proceeds to repay debt, or to offer to repurchase the
Charter Operating notes with any remaining proceeds.
Charter Operating and its restricted subsidiaries may generally
not engage in sale and leaseback transactions unless, at the
time of the transaction, Charter Operating could have incurred
secured indebtedness in an amount equal to the present value of
the net rental payments to be made under the lease, and the sale
of the assets and application of proceeds is permitted by the
covenant restricting asset sales.
Charter Operatings restricted subsidiaries may generally
not enter into restrictions on their ability to make dividends
or distributions or transfer assets to Charter Operating on
terms that are materially more restrictive than those governing
their debt, lien, asset sale, lease and similar agreements
existing when Charter Operating entered into the indenture
governing the Charter Operating senior second-lien notes unless
those restrictions are on customary terms that will not
materially impair Charter Operatings ability to repay the
Charter Operating notes.
The restricted subsidiaries of Charter Operating are generally
not permitted to guarantee or pledge assets to secure debt of
Charter Operating, unless the guarantying subsidiary issues a
guarantee of the
134
notes of comparable priority and tenor, and waives any rights of
reimbursement, indemnity or subrogation arising from the
guarantee transaction for at least one year.
The indenture also restricts the ability of Charter Operating
and its restricted subsidiaries to enter into certain
transactions with affiliates involving consideration in excess
of $15 million without a determination by the board of
directors that the transaction is on terms no less favorable
than arms-length, or transactions with affiliates involving over
$50 million without receiving an independent opinion as to
the fairness of the transaction to the holders of the Charter
Operating notes.
Charter Operating and its restricted subsidiaries are generally
not permitted to transfer equity interests in restricted
subsidiaries unless the transfer is of all of the equity
interests in the restricted subsidiary or the restricted
subsidiary remains a restricted subsidiary and net proceeds of
the equity sale are applied in accordance with the asset sales
covenant.
Until the guarantee and pledge date, the Charter Operating notes
are secured by a second-priority lien on all of Charter
Operatings assets that secure the obligations of Charter
Operating under the Charter Operating credit facility and
specified related obligations. The collateral secures the
obligations of Charter Operating with respect to the
8% senior second-lien notes due 2012 and the
83/8
% senior second-lien notes due 2014 on a ratable
basis. The collateral consists of substantially all of Charter
Operatings assets in which security interests may be
perfected under the Uniform Commercial Code by filing a
financing statement (including capital stock and intercompany
obligations), including, but not limited to:
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all of the capital stock of all of Charter Operatings
direct subsidiaries, including, but not limited to,
CCO NR Holdings, LLC; and |
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all intercompany obligations owing to Charter Operating
including, but not limited to, intercompany notes from
CC VI Operating, CC VIII Operating and Falcon, which
notes are supported by the same guarantees and collateral that
supported these subsidiaries credit facilities prior to
the amendment and restatement of the Charter Operating credit
facilities. |
Since the occurrence of the guarantee and pledge date, the
collateral for the Charter Operating notes consists of all of
Charter Operatings 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 Operatings 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:
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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 |
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with certain exceptions, all intercompany obligations owing to
Charter Operating or any guarantor. |
In March 2005, CC V Holdings, LLC redeemed in full the notes
outstanding under the CC V indenture. Following that redemption
CC V Holdings, LLC and its subsidiaries guaranteed the Charter
Operating credit facilities and the related obligations and
secured those guarantees with first-priority liens, and
guaranteed the notes and secured the Charter Operating senior
second-lien notes with second-priority liens, on substantially
all of their assets in which security interests may be perfected
under the Uniform Commercial Code by filing a financing
statement (including capital stock and intercompany obligations).
In addition, if Charter Operating or its subsidiaries exercise
any option to redeem in full the notes outstanding under the
Renaissance indenture, then, provided that the Leverage
Condition remains satisfied, the Renaissance entities will be
required to provide corresponding guarantees of the Charter
Operating credit facilities and related obligations and note
guarantees and to secure the Charter Operating notes and the
Charter Operating credit facilities and related obligations with
corresponding liens.
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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 10% senior discount notes due 2008 were issued by
Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee)
LLC and Renaissance Media Holdings Capital Corporation, with
Renaissance Media Group LLC as guarantor and the United States
Trust Company of New York as trustee. Renaissance Media Group
LLC, which is the direct or indirect parent company of these
issuers, is a subsidiary of Charter Operating. The
Renaissance 10% notes and the Renaissance guarantee are
unsecured, unsubordinated debt of the issuers and the guarantor,
respectively. In October 1998, the issuers of the Renaissance
notes exchanged $163 million of the original issued and
outstanding Renaissance notes for an equivalent value of new
Renaissance notes. The form and terms of the new Renaissance
notes are the same in all material respects as the form and
terms of the original Renaissance notes except that the issuance
of the new Renaissance notes was registered under the Securities
Act.
Interest on the Renaissance notes is payable semi-annually in
arrears in cash at a rate of 10% per year. The Renaissance
notes are redeemable at the option of the issuers thereof, in
whole or in part, initially at 105% of their principal amount at
maturity, plus accrued interest, declining to 100% of the
principal amount at maturity, plus accrued interest, on or after
April 15, 2006.
Our acquisition of Renaissance triggered change of control
provisions of the Renaissance notes that required us to offer to
purchase the Renaissance notes at a purchase price equal to 101%
of their accreted value on the date of the purchase, plus
accrued interest, if any. In May 1999, we made an offer to
repurchase the Renaissance notes, and holders of Renaissance
notes representing 30% of the total principal amount outstanding
at maturity tendered their Renaissance notes for repurchase.
The limitations on incurrence of debt contained in the indenture
governing the Renaissance notes permit Renaissance Media Group
and its restricted subsidiaries to incur additional debt, so
long as they are not in default under the indenture:
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if, after giving effect to the incurrence, Renaissance Media
Group could meet a leverage ratio (ratio of consolidated debt to
four times consolidated EBITDA, as defined, from the most recent
quarter) of 6.75 to 1.0, and, regardless of whether the leverage
ratio could be met, |
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up to the greater of $200 million or 4.5 times
Renaissance Media Groups consolidated annualized EBITDA,
as defined, |
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up to an amount equal to 5% of Renaissance Media Groups
consolidated total assets to finance the purchase of new assets, |
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up to two times the sum of (a) the net cash proceeds of new
equity issuances and capital contributions, and (b) 80% of
the fair market value of property received by Renaissance Media
Group or an issuer as a capital contribution, in each case
received after the issue date of the Renaissance notes and not
allocated to make restricted payments, and |
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other items of indebtedness for specific purposes such as
intercompany debt, refinancing of existing debt and interest
rate swaps to provide protection against fluctuation in interest
rates. |
The indenture governing the Renaissance notes permits us to
incur debt under one of the categories above, and reclassify the
debt into a different category.
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Under the indenture governing the Renaissance notes, Renaissance
Media Group and its restricted subsidiaries are permitted to pay
dividends on equity interests, repurchase interests, make
restricted investments, or make other specified restricted
payments only if Renaissance Media Group could incur $1.00 of
additional debt under the debt incurrence test, which requires
that Renaissance Media Group meet the 6.75 to 1.0 leverage
ratio after giving effect to the transaction of the indebtedness
covenant and that no default exists or would occur as a
consequence thereof. If those conditions are met, Renaissance
Media Group and its restricted subsidiaries are permitted to
make restricted payments in a total amount not to exceed the
result of 100% of Renaissance Media Groups consolidated
EBITDA, as defined, minus 130% of its consolidated interest
expense, plus 100% of new cash equity proceeds received by
Renaissance Media Group and not allocated to the indebtedness
covenant, plus returns on certain investments, all cumulatively
from June 1998. Renaissance Media Group and its restricted
subsidiaries may make permitted investments up to
$2 million in related businesses and other specified
permitted investments, restricted payments up to
$10 million, dividends up to 6% each year of the net cash
proceeds of public equity offerings, and other specified
restricted payments without meeting the foregoing test.
Renaissance Media Group and its restricted subsidiaries are not
permitted to grant liens on their assets other than specified
permitted liens, unless corresponding liens are granted to
secure the Renaissance notes. Permitted liens include liens
securing debt permitted to be incurred under credit facilities,
liens securing debt incurred under the incurrence of
indebtedness test, in amounts up to the greater of
$200 million or 4.5 times Renaissance Media Groups
consolidated EBITDA, as defined, liens as deposits for
acquisitions up to 10% of the estimated purchase price, liens
securing permitted financings of new assets, liens securing debt
permitted to be incurred by restricted subsidiaries, and
specified liens incurred in the ordinary course of business.
Renaissance Media Group and the issuers of the Renaissance notes
are generally not permitted to sell or otherwise dispose of all
or substantially all of their assets or merge with or into other
companies unless their consolidated net worth after any such
transaction would be equal to or greater than their consolidated
net worth immediately prior to the transaction, or unless
Renaissance Media Group could incur $1.00 of additional debt
under the debt incurrence test, which would require them to meet
a leverage ratio of 6.75 to 1.00 after giving effect to the
transaction.
Renaissance Media Group and its subsidiaries may generally not
otherwise sell assets or, in the case of subsidiaries, equity
interests, unless they receive consideration at least equal to
the fair market value of the assets, consisting of at least 75%
cash, temporary cash investments or assumption of debt. Charter
Holdings and its restricted subsidiaries are then required
within 12 months after any asset sale either to commit to
use the net cash proceeds over a specified threshold either to
acquire assets used in their own or related businesses or use
the net cash proceeds to repay debt, or to offer to repurchase
the Renaissance notes with any remaining proceeds.
Renaissance Media Group and its restricted subsidiaries may
generally not engage in sale and leaseback transactions unless
the lease term does not exceed three years or the proceeds are
applied in accordance with the covenant limiting asset sales.
Renaissance Media Groups restricted subsidiaries may
generally not enter into restrictions on their abilities to make
dividends or distributions or transfer assets to Renaissance
Media Group except those not more restrictive than is customary
in comparable financings.
The restricted subsidiaries of Renaissance Media Group are not
permitted to guarantee or pledge assets to secure debt of the
Renaissance Media Group or its restricted subsidiaries, unless
the guarantying subsidiary issues a guarantee of the Renaissance
notes of comparable priority and tenor, and waives any rights of
reimbursement, indemnity or subrogation arising from the
guarantee transaction.
Renaissance Media Group and its restricted subsidiaries are
generally not permitted to issue or sell equity interests in
restricted subsidiaries, except sales of common stock of
restricted subsidiaries so long as the proceeds of the sale are
applied in accordance with the asset sale covenant, and
issuances as a result of
137
which the restricted subsidiary is no longer a restricted
subsidiary and any remaining investment in that subsidiary is
permitted by the covenant limiting restricted payments.
The indenture governing the Renaissance notes also restricts the
ability of Renaissance Media Group and its restricted
subsidiaries to enter into certain transactions with affiliates
involving consideration in excess of $2 million without a
determination by the disinterested members of the board of
directors that the transaction is on terms no less favorable
than arms length, or transactions with affiliates involving over
$4 million with affiliates without receiving an independent
opinion as to the fairness of the transaction to Renaissance
Media Group.
All of these covenants are subject to additional specified
exceptions. In general, the covenants of our subsidiaries
credit agreements are more restrictive than those of our
indentures.
Parent Company Debt
As of March 31, 2006 and December 31, 2005, our parent
companies actual total debt was approximately $8.8 billion
as summarized below (dollars in millions):
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March 31, 2006 | |
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December 31, 2005 | |
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Start date for | |
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cash interest | |
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Principal | |
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Accreted | |
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Principal | |
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Accreted | |
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Interest payment | |
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payment on | |
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Maturity | |
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Amount | |
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value(a) | |
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Amount | |
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value(a) | |
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dates | |
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discount notes | |
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date(b) | |
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Charter Communications, Inc.:
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4.750% convertible senior notes
due 2006(c)
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$ |
20 |
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$ |
20 |
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$ |
20 |
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$ |
20 |
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12/1 & 6/1 |
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6/1/06 |
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5.875% convertible senior notes
due 2009(c)
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863 |
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846 |
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863 |
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834 |
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5/16 & 11/16 |
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11/16/09 |
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Charter Holdings:
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8.250% senior notes due 2007
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105 |
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105 |
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105 |
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105 |
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4/1 & 10/1 |
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4/1/07 |
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8.625% senior notes due 2009
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292 |
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292 |
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292 |
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292 |
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4/1 & 10/1 |
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4/1/09 |
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9.920% senior discount notes due 2011
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198 |
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198 |
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198 |
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198 |
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4/1 & 10/1 |
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10/1/04 |
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4/1/11 |
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10.000% senior notes due 2009
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154 |
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154 |
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154 |
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154 |
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4/1 & 10/1 |
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4/1/09 |
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10.250% senior notes due 2010
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49 |
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49 |
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49 |
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49 |
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1/15 & 7/15 |
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1/15/10 |
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11.750% senior discount notes due 2010
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43 |
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43 |
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43 |
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43 |
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1/15 & 7/15 |
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7/15/05 |
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1/15/10 |
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10.750% senior notes due 2009
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131 |
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|
131 |
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131 |
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131 |
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4/1 & 10/1 |
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10/1/09 |
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11.125% senior notes due 2011
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217 |
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217 |
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217 |
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217 |
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1/15 & 7/15 |
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1/15/11 |
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13.500% senior discount notes due 2011
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94 |
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94 |
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94 |
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94 |
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1/15 & 7/15 |
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7/15/06 |
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1/15/11 |
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9.625% senior notes due 2009
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107 |
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107 |
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107 |
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107 |
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5/15 & 11/15 |
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11/15/09 |
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138
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March 31, 2006 | |
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December 31, 2005 | |
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Start date for | |
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cash interest | |
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Principal | |
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Accreted | |
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Principal | |
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Accreted | |
|
Interest payment | |
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payment on | |
|
Maturity | |
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|
Amount | |
|
value(a) | |
|
Amount | |
|
value(a) | |
|
dates | |
|
discount notes | |
|
date(b) | |
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10.000% senior notes due 2011
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137 |
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136 |
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137 |
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136 |
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5/15 & 11/15 |
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5/15/11 |
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11.750% senior discount notes due 2011
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125 |
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123 |
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125 |
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120 |
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5/15 & 11/15 |
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11/15/06 |
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5/15/11 |
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12.125% senior discount notes due 2012
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113 |
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103 |
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113 |
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100 |
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1/15 & 7/15 |
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7/15/07 |
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1/15/12 |
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CIH(a):
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11.125% senior notes due 2014
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151 |
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151 |
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151 |
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151 |
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1/15 & 7/15 |
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1/15/14 |
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9.920% senior discount notes due 2014
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471 |
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471 |
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471 |
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471 |
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4/1 & 10/1 |
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4/1/14 |
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10.000% senior notes due 2014
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299 |
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299 |
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299 |
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299 |
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5/15 & 11/15 |
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5/15/14 |
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11.750% senior discount notes due 2014
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815 |
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804 |
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815 |
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781 |
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5/15 & 11/15 |
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11/15/06 |
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5/15/14 |
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13.500% senior discount notes due 2014
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581 |
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581 |
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581 |
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578 |
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1/15 & 7/15 |
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7/15/06 |
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1/15/14 |
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12.125% senior discount notes due 2015
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|
217 |
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|
198 |
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217 |
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192 |
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1/15 & 7/15 |
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7/15/07 |
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1/15/15 |
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CCH I(a):
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11.00% senior notes due 2015
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3,525 |
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3,680 |
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3,525 |
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3,683 |
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4/1 & 10/1 |
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10/1/15 |
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$ |
8,707 |
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$ |
8,802 |
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$ |
8,707 |
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$ |
8,755 |
(d) |
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(a) |
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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. The accreted value of CIH notes issued in exchange
for Charter Holdings notes and the CCH I notes issued in
exchange for the 8.625% Charter Holdings notes due 2009 are
recorded at the historical book values of the Charter Holdings
notes for financial reporting purposes as opposed to the current
accreted value for legal purposes and notes indenture purposes
(which, for both purposes, is the amount that would become
payable if the debt becomes immediately due). As of
March 31, 2006, the accreted value of our parent
companies debt for legal purposes and notes and indentures
purposes is $8.3 billion. |
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(b) |
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In general, the obligors have the right to redeem all of the
notes set forth in the above table (except with respect to the
5.875% convertible senior notes due 2009, the 8.25% Charter
Holdings notes due 2007, the 10.000% Charter Holdings notes due
2009, the 10.75% Charter Holdings notes due 2009 and the 9.625%
Charter Holdings notes due 2009) in whole or part at their
option, beginning at various times prior to their stated
maturity dates, subject to certain conditions, upon the payment
of the outstanding principal amount (plus a specified redemption
premium) and all accrued and unpaid interest. The
5.875% convertible senior notes are redeemable if the
closing price of Charters Class A common stock
exceeds the conversion price by certain percentages as described
below. |
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(c) |
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The 4.75% convertible senior notes and the
5.875% convertible senior notes are convertible at the
option of the holders into shares of Charters Class A
common stock at a conversion rate, subject to |
139
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certain adjustments, of 38.0952 and 413.2231 shares,
respectively, per $1,000 principal amount of notes, which is
equivalent to a price of $26.25 and $2.42 per share,
respectively. Certain anti-dilutive provisions cause adjustments
to occur automatically upon the occurrence of specified events.
Additionally, the conversion ratio may be adjusted by Charter
when deemed appropriate. |
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(d) |
|
Not included within total long-term debt is the $51 million
CCHC note, which is included in note payable-related party on
Charters consolidated balance sheets. |
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Charter Communications, Inc. Notes |
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4.75% Convertible Senior Notes Due 2006 |
In May 2001, Charter issued 4.75% convertible senior notes
with a total principal amount at maturity of $633 million.
As of March 31, 2006, there was $20 million in total
principal amount of these notes outstanding. The
4.75% convertible notes rank equally with any of
Charters future unsubordinated and unsecured indebtedness,
but are structurally subordinated to all existing and future
indebtedness and other liabilities of Charters
subsidiaries.
The 4.75% convertible notes are convertible at the option
of the holder into shares of Charters Class A common
stock at a conversion rate of 38.0952 shares per $1,000
principal amount of notes, which is equivalent to a price of
$26.25 per share, subject to certain adjustments.
Specifically, the adjustments include anti-dilutive provisions,
which automatically occur based on the occurrence of specified
events to provide protection rights to holders of the notes.
Additionally, Charter may adjust the conversion ratio under
certain circumstances when deemed appropriate. These notes are
redeemable at Charters option at amounts decreasing from
101.9% to 100% of the principal amount, plus accrued and unpaid
interest beginning on June 4, 2004, to the date of
redemption.
Upon a change of control, subject to certain conditions and
restrictions, Charter may be required to repurchase the notes,
in whole or in part, at 100% of their principal amount plus
accrued interest at the repurchase date.
|
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|
Charter 5.875% Convertible Senior Notes due
2009 |
In November 2004, Charter issued 5.875% convertible senior
notes due 2009 with a total original principal amount of
$862.5 million. The 5.875% convertible senior notes
are unsecured (except with respect to the collateral as
described below) and rank equally with Charters 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 Charters
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 Charters
Class A common stock at an initial conversion rate of
413.2231 shares per $1,000 principal amount of notes, which
is equivalent to a conversion price of approximately
$2.42 per share, subject to certain adjustments.
Specifically, the adjustments include anti-dilutive provisions,
which cause adjustments to occur automatically based on the
occurrence of specified events to provide protection rights to
holders of the notes. The conversion rate may also be increased
(but not to exceed 462 shares per $1,000 principal amount
of notes) upon a specified change of control transaction.
Additionally, Charter may elect to increase the conversion rate
under certain circumstances when deemed appropriate and subject
to applicable limitations of the NASDAQ stock market. Holders
who convert their notes prior to November 16, 2007 will
receive an early conversion make whole amount in respect of
their notes based on a proportional share of the portfolio of
pledged securities described below, with specified adjustments.
No holder of notes will be entitled to receive shares of
Charters 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
Charters Class A common stock if such conversion
would take place prior to November 16, 2008, or more than
9.9% thereafter.
140
If a holder tenders a note for conversion, Charter may direct
that holder (unless Charter has called those notes for
redemption) to a financial institution designated by Charter 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, Charter remains obligated to convert the notes.
Charter Holdco used a portion of the proceeds from the sale of
the notes to purchase a portfolio of U.S. government
securities in an amount which it believes will be sufficient to
make the first six interest payments on the notes. These
government securities were pledged to us as security for a
mirror note issued by Charter Holdco to Charter and pledged to
the trustee under the indenture governing the notes as security
for Charters obligations thereunder. Charter expects to
use such securities to fund the first six interest payments
under the notes, two of which were funded in 2005. The fair
value of the pledged securities was $97 million at
March 31, 2006.
Upon a change of control and certain other fundamental changes,
subject to certain conditions and restrictions, Charter may be
required to repurchase the notes, in whole or in part, at 100%
of their principal amount plus accrued interest at the
repurchase date.
Charter may redeem the notes in whole or in part for cash at any
time at a redemption price equal to 100% of the aggregate
principal amount plus accrued and unpaid interest, deferred
interest and liquidated damages, if any, but only if for any 20
trading days in any 30 consecutive trading day period the
closing price has exceeded 180% of the conversion price, if such
30 trading day period begins prior to November 16, 2007 or
150% of the conversion price, if such 30 trading period begins
thereafter. Holders who convert notes that Charter has called
for redemption shall receive, in addition to the early
conversion make whole amount, if applicable, the present value
of the interest on the notes converted that would have been
payable for the period from the later of November 17, 2007
and the redemption date through the scheduled maturity date for
the notes, plus any accrued deferred interest.
In October 2005, Charter, acting through a Special Committee of
Charters Board of Directors, and Mr. Allen, settled a
dispute that had arisen between the parties with regard to the
ownership of CC VIII. As part of that settlement, CCHC issued
the CCHC note to CII. The CCHC note has a
15-year maturity. The
CCHC note has an initial accreted value of $48 million
accreting at the rate of 14% per annum compounded quarterly,
except that from and after February 28, 2009, CCHC may pay
any increase in the accreted value of the CCHC note in cash and
the accreted value of the CCHC note will not increase to the
extent such amount is paid in cash. The CCHC note is
exchangeable at CIIs option, at any time, for Charter
Holdco Class A Common units at a rate equal to the then
accreted value, divided by $2.00 (the Exchange
Rate). Customary anti-dilution protections have been
provided that could cause future changes to the Exchange Rate.
Additionally, the Charter Holdco Class A Common units
received will be exchangeable by the holder into Charter common
stock in accordance with existing agreements between CII,
Charter and certain other parties signatory thereto. Beginning
February 28, 2009, if the closing price of Charter common
stock is at or above the Exchange Rate for a certain period of
time as specified in the Exchange Agreement, Charter Holdco may
require the exchange of the CCHC note for Charter Holdco
Class A Common units at the Exchange Rate. Additionally,
CCHC has the right to redeem the CCHC note under certain
circumstances for cash in an amount equal to the then accreted
value, such amount, if redeemed prior to February 28, 2009,
would also include a make whole up to the accreted value through
February 28, 2009. CCHC must redeem the CCHC note at its
maturity for cash in an amount equal to the initial stated value
plus the accreted return through maturity. The accreted value of
the CCHC note is $51 million as of March 31, 2006.
141
|
|
|
Charter Communications Holdings, LLC Notes |
|
|
|
March 1999 Charter Holdings Notes |
The March 1999 Charter Holdings notes were issued under three
separate indentures, each dated as of March 17, 1999, among
Charter Holdings and Charter Capital, as the issuers, and BNY
Midwest Trust Company, as trustee. Charter Holdings and Charter
Capital exchanged these notes for new notes with substantially
similar terms, except that the new notes are registered under
the Securities Act.
The March 1999 Charter Holdings notes are general unsecured
obligations of Charter Holdings and Charter Capital. Cash
interest on the March 1999 9.920% Charter Holdings notes began
to accrue on April 1, 2004.
The March 1999 Charter Holdings notes are senior debt
obligations of Charter Holdings and Charter Capital. They rank
equally with all other current and future unsubordinated
obligations of Charter Holdings and Charter Capital. They are
structurally subordinated to the obligations of Charter
Holdings subsidiaries, including the CIH notes, the
CCH I notes, the CCH II notes, the CCO Holdings notes,
the Renaissance notes, the Charter Operating notes and the
Charter Operating credit facilities.
Charter Holdings and Charter Capital will not have the right to
redeem the March 1999 8.250% Charter Holdings notes prior to
their maturity date on April 1, 2007. Charter Holdings and
Charter Capital may redeem some or all of the March 1999 8.625%
Charter Holdings notes and the March 1999 9.920% Charter
Holdings notes at any time, in each case, at a premium. The
optional redemption price declines to 100% of the principal
amount of March 1999 Charter Holdings notes redeemed, plus
accrued and unpaid interest, if any, for redemption on or after
April 1, 2007.
In the event that a specified change of control event occurs,
Charter Holdings and Charter Capital must offer to repurchase
any then outstanding March 1999 Charter Holdings notes at 101%
of their principal amount or accreted value, as applicable, plus
accrued and unpaid interest, if any.
The indentures governing the March 1999 Charter Holdings notes
contain restrictive covenants that limit certain transactions or
activities by Charter Holdings and its restricted subsidiaries.
Substantially all of Charter Holdings direct and indirect
subsidiaries are currently restricted subsidiaries. See
Summary of Restrictive Covenants Under the
Charter Holdings High Yield Notes.
|
|
|
January 2000 Charter Holdings Notes |
The January 2000 Charter Holdings notes were issued under three
separate indentures, each dated as of January 12, 2000,
among Charter Holdings and Charter Capital, as the issuers, and
BNY Midwest Trust Company, as trustee. In June 2000, Charter
Holdings and Charter Capital exchanged these notes for new notes
with substantially similar terms, except that the new notes are
registered under the Securities Act.
The January 2000 Charter Holdings notes are general unsecured
obligations of Charter Holdings and Charter Capital. Cash
interest on the January 2000 11.75% Charter Holdings notes began
to accrue on January 15, 2005.
The January 2000 Charter Holdings notes are senior debt
obligations of Charter Holdings and Charter Capital. They rank
equally with all other current and future unsubordinated
obligations of Charter Holdings and Charter Capital. They are
structurally subordinated to the obligations of Charter
Holdings subsidiaries, including the CIH notes, the
CCH I notes, the CCH II notes, the CCO Holdings notes,
the Renaissance notes, the Charter Operating notes and the
Charter Operating credit facilities.
Charter Holdings and Charter Capital will not have the right to
redeem the January 2000 10.00% Charter Holdings notes prior to
their maturity on April 1, 2009. Charter Holdings and
Charter Capital may redeem some or all of the January 2000
10.25% Charter Holdings notes and the January 2000 11.75%
Charter Holdings notes at any time, in each case, at a premium.
The optional redemption price declines to
142
100% of the principal amount of the January 2000 Charter
Holdings notes redeemed, plus accrued and unpaid interest, if
any, for redemption on or after January 15, 2008.
In the event that a specified change of control event occurs,
Charter Holdings and Charter Capital must offer to repurchase
any then outstanding January 2000 Charter Holdings notes at 101%
of their total principal amount or accreted value, as
applicable, plus accrued and unpaid interest, if any.
The indentures governing the January 2000 Charter Holdings notes
contain substantially identical events of default, affirmative
covenants and negative covenants as those contained in the
indentures governing the March 1999 Charter Holdings notes. See
Summary of Restrictive Covenants Under the
Charter Holdings High-Yield Notes.
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January 2001 Charter Holdings Notes |
The January 2001 Charter Holdings notes were issued under three
separate indentures, each dated as of January 10, 2001,
each among Charter Holdings and Charter Capital, as the issuers,
and BNY Midwest Trust Company, as trustee. In March 2001,
Charter Holdings and Charter Capital exchanged these notes for
new notes with substantially similar terms, except that the new
notes are registered under the Securities Act.
The January 2001 Charter Holdings notes are general unsecured
obligations of Charter Holdings and Charter Capital. Cash
interest on the January 2001 13.500% Charter Holdings notes
began to accrue on January 15, 2006.
The January 2001 Charter Holdings notes are senior debt
obligations of Charter Holdings and Charter Capital. They rank
equally with all other current and future unsubordinated
obligations of Charter Holdings and Charter Capital. They are
structurally subordinated to the obligations of Charter
Holdings subsidiaries, including the CIH notes, the
CCH I notes, the CCH II notes, the CCO Holdings notes,
the Renaissance notes, the Charter Operating notes and the
Charter Operating credit facilities.
Charter Holdings and Charter Capital will not have the right to
redeem the January 2001 10.750% Charter Holdings notes prior to
their maturity on October 1, 2009. Charter Holdings and
Charter Capital may redeem some or all of the January 2001
11.125% Charter Holdings notes and the January 2001 13.500%
Charter Holdings notes at any time, in each case, at a premium.
The optional redemption price declines to 100% of the principal
amount of the January 2001 Charter Holdings notes redeemed, plus
accrued and unpaid interest, if any, for redemption on or after
January 15, 2009.
In the event that a specified change of control event occurs,
Charter Holdings and Charter Capital must offer to repurchase
any then outstanding January 2001 Charter Holdings notes at 101%
of their total principal amount or accreted value, as
applicable, plus accrued and unpaid interest, if any.
The indentures governing the January 2001 Charter Holdings notes
contain substantially identical events of default, affirmative
covenants and negative covenants as those contained in the
indentures governing the March 1999 and January 2000 Charter
Holdings notes. See Summary of Restrictive
Covenants Under the Charter Holdings High-Yield Notes.
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May 2001 Charter Holdings Notes |
The May 2001 Charter Holdings notes were issued under three
separate indentures, each among Charter Holdings and Charter
Capital, as the issuers, and BNY Midwest Trust Company, as
trustee. In September 2001, Charter Holdings and Charter Capital
exchanged substantially all of these notes for new notes with
substantially similar terms, except that the new notes are
registered under the Securities Act.
The May 2001 Charter Holdings notes are general unsecured
obligations of Charter Holdings and Charter Capital. Cash
interest on the May 2001 11.750% Charter Holdings notes will not
accrue prior to May 15, 2006.
143
The May 2001 Charter Holdings notes are senior debt obligations
of Charter Holdings and Charter Capital. They rank equally with
all other current and future unsubordinated obligations of
Charter Holdings and Charter Capital. They are structurally
subordinated to the obligations of Charter Holdings
subsidiaries, including the CIH notes, the CCH I notes, the
CCH II notes, the CCO Holdings notes, the Renaissance
notes, the Charter Operating notes and the Charter Operating
credit facilities.
Charter Holdings and Charter Capital will not have the right to
redeem the May 2001 9.625% Charter Holdings notes prior to their
maturity on November 15, 2009. On or after May 15,
2006, Charter Holdings and Charter Capital may redeem some or
all of the May 2001 10.000% Charter Holdings notes and the May
2001 11.750% Charter Holdings notes at any time, in each case,
at a premium. The optional redemption price declines to 100% of
the principal amount of the May 2001 Charter Holdings notes
redeemed, plus accrued and unpaid interest, if any, for
redemption on or after May 15, 2009.
In the event that a specified change of control event occurs,
Charter Holdings and Charter Capital must offer to repurchase
any then outstanding May 2001 Charter Holdings notes at 101% of
their total principal amount or accreted value, as applicable,
plus accrued and unpaid interest, if any.
The indentures governing the May 2001 Charter Holdings notes
contain substantially identical events of default, affirmative
covenants and negative covenants as those contained in the
indentures governing the March 1999, January 2000 and January
2001 Charter Holdings notes. See Summary of
Restrictive Covenants Under the Charter Holdings High-Yield
Notes.
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January 2002 Charter Holdings Notes |
The January 2002 Charter Holdings notes were issued under three
separate indentures, each among Charter Holdings and Charter
Capital, as the issuers, and BNY Midwest Trust Company, as
trustee, two of which were supplements to the indentures for the
May 2001 Charter Holdings notes. In July 2002, Charter Holdings
and Charter Capital exchanged substantially all of these notes
for new notes with substantially similar terms, except that the
new notes are registered under the Securities Act.
The January 2002 Charter Holdings notes are general unsecured
obligations of Charter Holdings and Charter Capital. Cash
interest on the January 2002 12.125% Charter Holdings notes will
not accrue prior to January 15, 2007.
The January 2002 Charter Holdings notes are senior debt
obligations of Charter Holdings and Charter Capital. They rank
equally with the current and future unsecured and unsubordinated
debt of Charter Holdings and Charter Capital. They are
structurally subordinated to the obligations of Charter
Holdings subsidiaries, including the CIH notes, the
CCH I notes, the CCH II notes, the CCO Holdings notes,
the Renaissance notes, the Charter Operating notes and the
Charter Operating credit facilities.
The Charter Holdings 12.125% senior discount notes are
redeemable at the option of the issuers at amounts decreasing
from 106.063% to 100% of accreted value beginning
January 15, 2007.
In the event that a specified change of control event occurs,
Charter Holdings and Charter Capital must offer to repurchase
any then outstanding January 2002 Charter Holdings notes at 101%
of their total principal amount or accreted value, as
applicable, plus accrued and unpaid interest, if any.
The indentures governing the January 2002 Charter Holdings notes
contain substantially identical events of default, affirmative
covenants and negative covenants as those contained in the
indentures governing the March 1999, January 2000, January 2001
and May 2001 Charter Holdings notes. See
Summary of Restrictive Covenants Under the
Charter Holdings High-Yield Notes.
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Summary of Restrictive Covenants Under the Charter
Holdings High-Yield Notes |
The limitations on incurrence of debt and issuance of preferred
stock contained in Charter Holdings indentures permit
Charter Holdings and its subsidiaries to incur additional debt
or issue preferred stock, so long as there is no default under
the Charter Holdings indentures. These limitations restrict the
incurrence of debt unless, after giving pro forma effect to the
incurrence, the Charter Holdings Leverage Ratio would
144
be below 8.75 to 1.0. In addition, regardless of whether the
leverage ratio could be met, so long as no default exists or
would result from the incurrence or issuance, Charter Holdings
and its restricted subsidiaries are permitted to issue:
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up to $3.5 billion of debt under credit facilities, |
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up to $75 million of debt incurred to finance the purchase
or capital lease of new assets, |
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up to $300 million of additional debt for any purpose, |
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additional debt in an amount equal to 200% of new cash equity
proceeds received by Charter Holdings and its restricted
subsidiaries since March 1999, the date of its first indenture,
and not allocated for restricted payments or permitted
investments, and |
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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. Accordingly, indebtedness under our credit
facilities is incurred under a combination of the categories of
permitted indebtedness listed above.
The restricted subsidiaries of Charter Holdings are generally
not permitted to issue debt securities contractually
subordinated in right of payment to other debt of the issuing
subsidiary or preferred stock, in either case in any public or
Rule 144A offering.
The Charter Holdings indentures permit Charter Holdings and its
restricted subsidiaries to incur debt under one category, and
later reclassify that debt into another category. The Charter
Operating credit facilities generally impose more restrictive
limitations on incurring new debt than Charter Holdings
indentures, so our subsidiaries that are subject to the Charter
Operating credit facilities may not be permitted to utilize the
full debt incurrence that would otherwise be available under the
Charter Holdings indenture covenants.
Generally, under Charter Holdings high-yield indentures:
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Charter Holdings and its restricted subsidiaries are generally
permitted to pay dividends on equity interests, repurchase
interests, or make other specified restricted payments only if,
Charter Holdings can incur $1.00 of new debt under the Charter
Holdings leverage ratio test which requires 8.75 to 1.0 leverage
ratio after giving effect to the transaction and if no default
exists or would exist as a consequence of such incurrence. If
those conditions are met, restricted payments in a total amount
of up to 100% of Charter Holdings consolidated EBITDA, as
defined, minus 1.2 times its consolidated interest expense, plus
100% of new cash and non-cash equity proceeds received by
Charter Holdings and not allocated to the debt incurrence
covenant or to permitted investments, all cumulatively from
March 1999, the date of the first Charter Holdings indenture,
plus $100 million. |
In addition, Charter Holdings may make distributions or
restricted payments, so long as no default exists or would be
caused by transactions:
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to repurchase management equity interests in amounts not to
exceed $10 million per fiscal year, |
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regardless of the existence of any default, to pay pass-through
tax liabilities in respect of ownership of equity interests in
Charter Holdings or its restricted subsidiaries, or |
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to make other specified restricted payments including merger
fees up to 1.25% of the transaction value, repurchases using
concurrent new issuances, and certain dividends on existing
subsidiary preferred equity interests. |
Charter Holdings and its restricted subsidiaries may not make
investments except permitted investments if there is a default
under the indentures or if, after giving effect to the
transaction, the Charter Holdings Leverage Ratio would be above
8.75 to 1.0.
145
Permitted investments include:
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investments by Charter Holdings in restricted subsidiaries or by
restricted subsidiaries in Charter Holdings, |
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investments in productive assets (including through equity
investments) aggregating up to $150 million since March
1999, |
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investments aggregating up to 100% of new cash equity proceeds
received by Charter Holdings since March 1999 and not allocated
to the debt incurrence or restricted payments covenant, and |
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other investments aggregating up to $50 million since March
1999. |
Charter Holdings is not permitted to grant liens on its assets
other than specified permitted liens. Permitted liens include
liens securing debt and other obligations incurred under Charter
Holdings and its subsidiaries credit facilities,
liens securing the purchase price of new assets, liens securing
indebtedness of up to $50 million and other specified liens
incurred in the ordinary course of business. The lien covenant
does not restrict liens on assets of subsidiaries of Charter
Holdings.
Charter Holdings and Charter Capital, its co-issuer, are
generally not permitted to sell all or substantially all of
their assets or merge with or into other companies unless their
leverage ratio after any such transaction would be no greater
than their leverage ratio immediately prior to the transaction,
or unless after giving effect to the transaction, the Charter
Holdings Leverage Ratio would be below 8.75 to 1.0, no default
exists, and the surviving entity is a U.S. entity that
assumes the Charter Holdings notes.
Charter Holdings and its restricted subsidiaries may generally
not otherwise sell assets or, in the case of restricted
subsidiaries, issue equity interests, unless they receive
consideration at least equal to the fair market value of the
assets or equity interests, consisting of at least 75% in cash,
assumption of liabilities, securities converted into cash within
60 days or productive assets. Charter Holdings and its
restricted subsidiaries are then required within 365 days
after any asset sale either to commit to use the net cash
proceeds over a specified threshold to acquire assets, including
current assets, used or useful in their businesses or use the
net cash proceeds to repay debt, or to offer to repurchase the
Charter Holdings notes with any remaining proceeds.
Charter Holdings and its restricted subsidiaries may generally
not engage in sale and leaseback transactions unless, at the
time of the transaction, Charter Holdings could have incurred
secured indebtedness in an amount equal to the present value of
the net rental payments to be made under the lease, and the sale
of the assets and application of proceeds is permitted by the
covenant restricting asset sales.
Charter Holdings restricted subsidiaries may generally not
enter into restrictions on their ability to make dividends or
distributions or transfer assets to Charter Holdings on terms
that are materially more restrictive than those governing their
debt, lien, asset sale, lease and similar agreements existing
when they entered into the indentures, unless those restrictions
are on customary terms that will not materially impair Charter
Holdings ability to repay the high-yield notes.
The restricted subsidiaries of Charter Holdings are generally
not permitted to guarantee or pledge assets to secure debt of
Charter Holdings, unless the guaranteeing subsidiary issues a
guarantee of the notes of comparable priority and tenor, and
waives any rights of reimbursement, indemnity or subrogation
arising from the guarantee transaction for at least one year.
The indentures also restrict the ability of Charter Holdings and
its restricted subsidiaries to enter into certain transactions
with affiliates involving consideration in excess of
$15 million without a determination by the board of
directors of Charter Holdings that the transaction is on terms
no less favorable than arms length, or transactions with
affiliates involving over $50 million without receiving an
independent opinion as to the fairness of the transaction
addressed to the holders of the Charter Holdings notes.
146
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CCH I Holdings, LLC Notes |
In September 2005, CIH and CCH I Holdings Capital Corp.
jointly issued $2.5 billion total principal amount of 9.92%
to 13.50% senior accreting notes due 2014 and 2015 in exchange
for an aggregate amount of $2.4 billion of Charter Holdings
notes due 2011 and 2012, spread over six series of notes and
with varying interest rates as set forth in the table under
Description of Certain Indebtedness. The notes are
guaranteed by Charter Holdings.
The CIH notes are senior debt obligations of CIH and
CCH I Holdings Capital Corp. They rank equally with all
other current and future unsecured, unsubordinated obligations
of CIH and CCH I Holdings Capital Corp. The CIH notes
are structurally subordinated to all obligations of subsidiaries
of CIH, including the CCH I notes,
the CCH II notes, the CCO Holdings notes,
the Renaissance notes, the Charter Operating notes and the
Charter Operating credit facilities.
The CIH notes may not be redeemed at the option of the
issuers until September 30, 2007. On or after such date,
the CIH notes may be redeemed in accordance with the following
table.
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Note Series |
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Redemption Dates | |
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Percentage of Principal | |
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11.125%
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September 30, 2007 - January 14, 2008 |
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103.708 |
% |
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January 15, 2008 - January 14, 2009 |
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101.854 |
% |
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Thereafter |
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100.0% |
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9.92%
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September 30, 2007 - Thereafter |
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100.0% |
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10.0%
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September 30, 2007 - May 14, 2008 |
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103.333 |
% |
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May 15, 2008 - May 14, 2009 |
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101.667 |
% |
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Thereafter |
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100.0% |
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11.75%
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September 30, 2007 - May 14, 2008 |
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103.917 |
% |
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May 15, 2008 - May 14, 2009 |
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101.958 |
% |
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Thereafter |
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100.0% |
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13.5%
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September 30, 2007 - January 14, 2008 |
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104.5% |
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January 15, 2008 - January 14, 2009 |
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102.25% |
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Thereafter |
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100.0% |
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12.125%
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September 30, 2007 - January 14, 2008 |
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106.063 |
% |
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January 15, 2008 - January 14, 2009 |
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104.042 |
% |
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January 15, 2009 - January 14, 2010 |
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102.021 |
% |
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Thereafter |
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100.0% |
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In the event that a specified change of control event happens,
CIH and CCH I Holdings Capital Corp. must offer to
repurchase any outstanding notes at a price equal to the sum of
the accreted value of the notes plus accrued and unpaid interest
plus a premium that varies over time.
The indenture governing the CIH notes contains restrictive
covenants similar to those contained in the indenture governing
the Charter Holdings notes with the following exceptions:
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The debt incurrence covenant permits up to $9.75 billion
(rather than $3.5 billion) of debt under credit facilities
(less the amount of net proceeds of asset sales applied to repay
such debt as required by the asset sale covenant). |
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CIH and its restricted subsidiaries are generally permitted to
pay dividends on equity interests, repurchase interests, or make
other specified restricted payments only if, after giving
pro forma effect to the transaction, the CIH Leverage Ratio
would be below 8.75 to 1.0 and if no default exists or would
exist as a consequence of such transaction. If those conditions
are met, restricted payments are permitted in a total amount of
up to the sum of (1) the greater of
(a) $500 million or (b) 100% of CIHs
consolidated EBITDA, as defined, minus 1.2 times its
consolidated interest expense each for the period from
September 28, 2005 to the end of CIHs most recently
ended full fiscal quarter for which internal financial
statements are available, plus (2) 100% of new cash and
non-cash equity proceeds received by CIH and not allocated to
the debt incurrence covenant or to permitted investments, all
cumulatively from September 28, 2005. |
147
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Instead of the $150 million and $50 million permitted
investment baskets described above, there is a $750 million
permitted investment basket. |
In September 2005, CCH I and CCH I Capital Corp.
jointly issued $3.5 billion total principal amount of 11%
senior secured notes due October 2015 in exchange for an
aggregate amount of $4.2 billion of certain Charter
Holdings notes. The notes are guaranteed by Charter Holdings and
are secured by a pledge of 100% of the equity interest of
CCH Is wholly owned direct subsidiary, CCH II.
Such pledge is subject to significant limitations as described
in the related pledge agreement. Interest on the
CCH I notes accrues at 11% per annum and is
payable semi-annually in arrears on each April 1 and
October 1, commencing on April 1, 2006.
The CCH I notes are senior debt obligations of CCH I
and CCH I Capital Corp. To the extent of the value of the
collateral, they rank senior to all of CCH Is future
unsecured senior indebtedness. The CCH I notes are
structurally subordinated to all obligations of subsidiaries of
CCH I, including the CCH II notes, CCO
Holdings notes, the Renaissance notes, the Charter Operating
notes and the Charter Operating credit facilities.
CCH I and CCH I Capital Corp. may, prior to
October 1, 2008 in the event of a qualified equity offering
providing sufficient proceeds, redeem up to 35% of the aggregate
principal amount of the CCH I notes at a redemption price
of 111% of the principal amount plus accrued and unpaid
interest. Aside from this provision, CCH I and CCH I
Capital Corp. may not redeem at their option any of the notes
prior to October 1, 2010. On or after October 1, 2010,
CCH I and CCH I Capital Corp. may redeem, in whole or
in part, CCH I notes at the applicable prices
(expressed as percentages of principal amount) listed below,
plus accrued and unpaid interest if redeemed during the twelve
month period beginning on October 1 of the years listed
below.
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Year |
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Percentage | |
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2010
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105.5% |
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2011
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102.75% |
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2012
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101.375% |
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2013 and thereafter
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100.0% |
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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 holders
CCH I notes at 101% of the principal amount plus accrued
and unpaid interest.
The indenture governing the CCH I notes contains
restrictive covenants that limit certain transactions or
activities by CCH I and its restricted subsidiaries,
including the covenants summarized below. Substantially all of
CCH Is direct and indirect subsidiaries are currently
restricted subsidiaries.
The covenant in the indenture governing the CCH I notes
that restricts incurrence of debt and issuance of preferred
stock permits CCH I and its subsidiaries to incur or issue
specified amounts of debt or preferred stock, if, after giving
pro forma effect to the incurrence or issuance, CCH I could
meet a leverage ratio (ratio of consolidated debt to four times
EBITDA, as defined, from the most recent fiscal quarter for
which internal financial reports are available) of 7.5 to 1.0.
In addition, regardless of whether the leverage ratio could be
met, so long as no default exists or would result from the
incurrence or issuance, CCH I and its restricted
subsidiaries are permitted to incur or issue:
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up to $9.75 billion of debt under credit facilities (less
the amount of net proceeds of asset sales applied to repay such
debt as required by the asset sale covenant); |
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up to $75 million of debt incurred to finance the purchase
or capital lease of new assets; |
148
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up to $300 million of additional debt for any
purpose; and |
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other items of indebtedness for specific purposes such as
intercompany debt, refinancing of existing debt, and interest
rate swaps to provide protection against fluctuation in interest
rates. |
The restricted subsidiaries of CCH I are generally not
permitted to issue debt securities contractually subordinated to
other debt of the issuing subsidiary or preferred stock, in
either case in any public offering or private placement.
The CCH I indenture generally permits CCH I and its
restricted subsidiaries to incur debt under one category, and
later reclassify that debt into another category. The Charter
Operating credit facilities generally impose more restrictive
limitations on incurring new debt than those in the CCH I
indenture, so our subsidiaries that are subject to credit
facilities are not permitted to utilize the full debt incurrence
that would otherwise be available under the CCH I indenture
covenants.
Generally, under the CCH I indenture:
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CCH I and its restricted subsidiaries are permitted to pay
dividends on equity interests, repurchase interests, or make
other specified restricted payments only if CCH I can incur
$1.00 of new debt under the leverage ratio test, which requires
that CCH I meet a 7.5 to 1.0 leverage ratio after giving
effect to the transaction, and if no default exists or would
exist as a consequence of such incurrence. If those conditions
are met, restricted payments are permitted in a total amount of
up to 100% of CCH Is consolidated EBITDA, as defined,
for the period from September 28, 2005 to the end of
CCH Is most recently ended full fiscal quarter for
which financial statements are available minus 1.3 times its
consolidated interest expense for such period, plus 100% of new
cash and appraised non-cash equity proceeds received by
CCH I and not allocated to certain investments, from and
after September 28, 2005, plus $100 million. |
In addition, CCH I and its restricted subsidiaries may make
distributions or restricted payments, so long as no default
exists or would be caused by the transaction:
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to repurchase management equity interests in amounts not to
exceed $10 million per fiscal year; |
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to pay, regardless of the existence of any default, pass-through
tax liabilities in respect of ownership of equity interests in
CCH I or its restricted subsidiaries; |
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to enable certain of its parents to pay interest on certain of
their indebtedness; |
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to enable certain of its parents to purchase, redeem or
refinance certain indebtedness, so long as CCH I could
incur $1.00 of indebtedness under the 7.5 to 1.0 leverage ratio
test referred to above; or |
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to make other specified restricted payments including merger
fees up to 1.25% of the transaction value, repurchases using
concurrent new issuances, and certain dividends on existing
subsidiary preferred equity interests. |
The indenture governing the CCH I notes restricts
CCH I and its restricted subsidiaries from making
investments, except specified permitted investments, or creating
new unrestricted subsidiaries, if there is a default under the
indenture or if CCH I could not incur $1.00 of new debt
under the 7.5 to 1.0 leverage ratio test described above after
giving effect to the transaction.
Permitted investments include:
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investments by CCH I and its restricted subsidiaries in
CCH I and in other restricted subsidiaries, or entities
that become restricted subsidiaries as a result of the
investment, |
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investments aggregating up to 100% of new cash equity proceeds
received by CCH I since September 28, 2005 to the
extent the proceeds have not been allocated to the restricted
payments covenant described above, |
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other investments up to $750 million outstanding at any
time, and |
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certain specified additional investments, such as investments in
customers and suppliers in the ordinary course of business and
investments received in connection with permitted asset sales. |
CCH I is not permitted to grant liens on its assets other
than specified permitted liens. Permitted liens include liens
securing the purchase price of new assets, liens securing
obligations up to $50 million and other specified liens.
The lien covenant does not restrict liens on assets of
subsidiaries of CCH I.
CCH I and CCH I Capital Corp., its co-issuer, are
generally not permitted to sell all or substantially all of
their assets or merge with or into other companies unless their
leverage ratio after any such transaction would be no greater
than their leverage ratio immediately prior to the transaction,
or unless CCH I and its subsidiaries could incur $1.00 of
new debt under the 7.50 to 1.0 leverage ratio test described
above after giving effect to the transaction, no default exists,
and the surviving entity is a U.S. entity that assumes the
CCH I notes.
CCH I and its restricted subsidiaries may generally not
otherwise sell assets or, in the case of restricted
subsidiaries, issue equity interests, unless they receive
consideration at least equal to the fair market value of the
assets or equity interests, consisting of at least 75% in cash,
assumption of liabilities, securities converted into cash within
60 days or productive assets. CCH I and its restricted
subsidiaries are then required within 365 days after any
asset sale either to commit to use the net cash proceeds over a
specified threshold to acquire assets, including current assets,
used or useful in their businesses or use the net cash proceeds
to repay certain debt, or to offer to repurchase the CCH I
notes with any remaining proceeds.
CCH I and its restricted subsidiaries may generally not
engage in sale and leaseback transactions unless, at the time of
the transaction, CCH I could have incurred secured
indebtedness in an amount equal to the present value of the net
rental payments to be made under the lease, and the sale of the
assets and application of proceeds is permitted by the covenant
restricting asset sales.
With certain exceptions, CCH Is restricted
subsidiaries may generally not enter into restrictions on their
ability to make dividends or distributions or transfer assets to
CCH I.
The restricted subsidiaries of CCH I are generally not
permitted to guarantee or pledge assets to secure other debt of
CCH I, except in respect of credit facilities unless the
guarantying subsidiary issues a guarantee of the CCH I
notes and waives any rights of reimbursement, indemnity or
subrogation arising from the guarantee transaction for at least
one year.
The indenture also restricts the ability of CCH I and its
restricted subsidiaries to enter into certain transactions with
affiliates involving consideration in excess of $15 million
without a determination by the board of directors that the
transaction is on terms no less favorable than arms-length, or
transactions with affiliates involving over $50 million
without receiving an independent opinion as to the fairness of
the transaction to the holders of the CCH I notes.
Cross-Defaults
Our indentures and those of certain of our parent companies and
our subsidiaries include various events of default, including
cross-default provisions. Under these provisions, a failure by
any of the issuers or any of their restricted subsidiaries to
pay at the final maturity thereof the principal amount of other
indebtedness having a principal amount of $100 million or
more (or any other default under any such indebtedness resulting
in its acceleration) would result in an event of default under
the indenture governing the applicable notes. The Renaissance
indenture contains a similar cross-default provision with a
$10 million threshold that applies to the issuers of the
Renaissance notes and their restricted subsidiaries. As a
result, an event of default related to the failure to repay
principal at maturity or the acceleration of the indebtedness
under the Charter Holdings notes, CIH notes, CCH I notes,
CCH II notes, CCO Holdings notes, Charter Operating
notes, the Charter Operating credit facilities or the
Renaissance notes could cause cross-defaults under our, our
parent companies and our subsidiaries indentures.
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THE EXCHANGE OFFER
Terms of the Exchange Offer
General. We issued the original notes on
January 30, 2006 in a transaction exempt from the
registration requirements of the Securities Act of 1933, as
amended.
In connection with the sale of original notes, the holders of
the original notes became entitled to the benefits of the
exchange and registration rights agreement, dated
January 30, 2006, among us and the initial purchasers.
Under the exchange and registration rights agreement, we became
obligated to file a registration statement in connection with an
exchange offer within 90 days after January 30, 2006
and to use our reasonable best efforts to have the exchange
offer registration statement declared effective within
210 days after January 30, 2006. The exchange offer
being made by this prospectus, if consummated within the
required time periods, will satisfy our obligations under the
exchange and registration rights agreement. This prospectus,
together with the letter of transmittal, is being sent to all
beneficial holders of original notes known to us.
Upon the terms and subject to the conditions set forth in this
prospectus and in the accompanying letter of transmittal, we
will accept for exchange all original notes properly tendered
and not withdrawn on or prior to the expiration date. We will
issue $1,000 principal amount of new notes in exchange for each
$1,000 principal amount of outstanding original notes accepted
in the exchange offer. Holders may tender some or all of their
original notes pursuant to the exchange offer.
Based on no-action letters issued by the staff of the Securities
and Exchange Commission to third parties, we believe that
holders of the new notes issued in exchange for original notes
may offer for resale, resell and otherwise transfer the new
notes, other than any holder that is an affiliate of ours within
the meaning of Rule 405 under the Securities Act of 1933,
without compliance with the registration and prospectus delivery
provisions of the Securities Act of 1933. This is true as long
as the new notes are acquired in the ordinary course of the
holders business, the holder has no arrangement or
understanding with any person to participate in the distribution
of the new notes and neither the holder nor any other person is
engaging in or intends to engage in a distribution of the new
notes. A broker-dealer that acquired original notes directly
from us cannot exchange the original notes in the exchange
offer. Any holder who tenders in the exchange offer for the
purpose of participating in a distribution of the new notes
cannot rely on the no-action letters of the staff of the
Securities and Exchange Commission and must comply with the
registration and prospectus delivery requirements of the
Securities Act of 1933 in connection with any resale transaction.
Each broker-dealer that receives new notes for its own account
in exchange for original notes, where original notes were
acquired by such broker-dealer as a result of market-making or
other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such new notes.
See Plan of Distribution for additional information.
We shall be deemed to have accepted validly tendered original
notes when, as and if we have given oral or written notice of
the acceptance of such notes to the exchange agent. The exchange
agent will act as agent for the tendering holders of original
notes for the purposes of receiving the new notes from the
issuers and delivering new notes to such holders.
If any tendered original notes are not accepted for exchange
because of an invalid tender or the occurrence of the conditions
set forth under Conditions without
waiver by us, certificates for any such unaccepted original
notes will be returned, without expense, to the tendering holder
of any such original notes as promptly as practicable after the
expiration date.
Holders of original notes who tender in the exchange offer will
not be required to pay brokerage commissions or fees or, subject
to the instructions in the letter of transmittal, or transfer
taxes with respect
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to the exchange of original notes, pursuant to the exchange
offer. We will pay all charges and expenses, other than certain
applicable taxes in connection with the exchange offer. See
Fees and Expenses.
Shelf Registration Statement. Pursuant to the
exchange and registration rights agreement, if the exchange
offer is not completed prior to the date on which the earliest
of any of the following events occurs:
(a) existing law or applicable policy or interpretations of
the staff of the Securities and Exchange Commission do not
permit us to effect the exchange offer,
(b) any holder of notes notifies us that either:
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(1) such holder is not eligible to participate in the
exchange offer, or |
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(2) such holder participates in the exchange offer and does
not receive freely transferable new notes in exchange for
tendered original notes, or |
(c) the exchange offer is not completed within
240 days after January 30, 2006, we will, at our cost:
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file a shelf registration statement covering resales of the
original notes, |
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use our reasonable best efforts to cause the shelf registration
statement to be declared effective under the Securities Act of
1933 at the earliest possible time, but no later than
90 days after the time such obligation to file
arises, and |
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use our reasonable best efforts to keep effective the shelf
registration statement until the earlier of two years after the
date as of which the Securities and Exchange Commission declares
such shelf registration statement effective or the shelf
registration otherwise becomes effective, or the time when all
of the applicable original notes are no longer outstanding. |
If any of the events described occurs, we will refuse to accept
any original notes and will return all tendered original notes.
We will, if and when we file the shelf registration statement,
provide to each holder of the original notes copies of the
prospectus which is a part of the shelf registration statement,
notify each holder when the shelf registration statement has
become effective and take other actions as are required to
permit unrestricted resales of the original notes. A holder that
sells original notes pursuant to the shelf registration
statement generally must be named as a selling security holder
in the related prospectus and must deliver a prospectus to
purchasers, and such a seller will be subject to civil liability
provisions under the Securities Act of 1933 in connection with
these sales. A seller of the original notes also will be bound
by applicable provisions of the registration rights agreements,
including indemnification obligations. In addition, each holder
of original notes must deliver information to be used in
connection with the shelf registration statement and provide
comments on the shelf registration statement in order to have
its original notes included in the shelf registration statement
and benefit from the provisions regarding any liquidated damages
in the registration rights agreement.
Expiration Date; Extensions; Amendment. We will
keep the exchange offer open for not less than 20 business
days, or longer if required by applicable law, after the date on
which notice of the exchange offer is mailed to the holders of
the original notes. The term expiration date means
the expiration date set forth on the cover page of this
prospectus, unless we extend the exchange offer, in which case
the term expiration date means the latest date to
which the exchange offer is extended.
In order to extend the expiration date, we will notify the
exchange agent of any extension by oral or written notice and
will issue a public announcement of the extension, each prior to
5:00 p.m., New York City time, on the next business day
after the previously scheduled expiration date.
We reserve the right
(a) to delay accepting any original notes, to extend the
exchange offer or to terminate the exchange offer and not accept
original notes not previously accepted if any of the conditions
set forth under
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Conditions shall have occurred and shall
not have been waived by us, if permitted to be waived by us, by
giving oral or written notice of such delay, extension or
termination to the exchange agent, or
(b) to amend the terms of the exchange offer in any manner
deemed by us to be advantageous to the holders of the original
notes.
Any delay in acceptance, extension, termination or amendment
will be followed as promptly as practicable by oral or written
notice. If the exchange offer is amended in a manner determined
by us to constitute a material change, we promptly will disclose
such amendment in a manner reasonably calculated to inform the
holders of the original notes of such amendment. Depending upon
the significance of the amendment, we may extend the exchange
offer if it otherwise would expire during such extension period.
Without limiting the manner in which we may choose to make a
public announcement of any extension, amendment or termination
of the exchange offer, we will not be obligated to publish,
advertise, or otherwise communicate any such announcement, other
than by making a timely release to an appropriate news agency.
Procedures for Tendering
To tender in the exchange offer, a holder must complete, sign
and date the letter of transmittal, or a facsimile of the letter
of transmittal, have the signatures on the letter of transmittal
guaranteed if required by instruction 2 of the letter of
transmittal, and mail or otherwise deliver such letter of
transmittal or such facsimile or an agents message in
connection with a book entry transfer, together with the
original notes and any other required documents. To be validly
tendered, such documents must reach the exchange agent before
5:00 p.m., New York City time, on the expiration date.
Delivery of the original notes may be made by book-entry
transfer in accordance with the procedures described below.
Confirmation of such book-entry transfer must be received by the
exchange agent prior to the expiration date.
The term agents message means a message,
transmitted by a
book-entry transfer
facility to, and received by, the exchange agent, forming a part
of a confirmation of a
book-entry transfer,
which states that such book-entry transfer facility has received
an express acknowledgment from the participant in such
book-entry transfer facility tendering the original notes that
such participant has received and agrees to be bound by the
terms of the letter of transmittal and that we may enforce such
agreement against such participant.
The tender by a holder of original notes will constitute an
agreement between such holder and us in accordance with the
terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal.
Delivery of all documents must be made to the exchange agent at
its address set forth below. Holders may also request their
respective brokers, dealers, commercial banks, trust companies
or nominees to effect such tender for such holders.
The method of delivery of original notes and the letter of
transmittal and all other required documents to the exchange
agent is at the election and risk of the holders. Instead of
delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient
time should be allowed to assure timely delivery to the exchange
agent before 5:00 p.m., New York City time, on the
expiration date. No letter of transmittal or original notes
should be sent to us.
There will be no fixed record date for determining registered
holders of original notes entitled to participate in the
exchange offer.
Any beneficial holder whose original notes are registered in the
name of its broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact such
registered holder promptly and instruct such registered holder
to tender on its behalf. If such beneficial holder wishes to
tender on its own behalf, such registered holder must, prior to
completing and executing the letter of transmittal and
delivering its original notes, either make appropriate
arrangements to register ownership of
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the original notes in such holders name or obtain a
properly completed bond power from the registered holder. The
transfer of record ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal,
must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities
Dealers, Inc. or a commercial bank or trust company having an
office or correspondent in the United States referred to as an
eligible institution, unless the original notes are
tendered:
(a) by a registered holder who has not completed the box
entitled Special Issuance Instructions or
Special Delivery Instructions on the letter of
transmittal or
(b) for the account of an eligible institution. In the
event that signatures on a letter of transmittal or a notice of
withdrawal, are required to be guaranteed, such guarantee must
be by an eligible institution.
If the letter of transmittal is signed by a person other than
the registered holder of any original notes listed therein, such
original notes must be endorsed or accompanied by appropriate
bond powers and a proxy which authorizes such person to tender
the original notes on behalf of the registered holder, in each
case signed as the name or names of the registered holder or
holders appear on the original notes.
If the letter of transmittal or any original notes or bond
powers are signed by trustees, executors, administrators,
guardians,
attorneys-in-fact,
officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when
signing, and unless waived by us, evidence satisfactory to us of
their authority so to act must be submitted with the letter of
transmittal.
All questions as to the validity, form, eligibility, including
time of receipt, and withdrawal of the tendered original notes
will be determined by us in our sole discretion, which
determination will be final and binding. We reserve the absolute
right to reject any and all original notes not properly tendered
or any original notes our acceptance of which, in the opinion of
counsel for us, would be unlawful. We also reserve the right to
waive any irregularities or conditions of tender as to
particular original notes. Our interpretation of the terms and
conditions of the exchange offer, including the instructions in
the letter of transmittal, will be final and binding on all
parties. Unless waived, any defects or irregularities in
connection with tenders of original notes must be cured within
such time as we shall determine. None of us, the exchange agent
or any other person shall be under any duty to give notification
of defects or irregularities with respect to tenders of original
notes, nor shall any of them incur any liability for failure to
give such notification. Tenders of original notes will not be
deemed to have been made until such irregularities have been
cured or waived. Any original notes received by the exchange
agent that are not properly tendered and as to which the defects
or irregularities have not been cured or waived will be returned
without cost to such holder by the exchange agent to the
tendering holders of original notes, unless otherwise provided
in the letter of transmittal, as soon as practicable following
the expiration date.
In addition, we reserve the right in our sole discretion to
(a) purchase or make offers for any original notes that
remain outstanding subsequent to the expiration date or, as set
forth under Conditions, to terminate the
exchange offer in accordance with the terms of the registration
rights agreement and
(b) to the extent permitted by applicable law, purchase
original notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or
offers may differ from the terms of the exchange offer.
By tendering, each holder will represent to us that, among other
things,
(a) the new notes acquired pursuant to the exchange offer
are being obtained in the ordinary course of business of such
holder or other person,
(b) neither such holder nor such other person is engaged in
or intends to engage in a distribution of the new notes,
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(c) neither such holder or other person has any arrangement
or understanding with any person to participate in the
distribution of such new notes, and
(d) such holder or other person is not our
affiliate, as defined under Rule 405 of the
Securities Act of 1933, or, if such holder or other person is
such an affiliate, will comply with the registration and
prospectus delivery requirements of the Securities Act of 1933
to the extent applicable.
We understand that the exchange agent will make a request
promptly after the date of this prospectus to establish accounts
with respect to the original notes at The Depository Trust
Company for the purpose of facilitating the exchange offer, and
subject to the establishment of such accounts, any financial
institution that is a participant in The Depository Trust
Companys system may make book-entry delivery of original
notes by causing The Depository Trust Company to transfer such
original notes into the exchange agents account with
respect to the original notes in accordance with The Depository
Trust Companys procedures for such transfer. Although
delivery of the original notes may be effected through
book-entry transfer into the exchange agents account at
The Depository Trust Company, an appropriate letter of
transmittal properly completed and duly executed with any
required signature guarantee, or an agents message in lieu
of the letter of transmittal, and all other required documents
must in each case be transmitted to and received or confirmed by
the exchange agent at its address set forth below on or prior to
the expiration date, or, if the guaranteed delivery procedures
described below are complied with, within the time period
provided under such procedures. Delivery of documents to The
Depository Trust Company does not constitute delivery to the
exchange agent.
Guaranteed Delivery Procedures
Holders who wish to tender their original notes and
(a) whose original notes are not immediately
available or
(b) who cannot deliver their original notes, the letter of
transmittal or any other required documents to the exchange
agent prior to the expiration date, may effect a tender if:
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(1) The tender is made through an eligible institution; |
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(2) prior to the expiration date, the exchange agent
receives from such eligible institution a properly completed and
duly executed Notice of Guaranteed Delivery, by facsimile
transmission, mail or hand delivery, setting forth the name and
address of the holder of the original notes, the certificate
number or numbers of such original notes and the principal
amount of original notes tendered, stating that the tender is
being made thereby, and guaranteeing that, within three business
days after the expiration date, the letter of transmittal, or
facsimile thereof or agents message in lieu of the letter
of transmittal, together with the certificate(s) representing
the original notes to be tendered in proper form for transfer
and any other documents required by the letter of transmittal
will be deposited by the eligible institution with the exchange
agent; and |
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(3) such properly completed and executed letter of
transmittal (or facsimile thereof) together with the
certificate(s) representing all tendered original notes in
proper form for transfer and all other documents required by the
letter of transmittal are received by the exchange agent within
three business days after the expiration date. |
Withdrawal of Tenders
Except as otherwise provided in this prospectus, tenders of
original notes may be withdrawn at any time prior to
5:00 p.m., New York City time, on the expiration date.
However, where the expiration date has been extended, tenders of
original notes previously accepted for exchange as of the
original expiration date may not be withdrawn.
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To withdraw a tender of original notes in the exchange offer, a
written or facsimile transmission notice of withdrawal must be
received by the exchange agent as its address set forth in this
prospectus prior to 5:00 p.m., New York City time, on the
expiration date. Any such notice of withdrawal must:
(a) specify the name of the depositor, who is the person
having deposited the original notes to be withdrawn,
(b) identify the original notes to be withdrawn, including
the certificate number or numbers and principal amount of such
original notes or, in the case of original notes transferred by
book-entry transfer, the name and number of the account at The
Depository Trust Company to be credited,
(c) be signed by the depositor in the same manner as the
original signature on the letter of transmittal by which such
original notes were tendered, including any required signature
guarantees, or be accompanied by documents of transfer
sufficient to have the trustee with respect to the original
notes register the transfer of such original notes into the name
of the depositor withdrawing the tender, and
(d) Specify the name in which any such original notes are
to be registered, if different from that of the depositor. All
questions as to the validity, form and eligibility, including
time of receipt, of such withdrawal notices will be determined
by us, and our determination shall be final and binding on all
parties. Any original notes so withdrawn will be deemed not to
have been validly tendered for purposes of the exchange offer
and no new notes will be issued with respect to the original
notes withdrawn unless the original notes so withdrawn are
validly retendered. Any original notes which have been tendered
but which are not accepted for exchange will be returned to its
holder without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the exchange
offer. Properly withdrawn original notes may be retendered by
following one of the procedures described above under
Procedures for Tendering at any time
prior to the expiration date.
Conditions
Notwithstanding any other term of the exchange offer, we will
not be required to accept for exchange, or exchange, any new
notes for any original notes, and may terminate or amend the
exchange offer before the expiration date, if the exchange offer
violates any applicable law or interpretation by the staff of
the Securities and Exchange Commission.
If we determine in our reasonable discretion that the foregoing
condition exists, we may
(1) refuse to accept any original notes and return all
tendered original notes to the tendering holders,
(2) extend the exchange offer and retain all original notes
tendered prior to the expiration of the exchange offer, subject,
however, to the rights of holders who tendered such original
notes to withdraw their tendered original notes, or
(3) waive such condition, if permissible, with respect to
the exchange offer and accept all properly tendered original
notes which have not been withdrawn. If such waiver constitutes
a material change to the exchange offer, we will promptly
disclose such waiver by means of a prospectus supplement that
will be distributed to the holders, and we will extend the
exchange offer as required by applicable law.
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Exchange Agent
Wells Fargo Bank, N.A. has been appointed as exchange agent for
the exchange offer. Questions and requests for assistance and
requests for additional copies of this prospectus or of the
letter of transmittal should be directed to Wells Fargo
addressed as follows:
For Information by Telephone:
800-344-5128
Wells Fargo Bank, N.A.
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By Regular Mail or Overnight Courier:
Wells Fargo Bank, N.A.
MAC #N9303-121
Corporate Trust Operations
6th and Marquette Avenue
Minneapolis, MN 55479 |
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By Hand:
Wells Fargo Bank, N.A.
608 Second Avenue South
Corporate Operations, 12th floor
Minneapolis, MN 55402 |
By Registered/ Certified Mail:
Wells Fargo Bank, N.A.
MAC #N9303-121
Corporate Trust Operations
P.O. Box 1517
Minneapolis, MN 55480-1517
By Facsimile Transmission:
612-667-6282
(Telephone Confirmation)
800-344-5128
Fees and Expenses
We have agreed to bear the expenses of the exchange offer
pursuant to the exchange and registration rights agreement. We
have not retained any dealer-manager in connection with the
exchange offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the exchange offer.
We, however, will pay the exchange agent reasonable and
customary fees for its services and will reimburse it for its
reasonable
out-of-pocket expenses
in connection with providing the services.
The cash expenses to be incurred in connection with the exchange
offer will be paid by us. Such expenses include fees and
expenses of Wells Fargo Bank, N.A. as exchange agent, accounting
and legal fees and printing costs, among others.
Accounting Treatment
The new notes will be recorded at the same carrying value as the
original notes as reflected in our accounting records on the
date of exchange. Accordingly, no gain or loss for accounting
purposes will be recognized by us. The expenses of the exchange
offer and the unamortized expenses related to the issuance of
the original notes will be amortized over the term of the notes.
Consequences of Failure to Exchange
Holders of original notes who are eligible to participate in the
exchange offer but who do not tender their original notes will
not have any further registration rights, and their original
notes will continue to be subject to restrictions on transfer.
Accordingly, such original notes may be resold only
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to us, upon redemption of these notes or otherwise, |
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so long as the original notes are eligible for resale pursuant
to Rule 144A under the Securities Act of 1933, to a person
inside the United States whom the seller reasonably believes is
a qualified |
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institutional buyer within the meaning of Rule 144A in a
transaction meeting the requirements of Rule 144A, |
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in accordance with Rule 144 under the Securities Act of
1933, or under another exemption from the registration
requirements of the Securities Act of 1933, and based upon an
opinion of counsel reasonably acceptable to us, |
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outside the United States to a foreign person in a transaction
meeting the requirements of Rule 904 under the Securities
Act of 1933, or |
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under an effective registration statement under the Securities
Act of 1933, |
in each case in accordance with any applicable securities laws
of any state of the United States.
Regulatory Approvals
We do not believe that the receipt of any material federal or
state regulatory approval will be necessary in connection with
the exchange offer, other than the effectiveness of the exchange
offer registration statement under the Securities Act of 1933.
Other
Participation in the exchange offer is voluntary and holders of
original notes should carefully consider whether to accept the
terms and condition of this exchange offer. Holders of the
original notes are urged to consult their financial and tax
advisors in making their own decision on what action to take
with respect to the exchange offer.
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DESCRIPTION OF NOTES
We refer to CCH II, LLC and CCH II Capital Corp.,
which are the co-obligors with respect to the Notes, as the
Issuers, and we sometimes refer to them each as an
Issuer. We may also refer to CCH II, LLC as
CCH II. You can find the definitions of certain
terms used in this description under Certain
definitions. The definitions of terms set forth in this
section Description of Notes shall apply in this
section.
The Notes will be issued on terms substantially identical to
those of the original notes and vote together as a single class
on any matter submitted to Noteholders, except that (i) the
Notes and the $1.6 billion of 10.250% notes issued on
September 23, 2003 pursuant to the Indenture, dated as of
September 23, 2003, among the Issuers and Wells Fargo Bank
National Association, as trustee, as supplemented by a
supplemental indenture, dated as of January 30, 2006 (as
supplemented the Indenture) will have a
separate CUSIP number from the original notes and thus will not
trade fungibly with the original notes. The Notes have been
registered under the Securities Act of 1933 and, therefore, will
not bear legends restricting their transfer. You will not be
entitled to any exchange or registration rights with respect to
the Notes and the Notes will not provide for additional interest
in connection with registration defaults. For purposes of this
description, except where the context otherwise requires, the
term Notes shall refer collectively to the original
notes, the Notes offered hereby and the other notes issued
pursuant to the indenture.
The Notes will be issued pursuant to the Indenture. The terms of
the Notes include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of
1939.
The following description is a summary of the provisions we
consider material of the Indenture. It does not restate the
Indenture in its entirety. We urge you to read the Indenture
because it, and not this description, defines your rights as
holders of the respective Notes. Copies of the Indenture are
available as set forth under Additional
information.
Brief Description of the Notes
The Notes are:
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general unsecured obligations of the Issuers; |
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effectively subordinated in right of payment to any future
secured Indebtedness of the Issuers, to the extent of the value
of the assets securing such Indebtedness; |
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equal in right of payment to any future unsubordinated,
unsecured Indebtedness of the Issuers; |
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structured to be effectively senior to the outstanding senior
notes and senior discount notes of CCH I, CIH and Charter
Holdings and the outstanding convertible senior notes of Charter
Communications, Inc.; |
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senior in right of payment to any future subordinated
Indebtedness of the Issuers; and |
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structurally subordinated to all indebtedness and other
liabilities (including trade payables) of the Issuers
subsidiaries, including indebtedness under our
subsidiaries credit facilities and the senior notes of CCO
Holdings. |
At March 31, 2006, the outstanding Indebtedness and other
liabilities of CCH II and its subsidiaries totaled
approximately $12.2 billion, approximately
$10.2 billion of which would have been Indebtedness of its
Subsidiaries and, therefore, structurally senior to the Notes.
Substantially all of the Subsidiaries of CCH II (except
certain non-material subsidiaries) are Restricted
Subsidiaries. Under the circumstances described below
under Certain covenants
Investments, CCH II will be permitted to designate
additional Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will generally not
be subject to the restrictive covenants in the Indenture.
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Principal, Maturity and Interest
The Notes will be issued in denominations of $1,000 and integral
multiples of $1,000. The Notes will mature on September 15,
2010.
Interest on the Notes accrues at the rate of 10.250% per
annum. Interest on the new notes accrues from March 15,
2006 or, if interest already has been paid, from the date it was
most recently paid. Interest on the new notes will be payable
semi-annually in arrears on March 15 and September 15,
commencing on September 15, 2006. The Issuers will make
each interest payment to the holders of record of the Notes on
the immediately preceding March 1 and September 1. Interest
is computed on the basis of a
360-day year comprised
of twelve 30-day months.
There are currently outstanding Notes in the aggregate principal
amount of $2.05 billion. Subject to the limitations set
forth under Certain covenants Incurrence
of indebtedness and issuance of preferred stock, the
Issuers may issue an unlimited principal amount of Additional
Notes under the Indenture. The Notes and any Additional Notes
subsequently issued under the Indenture, would be treated as a
single class of securities for all purposes of the Indenture.
For purposes of this description, unless otherwise indicated,
references to the Notes include any Additional Notes
subsequently issued under the Indenture.
Optional Redemption
At any time prior to September 15, 2006, the Issuers may,
on any one or more occasions, redeem up to 35% of the aggregate
principal amount of the Notes on a pro rata basis (or as nearly
to pro rata as practicable), at a redemption price of 110.25% of
the principal amount thereof, plus accrued and unpaid interest
to the redemption date, with the net cash proceeds of one or
more Equity Offerings; provided that
(1) at least 65% of the aggregate principal amount of the
Notes remain outstanding immediately after the occurrence of
such redemption (excluding Notes held by the Issuers and their
Subsidiaries), and
(2) the redemption must occur within 60 days of the
date of the closing of such Equity Offering.
Except pursuant to the preceding paragraph, the Notes are not
redeemable at the option of the Issuers prior to
September 15, 2008.
On or after September 15, 2008, the Issuers may redeem all
or a part of the Notes upon not less than 30 nor more than
60 days notice, at the redemption prices (expressed as
percentages of principal amount of the Notes) set forth below
plus accrued and unpaid interest thereon, if any, to the
applicable redemption date, if redeemed during the twelve-month
period beginning on September 15 of the years indicated below:
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2008
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105.125% |
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2009 and thereafter
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100.000% |
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Repurchase at the Option of Holders
If a Change of Control occurs, each holder of Notes will have
the right to require the Issuers to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of that
holders Notes pursuant to a Change of Control
Offer. In the Change of Control Offer, the Issuers will
offer a Change of Control Payment in cash equal to
101% of the aggregate principal amount of the Notes repurchased
plus accrued and unpaid interest thereon, if any, to the date of
purchase.
Within ten days following any Change of Control, the Issuers
will mail a notice to each holder (with a copy to the trustee)
describing the transaction or transactions that constitute the
Change of Control and offering to repurchase Notes on a certain
date (the Change of Control Payment Date) specified
in such
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notice, pursuant to the procedures required by the Indenture and
described in such notice. The Issuers will comply with the
requirements of
Rule 14e-1 under
the Securities Exchange Act of 1934 or any successor rules, and
any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection
with the repurchase of the Notes as a result of a Change of
Control. To the extent that the provisions of any securities
laws or regulations conflict with the provisions of this
covenant, the Issuers compliance with such laws and
regulations shall not in and of itself cause a breach of their
obligations under such covenant.
On the Change of Control Payment Date, the Issuers will, to the
extent lawful:
(1) accept for payment all Notes or portions thereof
properly tendered pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the
Change of Control Payment in respect of all Notes or portions
thereof so tendered; and
(3) deliver or cause to be delivered to the trustee the
Notes so accepted together with an officers certificate
stating the aggregate principal amount of Notes or portions
thereof being purchased by the Issuers.
The paying agent will promptly mail to each holder of Notes so
tendered the Change of Control Payment for such Notes, and the
trustee will promptly authenticate and mail, or cause to be
transferred by book entry, to each holder a new Note equal in
principal amount to any unpurchased portion of the Notes
surrendered, if any; provided that each such new Note
will be in a principal amount of $1,000 or an integral multiple
thereof.
The provisions described above that require the Issuers to make
a Change of Control Offer following a Change of Control will be
applicable regardless of whether or not any other provisions of
the Indenture are applicable. Except as described above with
respect to a Change of Control, the Indenture does not contain
provisions that permit the holders of the Notes to require that
the Issuers repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction.
The Issuers will not be required to make a Change of Control
Offer upon a Change of Control if a third party makes the Change
of Control Offer in the manner, at the times and otherwise in
compliance with the requirements set forth in the Indenture
applicable to a Change of Control Offer made by the Issuers and
purchases all Notes validly tendered and not withdrawn under
such Change of Control Offer.
The definition of Change of Control includes a phrase relating
to the sale, lease, transfer, conveyance or other disposition of
all or substantially all of the assets of
CCH II and its Subsidiaries, taken as a whole, or of a
Parent and its Subsidiaries, taken as a whole. Although there is
a limited body of case law interpreting the phrase
substantially all, there is no precise established
definition of the phrase under applicable law. Accordingly, the
ability of a holder of Notes to require the Issuers to
repurchase Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets
of CCH II and its Subsidiaries, taken as a whole, or of a
Parent and its Subsidiaries, taken as a whole, to another Person
or group may be uncertain.
CCH II will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless:
(1) CCH II or such Restricted Subsidiary receives
consideration at the time of such Asset Sale at least equal to
the fair market value of the assets or Equity Interests issued
or sold or otherwise disposed of;
(2) such fair market value is determined by the Board of
Directors of CCH II and evidenced by a resolution of such
Board of Directors set forth in an officers certificate
delivered to the trustee; and
(3) at least 75% of the consideration therefor received by
CCH II or such Restricted Subsidiary is in the form of
cash, Cash Equivalents or readily marketable securities.
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For purposes of this provision, each of the following shall be
deemed to be cash:
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(a) any liabilities (as shown on CCH IIs or such
Restricted Subsidiarys most recent balance sheet) of
CCH II or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated
to the Notes) that are assumed by the transferee of any such
assets pursuant to a customary novation agreement that releases
CCH II or such Restricted Subsidiary from further liability; |
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(b) any securities, Notes or other obligations received by
CCH II or any such Restricted Subsidiary from such
transferee that are converted by the recipient thereof into
cash, Cash Equivalents or readily marketable securities within
60 days after receipt thereof (to the extent of the cash,
Cash Equivalents or readily marketable securities received in
that conversion); and |
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(c) Productive Assets. |
Within 365 days after the receipt of any Net Proceeds from
an Asset Sale, CCH II or a Restricted Subsidiary of
CCH II may apply such Net Proceeds at its option:
(1) to repay debt under the Credit Facilities or any other
Indebtedness of the Restricted Subsidiaries of CCH II
(other than Indebtedness represented by a guarantee of a
Restricted Subsidiary of CCH II); or
(2) to invest in Productive Assets; provided that any such
amount of Net Proceeds which CCH II or a Restricted
Subsidiary has committed to invest in Productive Assets within
365 days of the applicable Asset Sale may be invested in
Productive Assets within two years of such Asset Sale.
The amount of any Net Proceeds received from Asset Sales that
are not applied or invested as provided in the preceding
paragraph will constitute Excess Proceeds. When the aggregate
amount of Excess Proceeds exceeds $25 million, CCH II
will make an Asset Sale Offer to all holders of Notes and all
holders of other Indebtedness that is of equal priority with the
Notes containing provisions requiring offers to purchase or
redeem with the proceeds of sales of assets to purchase the
maximum principal amount of Notes and such other Indebtedness of
equal priority that may be purchased out of the Excess Proceeds,
which amount includes the entire amount of the Net Proceeds. The
offer price in any Asset Sale Offer will be payable in cash and
equal to 100% of the principal amount of the subject Notes plus
accrued and unpaid interest, if any, to the date of purchase. If
the aggregate principal amount of Notes and such other
Indebtedness of equal priority tendered into such Asset Sale
Offer exceeds the amount of Excess Proceeds, the trustee shall
select the Notes and such other Indebtedness of equal priority
to be purchased on a pro rata basis.
If any Excess Proceeds remain after consummation of an Asset
Sale Offer, then CCH II or any Restricted Subsidiary
thereof may use such remaining Excess Proceeds for any purpose
not otherwise prohibited by the Indenture. Upon completion of
any Asset Sale Offer, the amount of Excess Proceeds shall be
reset at zero.
Selection and Notice
If less than all of the Notes are to be redeemed at any time,
the trustee will select Notes for redemption as follows:
(1) if any Notes are listed, in compliance with the
requirements of the principal national securities exchange on
which the Notes are listed; or
(2) if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the trustee shall deem fair and
appropriate.
No Notes of $1,000 principal amount or less shall be redeemed in
part. Notices of redemption shall be mailed by first class mail
at least 30 but not more than 60 days before the redemption
date to each holder of Notes to be redeemed at its registered
address. Notices of redemption may not be conditional.
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If any Note is to be redeemed in part only, the notice of
redemption that relates to that Note shall state the portion of
the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion of the original
Note will be issued in the name of the holder thereof upon
cancellation of the original Note. Notes called for redemption
become irrevocably due and payable on the date fixed for
redemption at the redemption price. On and after the redemption
date, interest ceases to accrue on the Notes or portions of them
called for redemption.
Certain Covenants
Set forth in this section are summaries of certain covenants
contained in the Indenture.
During any period of time that (a) any Notes have
Investment Grade Ratings from both Rating Agencies and
(b) no Default or Event of Default has occurred and is
continuing under the Indenture, CCH II and the Restricted
Subsidiaries of CCH II will not be subject to the provisions of
the Indenture described under:
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Repurchase at the option of
holders Asset sales, |
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Restricted payments, |
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Investments, |
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Incurrence of indebtedness and issuance of
preferred stock, |
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Dividend and other payment restrictions
affecting subsidiaries, |
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clause (D) of the first paragraph of
Merger, consolidation, or sale of assets, |
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Transactions with affiliates and |
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Sale and leaseback transactions. |
If CCH II and its Restricted Subsidiaries are not subject
to these covenants for any period of time as a result of the
previous sentence and, subsequently, one, or both, of the Rating
Agencies withdraws its ratings or downgrades the ratings
assigned to the applicable Notes below the required Investment
Grade Ratings or a Default or Event of Default occurs and is
continuing, then CCH II and its Restricted Subsidiaries
will thereafter again be subject to these covenants. The ability
of CCH II and its Restricted Subsidiaries to make
Restricted Payments after the time of such withdrawal,
downgrade, Default or Event of Default will be calculated as if
the covenant governing Restricted Payments had been in effect
during the entire period of time from the Issue Date.
CCH II will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) declare or pay any dividend or make any other payment
or distribution on account of its or any of its Restricted
Subsidiaries Equity Interests (including, without
limitation, any payment in connection with any merger or
consolidation involving CCH II or any of its Restricted
Subsidiaries) or to the direct or indirect holders of
CCH IIs or any of its Restricted Subsidiaries
Equity Interests in their capacity as such (other than dividends
or distributions payable (x) solely in Equity Interests
(other than Disqualified Stock) of CCH II or (y), in the
case of CCH II and its Restricted Subsidiaries, to
CCH II or a Restricted Subsidiary thereof);
(2) purchase, redeem or otherwise acquire or retire for
value (including, without limitation, in connection with any
merger or consolidation involving CCH II or any of its
Restricted Subsidiaries) any Equity Interests of CCH II or
any direct or indirect Parent of CCH II or any Restricted
Subsidiary of CCH II (other than, in the case of
CCH II and its Restricted Subsidiaries, any such Equity
Interests owned by CCH II or any of its Restricted
Subsidiaries); or
163
(3) make any payment on or with respect to, or purchase,
redeem, defease or otherwise acquire or retire for value, any
Indebtedness of CCH II that is subordinated to the Notes,
except a payment of interest or principal at the Stated Maturity
thereof (all such payments and other actions set forth in
clauses (1) through (3) above are collectively
referred to as Restricted Payments), unless, at the
time of and after giving effect to such Restricted Payment:
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(1) no Default or Event of Default under the Indenture
shall have occurred and be continuing or would occur as a
consequence thereof; and |
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(2) CCH II would, at the time of such Restricted
Payment and after giving pro forma effect thereto as if such
Restricted Payment had been made at the beginning of the
applicable quarter period, have been permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Leverage Ratio
test set forth in the first paragraph of the covenant described
below under the caption Incurrence of
indebtedness and issuance of preferred stock; and |
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(3) such Restricted Payment, together with the aggregate
amount of all other Restricted Payments made by CCH II and
its Restricted Subsidiaries from and after the Issue Date
(excluding Restricted Payments permitted by clauses (2),
(3), (4), (5), (6), (7), (8) and (10) of the next succeeding
paragraph), shall not exceed, at the date of determination, the
sum of: |
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(a) an amount equal to 100% of the Consolidated EBITDA of
CCH II for the period beginning on the first day of the
fiscal quarter commencing July 1, 2003 to the end of
CCH IIs most recently ended full fiscal quarter for
which internal financial statements are available, taken as a
single accounting period, less the product of 1.3 times the
Consolidated Interest Expense of CCH II for such period,
plus |
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(b) an amount equal to 100% of Capital Stock Sale Proceeds
less any amount of such Capital Stock Sale Proceeds used in
connection with an Investment made on or after the Issue Date
pursuant to clause (5) of the definition of Permitted
Investments, plus |
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(c) $100 million. |
So long as no Default under the Indenture has occurred and is
continuing or would be caused thereby, the preceding provisions
will not prohibit:
(1) the payment of any dividend within 60 days after
the date of declaration thereof, if at said date of declaration
such payment would have complied with the provisions of the
Indenture;
(2) the redemption, repurchase, retirement, defeasance or
other acquisition of any subordinated Indebtedness of
CCH II in exchange for, or out of the net proceeds of, the
substantially concurrent sale (other than to a Subsidiary of
CCH II) of Equity Interests of CCH II (other than
Disqualified Stock); provided that the amount of any such
net cash proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be
excluded from clause (3)(b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other
acquisition of subordinated Indebtedness of CCH II or any
of its Restricted Subsidiaries with the net cash proceeds from
an incurrence of Permitted Refinancing Indebtedness;
(4) regardless of whether a Default then exists, the
payment of any dividend or distribution to the extent necessary
to permit direct or indirect beneficial owners of shares of
Capital Stock of CCH II to pay federal, state or local
income tax liabilities that would arise solely from income of
CCH II or any of its Restricted Subsidiaries, as the case
may be, for the relevant taxable period and attributable to them
solely as a result of CCH II (and any intermediate entity
through which the holder owns such shares) or any of its
Restricted Subsidiaries being a limited liability company,
partnership or similar entity for federal income tax purposes;
(5) regardless of whether a Default then exists, the
payment of any dividend by a Restricted Subsidiary of
CCH II to the holders of its common Equity Interests on a
pro rata basis;
164
(6) the payment of any dividend on the Helicon Preferred
Stock or the redemption, repurchase, retirement or other
acquisition of the Helicon Preferred Stock in an amount not in
excess of its aggregate liquidation value;
(7) the repurchase, redemption or other acquisition or
retirement for value, or the payment of any dividend or
distribution to the extent necessary to permit the repurchase,
redemption or other acquisition or retirement for value, of any
Equity Interests of CCH II or Parent of CCH II held by
any member of CCH IIs or such Parents
management pursuant to any management equity subscription
agreement or stock option agreement entered into in accordance
with the policies of CCH II or any Parent; provided that
the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed
$10 million in any fiscal year of the Issuers;
(8) payment of fees in connection with any acquisition,
merger or similar transaction in an amount that does not exceed
an amount equal to 1.25% of the transaction value of such
acquisition, merger or similar transaction;
(9) additional dividends and distributions directly or
indirectly to CCH II or any Parent (i) regardless of
whether a Default exists (other than a Default described in
paragraphs (1), (2), (7) or (8) under the caption
Events of default and remedies), for the purpose of
enabling Charter Holdings, and/or any Charter Refinancing
Subsidiary to pay interest when due on Indebtedness under the
Charter Holdings Indentures, and/or any Charter Refinancing
Indebtedness, (ii) for the purpose of enabling
CCI and/or any Charter Refinancing Subsidiary to pay
interest when due on Indebtedness under the CCI Indentures
and/or any Charter Refinancing Indebtedness and (iii) so
long as CCH II would have been permitted, at the time of
such Restricted Payment and after giving pro forma effect
thereto as if such Restricted Payment had been made at the
beginning of the applicable quarter period, to incur at least
$1.00 of additional Indebtedness pursuant to the Leverage Ratio
test set forth in the first paragraph of the covenant described
below under the caption Incurrence of
indebtedness and issuance of preferred stock, to the
extent required to enable Charter Holdings, CCI or any Charter
Refinancing Subsidiary to defease, redeem, repurchase, prepay,
repay, discharge or otherwise acquire or retire for value
Indebtedness under the Charter Holdings Indentures, the CCI
Indentures or any Charter Refinancing Indebtedness; and
(10) dividends or distributions to any Parent to consummate
the Private Exchanges.
The amount of all Restricted Payments (other than cash) shall be
the fair market value on the date of the Restricted Payment of
the asset(s) or securities proposed to be transferred or issued
by CCH II or any of its Restricted Subsidiaries pursuant to
the Restricted Payment. The fair market value of any assets or
securities that are required to be valued by this covenant shall
be determined by the Board of Directors of CCH II, whose
resolution with respect thereto shall be delivered to the
trustee. Such Board of Directors determination must be
based upon an opinion or appraisal issued by an accounting,
appraisal or investment banking firm of national standing if the
fair market value exceeds $100 million.
Not later than the date of making any Restricted Payment
involving an amount or fair market value in excess of
$10 million, the Issuers shall deliver to the trustee an
officers certificate stating that such Restricted Payment
is permitted and setting forth the basis upon which the
calculations required by this Restricted Payments
covenant were computed, together with a copy of any fairness
opinion or appraisal required by the Indenture.
Investments
CCH II will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(1) make any Restricted Investment; or
(2) allow any of its Restricted Subsidiaries to become an
Unrestricted Subsidiary, unless, in each case:
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(a) no Default or Event of Default under the Indenture
shall have occurred and be continuing or would occur as a
consequence thereof; and |
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(b) CCH II would, at the time of, and after giving
effect to, such Restricted Investment or such designation of a
Restricted Subsidiary as an Unrestricted Subsidiary, have been
permitted to incur at least $1.00 of additional Indebtedness
pursuant to the applicable Leverage Ratio test set forth in the
first paragraph of the covenant described below under the
caption Incurrence of indebtedness and
issuance of preferred stock. |
An Unrestricted Subsidiary may be redesignated as a Restricted
Subsidiary if such redesignation would not cause a Default.
Incurrence of Indebtedness and Issuance of Preferred
Stock
CCH II will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly
liable, contingently or otherwise, with respect to
(collectively, incur) any Indebtedness (including
Acquired Debt) and CCH II will not issue any Disqualified
Stock and will not permit any of its Restricted Subsidiaries to
issue any shares of Disqualified Stock or Preferred Stock,
provided that CCH II or any of its Restricted
Subsidiaries may incur Indebtedness, CCH II may issue
Disqualified Stock and subject to the final paragraph of this
covenant below, Restricted Subsidiaries of CCH II may incur
Preferred Stock if the Leverage Ratio of CCH II and its
Restricted Subsidiaries would have been not greater than 5.5 to
1.0 determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock or
Preferred Stock had been issued, as the case may be, at the
beginning of the most recently ended fiscal quarter.
So long as no Default under the Indenture shall have occurred
and be continuing or would be caused thereby, the first
paragraph of this covenant will not prohibit the incurrence of
any of the following items of Indebtedness (collectively,
Permitted Debt):
(1) the incurrence by CCH II and its Restricted
Subsidiaries of Indebtedness under the Credit Facilities;
provided that the aggregate principal amount of all
Indebtedness of CCH II and its Restricted Subsidiaries
outstanding under this clause (1) for all Credit Facilities
of CCH II and its Restricted Subsidiaries after giving
effect to such incurrence does not exceed an amount equal to
$9.75 billion less the aggregate amount of all Net Proceeds
from Asset Sales applied by CCH II or any of its Restricted
Subsidiaries to repay Indebtedness under a Credit Facility
pursuant to the covenant described under
Repurchase at the option of
holders Asset sales;
(2) the incurrence by CCH II and its Restricted
Subsidiaries of Existing Indebtedness (other than under the
Credit Facilities);
(3) the incurrence on the Issue Date by CCH II and its
Restricted Subsidiaries of Indebtedness represented by the Notes
(other than any Additional Notes);
(4) the incurrence by CCH II or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease
Obligations, mortgage financings or purchase money obligations,
in each case, incurred for the purpose of financing all or any
part of the purchase price or cost of construction or
improvement (including, without limitation, the cost of design,
development, construction, acquisition, transportation,
installation, improvement, and migration) of Productive Assets
of CCH II or any of its Restricted Subsidiaries in an
aggregate principal amount not to exceed $75 million at any
time outstanding pursuant to this clause (4);
(5) the incurrence by CCH II or any of its Restricted
Subsidiaries of Permitted Refinancing Indebtedness in exchange
for, or the net proceeds of which are used to refund, refinance
or replace, in whole or in part, Indebtedness (other than
intercompany Indebtedness) that was permitted by the Indenture
to be incurred under this clause (5), the first paragraph
of this covenant or clauses (2) or (3) of this paragraph;
166
(6) the incurrence by CCH II or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among
CCH II and any of its Restricted Subsidiaries; provided
that:
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(a) if CCH II is the obligor on such Indebtedness,
such Indebtedness must be expressly subordinated to the prior
payment in full in cash of all obligations with respect to the
Notes; and |
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(b) (i) any subsequent issuance or transfer of Equity
Interests that results in any such Indebtedness being held by a
Person other than CCH II or a Restricted Subsidiary of
CCH II and (ii) any sale or other transfer of any such
Indebtedness to a Person that is not either CCH II or a
Restricted Subsidiary of CCH II, shall be deemed, in each
case, to constitute an incurrence of such Indebtedness that was
not permitted by this clause (6); |
(7) the incurrence by CCH II or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the
purpose of fixing or hedging interest rate risk with respect to
any floating rate Indebtedness that is permitted by the terms of
the Indenture to be outstanding;
(8) the guarantee by CCH II or any of its Restricted
Subsidiaries of Indebtedness of a Restricted Subsidiary that was
permitted to be incurred by another provision of this covenant;
(9) the incurrence by CCH II or any of its Restricted
Subsidiaries of additional Indebtedness in an aggregate
principal amount at any time outstanding under this
clause (9), not to exceed $300 million; and
(10) the accretion or amortization of original issue
discount and the write up of Indebtedness in accordance with
purchase accounting.
For purposes of determining compliance with this
Incurrence of Indebtedness and Issuance of Preferred
Stock covenant, any Indebtedness under Credit Facilities
outstanding on the Issue Date shall be deemed to have been
incurred pursuant to clause (1) above and, in the event
that an item of proposed Indebtedness (other than any
Indebtedness initially deemed on the Issue Date to be incurred
under clause (1) above) (a) meets the criteria of more
than one of the categories of Permitted Debt described in
clauses (1) through (10) above or (b) is entitled
to be incurred pursuant to the first paragraph of this covenant,
CCH II will be permitted to classify and from time to time
to reclassify such item of Indebtedness in any manner that
complies with this covenant. Once any item of Indebtedness is so
reclassified, it will no longer be deemed outstanding under the
category of Permitted Debt, where initially incurred or
previously reclassified. For avoidance of doubt, Indebtedness
incurred pursuant to a single agreement, instrument, program,
facility or line of credit may be classified as Indebtedness
arising in part under one of the clauses listed above or under
the first paragraph of this covenant, and in part under any one
or more of the clauses listed above, to the extent that such
Indebtedness satisfies the criteria for such classification.
Notwithstanding the foregoing, in no event shall any Restricted
Subsidiary of CCH II consummate a Subordinated Debt
Financing or a Preferred Stock Financing. A Subordinated
Debt Financing or a Preferred Stock Financing,
as the case may be, with respect to any Restricted Subsidiary of
CCH II shall mean a public offering or private placement
(whether pursuant to Rule 144A under the Securities Act or
otherwise) of Subordinated Notes or Preferred Stock (whether or
not such Preferred Stock constitutes Disqualified Stock), as the
case may be, of such Restricted Subsidiary to one or more
purchasers (other than to one or more Affiliates of
CCH II). Subordinated Notes with respect to any
Restricted Subsidiary of CCH II shall mean Indebtedness of
such Restricted Subsidiary that is contractually subordinated in
right of payment to any other Indebtedness of such Restricted
Subsidiary (including, without limitation, Indebtedness under
the Credit Facilities). The foregoing limitation shall not apply
to
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(a) any Indebtedness or Preferred Stock of any Person
existing at the time such Person is merged with or into or
becomes a Subsidiary of CCH II; provided that such
Indebtedness or Preferred Stock was not incurred or issued in
connection with, or in contemplation of, such Person merging
with or into, or becoming a Subsidiary of, CCH II, and |
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(b) any Indebtedness or Preferred Stock of a Restricted
Subsidiary issued in connection with, and as part of the
consideration for, an acquisition, whether by stock purchase,
asset sale, merger or otherwise, in each case involving such
Restricted Subsidiary, which Indebtedness or Preferred Stock is
issued to the seller or sellers of such stock or assets;
provided that such Restricted Subsidiary is not obligated
to register such Indebtedness or Preferred Stock under the
Securities Act or obligated to provide information pursuant to
Rule 144A under the Securities Act. |
Liens
The Indenture provides that CCH II will not, directly or
indirectly, create, incur, assume or suffer to exist any Lien of
any kind securing Indebtedness, Attributable Debt or trade
payables on any asset of CCH II, whether owned on the Issue
Date or thereafter acquired, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting
Subsidiaries
CCH II will not, directly or indirectly, create or permit
to exist or become effective any encumbrance or restriction on
the ability of any of its Restricted Subsidiaries to:
(1) pay dividends or make any other distributions on its
Capital Stock to CCH II or any of its Restricted
Subsidiaries, or with respect to any other interest or
participation in, or measured by, its profits, or pay any
Indebtedness owed to CCH II or any of its Restricted
Subsidiaries;
(2) make loans or advances to CCH II or any of its
Restricted Subsidiaries; or
(3) transfer any of its properties or assets to CCH II
or any of its Restricted Subsidiaries.
However, the preceding restrictions will not apply to
encumbrances or restrictions existing under or by reason of:
(1) Existing Indebtedness as in effect on the Issue Date
(including, without limitation, the Indebtedness under any of
the Credit Facilities, including the Vulcan Backstop Facility,
and only with respect to the Vulcan Backstop Facility, whether
or not any Indebtedness is outstanding on the Issue Date) and
any amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings
thereof; provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings,
replacements or refinancings are no more restrictive, taken as a
whole, with respect to such dividend and other payment
restrictions than those contained in the most restrictive
Existing Indebtedness, as in effect on the Issue Date, including
the Vulcan Backstop Facility;
(2) the Indenture and the Notes;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock
of a Person acquired by CCH II or any of its Restricted
Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or
the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired; provided
that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the Indenture to be incurred;
(5) customary non-assignment provisions in leases,
franchise agreements and other commercial agreements entered
into in the ordinary course of business and consistent with past
practices;
(6) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions on the
property so acquired of the nature described in clause (3)
of the preceding paragraph;
(7) any agreement for the sale or other disposition of a
Restricted Subsidiary that restricts distributions by such
Restricted Subsidiary pending its sale or other disposition;
168
(8) Permitted Refinancing Indebtedness; provided that the
restrictions contained in the agreements governing such
Permitted Refinancing Indebtedness are no more restrictive,
taken as a whole, than those contained in the agreements
governing the Indebtedness being refinanced;
(9) Liens securing Indebtedness or other obligations
otherwise permitted to be incurred pursuant to the provisions of
the covenant described above under the caption
Liens that limit the right of
CCH II or any of its Restricted Subsidiaries to dispose of
the assets subject to such Lien;
(10) provisions with respect to the disposition or
distribution of assets or property in joint venture agreements
and other similar agreements entered into in the ordinary course
of business;
(11) restrictions on cash or other deposits or net worth
imposed by customers under contracts entered into in the
ordinary course of business;
(12) restrictions contained in the terms of Indebtedness
permitted to be incurred under the covenant described under the
caption Incurrence of indebtedness and
issuance of preferred stock; provided that such
restrictions are no more restrictive, taken as a whole, than the
terms contained in the most restrictive, together or
individually, of the Credit Facilities as in effect on the Issue
Date and the terms contemplated by the Vulcan Facility; and
(13) restrictions that are not materially more restrictive,
taken as a whole, than customary provisions in comparable
financings and that the management of CCH II determines, at
the time of such financing, will not materially impair the
Issuers ability to make payments as required under the
Notes.
Merger, Consolidation or Sale of Assets
Neither Issuer may, directly or indirectly, (1) consolidate
or merge with or into another Person (whether or not such Issuer
is the surviving Person) or (2) sell, assign, transfer,
convey or otherwise dispose of all or substantially all of its
properties or assets, in one or more related transactions, to
another Person; unless:
(A) either:
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(i) such Issuer is the surviving Person; or |
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(ii) the Person formed by or surviving any such
consolidation or merger (if other than such Issuer) or to which
such sale, assignment, transfer, conveyance or other disposition
shall have been made is a Person organized or existing under the
laws of the United States, any state thereof or the District of
Columbia, provided that if the Person formed by or
surviving any such consolidation or merger with such Issuer is a
limited liability company or a Person other than a corporation,
a corporate co-issuer shall also be an obligor with respect to
the Notes; |
(B) the Person formed by or surviving any such
consolidation or merger (if other than such Issuer) or the
Person to which such sale, assignment, transfer, conveyance or
other disposition shall have been made assumes all the
obligations of such Issuer under the Notes and the Indenture
pursuant to agreements reasonably satisfactory to the trustee;
(C) immediately after such transaction no Default or Event
of Default exists; and
(D) such Issuer or the Person formed by or surviving any
such consolidation or merger (if other than such Issuer) will,
on the date of such transaction after giving pro forma effect
thereto and any related financing transactions as if the same
had occurred at the beginning of the applicable four-quarter
period,
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(x) be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Leverage Ratio test set forth in
the first paragraph of the covenant described above under the
caption Incurrence of indebtedness and
issuance of preferred stock; or |
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(y) have a Leverage Ratio immediately after giving effect
to such consolidation or merger no greater than the Leverage
Ratio immediately prior to such consolidation or merger. |
169
In addition, neither of the Issuers may, directly or indirectly,
lease all or substantially all of their properties or assets, in
one or more related transactions, to any other Person. The
foregoing clause (D) of this Merger, Consolidation,
or Sale of Assets covenant will not apply to a sale,
assignment, transfer, conveyance or other disposition of assets
between or among an Issuer and any of its Wholly Owned
Restricted Subsidiaries or to the consummation of the Private
Exchanges.
Transactions with Affiliates
CCH II will not, and will not permit any of its Restricted
Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or
amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate
(each, an Affiliate Transaction), unless:
(1) such Affiliate Transaction is on terms that are no less
favorable to CCH II or the relevant Restricted Subsidiary than
those that would have been obtained in a comparable transaction
by CCH II or such Restricted Subsidiary with an unrelated
Person; and
(2) CCH II delivers to the trustee:
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(a) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration
given or received by CCH II or any such Restricted
Subsidiary in excess of $15 million, a resolution of the
Board of Directors of CCH II set forth in an officers
certificate certifying that such Affiliate Transaction complies
with this covenant and that such Affiliate Transaction has been
approved by a majority of the members of such Board of
Directors; and |
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(b) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration
given or received by CCH II or any such Restricted
Subsidiary in excess of $50 million, an opinion as to the
fairness to the holders of such Affiliate Transaction from a
financial point of view issued by an accounting, appraisal or
investment banking firm of national standing. |
The following items shall not be deemed to be Affiliate
Transactions and, therefore, will not be subject to the
provisions of the prior paragraph:
(1) any existing employment agreement entered into by
CCH II or any of its Subsidiaries and any employment
agreement entered into by CCH II or any of its Restricted
Subsidiaries in the ordinary course of business and consistent
with the past practice of CCH II or such Restricted
Subsidiary;
(2) transactions between or among CCH II and/or its
Restricted Subsidiaries;
(3) payment of reasonable directors fees to Persons who are
not otherwise Affiliates of CCH II, and customary
indemnification and insurance arrangements in favor of
directors, regardless of affiliation with CCH II or any of
its Restricted Subsidiaries;
(4) payment of Management Fees;
(5) Restricted Payments that are permitted by the
provisions of the covenant described above under the caption
Restricted payments and Restricted
Investments that are permitted by the provisions of the covenant
described above under the caption
Investments;
(6) Permitted Investments;
(7) the transactions contemplated by the Vulcan Backstop
Facility on substantially the same terms as described in
Charters quarterly report on
Form 10-Q for its
fiscal quarter ended June 30, 2003 with respect to the
commitment letter; and
(8) transactions pursuant to agreements existing on the
Issue Date, as in effect on the Issue Date, or as subsequently
modified, supplemented, or amended, to the extent that any such
modifications, supplements, or amendments complied with the
applicable provisions of the first paragraph of this covenant.
170
Sale and Leaseback Transactions
CCH II will not, and will not permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction;
provided that CCH II and its Restricted Subsidiaries
may enter into a sale and leaseback transaction if:
(1) CCH II or such Restricted Subsidiary could have
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(a) incurred Indebtedness in an amount equal to the
Attributable Debt relating to such sale and leaseback
transaction under the Leverage Ratio test in the first paragraph
of the covenant described above under the caption
Incurrence of additional indebtedness and
issuance of preferred stock; and |
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(b) incurred a Lien to secure such Indebtedness pursuant to
the covenant described above under the caption
Liens or the definition of
Permitted Liens; and |
(2) the transfer of assets in that sale and leaseback
transaction is permitted by, and CCH II or such Restricted
Subsidiary applies the proceeds of such transaction in
compliance with, the covenant described above under the caption
Repurchase at the option of
holders Asset sales.
The foregoing restrictions do not apply to a sale and leaseback
transaction if the lease is for a period, including renewal
rights, of not in excess of three years.
Limitations on Issuances of Guarantees of
Indebtedness
CCH II will not permit any of its Restricted Subsidiaries,
directly or indirectly, to Guarantee or pledge any assets to
secure the payment of any other Indebtedness of CCH II,
except in respect of the Credit Facilities (the Guaranteed
Indebtedness), unless
(1) such Restricted Subsidiary simultaneously executes and
delivers a supplemental indenture providing for the Guarantee (a
Subsidiary Guarantee) of the payment of the 2010
Notes by such Restricted Subsidiary, and
(2) until one year after all the Notes have been paid in
full in cash, such Restricted Subsidiary waives and will not in
any manner whatsoever claim or take the benefit or advantage of,
any rights of reimbursement, indemnity or subrogation or any
other rights against CCH II or any other Restricted
Subsidiary of CCH II as a result of any payment by such
Restricted Subsidiary under its Subsidiary Guarantee;
provided that this paragraph shall not be applicable to
any Guarantee or any Restricted Subsidiary that existed at the
time such Person became a Restricted Subsidiary and was not
incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary.
If the Guaranteed Indebtedness is subordinated to the Notes,
then the Guarantee of such Guaranteed Indebtedness shall be
subordinated to the Subsidiary Guarantee at least to the extent
that the Guaranteed Indebtedness is subordinated to the Notes.
Payments for Consent
CCH II will not, and will not permit any of its
Subsidiaries to, directly or indirectly, pay or cause to be paid
any consideration to or for the benefit of any holder of Notes
for or as an inducement to any consent, waiver or amendment of
any of the terms or provisions of the Indenture or the Notes
unless such consideration is offered to be paid and is paid to
all holders of the Notes that consent, waive or agree to amend
in the time frame set forth in the solicitation documents
relating to such consent, waiver or agreement.
171
Reports
Whether or not required by the Securities and Exchange
Commission, so long as any Notes are outstanding, the Issuers
will furnish to the holders of the Notes, within the time
periods specified in the Securities and Exchange
Commissions rules and regulations:
(1) all quarterly and annual financial information that
would be required to be contained in a filing with the
Securities and Exchange Commission on
Forms 10-Q
and 10-K if the
Issuers were required to file such forms, including a
Managements Discussion and Analysis of Financial
Condition and Results of Operations section and, with
respect to the annual information only, a report on the annual
consolidated financial statements of CCH II of its
independent public accountants; and
(2) all current reports that would be required to be filed
with the Securities and Exchange Commission on
Form 8-K if the
Issuers were required to file such reports.
If CCH II has designated any of its Subsidiaries as
Unrestricted Subsidiaries, then the quarterly and annual
financial information required by the preceding paragraph shall
include a reasonably detailed presentation, either on the face
of the financial statements or in the footnotes thereto, and in
Managements Discussion and Analysis of Financial Condition
and Results of Operations, of the financial condition and
results of operations of CCH II and its Restricted
Subsidiaries separate from the financial condition and results
of operations of the Unrestricted Subsidiaries of CCH II.
In addition, after consummation of the exchange offer, whether
or not required by the Securities and Exchange Commission, the
Issuers will file a copy of all of the information and reports
referred to in clauses (1) and (2) above with the
Securities and Exchange Commission for public availability
within the time periods specified in the Securities and Exchange
Commissions rules and regulations, unless the Securities
and Exchange Commission will not accept such a filing, and make
such information available to securities analysts and
prospective investors upon request.
Events of Default and Remedies
Each of the following is an Event of Default with respect to the
Notes:
(1) default for 30 days in the payment when due of
interest on the Notes;
(2) default in payment when due of the principal of or
premium, if any, on the Notes;
(3) failure by CCH II or any of its Restricted
Subsidiaries to comply with the provisions of the Indenture
described under the captions Repurchase at the
option of holders Change of control or
Certain covenants Merger,
consolidation, or sale of Assets;
(4) failure by CCH II or any of its Restricted
Subsidiaries for 30 days after written notice thereof has
been given to the Issuers by the trustee or to the Issuers and
the trustee by holders of at least 25% of the aggregate
principal amount of the Notes outstanding to comply with any of
their other covenants or agreements in the Indenture;
(5) default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured
or evidenced any Indebtedness for money borrowed by CCH II
or any of its Restricted Subsidiaries (or the payment of which
is guaranteed by CCH II or any of its Restricted
Subsidiaries) whether such Indebtedness or guarantee now exists,
or is created after the Issue Date, if that default:
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(a) is caused by a failure to pay at final stated maturity
the principal amount on such Indebtedness prior to the
expiration of the grace period provided in such Indebtedness on
the date of such default (a Payment Default); or |
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(b) results in the acceleration of such Indebtedness prior
to its express maturity, and, in each case, the principal amount
of any such Indebtedness, together with the principal amount of
any other |
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such Indebtedness under which there has been a Payment Default
or the maturity of which has been so accelerated, aggregates
$100 million or more; |
(6) failure by CCH II or any of its Restricted
Subsidiaries to pay final judgments which are non-appealable
aggregating in excess of $100 million, net of applicable
insurance which has not been denied in writing by the insurer,
which judgments are not paid, discharged or stayed for a period
of 60 days; and
(7) CCH II or any of its Significant Subsidiaries
pursuant to or within the meaning of bankruptcy law:
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(a) commences a voluntary case, |
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(b) consents to the entry of an order for relief against it
in an involuntary case, |
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(c) consents to the appointment of a custodian of it or for
all or substantially all of its property, or |
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(d) makes a general assignment for the benefit of its
creditors; or |
(8) a court of competent jurisdiction enters an order or
decree under any bankruptcy law that:
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(a) is for relief against CCH II or any of its
Significant Subsidiaries in an involuntary case; |
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(b) appoints a custodian of CCH II or any of its
Significant Subsidiaries or for all or substantially all of the
property of CCH II or any of its Significant
Subsidiaries; or |
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(c) orders the liquidation of CCH II or any of its
Significant Subsidiaries; |
and the order or decree remains unstayed and in effect for 60
consecutive days.
In the case of an Event of Default described in the foregoing
clauses (7) and (8) with respect to CCH II, all
outstanding Notes will become due and payable immediately
without further action or notice. If any other Event of Default
occurs and is continuing, the trustee or the holders of at least
25% in principal amount of the then outstanding Notes may
declare the Notes to be due and payable immediately.
Holders of the Notes may not enforce the Indenture or the Notes
except as provided in the Indenture. Subject to certain
limitations, the holders of a majority in principal amount of
the then outstanding Notes may direct the trustee in its
exercise of any trust or power. The trustee may withhold from
holders of the Notes notice of any continuing Default or Event
of Default under the Indenture (except a Default or Event of
Default relating to the payment of principal or interest) if it
determines that withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the
Notes then outstanding by notice to the trustee may on behalf of
the holders of all of the Notes waive any existing Default or
Event of Default and its consequences under the Indenture except
a continuing Default or Event of Default in the payment of
interest on, or the principal of, or premium, if any, on, the
Notes.
The Issuers are required to deliver to the trustee annually a
statement regarding compliance with the Indenture. Upon becoming
aware of any Default or Event of Default, the Issuers will be
required to deliver to the trustee a statement specifying such
Default or Event of Default and what action the Issuers are
taking or propose to take with respect thereto.
No Personal Liability of Directors, Officers, Employees,
Members and Stockholders
No director, officer, employee or incorporator of the Issuers,
as such, and no member or stockholder of the Issuers, as such,
shall have any liability for any obligations of the Issuers
under the Notes or the Indenture, or for any claim based on, in
respect of, or by reason of, such obligations or their creation.
Each holder of Notes by accepting a Note waives and releases all
such liability. The waiver and release are part of the
consideration for issuance of the Notes. The waiver may not be
effective to waive liabilities under the federal securities laws.
173
Legal Defeasance and Covenant Defeasance
The Issuers may, at their option and at any time, elect to have
all of their obligations discharged with respect to any
outstanding Notes (Legal Defeasance) except for:
(1) the rights of holders of outstanding Notes to receive
payments in respect of the principal of, premium, if any, and
interest on the Notes when such payments are due from the trust
referred to below;
(2) the Issuers obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance
of an office or agency for payment and money for security
payments held in trust;
(3) the rights, powers, trusts, duties and immunities of
the trustee, and the Issuers obligations in connection
therewith; and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Issuers may, at their option and at any time,
elect to have the obligations of the Issuers released with
respect to certain covenants that are described in the Indenture
(Covenant Defeasance) and thereafter any omission to
comply with those covenants shall not constitute a Default or
Event of Default with respect to the Notes. In the event
Covenant Defeasance occurs, certain events (not including
non-payment, bankruptcy, receivership, rehabilitation and
insolvency events) described under Events of Default
will no longer constitute an Event of Default with respect to
the Notes.
In order to exercise either Legal Defeasance or Covenant
Defeasance:
(1) the Issuers must irrevocably deposit with the trustee,
in trust, for the benefit of the holders of the Notes, cash in
U.S. dollars, non-callable Government Securities, or a
combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any,
and interest on the outstanding Notes on the stated maturity or
on the applicable redemption date, as the case may be, and the
Issuers must specify whether the Notes are being defeased to
maturity or to a particular redemption date;
(2) in the case of Legal Defeasance, the Issuers shall have
delivered to the trustee an opinion of counsel reasonably
acceptable to the trustee confirming that
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(a) the Issuers have received from, or there has been
published by, the Internal Revenue Service a ruling or |
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(b) since the Issue Date, there has been a change in the
applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel shall confirm
that, the holders of the outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result
of such Legal Defeasance and will be subject to federal income
tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had
not occurred; |
(3) in the case of Covenant Defeasance, the Issuers shall
have delivered to the trustee an opinion of counsel reasonably
acceptable to the trustee confirming that the holders of the
outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have
been the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default under the Indenture
shall have occurred and be continuing either:
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(a) on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be
applied to such deposit); or |
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(b) insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit; |
174
(5) such Legal Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a default
under any material agreement or instrument (other than the
Indenture) to which the Issuers or any of their Restricted
Subsidiaries is a party or by which the Issuers or any of their
Restricted Subsidiaries is bound;
(6) the Issuers must have delivered to the trustee an
opinion of counsel to the effect that after the 91st day,
assuming no intervening bankruptcy, that no holder is an insider
of either of the Issuers following the deposit and that such
deposit would not be deemed by a court of competent jurisdiction
a transfer for the benefit of the Issuers in their capacities as
such, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors rights generally;
(7) the Issuers must deliver to the trustee an
officers certificate stating that the deposit was not made
by the Issuers with the intent of preferring the holders of the
Notes over the other creditors of the Issuers with the intent of
defeating, hindering, delaying or defrauding creditors of the
Issuers or others; and
(8) the Issuers must deliver to the trustee an
officers certificate and an opinion of counsel, each
stating that all conditions precedent relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
Notwithstanding the foregoing, the opinion of counsel required
by clause (2) above with respect to a Legal Defeasance need
not be delivered if all applicable Notes not theretofore
delivered to the trustee for cancellation
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(a) have become due and payable or |
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(b) will become due and payable on the maturity date within
one year under arrangements satisfactory to the trustee for the
giving of notice of redemption by the trustee in the name, and
at the expense, of the Issuers. |
Amendment, Supplement and Waiver
Except as provided below, the Indenture or Notes may be amended
or supplemented with the consent of the holders of at least a
majority in aggregate principal amount of the then outstanding
Notes. This includes consents obtained in connection with a
purchase of Notes, a tender offer for Notes or an exchange offer
for Notes. Any existing Default or compliance with any provision
of the Indenture or the Notes (other than any provision relating
to the right of any holder of a Note to bring suit for the
enforcement of any payment of principal, premium, if any, and
interest on the Note, on or after the scheduled due dates
expressed in the Notes) may be waived with the consent of the
holders of a majority in aggregate principal amount of the then
outstanding Notes. This includes consents obtained in connection
with a purchase of Notes, a tender offer for Notes or an
exchange offer for Notes.
Without the consent of each holder affected, an amendment or
waiver may not (with respect to any Notes held by a
non-consenting holder):
(1) reduce the principal amount of Notes whose holders must
consent to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of
any Note or alter the payment provisions with respect to the
redemption of the Notes (other than provisions relating to the
covenants described above under the caption
Repurchase at the option of holders);
(3) reduce the rate of or extend the time for payment of
interest on any Note;
(4) waive a Default or an Event of Default in the payment
of principal of or premium, if any, or interest on the Notes
(except a rescission of acceleration of the Notes by the holders
of at least a majority in aggregate principal amount of the
Notes and a waiver of the payment default that resulted from
such acceleration);
(5) make any Note payable in money other than that stated
in the Notes;
175
(6) make any change in the provisions of the Indenture
relating to waivers of past Defaults or the rights of holders of
Notes to receive payments of principal of, or premium, if any,
or interest on the Notes;
(7) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described
above under the caption Repurchase at the
option of holders); or
(8) make any change in the preceding amendment and waiver
provisions.
Notwithstanding the preceding, without the consent of any holder
of Notes, the Issuers and the trustee may amend or supplement
the Indenture or the Notes:
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(1) to cure any ambiguity, defect or inconsistency; |
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(2) to provide for uncertificated Notes in addition to or
in place of certificated Notes; |
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(3) to provide for or confirm the issuance of Additional
Notes; |
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(4) to provide for the assumption of the Issuers
obligations to holders of Notes in the case of a merger or
consolidation or sale of all or substantially all of the
Issuers assets; |
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(5) to make any change that would provide any additional
rights or benefits to the holders of Notes or that does not
adversely affect the legal rights under the Indenture of any
such holder; or |
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(6) to comply with requirements of the Securities and
Exchange Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act or
otherwise as necessary to comply with applicable law. |
Governing Law
The Indenture and the Notes are governed by the laws of the
State of New York.
Concerning the Trustee
If the trustee becomes a creditor of the Issuers, the Indenture
will limit its right to obtain payment of claims in certain
cases, or to realize on certain property received in respect of
any such claim as security or otherwise. The trustee will be
permitted to engage in other transactions; however, if it
acquires any conflicting interest it must eliminate such
conflict within 90 days, apply to the Securities and
Exchange Commission for permission to continue or resign.
The holders of a majority in principal amount of the then
outstanding Notes will have the right to direct the time, method
and place of conducting any proceeding for exercising any remedy
available to the trustee, subject to certain exceptions. The
Indenture provides that in case an Event of Default shall occur
and be continuing, the trustee will be required, in the exercise
of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the
trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any
holder of Notes, unless such holder shall have offered to the
trustee indemnity satisfactory to it against any loss, liability
or expense.
Additional Information
Anyone who receives this prospectus may obtain a copy of the
Indenture and the exchange and registration rights agreement
without charge by writing to the Issuers at Charter Plaza, 12405
Powerscourt Drive, St. Louis, Missouri 63131, Attention:
Corporate Secretary.
Certain Definitions
This section sets forth certain defined terms used in the
Indenture. Reference is made to the Indenture for a full
disclosure of all such terms, as well as any other capitalized
terms used herein for which no definition is provided.
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Acquired Debt means, with respect to
any specified Person:
(1) Indebtedness of any other Person existing at the time
such other Person is merged with or into or became a Subsidiary
of such specified Person, whether or not such Indebtedness is
incurred in connection with, or in contemplation of, such other
Person merging with or into, or becoming a Subsidiary of, such
specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset
acquired by such specified Person.
Additional Notes means the
Issuers 10.250% senior notes due 2010 issued under
the Indenture in addition to the Original Notes (other than
Notes issued in exchange for the Original Notes and certain
Original Notes identified in the Indenture). The Notes offered
hereby constitute Additional Notes under the
Indenture.
Affiliate of any specified Person
means any other Person directly or indirectly controlling or
controlled by or under direct or indirect common control with
such specified Person. For purposes of this definition,
control, as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of
such Person, whether through the ownership of voting securities,
by agreement or otherwise; provided that beneficial ownership of
10% or more of the Voting Stock of a Person shall be deemed to
be control. For purposes of this definition, the terms
controlling, controlled by and
under common control with shall have correlative
meanings.
Asset Acquisition means
(a) an Investment by CCH II or any of its Restricted
Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary of CCH II or any of
its Restricted Subsidiaries or shall be merged with or into
CCH II or any of its Restricted Subsidiaries, or
(b) the acquisition by CCH II or any of its Restricted
Subsidiaries of the assets of any Person which constitute all or
substantially all of the assets of such Person, any division or
line of business of such Person or any other properties or
assets of such Person other than in the ordinary course of
business.
Asset Sale means:
(1) the sale, lease, conveyance or other disposition of any
assets or rights, other than sales of inventory in the ordinary
course of the Cable Related Business consistent with applicable
past practices; provided that the sale, conveyance or other
disposition of all or substantially all of the assets of
CCH II and its Subsidiaries, taken as a whole, will be
governed by the provisions of the Indenture described above
under the caption Repurchase at the option of
holders Change of control and/or the
provisions described above under the caption
Certain covenants Merger,
consolidation, or sale of assets and not by the provisions
of the Asset Sale covenant; and
(2) the issuance of Equity Interests by any Restricted
Subsidiary of CCH II or the sale of Equity Interests in any
Restricted Subsidiary of CCH II.
Notwithstanding the preceding, the following items shall not be
deemed to be Asset Sales:
(1) any single transaction or series of related
transactions that:
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(a) involves assets having a fair market value of less than
$100 million; or |
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(b) results in net proceeds to CCH II and its
Restricted Subsidiaries of less than $100 million; |
(2) a transfer of assets between or among CCH II and
its Restricted Subsidiaries;
(3) an issuance of Equity Interests by a Restricted
Subsidiary of CCH II to CCH II or to another Wholly
Owned Restricted Subsidiary of CCH II;
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(4) a Restricted Payment that is permitted by the covenant
described above under the caption Certain
covenants Restricted payments, a Restricted
Investment that is permitted by the covenant described above
under the caption Certain
covenants Investments or a Permitted
Investment;
(5) the incurrence of Liens not prohibited by the Indenture
and the disposition of assets related to such Liens by the
secured party pursuant to a foreclosure; and
(6) any disposition of cash or Cash Equivalents.
Attributable Debt in respect of a sale
and leaseback transaction means, at the time of determination,
the present value of the obligation of the lessee for net rental
payments during the remaining term of the lease included in such
sale and leaseback transaction, including any period for which
such lease has been extended or may, at the option of the
lessee, be extended. Such present value shall be calculated
using a discount rate equal to the rate of interest implicit in
such transaction, determined in accordance with GAAP.
Beneficial Owner has the meaning
assigned to such term in
Rule 13d-3 and
Rule 13d-5 under
the Exchange Act, except that in calculating the beneficial
ownership of any particular person (as such term is
used in Section 13(d)(3) of the Exchange Act) such
person shall be deemed to have beneficial ownership
of all securities that such person has the right to
acquire, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition.
Board of Directors means the board of
directors or comparable governing body of CCI or if so specified
CCH II, in either case, as constituted as of the date of
any determination required to be made, or action required to be
taken, pursuant to the Indenture.
Cable Related Business means the
business of owning cable television systems and businesses
ancillary, complementary and related thereto.
Capital Corp. means, CCH II
Capital Corp., a Delaware corporation, and any successor Person
thereto.
Capital Lease Obligation means, at the
time any determination thereof is to be made, the amount of the
liability in respect of a capital lease that would at that time
be required to be capitalized on a balance sheet in accordance
with GAAP.
Capital Stock means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any
and all shares, interests, participations, rights or other
equivalents (however designated) of corporate stock;
(3) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or
limited); and
(4) any other interest (other than any debt obligation) or
participation that confers on a Person the right to receive a
share of the profits and losses of, or distributions of assets
of, the issuing Person.
Capital Stock Sale Proceeds means the
aggregate net cash proceeds (including the fair market value of
the non-cash proceeds, as determined by an independent appraisal
firm) received by CCH II from and after the Issue Date, in
each case
(x) as a contribution to the common equity capital or from
the issue or sale of Equity Interests (other than Disqualified
Stock and other than issuances or sales to a Subsidiary of
CCH II) of CCH II after the Issue Date, or
(y) from the issue or sale of convertible or exchangeable
Disqualified Stock or convertible or exchangeable debt
securities of CCH II that have been converted into or
exchanged for such Equity Interests (other than Equity Interests
(or Disqualified Stock or debt securities) sold to a Subsidiary
of CCH II).
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Cash Equivalents means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or
insured by the United States government or any agency or
instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having
maturities of not more than twelve months from the date of
acquisition;
(3) certificates of deposit and eurodollar time deposits
with maturities of twelve months or less from the date of
acquisition, bankers acceptances with maturities not
exceeding six months and overnight bank deposits, in each case,
with any domestic commercial bank having combined capital and
surplus in excess of $500 million and a Thompson Bank Watch
Rating at the time of acquisition of B or better;
(4) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in
clauses (2) and (3) above entered into with any financial
institution meeting the qualifications specified in
clause (3) above;
(5) commercial paper having a rating at the time of
acquisition of at least
P-1 from
Moodys or at least
A-1 from
S&P and in each case maturing within twelve months after the
date of acquisition;
(6) corporate debt obligations maturing within twelve
months after the date of acquisition thereof, rated at the time
of acquisition at least Aaa or
P-1 by
Moodys or AAA or
A-1 by
S&P;
(7) auction-rate Preferred Stocks of any corporation
maturing not later than 45 days after the date of
acquisition thereof, rated at the time of acquisition at least
Aaa by Moodys or AAA by S&P;
(8) securities issued by any state, commonwealth or
territory of the United States, or by any political subdivision
or taxing authority thereof, maturing not later than six months
after the date of acquisition thereof, rated at the time of
acquisition at least A by Moodys or
S&P; and
(9) money market or mutual funds at least 90% of the assets
of which constitute Cash Equivalents of the kinds described in
clauses (1) through (8) of this definition.
CCH I means CCH I, LLC, a
Delaware limited liability company, and any successor Person
thereto.
CCH II means CCH II, LLC, a
Delaware limited liability company, and any successor Person
thereto.
CCI means Charter Communications,
Inc., a Delaware corporation, and any successor Person thereto.
CCI Indentures means, collectively,
the indentures entered into by CCI with respect to its
5.75% Convertible Senior Notes due 2005, its
4.75% Convertible Senior Notes due 2006 and any indentures,
note purchase agreements or similar documents entered into by
CCI for the purpose of incurring Indebtedness in exchange for,
or the proceeds of which are used to refinance, any of the
Indebtedness described above, in each case, together with all
instruments and other agreements entered into by CCI in
connection therewith, as any of the foregoing may be refinanced,
replaced, amended, supplemented or otherwise modified from time
to time.
CCO Holdings means CCO Holdings, LLC,
a Delaware limited liability company, and any successor Person
thereto.
Change of Control means the occurrence
of any of the following:
(1) the sale, transfer, conveyance or other disposition
(other than by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of
the assets of CCH II and its Subsidiaries, taken as a
whole, or of a Parent and its Subsidiaries, taken as a whole, to
any person (as such term is used in
Section 13(d)(3) of the Exchange Act) other than Paul G.
Allen or a Related Party;
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(2) the adoption of a plan relating to the liquidation or
dissolution of CCH II or a Parent (except the liquidation of any
Parent into any other Parent);
(3) the consummation of any transaction, including, without
limitation, any merger or consolidation, the result of which is
that any person (as defined above) other than Paul
G. Allen and Related Parties becomes the Beneficial Owner,
directly or indirectly, of more than 35% of the Voting Stock of
CCH II or a Parent, measured by voting power rather than
the number of shares, unless Paul G. Allen or a Related Party
Beneficially Owns, directly or indirectly, a greater percentage
of Voting Stock of CCH II or such Parent, as the case may
be, measured by voting power rather than the number of shares,
than such person;
(4) after the Issue Date, the first day on which a majority
of the members of the board of directors of CCH II or the
board of directors of a Parent are not Continuing Directors;
(5) CCH II or a Parent consolidates with, or merges
with or into, any Person, or any Person consolidates with, or
merges with or into, CCH II or a Parent, in any such event
pursuant to a transaction in which any of the outstanding Voting
Stock of CCH II or such Parent is converted into or
exchanged for cash, securities or other property, other than any
such transaction where the Voting Stock of CCH II or such
Parent outstanding immediately prior to such transaction is
converted into or exchanged for Voting Stock (other than
Disqualified Stock) of the surviving or transferee Person
constituting a majority of the outstanding shares of such Voting
Stock of such surviving or transferee Person immediately after
giving effect to such issuance; or
(6) (i) Charter Communications Holdings Company, LLC
shall cease to own beneficially, directly or indirectly, 100% of
the Capital Stock of Charter Holdings or (ii) Charter
Holdings shall cease to own beneficially, directly or
indirectly, 100% of the Capital Stock of CCH II.
Charter Holdings means Charter
Communications Holdings, LLC, a Delaware limited liability
company, and any successor Person thereto.
Charter Holdings Indentures means,
collectively (a) the indentures entered into by Charter
Holdings and Charter Communications Holdings Capital Corporation
in connection with the issuance of each 8.250% Senior Notes
Due 2007 dated March 1999, 8.625% Senior Notes Due 2009
dated March 1999, 9.920% Senior Discount Notes Due 2011
dated March 1999, 10.000% Senior Notes Due 2009 dated
January 2000, 10.250% Senior Notes Due 2010 dated January
2000, 11.750% Senior Discount Notes Due 2010 dated January
2000, 10.750% Senior Notes Due 2009 dated January 2001,
11.125% Senior Notes Due 2011 dated January 2001,
13.500% Senior Discount Notes Due 2011 dated January 2001,
9.625% Senior Notes Due 2009 dated May 2001,
10.000% Senior Notes Due 2011 dated May 2001,
11.750% Senior Discount Notes Due 2011 dated May 2001,
9.625% Senior Notes Due 2009 dated January 2002,
10.000% Senior Notes Due 2011 dated January 2002, and
11.750% Senior Discount Notes Due 2011 dated January 2002,
and (b) any indentures, note purchase agreements or similar
documents entered into by Charter Holdings and/or Charter
Communications Holdings Capital Corporation on or after the
Issue Date for the purpose of incurring Indebtedness in exchange
for, or proceeds of which are used to refinance, any of the
Indebtedness described in the foregoing clause (a), in each
case, together with all instruments and other agreements entered
into by Charter Holdings or Charter Communications Holdings
Capital Corporation in connection therewith, as the same may be
refinanced, replaced, amended, supplemented or otherwise
modified from time to time.
Charter Refinancing Indebtedness means
any Indebtedness of a Charter Refinancing Subsidiary issued in
exchange for, or the net proceeds of which are used within
90 days after the date of issuance thereof to extend,
refinance, renew, replace, defease, purchase, acquire or refund
(including successive extensions, refinancings, renewals,
replacements, defeasances, purchases, acquisitions or refunds),
Indebtedness initially incurred under any one or more of the
Charter Holdings Indentures, the CCI Indentures, or the
Indenture; provided that:
(1) the principal amount (or accreted value, if applicable)
of such Charter Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable) plus
accrued interest and premium, if any, on the Indebtedness so
extended, refinanced, renewed, replaced, defeased, purchased,
180
acquired or refunded (plus the amount of reasonable fees,
commissions and expenses incurred in connection
therewith); and
(2) such Charter Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
Charter Refinancing Subsidiary means
CCH I, CCH II or any other directly or indirectly
wholly owned Subsidiary (and any related corporate co-obligor if
such Subsidiary is a limited liability company or other
association not taxed as a corporation) of CCI or Charter
Communications Holding Company, LLC, which is or becomes a
Parent.
Consolidated EBITDA means with respect
to any Person, for any period, the net income of such Person and
its Restricted Subsidiaries for such period plus, to the extent
such amount was deducted in calculating such net income:
(1) Consolidated Interest Expense;
(2) income taxes;
(3) depreciation expense;
(4) amortization expense;
(5) all other non-cash items, extraordinary items,
nonrecurring and unusual items and the cumulative effects of
changes in accounting principles reducing such net income, less
all non-cash items, extraordinary items, nonrecurring and
unusual items and cumulative effects of changes in accounting
principles increasing such net income, all as determined on a
consolidated basis for such Person and its Restricted
Subsidiaries in conformity with GAAP;
(6) amounts actually paid during such period pursuant to a
deferred compensation plan; and
(7) for purposes of Section 4.10 only, Management
Fees; provided that Consolidated EBITDA shall not include:
(x) the net income (or net loss) of any Person that is not
a Restricted Subsidiary (Other Person), except
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(i) with respect to net income, to the extent of the amount
of dividends or other distributions actually paid to such Person
or any of its Restricted Subsidiaries by such Other Person
during such period; and |
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(ii) with respect to net losses, to the extent of the
amount of investments made by such Person or any Restricted
Subsidiary of such Person in such Other Person during such
period; |
(y) solely for the purposes of calculating the amount of
Restricted Payments that may be made pursuant to clause (3)
of the covenant described under the caption
Certain covenants Restricted
payments (and in such case, except to the extent
includable pursuant to clause (x) above), the net income
(or net loss) of any Other Person accrued prior to the date it
becomes a Restricted Subsidiary or is merged into or
consolidated with such Person or any Restricted Subsidiaries or
all or substantially all of the property and assets of such
Other Person are acquired by such Person or any of its
Restricted Subsidiaries; and
(z) the net income of any Restricted Subsidiary of
CCH II to the extent that the declaration or payment of
dividends or similar distributions by such Restricted Subsidiary
of such net income is not at the time permitted by the operation
of the terms of such Restricted Subsidiarys charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to such Restricted Subsidiary
(other than any agreement or instrument evidencing Indebtedness
or Preferred Stock (i) outstanding on the Issue Date or
(ii) incurred or issued thereafter in compliance with the
covenant described under the caption Certain
covenants Incurrence of indebtedness and issuance of
preferred
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stock; provided that (a) the terms of any such
agreement or instrument restricting the declaration and payment
of dividends or similar distributions apply only in the event of
a default with respect to a financial covenant or a covenant
relating to payment, beyond any applicable period of grace,
contained in such agreement or instrument, (b) such terms
are determined by such Person to be customary in comparable
financings and (c) such restrictions are determined by
CCH II not to materially affect the Issuers ability
to make principal or interest payments on the applicable Notes
when due).
Consolidated Indebtedness means, with
respect to any Person as of any date of determination, the sum,
without duplication, of:
(1) the total amount of outstanding Indebtedness of such
Person and its Restricted Subsidiaries, plus
(2) the total amount of Indebtedness of any other Person
that has been Guaranteed by the referent Person or one or more
of its Restricted Subsidiaries, plus
(3) the aggregate liquidation value of all Disqualified
Stock of such Person and all Preferred Stock of Restricted
Subsidiaries of such Person, in each case, determined on a
consolidated basis in accordance with GAAP.
Consolidated Interest Expense means,
with respect to any Person for any period, without duplication,
the sum of:
(1) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or
accrued (including, without limitation, amortization or original
issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease
Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers
acceptance financings, and net payments (if any) pursuant to
Hedging Obligations); and
(2) the consolidated interest expense of such Person and
its Restricted Subsidiaries that was capitalized during such
period; and
(3) any interest expense on Indebtedness of another Person
that is guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or
one of its Restricted Subsidiaries (whether or not such
Guarantee or Lien is called upon); excluding, however, any
amount of such interest of any Restricted Subsidiary of the
referent Person if the net income of such Restricted Subsidiary
is excluded in the calculation of Consolidated EBITDA pursuant
to clause (z) of the definition thereof (but only in the
same proportion as the net income of such Restricted Subsidiary
is excluded from the calculation of Consolidated EBITDA pursuant
to clause (z) of the definition thereof), in each case, on
a consolidated basis and in accordance with GAAP.
Continuing Directors means, as of any
date of determination, any member of the Board of Directors of
CCI who:
(1) was a member of the Board of Directors of CCI on the
Issue Date; or
(2) was nominated for election or elected to the Board of
Directors of CCI with the approval of a majority of the
Continuing Directors who were members of such Board of Directors
of CCI at the time of such nomination or election or whose
election or appointment was previously so approved.
Credit Facilities means, with respect
to CCH II and/or its Restricted Subsidiaries, one or more
debt facilities or commercial paper facilities (including the
Vulcan Backstop Facility), in each case with banks or other
lenders (other than a Parent of the Issuers, but including the
Lenders under the Vulcan Backstop Facility) providing for
revolving credit loans, term loans, receivables financing
(including through the sale of receivables to such lenders or to
special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or
refinanced in whole or in part from time to time.
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Default means any event that is, or
with the passage of time or the giving of notice or both would
be, an Event of Default.
Disposition means, with respect to any
Person, any merger, consolidation or other business combination
involving such Person (whether or not such Person is the
Surviving Person) or the sale, assignment, transfer, lease or
conveyance, or other disposition of all or substantially all of
such Persons assets or Capital Stock.
Disqualified Stock means any Capital
Stock that, by its terms (or by the terms of any security into
which it is convertible, or for which it is exchangeable, in
each case at the option of the holder thereof) or upon the
happening of any event, matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or
redeemable at the option of the holder thereof, in whole or in
part, on or prior to the date that is 91 days after the
date on which the Notes mature. Notwithstanding the preceding
sentence, any Capital Stock that would constitute Disqualified
Stock solely because the holders thereof have the right to
require CCH II to repurchase such Capital Stock upon the
occurrence of a change of control or an asset sale shall not
constitute Disqualified Stock if the terms of such Capital Stock
provide that CCH II may not repurchase or redeem any such
Capital Stock pursuant to such provisions unless such repurchase
or redemption complies with the covenant described above under
the caption Certain covenants
Restricted payments.
Equity Interests means Capital Stock
and all warrants, options or other rights to acquire Capital
Stock (but excluding any debt security that is convertible into,
or exchangeable for, Capital Stock).
Equity Offering means any private or
underwritten public offering of Qualified Capital Stock of
CCH II or a Parent of which the gross proceeds to
CCH II or received by CCH II as a capital contribution
from such Parent, as the case may be, are at least
$25 million.
Existing Indebtedness means
Indebtedness of CCH II and its Restricted Subsidiaries in
existence on the Issue Date, until such amounts are repaid.
GAAP means generally accepted
accounting principles set forth in the opinions and
pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity
as have been approved by a significant segment of the accounting
profession, which were in effect on the Issue Date.
Guarantee or
guarantee means a guarantee other than
by endorsement of negotiable instruments for collection in the
ordinary course of business, direct or indirect, in any manner
including, without limitation, by way of a pledge of assets or
through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness, measured as the
lesser of the aggregate outstanding amount of the Indebtedness
so guaranteed and the face amount of the guarantee.
Hedging Obligations means, with
respect to any Person, the obligations of such Person under:
(1) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements;
(2) interest rate option agreements, foreign currency
exchange agreements, foreign currency swap agreements; and
(3) other agreements or arrangements designed to protect
such Person against fluctuations in interest and currency
exchange rates.
Helicon Preferred Stock means the
preferred limited liability company interest of Charter-Helicon
LLC with an aggregate liquidation value of $25 million.
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Indebtedness means, with respect to
any specified Person, any indebtedness of such Person, whether
or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar
instruments or letters of credit (or reimbursement agreements in
respect thereof);
(3) in respect of bankers acceptances;
(4) representing Capital Lease Obligations;
(5) in respect of the balance deferred and unpaid of the
purchase price of any property, except any such balance that
constitutes an accrued expense or trade payable; or
(6) representing the notional amount of any Hedging
Obligations, if and to the extent any of the preceding items
(other than letters of credit and Hedging Obligations) would
appear as a liability upon a balance sheet of the specified
Person prepared in accordance with GAAP. In addition, the term
Indebtedness includes all Indebtedness of others
secured by a Lien on any asset of the specified Person (whether
or not such Indebtedness is assumed by the specified Person)
and, to the extent not otherwise included, the guarantee by such
Person of any indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date shall
be:
(1) the accreted value thereof, in the case of any
Indebtedness issued with original issue discount; and
(2) the principal amount thereof, together with any
interest thereon that is more than 30 days past due, in the
case of any other Indebtedness.
Investment Grade Rating means a rating
equal to or higher than Baa3 (or the equivalent) by Moodys
and BBB- (or the equivalent) by S&P.
Investments means, with respect to any
Person, all investments by such Person in other Persons,
including Affiliates, in the forms of direct or indirect loans
(including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel
and similar advances to officers and employees made in the
ordinary course of business) and purchases or other acquisitions
for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be
classified as investments on a balance sheet prepared in
accordance with GAAP.
Issue Date means September 23,
2003.
Leverage Ratio means, as to
CCH II, as of any date, the ratio of:
(1) the Consolidated Indebtedness of CCH II on such
date to
(2) the aggregate amount of Consolidated EBITDA for
CCH II for the most recently ended fiscal quarter for which
internal financial statements are available multiplied by four
(the Reference Period).
In addition to the foregoing, for purposes of this definition,
Consolidated EBITDA shall be calculated on a pro
forma basis after giving effect to
(1) the issuance of the Notes;
(2) the incurrence of the Indebtedness or the issuance of
the Disqualified Stock or Preferred Stock of a Restricted
Subsidiary (and the application of the proceeds therefrom)
giving rise to the need to make such calculation and any
incurrence or issuance (and the application of the proceeds
therefrom) or repayment of other Indebtedness, Disqualified
Stock or Preferred Stock of a Restricted Subsidiary, other than
the incurrence or repayment of Indebtedness for ordinary working
capital purposes, at any time subsequent to the beginning of the
Reference Period and on or prior to the date of determination,
as if such incurrence (and the application of the proceeds
thereof), or the repayment, as the case may be, occurred on the
first day of the Reference Period;
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(3) any Dispositions or Asset Acquisitions (including,
without limitation, any Asset Acquisition giving rise to the
need to make such calculation as a result of such Person or one
of its Restricted Subsidiaries (including any person that
becomes a Restricted Subsidiary as a result of such Asset
Acquisition) incurring, assuming or otherwise becoming liable
for or issuing Indebtedness, Disqualified Stock or Preferred
Stock) made on or subsequent to the first day of the Reference
Period and on or prior to the date of determination, as if such
Disposition or Asset Acquisition (including the incurrence,
assumption or liability for any such Indebtedness, Disqualified
Stock or Preferred Stock and also including any Consolidated
EBITDA associated with such Asset Acquisition, including any
cost savings adjustments in compliance with
Regulation S-X
promulgated by the Securities and Exchange Commission) had
occurred on the first day of the Reference Period.
Lien means, with respect to any asset,
any mortgage, lien, pledge, charge, security interest or
encumbrance of any kind in respect of such asset, whether or not
filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other
agreement to sell or give a security interest in and any filing
of or agreement to give any financing statement under the
Uniform Commercial Code (or equivalent statutes) of any
jurisdiction.
Management Fees means the fees payable
to CCI pursuant to the management and mutual services agreements
between any Parent of CCH II and Charter Communications
Operating, LLC and between any Parent of CCH II and other
Restricted Subsidiaries of CCH II and pursuant to the
limited liability company agreements of certain Restricted
Subsidiaries as such management, mutual services or limited
liability company agreements existed on the Issue Date (or, if
later, on the date any new Restricted Subsidiary is acquired or
created), including any amendment or replacement thereof,
provided, that any such new agreements or amendments or
replacements of existing agreements is not more disadvantageous
to the holders of the Notes in any material respect than such
management agreements that existed on the Issue Date and
further provided, that such new, amended or replacement
management agreements do not provide for percentage fees, taken
together with fees under existing agreements, any higher than
3.5% of CCIs consolidated total revenues for the
applicable payment period.
Moodys means Moodys
Investors Service, Inc. or any successor to the rating agency
business thereof.
Net Proceeds means the aggregate cash
proceeds received by CCH II or any of its Restricted
Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition
of any non-cash consideration received in any Asset Sale), net
of the direct costs relating to such Asset Sale, including,
without limitation, legal, accounting and investment banking
fees, and sales commissions, and any relocation expenses
incurred as a result thereof or taxes paid or payable as a
result thereof (including amounts distributable in respect of
owners, partners or members tax liabilities
resulting from such sale), in each case after taking into
account any available tax credits or deductions and any tax
sharing arrangements and amounts required to be applied to the
repayment of Indebtedness.
Non-Recourse Debt means Indebtedness:
(1) as to which neither CCH II nor any of its
Restricted Subsidiaries
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(a) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute
Indebtedness); |
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(b) is directly or indirectly liable as a guarantor or
otherwise; or |
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(c) constitutes the lender; |
(2) no default with respect to which (including any rights
that the holders thereof may have to take enforcement action
against an Unrestricted Subsidiary) would permit upon notice,
lapse of time or both any holder of any other Indebtedness
(other than the Notes) of CCH II or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to
its stated maturity; and
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(3) as to which the lenders have been notified in writing
that they will not have any recourse to the Capital Stock or
assets of CCH II or any of its Restricted Subsidiaries.
Parent means CCH I, Charter
Holdings, Charter Communications Holding Company, LLC,
CCI and/or any direct or indirect Subsidiary of the
foregoing 100% of the Capital Stock of which is owned directly
or indirectly by one or more of the foregoing Persons, as
applicable, and that directly or indirectly beneficially owns
100% of the Capital Stock of CCH II, and any successor
Person to any of the foregoing.
Permitted Investments means:
(1) any Investment by CCH II in a Restricted
Subsidiary thereof, or any Investment by a Restricted Subsidiary
of CCH II in CCH II or in another Restricted
Subsidiary of CCH II;
(2) any Investment in Cash Equivalents;
(3) any Investment by CCH II or any of its Restricted
Subsidiaries in a Person, if as a result of such Investment:
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(a) such Person becomes a Restricted Subsidiary of
CCH II; or |
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(b) such Person is merged, consolidated or amalgamated with
or into, or transfers or conveys substantially all of its assets
to, or is liquidated into, CCH II or a Restricted
Subsidiary of CCH II; |
(4) any Investment made as a result of the receipt of
non-cash consideration from an Asset Sale that was made pursuant
to and in compliance with the covenant described above under the
caption Repurchase at the option of
holders Asset sales;
(5) any Investment made out of the net cash proceeds of the
issue and sale from and after the Issue Date (other than to a
Subsidiary of CCH II) of Equity Interests (other than
Disqualified Stock) of CCH II to the extent that such net
cash proceeds have not been applied to make a Restricted Payment
or to effect other transactions pursuant to the covenant
described under Restricted payments
(6) other Investments in any Person (other than any Parent)
having an aggregate fair market value when taken together with
all other Investments in any Person made by CCH II and its
Restricted Subsidiaries (without duplication) pursuant to this
clause (6) from and after the Issue Date, not to exceed
$750 million (initially measured on the date each such
Investment was made and without giving effect to subsequent
changes in value, but reducing the amount outstanding by the
aggregate amount of principal, interest, dividends,
distributions, repayments, proceeds or other value otherwise
returned or recovered in respect of any such Investment, but not
to exceed the initial amount of such Investment) at any one time
outstanding; and
(7) Investments in customers and suppliers in the ordinary
course of business which either
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(A) generate accounts receivable, or |
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(B) are accepted in settlement of bona fide
disputes; and |
(8) Investments resulting from the Private Exchanges.
Permitted Liens means:
(1) Liens on the assets of CCH II and its Restricted
Subsidiaries securing Indebtedness and other obligations under
any of the Credit Facilities;
(2) Liens in favor of CCH II;
(3) Liens on property of a Person existing at the time such
Person is merged with or into or consolidated with CCH II
or a Restricted Subsidiary thereof; provided that such
Liens were in existence prior to the contemplation of such
merger or consolidation and do not extend to any assets other
than those of the Person merged into or consolidated with
CCH II or a Restricted Subsidiary thereof;
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(4) Liens on property existing at the time of acquisition
thereof by CCH II or its Restricted Subsidiaries;
provided that such Liens were in existence prior to the
contemplation of such acquisition;
(5) Liens to secure the performance of statutory
obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of
business;
(6) purchase money mortgages or other purchase money Liens
(including, without limitation, any Capitalized Lease
Obligations) incurred by CCH II or its Restricted
Subsidiaries upon any fixed or capital assets acquired after the
Issue Date or purchase money mortgages (including, without
limitation, Capital Lease Obligations) on any such assets,
whether or not assumed, existing at the time of acquisition of
such assets, whether or not assumed, so long as
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(a) such mortgage or lien does not extend to or cover any
of the assets of CCH II or any of its Restricted
Subsidiaries, except the asset so developed, constructed, or
acquired, and directly related assets such as enhancements and
modifications thereto, substitutions, replacements, proceeds
(including insurance proceeds), products, rents and profits
thereof, and |
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(b) such mortgage or lien secures the obligation to pay all
or a portion of the purchase price of such asset, interest
thereon and other charges, costs and expenses (including,
without limitation, the cost of design, development,
construction, acquisition, transportation, installation,
improvement, and migration) and is incurred in connection
therewith (or the obligation under such Capitalized Lease
Obligation) only; |
(7) Liens existing on the Issue Date (other than in
connection with the Credit Facilities) and replacement Liens
therefor that do not encumber additional property;
(8) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested
in good faith by appropriate proceedings promptly instituted and
diligently concluded; provided that any reserve or other
appropriate provision as shall be required in conformity with
GAAP shall have been made therefor;
(9) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen,
repairmen or other similar Liens arising in the ordinary course
of business and with respect to amounts not yet delinquent or
being contested in good faith by appropriate legal proceedings
promptly instituted and diligently conducted and for which a
reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made;
(10) Liens incurred or deposits made in the ordinary course
of business in connection with workers compensation,
unemployment insurance and other types of social security;
(11) Liens incurred or deposits made to secure the
performance of tenders, bids, leases, statutory or regulatory
obligation, bankers acceptance, surety and appeal bonds,
government contracts, performance and
return-of-money bonds
and other obligations of a similar nature incurred in the
ordinary course of business (exclusive of obligations for the
payment of borrowed money);
(12) easements,
rights-of-way,
municipal and zoning ordinances and similar charges,
encumbrances, title defects or other irregularities that do not
materially interfere with the ordinary course of business of CCO
Holdings or any of its Restricted Subsidiaries;
(13) Liens of franchisors or other regulatory bodies
arising in the ordinary course of business;
(14) Liens arising from filing Uniform Commercial Code
financing statements regarding leases or other Uniform
Commercial Code financing statements for precautionary purposes
relating to arrangements not constituting Indebtedness;
(15) Liens arising from the rendering of a final judgment
or order against CCH II or any of its Restricted
Subsidiaries that does not give rise to an Event of Default;
(16) Liens securing reimbursement obligations with respect
to letters of credit that encumber documents and other property
relating to such letters of credit and the products and proceeds
thereof;
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(17) Liens encumbering customary initial deposits and
margin deposits, and other Liens that are within the general
parameters customary in the industry and incurred in the
ordinary course of business, in each case, securing Indebtedness
under Hedging Obligations and forward contracts, options, future
contracts, future options or similar agreements or arrangements
designed solely to protect CCH II or any of its Restricted
Subsidiaries from fluctuations in interest rates, currencies or
the price of commodities;
(18) Liens consisting of any interest or title of licensor
in the property subject to a license;
(19) Liens on the Capital Stock of Unrestricted
Subsidiaries;
(20) Liens arising from sales or other transfers of
accounts receivable which are past due or otherwise doubtful of
collection in the ordinary course of business;
(21) Liens incurred in the ordinary course of business of
CCH II and its Restricted Subsidiaries with respect to
obligations which in the aggregate do not exceed
$50 million at any one time outstanding;
(22) Liens in favor of the trustee arising under the
Indenture and similar provisions in favor of trustees or other
agents or representatives under indentures or other agreements
governing debt instruments entered into after the date hereof;
(23) Liens in favor of the trustee for its benefit and the
benefit of holders of the Notes, as their respective interests
appear; and
(24) Liens securing Permitted Refinancing Indebtedness, to
the extent that the Indebtedness being refinanced was secured or
was permitted to be secured by such Liens.
Permitted Refinancing Indebtedness
means any Indebtedness of CCH II or any of its
Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used within 60 days after the date of
issuance thereof to extend, refinance, renew, replace, defease
or refund, other Indebtedness of CCO Holdings or any of its
Restricted Subsidiaries (other than intercompany Indebtedness);
provided that unless permitted otherwise by the
Indenture, no Indebtedness of any Restricted Subsidiary may be
issued in exchange for, nor may the net proceeds of Indebtedness
be used to extend, refinance, renew, replace, defease or refund,
Indebtedness of the direct or indirect parent of such Restricted
Subsidiary; provided further that:
(1) the principal amount (or accreted value, if applicable)
of such Permitted Refinancing Indebtedness does not exceed the
principal amount of (or accreted value, if applicable) plus
accrued interest and premium, if any, on the Indebtedness so
extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses incurred in connection
therewith), except to the extent that any such excess principal
amount would be then permitted to be incurred by other
provisions of the covenant described above under the caption
Certain covenants Incurrence of
indebtedness and issuance of preferred stock.
(2) such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or
refunded; and
(3) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right
of payment to the Notes, such Permitted Refinancing Indebtedness
has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on terms
at least as favorable to the holders of Notes as those contained
in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
Person means any individual,
corporation, partnership, joint venture, association, limited
liability company, joint stock company, trust, unincorporated
organization, government or agency or political subdivision
thereof or any other entity.
Preferred Stock, as applied to the
Capital Stock of any Person, means Capital Stock of any class or
classes (however designated) which, by its terms, is preferred
as to the payment of dividends, or as to the
188
distribution of assets upon any voluntary or involuntary
liquidation or dissolution of such Person, over shares of
Capital Stock of any other class of such Person.
Private Exchanges means, collectively,
(1) the acquisition by CCH II of certain senior notes
and senior discount notes outstanding under the Charter Holdings
Indentures, in exchange for notes, pursuant to one or more
Exchange Agreements dated on or after September 18, 2003,
as such agreements may be supplemented, modified, extended or
amended from time to time;
(2) the acquisition by CCH II of certain convertible
senior notes outstanding under the CCI Indentures in exchange
for notes, pursuant to one or more Exchange Agreements dated on
or after September 18, 2003, as such agreements may be
supplemented, modified, extended or amended from time to
time; and
(3) the distribution, loan or investment of (a) senior
notes and senior discount notes accepted in exchange for notes
as contemplated by clause (1) of this definition,
(b) convertible notes accepted in exchange for notes as
contemplated by clause (2) of this definition and
(c) amounts sufficient to satisfy the expenses incurred by
any Parent in connection therewith (including any required
payment of accrued interest thereon), in each case, directly or
indirectly to or in any Parent.
Productive Assets means assets
(including assets of a referent Person owned directly or
indirectly through ownership of Capital Stock) of a kind used or
useful in the Cable Related Business.
Qualified Capital Stock means any
Capital Stock that is not Disqualified Stock.
Rating Agencies means Moodys and
S&P.
Related Party means: (1) the
spouse or an immediate family member, estate or heir of Paul G.
Allen; or (2) any trust, corporation, partnership or other
entity, the beneficiaries, stockholders, partners, owners or
Persons beneficially holding an 80% or more controlling interest
of which consist of Paul G. Allen and/or such other Persons
referred to in the immediately preceding clause (1).
Restricted Investment means an
Investment other than a Permitted Investment.
Restricted Subsidiary of a Person
means any Subsidiary of the referent Person that is not an
Unrestricted Subsidiary.
S&P means Standard &
Poors Ratings Service, a division of the McGraw-Hill
Companies, Inc. or any successor to the rating agency business
thereof.
Significant Subsidiary means
(a) with respect to any Person, any Restricted Subsidiary
of such Person which would be considered a Significant
Subsidiary as defined in Rule 1-02(w) of
Regulation S-X
under the Securities Act and (b) in addition, with respect
to CCH II, Capital Corp.
Stated Maturity means, with respect to
any installment of interest or principal on any series of
Indebtedness, the date on which such payment of interest or
principal was scheduled to be paid in the documentation
governing such Indebtedness on the Issue Date, or, if none, the
original documentation governing such Indebtedness, and shall
not include any contingent obligations to repay, redeem or
repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
Subsidiary means, with respect to any
Person:
(1) any corporation, association or other business entity
of which at least 50% of the total voting power of shares of
Capital Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other
Subsidiaries of that Person (or a combination thereof) and, in
the case of any such entity of which 50% of the total voting
power of shares of Capital Stock is so owned or controlled by
such Person or one or more of the other Subsidiaries of such
Person,
189
such Person and its Subsidiaries also have the right to control
the management of such entity pursuant to contract or
otherwise; and
(2) any partnership
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(a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such
Person, or |
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(b) the only general partners of which are such Person or
of one or more Subsidiaries of such Person (or any combination
thereof). |
Unrestricted Subsidiary means any
Subsidiary of CCH II that is designated by the Board of
Directors of CCH II as an Unrestricted Subsidiary pursuant
to a board resolution, but only to the extent that such
Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or
understanding with CCH II or any Restricted Subsidiary of
CCH II unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to
CCH II or such Restricted Subsidiary of CCH II than
those that might be obtained at the time from Persons who are
not Affiliates of CCH II unless such terms constitute
Investments permitted by the covenant described above under the
caption Certain covenants
Investments, Permitted Investments, Asset Sales permitted
under the covenant described above under the caption
Repurchase at the option of the
holders Asset sales or sale-leaseback
transactions permitted by the covenant described above under the
caption Certain covenants Sale and leaseback
transactions;
(3) is a Person with respect to which neither CCH II
nor any of its Restricted Subsidiaries has any direct or
indirect obligation
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(a) to subscribe for additional Equity Interests or |
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(b) to maintain or preserve such Persons financial
condition or to cause such Person to achieve any specified
levels of operating results; |
(4) has not guaranteed or otherwise directly or indirectly
provided credit support for any Indebtedness of CCH II or
any of its Restricted Subsidiaries;
(5) has at least one director on its board of directors
that is not a director or executive officer of CCH II or
any of its Restricted Subsidiaries or has at least one executive
officer that is not a director or executive officer of
CCH II or any of its Restricted Subsidiaries; and
(6) does not own any Capital Stock of any Restricted
Subsidiary of CCH II.
Any designation of a Subsidiary of CCH II as an
Unrestricted Subsidiary shall be evidenced to the trustee by
filing with the trustee a certified copy of the board resolution
giving effect to such designation and an officers
certificate certifying that such designation complied with the
preceding conditions and was permitted by the covenant described
above under the caption Certain
covenants Investments. If, at any time, any
Unrestricted Subsidiary would fail to meet the preceding
requirements as an Unrestricted Subsidiary, it shall thereafter
cease to be an Unrestricted Subsidiary for purposes of the
Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of CCH II
as of such date and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the
caption Certain covenants
Incurrence of indebtedness and issuance of preferred
stock, CCH II shall be in default of such covenant.
The Board of Directors of CCH II may at any time designate
any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided that such designation shall
190
be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if:
(1) such Indebtedness is permitted under the covenant
described under the caption Certain
covenants Incurrence of indebtedness and issuance of
preferred stock, calculated on a pro forma basis as if
such designation had occurred at the beginning of the
four-quarter reference period; and
(2) no Default or Event of Default would be in existence
immediately following such designation.
Voting Stock of any Person as of any
date means the Capital Stock of such Person that is at the time
entitled to vote in the election of the board of directors or
comparable governing body of such Person.
Vulcan Backstop Facility means a
credit facility entered into or to be entered into by and among
CCO Holdings, LLC, a Delaware limited liability company, CCI,
Charter Communications Holding Company, LLC, Charter Holdings,
CCH I, CCH II and/or one or more other Subsidiaries of
CCH II and the lenders party thereto pursuant to a
commitment letter dated March 14, 2003 between Vulcan Inc.
and Charter Communications VII, LLC, as amended by an extension
letter dated June 30, 2003, by and between Vulcan Inc., CCO
Holdings, LLC and Charter Communications VII, LLC, as the same
may be further amended, extended, modified, supplemented or
replaced from time to time.
Weighted Average Life to Maturity
means, when applied to any Indebtedness at any date, the
number of years obtained by dividing:
(1) the sum of the products obtained by multiplying
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(a) the amount of each then remaining installment, sinking
fund, serial maturity or other required payments of principal,
including payment at final maturity, in respect thereof, by |
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(b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making
of such payment; by |
(2) the then outstanding principal amount of such
Indebtedness.
Wholly Owned Restricted Subsidiary of
any Person means a Restricted Subsidiary of such Person all of
the outstanding common equity interests or other ownership
interests of which (other than directors qualifying
shares) shall at the time be owned by such Person and/or by one
or more Wholly Owned Restricted Subsidiaries of such Person.
191
IMPORTANT UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a general discussion of the material
U.S. federal income tax consequences of the purchase,
ownership and disposition of the new notes by a person who
acquires new notes pursuant to this exchange offer. Except where
noted, the summary deals only with the new notes held as capital
assets within the meaning of section 1221 of the Internal
Revenue Code of 1986, as amended (the Code), and
does not deal with special situations, such as those of
broker-dealers, tax exempt organizations, individual retirement
accounts and other tax deferred accounts, financial
institutions, insurance companies, holders whose functional
currency is not the U.S. dollar, or persons holding new
notes as part of a hedging or conversion transaction or a
straddle, or a constructive sale. Further, the discussion below
is based upon the provisions of the Code and Treasury
regulations, rulings and judicial decisions thereunder as of the
date hereof, and such authorities may be repealed, revoked, or
modified, possibly with retroactive effect, so as to result in
United States federal income tax consequences different from
those discussed below. In addition, except as otherwise
indicated, the following does not consider the effect of any
applicable foreign, state, local or other tax laws or estate or
gift tax considerations. Furthermore, this discussion does not
consider the tax treatment of holders of the new notes who are
partnerships or other pass-through entities for
U.S. federal income tax purposes, or who are former
citizens or long-term residents of the United States.
This summary addresses tax consequences relevant to a holder of
the new notes that is either a U.S. Holder or a
Non-U.S. Holder.
As used herein, a U.S. Holder is a beneficial
owner of a new note who is, for U.S. federal income tax
purposes, either an individual who is a citizen or resident of
the United States, a corporation or other entity taxable as a
corporation for U.S. federal income tax purposes created
in, or organized in or under the laws of, the United States or
any political subdivision thereof, an estate the income of which
is subject to U.S. federal income taxation regardless of
its source, or a trust the administration of which is subject to
the primary supervision of a U.S. court and which has one
or more United States persons who have the authority to control
all substantial decisions of the trust or that was in existence
on, August 20, 1996, was treated as a United States person
under the Code on that date and has made a valid election to be
treated as a United States person under the Code. A
Non-U.S. Holder
is a beneficial owner of a new note that is, for
U.S. federal income tax purposes, not a U.S. Holder or
a partnership or other pass-through entity for U.S. federal
income tax purposes.
The U.S. federal income tax treatment of a partner in a
partnership (or other entity classified as a partnership for
U.S. federal income tax purposes) that holds the new notes
generally will depend on such partners particular
circumstances and on the activities of the partnership. Partners
in such partnerships should consult their own tax advisors.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX
ADVISORS WITH REGARD TO THE APPLICATION OF THE TAX
CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR SITUATIONS,
AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN, ESTATE,
GIFT OR OTHER TAX LAWS, OR SUBSEQUENT REVISIONS THEREOF.
United States Federal Income Taxation of U.S. Holders
Pursuant to the exchange offer holders are entitled to exchange
the original notes for new notes that will be substantially
identical in all material respects to the original notes, except
that the new notes will be registered and therefore will not be
subject to transfer restrictions. Accordingly,
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(1) no gain or loss will be realized by a U.S. Holder
upon receipt of a new note, |
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(2) the holding period of the new note will include the
holding period of the original note exchanged therefor, |
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(3) the adjusted tax basis of the new notes will be the
same as the adjusted tax basis of the original notes exchanged
at the time of the exchange, and |
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(4) the U.S. Holder will continue to take into account
income in respect of the new note in the same manner as before
the exchange. |
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Payments of Interest on the New Notes |
Interest on the new notes constitutes qualified stated interest
and will be taxable to a U.S. Holder as ordinary income at
the time such interest is accrued or actually or constructively
received in accordance with the U.S. Holders regular
method of accounting for U.S. federal income tax purposes.
The original notes were issued with original issue discount
(OID) for federal income tax purposes and therefore
the new notes will have the same amounts of OID as the original
notes. The OID on the original notes is equal to the excess of
the stated redemption price at maturity of the notes over their
issue price. The stated redemption price at maturity of the
original notes is equal to their face amount. The issue price of
the original notes was less than their face amount by more than
a de minimis amount and the resulting OID must be taken
into account by holders of both the original notes and the new
notes.
A U.S. holder (whether a cash or accrual method taxpayer) will
be required to include in gross income all OID as it accrues on
a constant yield to maturity basis without regard to the timing
of the receipt of cash payments attributable thereto. The amount
of OID includible in gross income by a U.S. holder of a new note
for a taxable year will be the sum of the daily portions of OID
with respect to the new note for each day during that taxable
year on which the U.S. holder holds the new note. The daily
portion is determined by allocating to each day in an
accrual period a pro rata portion of the OID
allocable to that accrual period. The OID allocable to any
accrual period will equal the product of the adjusted issue
price of the new notes as of the beginning of such period and
the new notes yield to maturity. The adjusted issue price of a
new note as of the beginning of any accrual period will equal
its issue price, increased by previously accrued OID, and
decreased by the amount of any cash payments made on the new
note. A U.S. holders tax basis in the new notes will be
increased by the amount of OID that is includible in the
holders gross income. We or our paying agent will furnish
annually to the IRS and to the U.S. holders (other than with
respect to certain exempt holders, including, in particular,
corporations) information with respect to any OID accruing while
such U.S. holders hold the new notes.
Effect of Optional Redemption on Original Issue Discount.
At any time prior to September 15, 2006 we may redeem up to 35%
of the new notes upon the occurrence of certain public equity
offerings. Computation of the yield and maturity of the new
notes is not affected by such redemption rights if, based on all
the facts and circumstances as of the date of issuance, the
stated payment schedule of the new notes (that does not reflect
the equity offering event) is significantly more likely than not
to occur. We have determined that, based on all of the facts and
circumstances as of the date of issuance, it is significantly
more likely than not that the new notes will be paid according
to their stated schedule.
We may redeem the new notes, in whole or in part, at any time on
or after September 15, 2008 at redemption prices specified
elsewhere herein plus accrued and unpaid interest, if any. The
Treasury Regulations contain rules for determining the
maturity date and the stated redemption price at
maturity of an instrument that may be redeemed prior to its
stated maturity date at the option of the issuer. Under such
Treasury Regulations, solely for the purposes of the accrual of
original issue discount, it is assumed that an issuer will
exercise any option to redeem a debt instrument only if such
exercise would lower the yield to maturity of the debt
instrument. Because the exercise of such options would not lower
the yield to maturity of the new notes, we believe that we will
not be presumed under these rules to redeem the new notes prior
to their stated maturity.
193
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Sale, Redemption, Retirement or Other Taxable Disposition
of the New Notes |
Unless a non-recognition event applies, upon the sale,
redemption, retirement or other taxable disposition of a new
note, the U.S. Holder will generally recognize gain or loss
in an amount equal to the difference between (1) the amount
of cash and the fair market value of other property received in
exchange therefor and (2) the holders adjusted tax
basis in such new note. Amounts attributable to accrued but
unpaid interest on the new notes will be treated as ordinary
interest income as described above. A U.S. Holders
adjusted tax basis in a new note will generally equal the
purchase price of the new note(or the original note exchanged
therefor) increased by the amount of any OID includible in
income and any market discount, if any, that the
U.S. Holder elected to include in income and decreased by
the amount of any payment on such new note other than qualified
stated interest.
Except as discussed below with respect to market discount, gain
or loss realized on the sale, redemption, retirement or other
taxable disposition of a new note will be capital gain or loss
and will be long term capital gain or loss at the time of sale,
redemption, retirement or other taxable disposition, if the new
note has been held for more than one year. The deductibility of
capital losses is subject to certain limitations.
The resale of new notes may be affected by the impact on a
purchaser of the market discount provisions of the Code. For
this purpose, the market discount on a new note generally will
be equal to the amount, if any, by which the adjusted issue
price of the new note immediately after its acquisition exceeds
the amount paid for the new note. To the extent a U.S. holder
had market discount on an original note, the U.S. holder will
have market discount on a new note exchanged therefor. Subject
to a de minimis exception, these provisions generally require a
U.S. Holder who acquires a new note at a market discount to
treat as ordinary income any gain recognized on the disposition
of such new note to the extent of the accrued market discount on
such new note at the time of disposition, unless the
U.S. Holder elects to include accrued market discount in
income currently. In general, market discount will be treated as
accruing on a straight line basis over the remaining term of the
new note at the time of acquisition, or at the election of the
U.S. Holder, under a constant yield method. If an election
is made, the holders basis in the new notes will be
increased to reflect the amount of income recognized and the
rules described below regarding deferral of interest deductions
will not apply. The election to include market discount in
income currently, once made, applies to all market discount
obligations acquired on or after the first taxable year to which
the election applies and may not be revoked without the consent
of the Internal Revenue Service.
A U.S. Holder who acquires a new note at a market discount
and who does not elect to include accrued market discount in
income currently may be required to defer the deduction of a
portion of the interest on any indebtedness incurred or
maintained to purchase or carry such new note.
A U.S. Holder that purchased an original note for an amount
in excess of the adjusted issue price of such original note will
have acquisition premium with respect to such original note and
with respect to a new note received in exchange therefor. A U.S.
holder will reduce OID otherwise includible in income for each
accrual period by an amount equal to the product of (i) the
amount of such OID other includible for such period and
(ii) a fraction, the numerator of which is the acquisition
premium and the denominator of which is the excess of the
amounts payable on the new note after the purchase date over the
adjusted issue price.
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Information Reporting and Backup Withholding |
Backup withholding and information reporting requirements may
apply to certain payments of principal, interest and OID on a
new note and to certain payments of the proceeds of the sale or
redemption of a new note. We or our paying agent, as the case
may be, will be required to withhold from
194
any payment that is subject to backup withholding tax at a rate
of 28 percent if a U.S. Holder fails to furnish his
U.S. taxpayer identification number (TIN),
certify that such number is correct, certify that such holder is
not subject to backup withholding or otherwise comply with the
applicable backup withholding rules. Unless extended by future
legislation, however, the reduction in the backup withholding
rate to 28 percent expires and the 31 percent backup
withholding rate will be reinstated for payments made after
December 31, 2010. Exempt holders (including, among others,
all corporations) are not subject to these backup withholding
and information reporting requirements.
Any amounts withheld under the backup withholding rules from a
payment to a U.S. Holder of the new notes will be allowed
as a refund or a credit against such holders
U.S. federal income tax liability, provided that the
required information is furnished to the Internal Revenue
Service.
United States Federal Income Taxation of
Non-U.S. Holders
The exchange of original notes for the new notes pursuant to
this exchange offer will not constitute a taxable event for a
Non-U.S. Holder.
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Payments of Interest and OID |
Subject to the discussion of information reporting and backup
withholding below, and assuming that the DTCs book-entry
procedures set forth in the section entitled Description
of the Notes Book-Entry, Delivery and Form are
observed upon issuance and throughout the term of the Notes, the
payment to a
Non-U.S. Holder of
interest and OID on a new note will not be subject to United
States federal withholding tax pursuant to the portfolio
interest exception, provided that:
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(1) the interest and OID is not effectively connected with
the conduct of a trade or business in the United States; |
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(2) the
Non-U.S. Holder
(A) does not actually or constructively own 10 percent
or more of the combined voting power of all classes of stock of
CCH II Capital Corp entitled to vote nor 10 percent or more
of the capital or profits interests of CCH II, LLC and
(B) is neither a controlled foreign corporation that is
related to us through stock ownership within the meaning of the
Code, nor a bank that received the new notes on an extension of
credit in the ordinary course of its trade or business; and |
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(3) either (A) the beneficial owner of the new notes
certifies to us or our paying agent, under penalties of perjury,
that it is not a U.S. Holder and provides its name and
address on Internal Revenue Service Form W-8BEN (or a
suitable substitute form) or (B) a securities clearing
organization, bank or other financial institution that holds the
new notes on behalf of such
Non-U.S. Holder in
the ordinary course of its trade or business (a financial
institution) certifies under penalties of perjury that
such an Internal Revenue Service Form W-8BEN or W-8IMY (or
suitable substitute form) has been received from the beneficial
owner by it or by a financial institution between it and the
beneficial owner and, in case of a non-qualified intermediary,
furnishes the payor with a copy thereof. |
If a
Non-U.S. Holder
cannot satisfy the requirements of the portfolio interest
exception described above, payments of interest and OID made to
such
Non-U.S. Holder
will be subject to a 30 percent withholding tax, unless the
beneficial owner of the Note provides us or our paying agent, as
the case may be, with a properly executed (1) Internal
Revenue Service Form W-8BEN (or successor form) providing a
correct TIN and claiming an exemption from or reduction in the
rate of withholding under the benefit of a income tax treaty or
(2) Internal Revenue Service Form W-8ECI (or successor
form) providing a correct TIN and stating that interest paid on
the new note is not subject to withholding tax because it is
effectively connected with the beneficial owners conduct
of a trade or business in the United States.
195
Notwithstanding the foregoing, if a
Non-U.S. Holder of
a new note is engaged in a trade or business in the United
States and interest and OID on the new note is effectively
connected with the conduct of such trade or business, and, where
an income tax treaty applies, is attributable to a
U.S. permanent establishment or, in the case of an
individual, a fixed base in the United States, such
Non-U.S. Holder
generally will be subject to U.S. federal income tax on
such interest and OID in the same manner as if it were a
U.S. Holder (that is, will be taxable on a net basis at
applicable graduated individual or corporate rates). In
addition, if such
Non-U.S. Holder is
a foreign corporation, it may be subject to a branch profits tax
equal to 30 percent of its effectively connected earnings
and profits for that taxable year unless it qualifies for a
lower rate under an applicable income tax treaty.
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Sale, Redemption, Retirement or Other Taxable Disposition
of New Notes |
Generally, any gain realized on the sale, redemption, retirement
or other taxable disposition of a new note by a
Non-U.S. Holder
will not be subject to U.S. federal income tax, unless:
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(1) such gain is effectively connected with the conduct by
such holder of a trade or business in the United States, and,
where an income tax treaty applies, the gain is attributable to
a permanent establishment maintained in the United States or, in
the case of an individual, a fixed base in the United
States, or |
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(2) in the case of gains derived by an individual, such
individual is present in the United States for 183 days or
more in the taxable year of the disposition and certain other
conditions are met. |
If a
Non-U.S. Holder of
a new note is engaged in the conduct of a trade or business in
the United States, gain on the taxable disposition of a new note
that is effectively connected with the conduct of such trade or
business and, where an income tax treaty applies, is
attributable to a U.S. permanent establishment or, in the
case of an individual, a fixed base in the United States,
generally will be taxed on a net basis at applicable graduated
individual or corporate rates. Effectively connected gain of a
foreign corporation may, under certain circumstances, be subject
as well to a branch profits tax at a rate of 30 percent or
a lower applicable income tax treaty rate.
If an individual
Non-U.S. Holder is
present in the United States for 183 days or more in the
taxable year of the disposition of the Note and is nevertheless
a
Non-U.S. Holder,
such
Non-U.S. Holder
generally will be subject to U.S. federal income tax at a
rate of 30 percent (or a lower applicable income tax treaty
rate) on the amount by which capital gains allocable to
U.S. sources (including gain, if such gain is allowable to
U.S. sources, from the sale, exchange, retirement or other
disposition of the Note) exceed capital losses which are
allocable to U.S. sources and recognized during the same
taxable year.
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Information Reporting and Backup Withholding |
When required, we or our paying agent will report annually to
the Internal Revenue Service and to each
Non-U.S. Holder
the payment of any interest (and OID), regardless of whether
withholding was required, and any tax withheld with respect to
the interest (and OID). Copies of these information returns may
also be made available under the provisions of a specific treaty
or agreement of the tax authorities of the country in which the
Non-U.S. Holder
resides.
Certain
Non-U.S. Holders
may, under applicable U.S. Treasury regulations, be
presumed to be U.S. persons. Interest paid to such holders
generally will be subject to information reporting and backup
withholding at a 28 percent rate unless such holders
provide to us or our paying agent, as the case maybe, an
Internal Revenue Service Form W-8BEN (or satisfy certain
certification documentary evidence requirements for establishing
that such holders are non-United States persons under
U.S. Treasury regulations) or otherwise establish an
exemption. Unless extended by future legislation, however, the
reduction in the backup withholding rate to 28 percent
expires and the 31 percent backup withholding rate will be
reinstated for payments made after December 31, 2010.
Backup withholding will not apply to interest that was subject
to the 30 percent withholding tax (or at applicable income
tax treaty rate) applicable to certain
Non-U.S. Holders,
as described above.
196
Information reporting and backup withholding will also generally
apply to a payment of the proceeds of a disposition of a new
note (including a redemption) if payment is effected by or
through a U.S. office of a broker, unless a
Non-U.S. Holder
provides us or our paying agent, as the case may be, with such
Non-U.S. Holders
name and address and either certifies non-United States status
or otherwise establishes an exemption. In general, backup
withholding and information reporting will not apply to the
payment of the proceeds from the disposition of the Notes by or
through a foreign office of a broker. If, however, such broker
is (i) a United States person, (ii) a foreign person
50 percent or more of whose gross income is from a
U.S. trade or business for a specified three-year period,
(iii) a controlled foreign corporation as to
the United States, or (iv) a foreign partnership that, at
any time during its taxable year, is 50 percent or more (by
income or capital interest) owned by United States persons or is
engaged in the conduct of a U.S. trade or business, such
payment will be subject to information reporting, but not backup
withholding, unless such broker has documentary evidence in its
records that the holder is a
Non-U.S. Holder
and certain other conditions are met, or the holder otherwise
establishes an exemption.
Any amounts withheld under the backup withholding rules from a
payment to a holder of the new notes will be allowed as a refund
or a credit against such holders U.S. federal income tax
liability, provided that the required information is furnished
to the Internal Revenue Service.
PLAN OF DISTRIBUTION
A broker-dealer that is the holder of original notes that were
acquired for the account of such broker-dealer as a result of
market-making or other trading activities, other than original
notes acquired directly from us or any of our affiliates may
exchange such original notes for new notes pursuant to the
exchange offer. This is true so long as each broker-dealer that
receives new notes for its own account in exchange for original
notes, where such original notes were acquired by such
broker-dealer as a result of market-making or other trading
activities acknowledges that it will deliver a prospectus in
connection with any resale of such new notes. This prospectus,
as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of new notes
received in exchange for original notes where such original
notes were acquired as a result of market-making activities or
other trading activities. We have agreed that for a period of
180 days after consummation of the exchange offer or such
time as any broker-dealer no longer owns any registrable
securities, we will make this prospectus, as it may be amended
or supplemented from time to time, available to any
broker-dealer for use in connection with any such resale. All
dealers effecting transactions in the new notes will be required
to deliver a prospectus.
We will not receive any proceeds from any sale of new notes by
broker-dealers or any other holder of new notes. New notes
received by broker-dealers for their own account in the exchange
offer may be sold from time to time in one or more transactions
in the over-the-counter
market, in negotiated transactions, through the writing of
options on the new notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to
or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such new notes. Any
broker-dealer that resells new notes that were received by it
for its own account pursuant to the exchange offer and any
broker or dealer that participates in a distribution of such new
notes may be deemed to be an underwriter within the
meaning of the Securities Act of 1933, and any profit on any
such resale of new notes and any commissions or concessions
received by any such persons may be deemed to be underwriting
compensation under the Securities Act of 1933. The letter of
transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an underwriter within the
meaning of the Securities Act of 1933.
For a period of 180 days after consummation of the exchange
offer (or, if earlier, until such time as any broker-dealer no
longer owns any registrable securities), we will promptly send
additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests
such documents in the letter of transmittal. We have agreed to
pay all expenses incident to the exchange offer and to our
performance of, or compliance with, the exchange and
registration rights agreement (other than
197
commissions or concessions of any brokers or dealers) and will
indemnify the holders of the notes (including any
broker-dealers) against certain liabilities, including
liabilities under the Securities Act of 1933.
LEGAL MATTERS
The validity of the new notes offered in this prospectus will be
passed upon for the Issuers by Gibson, Dunn & Crutcher LLP,
New York, New York.
EXPERTS
The consolidated financial statements of CCH II, LLC and
subsidiaries as of December 31, 2005 and 2004, and for each
of the years in the three-year period ended December 31,
2005, have been included herein in reliance upon the report of
KPMG LLP, independent registered public accounting firm,
appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing. The report on the
consolidated financial statements referred to above includes
explanatory paragraphs regarding the adoption, effective
September 30, 2004 of EITF Topic D-108, Use of the
Residual Method to Value Acquired Assets Other than Goodwill,
and, effective January 1, 2003, of Statement of
Financial Accounting Standards, No. 123, Accounting
for Stock-Based Compensation, as amended by Statement of
Financial Accounting Standards No. 148, Accounting
for Stock Based Compensation Transition and Disclosure
an amendment to FASB Statement No. 123.
WHERE YOU CAN FIND MORE INFORMATION
The indenture governing the notes provides that, regardless of
whether they are at any time required to file reports with the
SEC, the Issuers will file with the SEC and furnish to the
holders of the notes all such reports and other information as
would be required to be filed with the SEC if the Issuers were
subject to the reporting requirements of the Exchange Act.
While any notes remain outstanding, the Issuers will make
available upon request to any holder and any prospective
purchaser of notes the information required pursuant to
Rule 144A(d)(4) under the Securities Act during any period
in which the Issuers are not subject to Section 13 or 15(d)
of the Exchange Act. This prospectus contains summaries,
believed to be accurate in all material respects, of certain
terms of certain agreements regarding this exchange offer and
the notes (including but not limited to the indenture governing
your notes), but reference is hereby made to the actual
agreements, copies of which will be made available to you upon
request to us or the initial purchasers, for complete
information with respect thereto, and all such summaries are
qualified in their entirety by this reference. Any such request
for the agreements summarized herein should be directed to
Investor Relations, CCH II, LLC, Charter Plaza, 12405
Powerscourt Drive, St. Louis, Missouri 63131, telephone
number
(314) 965-0555.
198
INDEX TO FINANCIAL STATEMENTS
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Page | |
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F-2 |
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F-3 |
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F-4 |
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F-5 |
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F-6 |
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F-7 |
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Unaudited Financial Statements:
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F-48 |
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F-49 |
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F-50 |
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F-51 |
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F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors
CCH II, LLC:
We have audited the accompanying consolidated balance sheets of
CCH II, LLC and subsidiaries (the Company) as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, changes in members equity, and
cash flows for each of the years in the three-year period ended
December 31, 2005. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of CCH II, LLC and subsidiaries as of
December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2005, in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 7 to the consolidated financial
statements, effective September 30, 2004, the Company
adopted EITF Topic
D-108, Use of the
Residual Method to Value Acquired Assets Other than Goodwill.
As discussed in Note 17 to the consolidated financial
statements, effective January 1, 2003, the Company adopted
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, as amended by
Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure an amendment of FASB
Statement No. 123.
St. Louis, Missouri
February 27, 2006
F-2
CCH II, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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December 31, | |
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2005 | |
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2004 | |
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(dollars in millions) | |
ASSETS |
CURRENT ASSETS:
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Cash and cash equivalents
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$ |
3 |
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$ |
546 |
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Accounts receivable, less allowance for doubtful accounts of $17
and $15, respectively
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212 |
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175 |
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Prepaid expenses and other current assets
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22 |
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20 |
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Total current assets
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237 |
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741 |
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INVESTMENT IN CABLE PROPERTIES:
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Property, plant and equipment, net of accumulated depreciation
of $6,712 and $5,142, respectively
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5,800 |
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6,110 |
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Franchises, net
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9,826 |
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9,878 |
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Total investment in cable properties, net
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15,626 |
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15,988 |
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OTHER NONCURRENT ASSETS
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238 |
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250 |
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Total assets
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$ |
16,101 |
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$ |
16,979 |
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LIABILITIES AND MEMBERS EQUITY |
CURRENT LIABILITIES:
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Accounts payable and accrued expenses
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$ |
923 |
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$ |
949 |
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Payables to related party
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102 |
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30 |
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Total current liabilities
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1,025 |
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979 |
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LONG-TERM DEBT
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10,624 |
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9,895 |
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LOANS PAYABLE RELATED PARTY
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22 |
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29 |
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DEFERRED MANAGEMENT FEES RELATED PARTY
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14 |
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14 |
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OTHER LONG-TERM LIABILITIES
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392 |
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493 |
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MINORITY INTEREST
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622 |
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656 |
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MEMBERS EQUITY:
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Members equity
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3,400 |
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4,928 |
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Accumulated other comprehensive income (loss)
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2 |
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(15 |
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Total members equity
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3,402 |
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4,913 |
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Total liabilities and members equity
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$ |
16,101 |
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$ |
16,979 |
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The accompanying notes are an integral part of these
consolidated financial statements.
F-3
CCH II, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
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Year Ended December 31, | |
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2005 | |
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2004 | |
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2003 | |
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| |
|
| |
|
| |
|
|
(dollars in millions) | |
REVENUES
|
|
$ |
5,254 |
|
|
$ |
4,977 |
|
|
$ |
4,819 |
|
|
|
|
|
|
|
|
|
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (excluding depreciation and amortization)
|
|
|
2,293 |
|
|
|
2,080 |
|
|
|
1,952 |
|
|
Selling, general and administrative
|
|
|
1,034 |
|
|
|
971 |
|
|
|
940 |
|
|
Depreciation and amortization
|
|
|
1,499 |
|
|
|
1,495 |
|
|
|
1,453 |
|
|
Impairment of franchises
|
|
|
|
|
|
|
2,433 |
|
|
|
|
|
|
Asset impairment charges
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
(Gain) loss on sale of assets, net
|
|
|
6 |
|
|
|
(86 |
) |
|
|
5 |
|
|
Option compensation expense, net
|
|
|
14 |
|
|
|
31 |
|
|
|
4 |
|
|
Hurricane asset retirement loss
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
Special charges, net
|
|
|
7 |
|
|
|
104 |
|
|
|
21 |
|
|
Unfavorable contracts and other settlements
|
|
|
|
|
|
|
(5 |
) |
|
|
(72 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
4,911 |
|
|
|
7,023 |
|
|
|
4,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
343 |
|
|
|
(2,046 |
) |
|
|
516 |
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(858 |
) |
|
|
(726 |
) |
|
|
(545 |
) |
|
Gain on derivative instruments and hedging activities, net
|
|
|
50 |
|
|
|
69 |
|
|
|
65 |
|
|
Loss on extinguishment of debt
|
|
|
(6 |
) |
|
|
(21 |
) |
|
|
|
|
|
Other, net
|
|
|
22 |
|
|
|
3 |
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(792 |
) |
|
|
(675 |
) |
|
|
(489 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest, income taxes and
cumulative effect of accounting change
|
|
|
(449 |
) |
|
|
(2,721 |
) |
|
|
27 |
|
MINORITY INTEREST
|
|
|
33 |
|
|
|
20 |
|
|
|
(29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and cumulative effect of accounting
change
|
|
|
(416 |
) |
|
|
(2,701 |
) |
|
|
(2 |
) |
INCOME TAX BENEFIT (EXPENSE)
|
|
|
(9 |
) |
|
|
35 |
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of accounting change
|
|
|
(425 |
) |
|
|
(2,666 |
) |
|
|
(15 |
) |
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX
|
|
|
|
|
|
|
(840 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(425 |
) |
|
$ |
(3,506 |
) |
|
$ |
(15 |
) |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
CCH II, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
Other | |
|
Total | |
|
|
Members | |
|
Comprehensive | |
|
Members | |
|
|
Equity | |
|
Income (Loss) | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
|
(dollars in millions) | |
BALANCE, December 31, 2002
|
|
$ |
11,145 |
|
|
$ |
(105 |
) |
|
$ |
11,040 |
|
|
Capital contributions
|
|
|
10 |
|
|
|
|
|
|
|
10 |
|
|
Distributions to parent company
|
|
|
(2,133 |
) |
|
|
|
|
|
|
(2,133 |
) |
|
Changes in fair value of interest rate agreements
|
|
|
|
|
|
|
48 |
|
|
|
48 |
|
|
Other, net
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
|
Net loss
|
|
|
(15 |
) |
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2003
|
|
|
9,008 |
|
|
|
(57 |
) |
|
|
8,951 |
|
|
Distributions to parent company
|
|
|
(578 |
) |
|
|
|
|
|
|
(578 |
) |
|
Changes in fair value of interest rate agreements
|
|
|
|
|
|
|
42 |
|
|
|
42 |
|
|
Other, net
|
|
|
4 |
|
|
|
|
|
|
|
4 |
|
|
Net loss
|
|
|
(3,506 |
) |
|
|
|
|
|
|
(3,506 |
) |
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2004
|
|
|
4,928 |
|
|
|
(15 |
) |
|
|
4,913 |
|
|
Distributions to parent company
|
|
|
(1,103 |
) |
|
|
|
|
|
|
(1,103 |
) |
|
Changes in fair value of interest rate agreements and other
|
|
|
|
|
|
|
17 |
|
|
|
17 |
|
|
Net loss
|
|
|
(425 |
) |
|
|
|
|
|
|
(425 |
) |
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2005
|
|
$ |
3,400 |
|
|
$ |
2 |
|
|
$ |
3,402 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
CCH II, LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
|
|
(dollars in millions) | |
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(425 |
) |
|
$ |
(3,506 |
) |
|
$ |
(15 |
) |
|
Adjustments to reconcile net loss to net cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
(33 |
) |
|
|
(20 |
) |
|
|
29 |
|
|
|
Depreciation and amortization
|
|
|
1,499 |
|
|
|
1,495 |
|
|
|
1,453 |
|
|
|
Impairment of franchises
|
|
|
|
|
|
|
2,433 |
|
|
|
|
|
|
|
Asset impairment charges
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on sale of assets, net
|
|
|
6 |
|
|
|
(86 |
) |
|
|
5 |
|
|
|
Option compensation expense, net
|
|
|
14 |
|
|
|
27 |
|
|
|
4 |
|
|
|
Hurricane asset retirement loss
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
Special charges, net
|
|
|
|
|
|
|
85 |
|
|
|
|
|
|
|
Unfavorable contracts and other settlements
|
|
|
|
|
|
|
(5 |
) |
|
|
(72 |
) |
|
|
Noncash interest expense
|
|
|
31 |
|
|
|
27 |
|
|
|
38 |
|
|
|
Gain on derivative instruments and hedging activities, net
|
|
|
(50 |
) |
|
|
(69 |
) |
|
|
(65 |
) |
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
3 |
|
|
|
(42 |
) |
|
|
13 |
|
|
|
Cumulative effect of accounting change, net of tax
|
|
|
|
|
|
|
840 |
|
|
|
|
|
|
|
Other, net
|
|
|
(22 |
) |
|
|
(5 |
) |
|
|
|
|
|
Changes in operating assets and liabilities, net of effects from
acquisitions and dispositions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(41 |
) |
|
|
(4 |
) |
|
|
69 |
|
|
|
Prepaid expenses and other assets
|
|
|
(7 |
) |
|
|
(4 |
) |
|
|
12 |
|
|
|
Accounts payable, accrued expenses and other
|
|
|
(66 |
) |
|
|
(103 |
) |
|
|
(103 |
) |
|
|
Receivables from and payables to related party, including
deferred management fees
|
|
|
(83 |
) |
|
|
(72 |
) |
|
|
(47 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities
|
|
|
884 |
|
|
|
1,009 |
|
|
|
1,321 |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(1,088 |
) |
|
|
(893 |
) |
|
|
(804 |
) |
|
Change in accrued expenses related to capital expenditures
|
|
|
13 |
|
|
|
(33 |
) |
|
|
(41 |
) |
|
Proceeds from sale of assets
|
|
|
44 |
|
|
|
744 |
|
|
|
91 |
|
|
Purchases of investments
|
|
|
(1 |
) |
|
|
(6 |
) |
|
|
|
|
|
Proceeds from investments
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from investing activities
|
|
|
(1,018 |
) |
|
|
(191 |
) |
|
|
(757 |
) |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings of long-term debt
|
|
|
1,207 |
|
|
|
3,147 |
|
|
|
739 |
|
|
Borrowings from related parties
|
|
|
140 |
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt
|
|
|
(1,107 |
) |
|
|
(4,860 |
) |
|
|
(1,368 |
) |
|
Repayments to related parties
|
|
|
(147 |
) |
|
|
(8 |
) |
|
|
(96 |
) |
|
Proceeds from issuance of debt
|
|
|
294 |
|
|
|
2,050 |
|
|
|
530 |
|
|
Payments for debt issuance costs
|
|
|
(11 |
) |
|
|
(108 |
) |
|
|
(42 |
) |
|
Redemption of preferred interest
|
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
Capital contributions
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
Distributions
|
|
|
(760 |
) |
|
|
(578 |
) |
|
|
(562 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities
|
|
|
(409 |
) |
|
|
(357 |
) |
|
|
(789 |
) |
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(543 |
) |
|
|
461 |
|
|
|
(225 |
) |
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
546 |
|
|
|
85 |
|
|
|
310 |
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$ |
3 |
|
|
$ |
546 |
|
|
$ |
85 |
|
|
|
|
|
|
|
|
|
|
|
CASH PAID FOR INTEREST
|
|
$ |
814 |
|
|
$ |
693 |
|
|
$ |
457 |
|
|
|
|
|
|
|
|
|
|
|
NONCASH TRANSACTIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of debt by Charter Communications Operating, LLC
|
|
$ |
333 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution of Charter Communications Holdings, LLC notes and
accrued interest
|
|
$ |
(343 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of property, plant and equipment from parent company
|
|
$ |
139 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of debt by CCH II, LLC to retire parent company
debt
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,572 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
|
|
1. |
Organization and Basis of Presentation |
CCH II, LLC (CCH II) is a holding company
whose principal assets at December 31, 2005 are equity
interests in its operating subsidiaries. CCH II is a direct
subsidiary of CCH I, LLC (CCH I), which is
an indirect subsidiary of Charter Communications Holdings, LLC
(Charter Holdings). Charter Holdings is an indirect
subsidiary of Charter Communications, Inc.
(Charter). The consolidated financial statements
include the accounts of CCH II and all of its wholly owned
subsidiaries where the underlying operations reside, which are
collectively referred to herein as the Company. All
significant intercompany accounts and transactions among
consolidated entities have been eliminated. The Company is a
broadband communications company operating in the United States.
The Company offers its customers traditional cable video
programming (analog and digital video) as well as high-speed
Internet services and, in some areas, advanced broadband
services such as high-definition television, video on demand and
telephone. The Company sells its cable video programming,
high-speed Internet and advanced broadband services on a
subscription basis. The Company also sells local advertising on
satellite-delivered networks.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Areas involving
significant judgments and estimates include capitalization of
labor and overhead costs; depreciation and amortization costs;
impairments of property, plant and equipment, franchises and
goodwill; income taxes; and contingencies. Actual results could
differ from those estimates.
Reclassifications. Certain prior year amounts have been
reclassified to conform with the 2005 presentation.
|
|
2. |
Liquidity and Capital Resources |
The Company incurred net loss of $425 million,
$3.5 billion and $15 million in 2005, 2004 and 2003,
respectively. The Companys net cash flows from operating
activities were $884 million, $1.0 billion and
$1.3 billion for the years ending December 31, 2005,
2004 and 2003, respectively.
The Companys long-term financing as of December 31,
2005 consists of $5.7 billion of credit facility debt and
$4.9 billion accreted value of high-yield notes. In 2006,
$30 million of the Companys debt matures and in 2007,
an additional $280 million matures. In 2008 and beyond,
significant additional amounts will become due under the
Companys remaining long-term debt obligations.
|
|
|
Recent Financing Transactions |
In January 2006, the Company issued $450 million in debt
securities, the proceeds of which were provided, directly or
indirectly, to Charter Communications Operating, LLC
(Charter Operating), which used such funds to reduce
borrowings, but not commitments, under the revolving portion of
its credit facilities.
In October 2005, CCO Holdings, LLC (CCO Holdings)
and CCO Holdings Capital Corp., as guarantor thereunder, entered
into a senior bridge loan agreement (the Bridge
Loan) with JPMorgan Chase Bank, N.A., Credit Suisse,
Cayman Islands Branch and Deutsche Bank AG Cayman Islands Branch
(the Lenders) whereby the Lenders committed to make
loans to CCO Holdings in an aggregate amount of
$600 million. Upon the issuance of $450 million of
CCH II notes discussed above, the commitment under the
Bridge Loan was reduced to $435 million. CCO Holdings may
draw upon the
F-7
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
facility between January 2, 2006 and September 29,
2006 and the loans will mature on the sixth anniversary of the
first borrowing under the Bridge Loan.
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, equity contributions from its parent companies,
sales of assets, issuances of debt securities and cash on hand.
However, the mix of funding sources changes from period to
period. For the year ended December 31, 2005, the Company
generated $884 million of net cash flows from operating
activities after paying cash interest of $814 million. In
addition, the Company used $1.1 billion for purchases of
property, plant and equipment. Finally, the Company used
$409 million of net cash flows in financing activities.
The Company expects that cash on hand, cash flows from operating
activities and the amounts available under its credit facilities
and Bridge Loan will be adequate to meet its and its parent
companies cash needs in 2006. The Company believes that
cash flows from operating activities and amounts available under
the Companys credit facilities and Bridge Loan will not be
sufficient to fund the Companys operations and satisfy its
and its parent companies interest and debt repayment
obligations in 2007 and beyond. The Company has been advised
that Charter is working with its financial advisors to address
this funding requirement. However, there can be no assurance
that such funding will be available to the Company or its parent
companies. In addition, Paul G. Allen, Charters Chairman
and controlling shareholder, and his affiliates are not
obligated to purchase equity from, contribute to or loan funds
to the Company or its parent companies.
The Companys ability to operate depends upon, among other
things, its continued access to capital, including credit under
the Charter Operating credit facilities and Bridge Loan. The
Charter Operating credit facilities, along with the
Companys indentures and Bridge Loan, contain certain
restrictive covenants, some of which require the Company to
maintain specified financial ratios and meet financial tests and
to provide audited financial statements with an unqualified
opinion from the Companys independent auditors. As of
December 31, 2005, the Company is in compliance with the
covenants under its indentures, Bridge Loan and credit
facilities, and the Company expects to remain in compliance with
those covenants for the next twelve months. As of
December 31, 2005, the Companys potential
availability under its credit facilities totaled approximately
$553 million, none of which was limited by covenants. In
addition, as of January 2, 2006, the Company had additional
borrowing availability of $600 million under the Bridge
Loan (which was reduced to $435 million as a result of the
issuance of the CCH II notes). Continued access to the
Companys credit facilities and Bridge Loan is subject to
the Company remaining in compliance with these covenants,
including covenants tied to the Companys operating
performance. If any events of non-compliance occur, funding
under the credit facilities and Bridge Loan may not be available
and defaults on some or potentially all of the Companys
debt obligations could occur. An event of default under any of
the Companys 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 Companys consolidated financial condition and results
of operations.
|
|
|
Parent Company Debt Obligations |
Any financial or liquidity problems of the Companys parent
companies could cause serious disruption to the Companys
business and have a material adverse effect on the
Companys business and results of
F-8
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
operations. A failure by Charter Holdings, CCH I Holdings,
LLC (CIH) or CCH I to satisfy their debt
payment obligations or a bankruptcy filing with respect to
Charter Holdings, CIH or CCH I would give the lenders under
the Companys credit facilities the right to accelerate the
payment obligations under these facilities. Any such
acceleration would be a default under the indenture governing
the Companys notes.
Charters ability to make interest payments on its
convertible senior notes, and, in 2006 and 2009, to repay the
outstanding principal of its convertible senior notes of
$20 million and $863 million, respectively, will
depend on its ability to raise additional capital and/or on
receipt of payments or distributions from Charter Communications
Holding Company, LLC (Charter Holdco) and its
subsidiaries, including the Company. During 2005, the Company
distributed $760 million of cash to its parent company of
which $60 million was subsequently distributed to Charter
Holdco. As of December 31, 2005, Charter Holdco was owed
$22 million in intercompany loans from its subsidiaries,
which were available to pay interest and principal on
Charters convertible senior notes. In addition, Charter
has $98 million of governmental securities pledged as
security for the next four scheduled semi-annual interest
payments on Charters 5.875% convertible senior notes.
As of December 31, 2005, Charter Holdings, CIH and
CCH I had approximately $7.8 billion principal amount
of high-yield notes outstanding with approximately
$105 million, $0, $684 million and $7.0 billion
maturing in 2007, 2008, 2009 and thereafter, respectively.
Charter, Charter Holdings, CIH and CCH I will need to raise
additional capital or receive distributions or payments from the
Company in order to satisfy their debt obligations. However,
because of their significant indebtedness, the Companys
ability and the ability of the parent companies to raise
additional capital at reasonable rates or at all is uncertain.
Distributions by Charters subsidiaries to a parent company
(including Charter, CCHC, LLC (CCHC), Charter
Holdco, Charter Holdings, CIH and CCH I) for payment of
principal on parent company notes are restricted under the
indentures governing the CIH notes, CCH I notes,
CCH II notes, CCO Holdings notes and Charter Operating
notes unless there is no default, each applicable
subsidiarys leverage ratio test is met at the time of such
distribution and, in the case of Charters convertible
senior notes, other specified tests are met. For the quarter
ended December 31, 2005, there was no default under any of
these indentures and each such subsidiary met its applicable
leverage ratio tests based on December 31, 2005 financial
results. Such distributions would be restricted, however, if any
such subsidiary fails to meet these tests. In the past, certain
subsidiaries have from time to time failed to meet their
leverage ratio test. There can be no assurance that they will
satisfy these tests at the time of such distribution.
Distributions by Charter Operating and CCO Holdings for payment
of principal on parent company notes are further restricted by
the covenants in the credit facilities and Bridge Loan,
respectively.
Distributions by CIH, CCH I, CCH II, CCO Holdings and
Charter Operating to a parent company for payment of parent
company interest are permitted if there is no default under the
aforementioned indentures. However, distributions for payment of
interest on Charters convertible senior notes are further
limited to when each applicable subsidiarys leverage ratio
test is met and other specified tests are met. There can be no
assurance that they will satisfy these tests at the time of such
distribution.
In September 2005, Charter Holdings and its wholly owned
subsidiaries, CCH I and CIH, completed the exchange of
approximately $6.8 billion total principal amount of
outstanding debt securities of Charter Holdings in a private
placement for new debt securities. Holders of Charter Holdings
notes due in 2009 and 2010 exchanged $3.4 billion principal
amount of notes for $2.9 billion principal amount of new
11% CCH I notes due 2015. Holders of Charter Holdings notes
due 2011 and 2012 exchanged $845 million principal amount
of notes for $662 million principal amount of 11%
CCH I notes due 2015. In addition,
F-9
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
holders of Charter Holdings notes due 2011 and 2012 exchanged
$2.5 billion principal amount of notes for
$2.5 billion principal amount of various series of new CIH
notes. Each series of new CIH notes has the same interest rate
and provisions for payment of cash interest as the series of old
Charter Holdings notes for which such CIH notes were exchanged.
In addition, the maturities for each series were extended three
years.
|
|
|
Specific Limitations at Charter Holdings |
The indentures governing the Charter Holdings notes permit
Charter Holdings to make distributions to Charter Holdco for
payment of interest or principal on the convertible senior
notes, only if, after giving effect to the distribution, Charter
Holdings can incur additional debt under the leverage ratio of
8.75 to 1.0, there is no default under Charter Holdings
indentures and other specified tests are met. For the quarter
ended December 31, 2005, there was no default under Charter
Holdings indentures and Charter Holdings met its leverage
ratio test based on December 31, 2005 financial results.
Such distributions would be restricted, however, if Charter
Holdings fails to meet these tests. In the past, Charter
Holdings has from time to time failed to meet this leverage
ratio test. There can be no assurance that Charter Holdings will
satisfy these tests at the time of such distribution. During
periods in which distributions are restricted, the indentures
governing the Charter Holdings notes permit Charter Holdings and
its subsidiaries to make specified investments (that are not
restricted payments) in Charter Holdco or Charter up to an
amount determined by a formula, as long as there is no default
under the indentures.
|
|
3. |
Summary of Significant Accounting Policies |
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 Companys capitalization is based on
specific activities, once capitalized, costs are tracked by
fixed asset category at the cable system level and not on a
specific asset basis. Costs associated with initial customer
installations and the additions of network equipment necessary
to enable advanced services are capitalized. Costs capitalized
as part of initial customer installations include materials,
labor, and certain indirect costs. Indirect costs are associated
with the activities of the Companys personnel who assist
in connecting and activating the new service and consist of
compensation and indirect costs associated with these support
functions. Indirect costs primarily include employee benefits
and payroll taxes, direct variable costs associated with
capitalizable activities, consisting primarily of installation
and construction vehicle costs, the cost of dispatch personnel
and indirect costs directly attributable to capitalizable
activities. The costs of disconnecting service at a
customers 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.
F-10
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
Depreciation is recorded using the straight-line composite
method over managements 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 Companys 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 has concluded that
substantially all of the related franchise rights are indefinite
lived intangible assets. Accordingly, the possibility is remote
that the Company would be required to incur significant
restoration or removal costs related to these franchise
agreements in the foreseeable future. Statement of Financial
Accounting Standards (SFAS) No. 143,
Accounting for Asset Retirement Obligations, as
interpreted by Financial Accounting Standards Board
(FASB) Interpretation (FIN) No. 47,
Accounting for Conditional Asset Retirement
Obligations an Interpretation of FASB Statement
No. 143, requires 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 Companys lease agreements, the liabilities
related to the removal provisions, where applicable, have been
recorded and are not significant to the financial statements.
Franchise rights represent the value attributed to agreements
with local authorities that allow access to homes in cable
service areas acquired through the purchase of cable systems.
Management estimates the fair value of franchise rights at the
date of acquisition and determines if the franchise has a finite
life or an indefinite-life as defined by SFAS No. 142,
Goodwill and Other Intangible Assets. All franchises that
qualify for indefinite-life treatment under
SFAS No. 142 are no longer amortized against earnings
but instead are tested for impairment annually as of
October 1, or more frequently as warranted by events or
changes in circumstances (see Note 7). The Company
concluded that 99% of its franchises qualify for indefinite-life
treatment; however, certain franchises did not qualify for
indefinite-life treatment due to technological or operational
factors that limit their lives. These franchise costs are
amortized on a straight-line basis over 10 years. Costs
incurred in renewing cable franchises are deferred and amortized
over 10 years.
Other noncurrent assets primarily include deferred financing
costs, governmental securities, investments in equity securities
and goodwill. Costs related to borrowings are deferred and
amortized to interest expense over the terms of the related
borrowings.
F-11
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
Investments in equity securities are accounted for at cost,
under the equity method of accounting or in accordance with
SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Charter recognizes losses for
any decline in value considered to be other than temporary.
Certain marketable equity securities are classified as
available-for-sale and reported at market value with unrealized
gains and losses recorded as accumulated other comprehensive
income or loss.
The following summarizes investment information as of and for
the years ended December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying | |
|
Gain (loss) for the | |
|
|
Value at | |
|
Years Ended | |
|
|
December 31, | |
|
December 31, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Equity investments, under the cost method
|
|
$ |
27 |
|
|
$ |
8 |
|
|
$ |
|
|
|
$ |
(3 |
) |
|
$ |
(2 |
) |
Equity investments, under the equity method
|
|
|
13 |
|
|
|
24 |
|
|
|
22 |
|
|
|
6 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
40 |
|
|
$ |
32 |
|
|
$ |
22 |
|
|
$ |
3 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys interest in an
equity investee for an investment in a larger enterprise. Such
amounts are included in other, 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 using asset groupings consistent with those
used to evaluate franchises. Such events or changes in
circumstances could include such factors as impairment of the
Companys indefinite life franchise under
SFAS No. 142, changes in technological advances,
fluctuations in the fair value of such assets, adverse changes
in relationships with local franchise authorities, adverse
changes in market conditions or a deterioration of operating
results. If a review indicates that the carrying value of such
asset is not recoverable from estimated undiscounted cash flows,
the carrying value of such asset is reduced to its estimated
fair value. While the Company believes that its estimates of
future cash flows are reasonable, different assumptions
regarding such cash flows could materially affect its
evaluations of asset recoverability. No impairments of
long-lived assets to be held and used were recorded in 2005,
2004 and 2003, however, approximately $39 million of
impairment on assets held for sale was recorded for the year
ended December 31, 2005 (see Note 4).
|
|
|
Derivative Financial Instruments |
The Company accounts for derivative financial instruments in
accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended.
For those instruments which qualify as hedging activities,
related gains or losses are recorded in accumulated other
comprehensive income. For all other derivative instruments, the
related gains or losses are recorded in the income statement.
The Company uses interest rate risk management derivative
instruments, such as interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements
(collectively referred to herein as interest rate agreements) as
required under the terms of the credit facilities of the
Companys subsidiaries. The Companys policy is to
manage interest costs using a mix of fixed and variable rate
debt. Using interest rate swap agreements, the Company agrees to
exchange, at specified intervals, the difference between fixed
and variable interest amounts calculated by reference to an
agreed-upon notional principal
F-12
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
amount. Interest rate cap agreements are used to lock in a
maximum interest rate should variable rates rise, but enable the
Company to otherwise pay lower market rates. Interest rate
collar agreements are used to limit exposure to and benefits
from interest rate fluctuations on variable rate debt to within
a certain range of rates. The Company does not hold or issue any
derivative financial instruments for trading purposes.
Revenues from residential and commercial video, high-speed
Internet and telephone services are recognized when the related
services are provided. Advertising sales are recognized at
estimated realizable values in the period that the
advertisements are broadcast. Local governmental authorities
impose franchise fees on the Company ranging up to a federally
mandated maximum of 5% of gross revenues as defined in the
franchise agreement. Such fees are collected on a monthly basis
from the Companys customers and are periodically remitted
to local franchise authorities. Franchise fees are reported as
revenues on a gross basis with a corresponding operating
expense.
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 programmers cable
television channel and recognizes the launch incentives on a
straight-line basis over the life of the programming agreement
as a reduction of programming expense. This offset to
programming expense was $42 million, $62 million and
$64 million for the years ended December 31, 2005,
2004 and 2003, respectively. Programming costs included in the
accompanying statement of operations were $1.4 billion,
$1.3 billion and $1.2 billion for the years ended
December 31, 2005, 2004 and 2003, respectively. As of
December 31, 2005 and 2004, the deferred amount of launch
incentives, included in other long-term liabilities, were
$83 million and $105 million, respectively.
Advertising costs associated with marketing the Companys
products and services are generally expensed as costs are
incurred. Such advertising expense was $97 million,
$72 million and $62 million for the years ended
December 31, 2005, 2004 and 2003, respectively.
The Company has historically accounted for stock-based
compensation in accordance with Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations, as
permitted by SFAS No. 123, Accounting for
Stock-Based Compensation. On January 1, 2003, the
Company adopted the fair value measurement provisions of
SFAS No. 123 using the prospective method under which
the Company will recognize compensation expense of a stock-based
award to an employee over the vesting period based on the fair
value of the award on the grant date consistent with the method
described in FIN No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award
Plans. Adoption of these provisions resulted in utilizing a
preferable accounting method
F-13
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
as the consolidated financial statements will present the
estimated fair value of stock-based compensation in expense
consistently with other forms of compensation and other expense
associated with goods and services received for equity
instruments. In accordance with SFAS No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure, the fair value method was applied
only to awards granted or modified after January 1, 2003,
whereas awards granted prior to such date were accounted for
under APB No. 25, unless they were modified or settled in
cash.
SFAS No. 123 requires pro forma disclosure of the
impact on earnings as if the compensation expense for these
plans had been determined using the fair value method. The
following table presents the Companys net loss as reported
and the pro forma amounts that would have been reported using
the fair value method under SFAS No. 123 for the years
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net loss
|
|
$ |
(425 |
) |
|
$ |
(3,506 |
) |
|
$ |
(15 |
) |
Add back stock-based compensation expense related to stock
options included in reported net loss
|
|
|
14 |
|
|
|
31 |
|
|
|
4 |
|
Less employee stock-based compensation expense determined under
fair value based method for all employee stock option awards
|
|
|
(14 |
) |
|
|
(33 |
) |
|
|
(30 |
) |
Effects of unvested options in stock option exchange (see
Note 17)
|
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$ |
(425 |
) |
|
$ |
(3,460 |
) |
|
$ |
(41 |
) |
|
|
|
|
|
|
|
|
|
|
The fair value of each option granted is estimated on the date
of grant using the Black-Scholes option-pricing model. The
following weighted average assumptions were used for grants
during the years ended December 31, 2005, 2004 and 2003,
respectively: risk-free interest rates of 4.0%, 3.3%, and 3.0%;
expected volatility of 70.9%, 92.4% and 93.6%; and expected
lives of 4.5 years, 4.6 years and 4.5 years,
respectively. The valuations assume no dividends are paid.
|
|
|
Unfavorable Contracts and Other Settlements |
The Company recognized $5 million of benefit for the year
ended December 31, 2004 related to changes in estimated
legal reserves established as part of previous business
combinations, which, based on an evaluation of current facts and
circumstances, are no longer required.
The Company recognized $72 million of benefit for the year
ended December 31, 2003 as a result of the settlement of
estimated liabilities recorded in connection with prior business
combinations. The majority of this benefit (approximately
$52 million) is due to the renegotiation of a major
programming contract, for which a liability had been recorded
for the above market portion of the agreement in conjunction
with the Falcon acquisition in 1999 and the Bresnan acquisition
in 2000. The remaining benefit relates to the reversal of
previously recorded liabilities, which are no longer required.
CCH II is a single member limited liability company not
subject to income tax. CCH II holds all operations through
indirect subsidiaries. The majority of these indirect
subsidiaries are limited liability companies that are also not
subject to income tax. However, certain of CCH IIs
indirect subsidiaries are corporations that are subject to
income tax. The Company recognizes deferred tax assets and
liabilities for temporary differences between the financial
reporting basis and the tax basis of these indirect corporate
subsidiaries assets and liabilities and expected benefits
of utilizing net operating loss carryforwards. The
F-14
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
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 20).
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 Companys 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
Companys services; have similarity in the type or class of
customer receiving the products and services; distributes the
Companys 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 Companys 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 2005, the Company closed the sale of certain cable systems in
Texas, West Virginia and Nebraska, representing a total of
approximately 33,000 analog video customers. During the year
ended December 31, 2005, those cable systems met the
criteria for assets held for sale under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. As such, the assets were written down to fair value
less estimated costs to sell resulting in asset impairment
charges during the year ended December 31, 2005 of
approximately $39 million.
In 2004, the Company closed the sale of certain cable systems in
Florida, Pennsylvania, Maryland, Delaware, New York and West
Virginia to Atlantic Broadband Finance, LLC. These transactions
resulted in a $106 million gain recorded as a gain on sale
of assets in the Companys consolidated statements of
operations. The total net proceeds from the sale of all of these
systems were approximately $735 million. The proceeds were
used to repay a portion of amounts outstanding under the
Companys revolving credit facility.
F-15
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
|
|
5. |
Allowance for Doubtful Accounts |
Activity in the allowance for doubtful accounts is summarized as
follows for the years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Balance, beginning of year
|
|
$ |
15 |
|
|
$ |
17 |
|
|
$ |
19 |
|
Charged to expense
|
|
|
76 |
|
|
|
92 |
|
|
|
79 |
|
Uncollected balances written off, net of recoveries
|
|
|
(74 |
) |
|
|
(94 |
) |
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$ |
17 |
|
|
$ |
15 |
|
|
$ |
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
6. |
Property, Plant and Equipment |
Property, plant and equipment consists of the following as of
December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Cable distribution systems
|
|
$ |
7,035 |
|
|
$ |
6,555 |
|
Customer equipment and installations
|
|
|
3,934 |
|
|
|
3,497 |
|
Vehicles and equipment
|
|
|
462 |
|
|
|
419 |
|
Buildings and leasehold improvements
|
|
|
525 |
|
|
|
518 |
|
Furniture, fixtures and equipment
|
|
|
556 |
|
|
|
263 |
|
|
|
|
|
|
|
|
|
|
|
12,512 |
|
|
|
11,252 |
|
Less: accumulated depreciation
|
|
|
(6,712 |
) |
|
|
(5,142 |
) |
|
|
|
|
|
|
|
|
|
$ |
5,800 |
|
|
$ |
6,110 |
|
|
|
|
|
|
|
|
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 Companys use of new
technology and upgrade programs, could materially affect future
depreciation expense.
Depreciation expense for each of the years ended
December 31, 2005, 2004 and 2003 was $1.5 billion.
|
|
7. |
Franchises and Goodwill |
Franchise rights represent the value attributed to agreements
with local authorities that allow access to homes in cable
service areas acquired through the purchase of cable systems.
Management estimates the fair value of franchise rights at the
date of acquisition and determines if the franchise has a finite
life or an indefinite-life as defined by SFAS No. 142,
Goodwill and Other Intangible Assets. Franchises that
qualify for indefinite-life treatment under
SFAS No. 142 are tested for impairment annually each
October 1 based on valuations, or more frequently as
warranted by events or changes in circumstances. Such test
resulted in a total franchise impairment of approximately
$3.3 billion during the third quarter of 2004. The 2003 and
2005 annual impairment tests resulted in no impairment.
Franchises are aggregated into essentially inseparable asset
groups to conduct the valuations. The asset groups generally
represent geographic clustering of the Companys cable
systems into groups by which such systems are managed.
Management believes such grouping represents the highest and
best use of those assets.
The Companys 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
F-16
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
value. The value of goodwill is the difference between the total
entity value and amounts assigned to the other assets.
Franchises, for valuation purposes, are defined as the future
economic benefits of the right to solicit and service potential
customers (customer marketing rights), and the right to deploy
and market new services such as interactivity and telephone to
the potential customers (service marketing rights). Fair value
is determined based on estimated discounted future cash flows
using assumptions consistent with internal forecasts. The
franchise after-tax cash flow is calculated as the after-tax
cash flow generated by the potential customers obtained and the
new services added to those customers in future periods. The sum
of the present value of the franchises after-tax cash flow
in years 1 through 10 and the continuing value of the after-tax
cash flow beyond year 10 yields the fair value of the franchise.
The Company follows the guidance of Emerging Issues Task Force
(EITF)
Issue 02-17,
Recognition of Customer Relationship Intangible Assets
Acquired in a Business Combination, in valuing customer
relationships. Customer relationships, for valuation purposes,
represent the value of the business relationship with existing
customers and are calculated by projecting future after-tax cash
flows from these customers including the right to deploy and
market additional services such as interactivity and telephone
to these customers. The present value of these after-tax cash
flows yields the fair value of the customer relationships.
Substantially all acquisitions occurred prior to January 1,
2002. The Company did not record any value associated with the
customer relationship intangibles related to those acquisitions.
For acquisitions subsequent to January 1, 2002 the Company
did assign a value to the customer relationship intangible,
which is amortized over its estimated useful life.
In September 2004, the SEC staff issued EITF Topic
D-108 which requires
the direct method of separately valuing all intangible assets
and does not permit goodwill to be included in franchise assets.
The Company adopted Topic
D-108 in its impairment
assessment as of September 30, 2004 that resulted in a
total franchise impairment of approximately $3.3 billion.
The Company recorded a cumulative effect of accounting change of
$840 million (approximately $875 million before tax
effects of $16 million and minority interest effects of
$19 million) for the year ended December 31, 2004
representing the portion of the Companys total franchise
impairment attributable to no longer including goodwill with
franchise assets. The remaining $2.4 billion of the total
franchise impairment was attributable to the use of lower
projected growth rates and the resulting revised estimates of
future cash flows in the Companys valuation, and was
recorded as impairment of franchises in the Companys
accompanying consolidated statements of operations for the year
ended December 31, 2004. Sustained analog video customer
losses by the Company in the third quarter of 2004 primarily as
a result of increased competition from direct broadcast
satellite providers and decreased growth rates in the
Companys high-speed Internet customers in the third
quarter of 2004, in part, as a result of increased competition
from digital subscriber line service providers led to the lower
projected growth rates and the revised estimates of future cash
flows from those used at October 1, 2003.
F-17
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
As of December 31, 2005 and 2004, indefinite-lived and
finite-lived intangible assets are presented in the following
table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Gross | |
|
|
|
Net | |
|
Gross | |
|
|
|
Net | |
|
|
Carrying | |
|
Accumulated | |
|
Carrying | |
|
Carrying | |
|
Accumulated | |
|
Carrying | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
Amount | |
|
Amortization | |
|
Amount | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchises with indefinite lives
|
|
$ |
9,806 |
|
|
$ |
|
|
|
$ |
9,806 |
|
|
$ |
9,845 |
|
|
$ |
|
|
|
$ |
9,845 |
|
|
Goodwill
|
|
|
52 |
|
|
|
|
|
|
|
52 |
|
|
|
52 |
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,858 |
|
|
$ |
|
|
|
$ |
9,858 |
|
|
$ |
9,897 |
|
|
$ |
|
|
|
$ |
9,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchises with finite lives
|
|
$ |
27 |
|
|
$ |
7 |
|
|
$ |
20 |
|
|
$ |
37 |
|
|
$ |
4 |
|
|
$ |
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2005 and 2004, the net
carrying amount of indefinite-lived franchises was reduced by
$52 million and $490 million, respectively, related to
the sale of cable systems (see Note 4). Additionally, in
2005 and 2004, approximately $13 million and
$37 million, respectively, of franchises that were
previously classified as finite-lived were reclassified to
indefinite-lived, based on the Companys renewal of these
franchise assets in 2005 and 2004. Franchise amortization
expense for the years ended December 31, 2005, 2004 and
2003 was $4 million, $4 million and $9 million,
respectively, which represents the amortization relating to
franchises that did not qualify for indefinite-life treatment
under SFAS No. 142, including costs associated with
franchise renewals. The Company expects that amortization
expense on franchise assets will be approximately
$2 million annually for each of the next five years. Actual
amortization expense in future periods could differ from these
estimates as a result of new intangible asset acquisitions or
divestitures, changes in useful lives and other relevant factors.
|
|
8. |
Accounts Payable and Accrued Expenses |
Accounts payable and accrued expenses consist of the following
as of December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Accounts payable trade
|
|
$ |
100 |
|
|
$ |
138 |
|
Accrued capital expenditures
|
|
|
73 |
|
|
|
60 |
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
166 |
|
|
|
149 |
|
|
Programming costs
|
|
|
272 |
|
|
|
278 |
|
|
Franchise related fees
|
|
|
67 |
|
|
|
67 |
|
|
Compensation
|
|
|
60 |
|
|
|
47 |
|
|
Other
|
|
|
185 |
|
|
|
210 |
|
|
|
|
|
|
|
|
|
|
$ |
923 |
|
|
$ |
949 |
|
|
|
|
|
|
|
|
F-18
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
Long-term debt consists of the following as of December 31,
2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Principal | |
|
Accreted | |
|
Principal | |
|
Accreted | |
|
|
Amount | |
|
Value | |
|
Amount | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
Long-Term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCH II:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.250% senior notes due 2010
|
|
$ |
1,601 |
|
|
$ |
1,601 |
|
|
$ |
1,601 |
|
|
$ |
1,601 |
|
CCO Holdings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83/4
% senior notes due 2013
|
|
|
800 |
|
|
|
794 |
|
|
|
500 |
|
|
|
500 |
|
|
Senior floating notes due 2010
|
|
|
550 |
|
|
|
550 |
|
|
|
550 |
|
|
|
550 |
|
Charter Operating:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8% senior second-lien notes due 2012
|
|
|
1,100 |
|
|
|
1,100 |
|
|
|
1,100 |
|
|
|
1,100 |
|
|
83/8
% senior second-lien notes due 2014
|
|
|
733 |
|
|
|
733 |
|
|
|
400 |
|
|
|
400 |
|
Renaissance Media Group LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.000% senior discount notes due 2008
|
|
|
114 |
|
|
|
115 |
|
|
|
114 |
|
|
|
116 |
|
CC V Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.875% senior discount notes due 2008
|
|
|
|
|
|
|
|
|
|
|
113 |
|
|
|
113 |
|
Credit Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter Operating
|
|
|
5,731 |
|
|
|
5,731 |
|
|
|
5,515 |
|
|
|
5,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,629 |
|
|
$ |
10,624 |
|
|
$ |
9,893 |
|
|
$ |
9,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
In January 2006, the Company issued $450 million in debt
securities, the proceeds of which will be provided, directly or
indirectly, to Charter Operating, which will use such funds to
reduce borrowings, but not commitments, under the revolving
portion of its credit facilities.
In October 2005, CCO Holdings and CCO Holdings Capital Corp., as
guarantor thereunder, entered into the Bridge Loan with the
Lenders whereby the Lenders committed to make loans to CCO
Holdings in an aggregate amount of $600 million. Upon the
issuance of $450 million of CCH II notes discussed
above, the commitment under the bridge loan agreement was
reduced to $435 million. CCO Holdings may draw upon the
facility between January 2, 2006 and September 29,
2006 and the loans will mature on the sixth anniversary of the
first borrowing under the bridge loan. Each loan will accrue
interest at a rate equal to an adjusted LIBOR rate plus a
spread. The spread will initially be 450 basis points and
will increase (a) by an additional 25 basis points at
the end of the six-month period following the date of the first
borrowing, (b) by an additional 25 basis points at the
end of each of the next two subsequent three month periods and
(c) by 62.5 basis points at the end of each of the
next two subsequent three-month periods. CCO Holdings will be
required to prepay loans from the net proceeds from (i) the
issuance of equity or incurrence of debt by Charter and its
subsidiaries, with certain exceptions, and (ii) certain
asset sales (to the extent not used for other purposes permitted
under the bridge loan).
F-19
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
In August 2005, CCO Holdings issued $300 million in debt
securities, the proceeds of which were used for general
corporate purposes, including the payment of distributions to
its parent companies, including Charter Holdings, to pay
interest expense.
In March and June 2005, Charter Operating consummated exchange
transactions with a small number of institutional holders of
Charter Holdings 8.25% senior notes due 2007 pursuant to
which Charter Operating issued, in private placements,
approximately $333 million principal amount of new notes
with terms identical to Charter Operatings
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.
|
|
|
Loss on Extinguishment of Debt |
In March 2005, CCH IIs subsidiary, CC V
Holdings, LLC, redeemed all of its 11.875% notes due 2008,
at 103.958% of principal amount, plus accrued and unpaid
interest to the date of redemption. The total cost of redemption
was approximately $122 million and was funded through
borrowings under the Charter Operating credit facilities. The
redemption resulted in a loss on extinguishment of debt for the
year ended December 31, 2005 of approximately
$5 million. Following such redemption, CC V Holdings,
LLC and its subsidiaries (other than non-guarantor subsidiaries)
guaranteed the Charter Operating credit facilities and granted a
lien on all of their assets as to which a lien can be perfected
under the Uniform Commercial Code by the filing of a financing
statement.
In April 2004, CCH IIs indirect subsidiaries, Charter
Operating and Charter Communications Operating Capital Corp.,
sold $1.5 billion of senior second-lien notes in a private
transaction. Additionally, Charter Operating amended and
restated its $5.1 billion credit facilities, among other
things, to defer maturities and increase availability under
those facilities to approximately $6.5 billion, consisting
of a $1.5 billion six-year revolving credit facility, a
$2.0 billion six-year term loan facility and a
$3.0 billion seven-year term loan facility. Charter
Operating used the additional borrowings under the amended and
restated credit facilities, together with proceeds from the sale
of the Charter Operating senior second-lien notes to refinance
the credit facilities of its subsidiaries, CC VI Operating
Company, LLC (CC VI Operating), Falcon Cable
Communications, LLC (Falcon Cable), and CC VIII
Operating, LLC (CC VIII Operating), all in
concurrent transactions. In addition, Charter Operating was
substituted as the lender in place of the banks under those
subsidiaries credit facilities. These transactions
resulted in a net loss on extinguishment of debt of
$21 million for the year ended December 31, 2004.
CCH II Notes. In September 2003, CCH II
and CCH II Capital Corp. jointly issued $1.6 billion
total principal amount of 10.25% senior notes due 2010 and
in January 2006, they issued an additional $450 million
principal amount of these notes. The CCH II notes are
general unsecured obligations of CCH II and CCH II
Capital Corp. They rank equally with all other current or future
unsubordinated obligations of CCH II and CCH II
Capital Corp. The CCH II notes are structurally
subordinated to all obligations of subsidiaries of CCH II,
including the CCO Holdings notes, the Renaissance notes, the
Charter Operating notes and the Charter Operating credit
facilities.
Interest on the CCH II notes accrues at 10.25% per
annum and is payable semi-annually in arrears on each March 15
and September 15.
At any time prior to September 15, 2006, in the event of a
qualified equity offering providing sufficient proceeds, the
issuers of the CCH II notes may redeem up to 35% of the
total principal amount of the CCH II notes on a pro rata
basis at a redemption price equal to 110.25% of the principal
amount of CCH II notes redeemed, plus any accrued and
unpaid interest.
F-20
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
On or after September 15, 2008, the issuers of the
CCH II notes may redeem all or a part of the notes at a
redemption price that declines ratably from the initial
redemption price of 105.125% to a redemption price on or after
September 15, 2009 of 100.0% of the principal amount of the
CCH II notes redeemed, plus, in each case, any accrued and
unpaid interest.
In the event of specified change of control events, CCH II
must offer to purchase the outstanding CCH II notes from
the holders at a purchase price equal to 101% of the total
principal amount of the notes, plus any accrued and unpaid
interest.
The indenture governing the CCH II notes contains
restrictive covenants that limit certain transactions or
activities by CCH II and its restricted subsidiaries.
Substantially all of CCH IIs direct and indirect
subsidiaries are currently restricted subsidiaries.
|
|
|
83/4% Senior
notes due 2013 |
In November 2003 and August 2005, CCO Holdings and CCO Holdings
Capital Corp. jointly issued $500 million and
$300 million, respectively, total principal amount of
83/4
% senior notes due 2013. The CCO Holdings notes are
general unsecured obligations of CCO Holdings and CCO Holdings
Capital Corp. They rank equally with all other current or future
unsubordinated obligations of CCO Holdings and CCO Holdings
Capital Corp. The CCO Holdings notes are structurally
subordinated to all obligations of CCO Holdings
subsidiaries, including the Renaissance notes, the Charter
Operating notes and the Charter Operating credit facilities. As
of December 31, 2005, there was $800 million in total
principal amount outstanding and $794 million in accreted
value outstanding.
Interest on the CCO Holdings senior notes accrues at
83/4
% per year and is payable semi-annually in arrears
on each May 15 and November 15.
At any time prior to November 15, 2006, the issuers of the
CCO Holdings senior notes may redeem up to 35% of the total
principal amount of the CCO Holdings senior notes to the extent
of public equity proceeds they have received on a pro rata basis
at a redemption price equal to 108.75% of the principal amount
of CCO Holdings senior notes redeemed, plus any accrued and
unpaid interest.
On or after November 15, 2008, the issuers of the CCO
Holdings senior notes may redeem all or a part of the notes at a
redemption price that declines ratably from the initial
redemption price of 104.375% to a redemption price on or after
November 15, 2011 of 100.0% of the principal amount of the
CCO Holdings senior notes redeemed, plus, in each case, any
accrued and unpaid interest.
In the event of specified change of control events, CCO Holdings
must offer to purchase the outstanding CCO Holdings senior notes
from the holders at a purchase price equal to 101% of the total
principal amount of the notes, plus any accrued and unpaid
interest.
|
|
|
Senior floating rate notes due 2010 |
In December 2004, CCO Holdings and CCO Holdings Capital Corp.
jointly issued $550 million total principal amount of
senior floating rate notes due 2010. The CCO Holdings notes are
general unsecured obligations of CCO Holdings and CCO Holdings
Capital Corp. They rank equally with all other current or future
unsubordinated obligations of CCO Holdings and CCO Holdings
Capital Corp. The CCO Holdings notes are structurally
subordinated to all obligations of CCO Holdings
subsidiaries, including the Renaissance notes, the Charter
Operating notes and the Charter Operating credit facilities.
F-21
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
Interest on the CCO Holdings senior floating rate notes accrues
at the LIBOR rate (4.53% and 2.56% as of December 31, 2005
and 2004, respectively) plus 4.125% annually, from the date
interest was most recently paid. Interest is reset and payable
quarterly in arrears on each March 15, June 15,
September 15 and December 15.
At any time prior to December 15, 2006, the issuers of the
senior floating rate notes may redeem up to 35% of the notes in
an amount not to exceed the amount of proceeds of one or more
public equity offerings at a redemption price equal to 100% of
the principal amount, plus a premium equal to the interest rate
per annum applicable to the notes on the date notice of
redemption is given, plus accrued and unpaid interest, if any,
to the redemption date, provided that at least 65% of the
original aggregate principal amount of the notes issued remains
outstanding after the redemption.
The issuers of the senior floating rate notes may redeem the
notes in whole or in part at the issuers option from
December 15, 2006 until December 14, 2007 for 102% of
the principal amount, from December 15, 2007 until
December 14, 2008 for 101% of the principal amount and from
and after December 15, 2008, at par, in each case, plus
accrued and unpaid interest.
The indentures governing the CCO Holdings senior notes contain
restrictive covenants that limit certain transactions or
activities by CCO Holdings and its restricted subsidiaries.
Substantially all of CCO Holdings direct and indirect
subsidiaries are currently restricted subsidiaries.
In the event of specified change of control events, CCO Holdings
must offer to purchase the outstanding CCO Holdings senior notes
from the holders at a purchase price equal to 101% of the total
principal amount of the notes, plus any accrued and unpaid
interest.
Charter Operating Notes. On 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
83/8% senior
second-lien notes due 2014, for total gross proceeds of
$1.5 billion. In March and June 2005, Charter Operating
consummated exchange transactions with a small number of
institutional holders of Charter Holdings 8.25% senior
notes due 2007 pursuant to which Charter Operating issued, in
private placement transactions, approximately $333 million
principal amount of its
83/8
% senior second-lien notes due 2014 in exchange for
approximately $346 million of the Charter Holdings
8.25% senior notes due 2007. Interest on the Charter
Operating notes is payable semi-annually in arrears on each
April 30 and October 30.
The Charter Operating notes were sold in a private transaction
that was not subject to the registration requirements of the
Securities Act of 1933. The Charter Operating notes are not
expected to have the benefit of any exchange or other
registration rights, except in specified limited circumstances.
On the issue date of the Charter Operating notes, because of
restrictions contained in the Charter Holdings indentures, there
were no Charter Operating note guarantees, even though Charter
Operatings immediate parent, CCO Holdings, and certain of
the Companys subsidiaries were obligors and/or guarantors
under the Charter Operating credit facilities. Upon the
occurrence of the guarantee and pledge date (generally, the
fifth business day after the Charter Holdings leverage ratio was
certified to be below 8.75 to 1.0), CCO Holdings and those
subsidiaries of Charter Operating that were then guarantors of,
or otherwise obligors with respect to, indebtedness under the
Charter Operating credit facilities and related obligations were
required to guarantee the Charter Operating notes. The note
guarantee of each such guarantor is:
|
|
|
|
|
a senior obligation of such guarantor; |
|
|
|
structurally senior to the outstanding CCO Holdings notes
(except in the case of CCO Holdings note guarantee, which
is structurally pari passu with such senior notes), the
outstanding CCH II |
F-22
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
|
|
|
|
|
notes, the outstanding CCH I notes, the outstanding CIH
notes, the outstanding Charter Holdings notes and the
outstanding Charter convertible senior notes (but subject to
provisions in the Charter Operating indenture that permit
interest and, subject to meeting the 4.25 to 1.0 leverage ratio
test, principal payments to be made thereon); and |
|
|
|
senior in right of payment to any future subordinated
indebtedness of such guarantor. |
As a result of the above leverage ratio test being met, CCO
Holdings and certain of its subsidiaries provided the additional
guarantees described above during the first quarter of 2005.
All the subsidiaries of Charter Operating (except CCO NR Sub,
LLC, and certain other subsidiaries that are not deemed material
and are designated as nonrecourse subsidiaries under the Charter
Operating credit facilities) are restricted subsidiaries of
Charter Operating under the Charter Operating notes.
Unrestricted subsidiaries generally will not be subject to the
restrictive covenants in the Charter Operating indenture.
In the event of specified change of control events, Charter
Operating must offer to purchase the Charter Operating notes at
a purchase price equal to 101% of the total principal amount of
the Charter Operating notes repurchased plus any accrued and
unpaid interest thereon.
The indenture governing the Charter Operating senior notes
contains restrictive covenants that limit certain transactions
or activities by Charter Operating and its restricted
subsidiaries. Substantially all of Charter Operatings
direct and indirect subsidiaries are currently restricted
subsidiaries.
Renaissance Notes. In connection with the
acquisition of Renaissance in April 1999, the Company assumed
$163 million principal amount at maturity of
10.000% senior discount notes due 2008 of which
$49 million was repurchased in May 1999. The Renaissance
notes bear interest, payable semi-annually, on April 15 and
October 15. The Renaissance notes are due on April 15,
2008. As of December 31, 2005, there was $114 million
in total principal amount outstanding and $115 million in
accreted value outstanding.
CC V Holdings Notes. These notes were
redeemed on March 14, 2005 and are therefore no longer
outstanding.
High-Yield Restrictive Covenants; Limitation on
Indebtedness. The indentures governing the notes of the
Companys subsidiaries contain certain covenants that
restrict the ability of CCH II, CCH II Capital Corp.,
CCO Holdings, CCO Holdings Capital Corp., Charter Operating,
Charter Communications Operating Capital Corp., Renaissance
Media Group, and all of their restricted subsidiaries to:
|
|
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|
|
incur additional debt; |
|
|
|
pay dividends on equity or repurchase equity; |
|
|
|
make investments; |
|
|
|
sell all or substantially all of their assets or merge with or
into other companies; |
|
|
|
sell assets; |
|
|
|
enter into sale-leasebacks; |
|
|
|
in the case of restricted subsidiaries, create or permit to
exist dividend or payment restrictions with respect to the bond
issuers, guarantee their parent companies debt, or issue
specified equity interests; |
F-23
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
|
|
|
|
|
engage in certain transactions with affiliates; and |
|
|
|
grant liens. |
|
|
|
Charter Operating Credit Facilities |
The Charter Operating credit facilities were amended and
restated concurrently with the sale of $1.5 billion senior
second-lien notes in April 2004, among other things, to defer
maturities and increase availability under these facilities and
to enable Charter Operating to acquire the interests of the
lenders under the CC VI Operating, CC VIII Operating
and Falcon credit facilities, thereby consolidating all credit
facilities under one amended and restated Charter Operating
credit agreement.
The Charter Operating credit facilities provide borrowing
availability of up to $6.5 billion as follows:
|
|
|
|
(i) |
a Term A facility with a total principal amount of
$2.0 billion, of which 12.5% matures in 2007, 30% matures
in 2008, 37.5% matures in 2009 and 20% matures in 2010; and |
|
|
|
|
(ii) |
a Term B facility with a total principal amount of
$3.0 billion, which shall be repayable in 27 equal
quarterly installments aggregating in each loan year to 1% of
the original amount of the Term B facility, with the remaining
balance due at final maturity in 2011; and |
|
|
|
|
|
a revolving credit facility, in a total amount of
$1.5 billion, with a maturity date in 2010. |
Amounts outstanding under the Charter Operating credit
facilities bear interest, at Charter Operatings election,
at a base rate or the Eurodollar rate (4.06% to 4.50% as of
December 31, 2005 and 2.07% to 2.28% as of
December 31, 2004), as defined, plus a margin for
Eurodollar loans of up to 3.00% for the Term A facility and
revolving credit facility, and up to 3.25% for the Term B
facility, and for base rate loans of up to 2.00% for the Term A
facility and revolving credit facility, and up to 2.25% for the
Term B facility. A quarterly commitment fee of up to .75% is
payable on the average daily unborrowed balance of the revolving
credit facilities.
The obligations of our subsidiaries under the Charter Operating
credit facilities (the Obligations) are guaranteed
by Charter Operatings immediate parent company, CCO
Holdings, and the subsidiaries of Charter Operating, except for
immaterial subsidiaries and subsidiaries precluded from
guaranteeing by reason of the provisions of other indebtedness
to which they are subject (the non-guarantor
subsidiaries, primarily Renaissance and its subsidiaries).
The Obligations are also secured by (i) a lien on all of
the assets of Charter Operating and its subsidiaries (other than
assets of the non-guarantor subsidiaries), to the extent such
lien can be perfected under the Uniform Commercial Code by the
filing of a financing statement, and (ii) a pledge by CCO
Holdings of the equity interests owned by it in Charter
Operating or any of Charter Operatings subsidiaries, as
well as intercompany obligations owing to it by any of such
entities.
Upon the Charter Holdings Leverage Ratio (as defined in the
indenture governing the Charter Holdings senior notes and senior
discount notes) being under 8.75 to 1.0, the Charter Operating
credit facilities required that the 11.875% notes due 2008
issued by CC V Holdings, LLC be redeemed. Because such
Leverage Ratio was determined to be under 8.75 to 1.0, CC V
Holdings, LLC redeemed such notes in March 2005, and CC V
Holdings, LLC and its subsidiaries (other than non-guarantor
subsidiaries) became guarantors of the Obligations and have
granted a lien on all of their assets as to which a lien can be
perfected under the Uniform Commercial Code by the filing of a
financing statement.
F-24
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
As of December 31, 2005, outstanding borrowings under the
Charter Operating credit facilities were approximately
$5.7 billion and the unused total potential availability
was approximately $553 million, none of which was limited
by covenant restrictions.
|
|
|
Charter Operating Credit Facilities
Restrictive Covenants |
The Charter Operating credit facilities contain representations
and warranties, and affirmative and negative covenants customary
for financings of this type. The financial covenants measure
performance against standards set for leverage, debt service
coverage, and interest coverage, tested as of the end of each
quarter. The maximum allowable leverage ratio is 4.25 to 1.0
until maturity, tested as of the end of each quarter beginning
September 30, 2004. Additionally, the Charter Operating
credit facilities contain provisions requiring mandatory loan
prepayments under specific circumstances, including when
significant amounts of assets are sold and the proceeds are not
reinvested in assets useful in the business of the borrower
within a specified period, and upon the incurrence of certain
indebtedness when the ratio of senior first lien debt to
operating cash flow is greater than 2.0 to 1.0.
The Charter Operating credit facilities permit Charter Operating
and its subsidiaries to make distributions to pay interest on
the Charter Operating senior second-lien notes, the CIH notes,
the CCH I notes, the CCH II senior notes, the CCO
Holdings senior notes, the Charter convertible senior notes, the
CCHC notes and the Charter Holdings senior notes, provided that,
among other things, no default has occurred and is continuing
under the Charter Operating credit facilities. Conditions to
future borrowings include absence of a default or an event of
default under the Charter Operating credit facilities and the
continued accuracy in all material respects of the
representations and warranties, including the absence since
December 31, 2003 of any event, development or circumstance
that has had or could reasonably be expected to have a material
adverse effect on our business.
The events of default under the Charter Operating credit
facilities include, among other things:
|
|
|
|
|
the failure to make payments when due or within the applicable
grace period, |
|
|
|
the failure to comply with specified covenants, including but
not limited to a covenant to deliver audited financial
statements with an unqualified opinion from our independent
auditors, |
|
|
|
the failure to pay or the occurrence of events that cause or
permit the acceleration of other indebtedness owing by CCO
Holdings, Charter Operating or Charter Operatings
subsidiaries in amounts in excess of $50 million in
aggregate principal amount, |
|
|
|
the failure to pay or the occurrence of events that result in
the acceleration of other indebtedness owing by certain of CCO
Holdings direct and indirect parent companies in amounts
in excess of $200 million in aggregate principal amount, |
|
|
|
Paul Allen and/or certain of his family members and/or their
exclusively owned entities (collectively, the Paul Allen
Group) ceasing to have the power, directly or indirectly,
to vote at least 35% of the ordinary voting power of Charter
Operating, |
|
|
|
the consummation of any transaction resulting in any person or
group (other than the Paul Allen Group) having power, directly
or indirectly, to vote more than 35% of the ordinary voting
power of Charter Operating, unless the Paul Allen Group holds a
greater share of ordinary voting power of Charter Operating, |
F-25
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
|
|
|
|
|
certain of Charter Operatings indirect or direct parent
companies having indebtedness in excess of $500 million
aggregate principal amount which remains undefeased three months
prior to the final maturity of such indebtedness, and |
|
|
|
Charter Operating ceasing to be a wholly-owned direct subsidiary
of CCO Holdings, except in certain very limited circumstances. |
In October 2005, CCO Holdings and CCO Holdings Capital Corp., as
guarantor thereunder, entered into the Bridge Loan) with
JPMorgan Chase Bank, N.A., Credit Suisse, Cayman Islands Branch
and Deutsche Bank AG Cayman Islands Branch (the
Lenders) whereby the Lenders committed to make loans
to CCO Holdings in an aggregate amount of $600 million. In
January 2006, upon the issuance of $450 million of
CCH II notes discussed above, the commitment under the
bridge loan agreement was reduced to $435 million. CCO
Holdings may draw upon the facility between January 2, 2006
and September 29, 2006 and the loans will mature on the
sixth anniversary of the first borrowing under the Bridge Loan.
Beginning on the first anniversary of the first date that CCO
Holdings borrows under the Bridge Loan and at any time
thereafter, any Lender will have the option to receive
exchange notes (the terms of which are described
below, the Exchange Notes) in exchange for any loan
that has not been repaid by that date. Upon the earlier of
(x) the date that at least a majority of all loans that
have been outstanding have been exchanged for Exchange Notes and
(y) the date that is 18 months after the first date
that CCO Holdings borrows under the Bridge Loan, the remainder
of loans will be automatically exchanged for Exchange Notes.
As conditions to each draw, (i) there shall be no default
under the Bridge Loan, (ii) all the representations and
warranties under the bridge loan shall be true and correct in
all material respects and (iii) all conditions to borrowing
under the Charter Operating credit facilities (with certain
exceptions) shall be satisfied.
The aggregate unused commitment will be reduced by 100% of the
net proceeds from certain asset sales, to the extent such net
proceeds have not been used to prepay loans or Exchange Notes.
However, asset sales that generate net proceeds of less than
$75 million will not be subject to such commitment
reduction obligation, unless the aggregate net proceeds from
such asset sales exceed $200 million, in which case the
aggregate unused commitment will be reduced by the amount of
such excess.
CCO Holdings will be required to prepay loans (and redeem or
offer to repurchase Exchange Notes, if issued) from the net
proceeds from (i) the issuance of equity or incurrence of
debt by Charter and its subsidiaries, with certain exceptions,
and (ii) certain asset sales (to the extent not used for
purposes permitted under the bridge loan).
The covenants and events of default applicable to CCO Holdings
under the Bridge Loan are similar to the covenants and events of
default in the indenture for the senior secured notes of
CCH I.
The Exchange Notes will mature on the sixth anniversary of the
first borrowing under the Bridge Loan. The Exchange Notes will
bear interest at a rate equal to the rate that would have been
borne by the loans. The same mandatory redemption provisions
will apply to the Exchange Notes as applied to the loans, except
that CCO Holdings will be required to make an offer to redeem
upon the occurrence of a change of control at 101% of principal
amount plus accrued and unpaid interest.
F-26
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
The Exchange Notes will, if held by a person other than an
initial lender or an affiliate thereof, be (a) non-callable
for the first three years after the first borrowing date and
(b) thereafter, callable at par plus accrued interest plus
a premium equal to 50% of the coupon in effect on the first
anniversary of the first borrowing date, which premium shall
decline to 25% of such coupon in the fourth year and to zero
thereafter. Otherwise, the Exchange Notes will be callable at
any time at 100% of the amount thereof plus accrued and unpaid
interest.
Based upon outstanding indebtedness as of December 31,
2005, the amortization of term loans, scheduled reductions in
available borrowings of the revolving credit facilities, and the
maturity dates for all senior and subordinated notes and
debentures, total future principal payments on the total
borrowings under all debt agreements as of December 31,
2005, are as follows:
|
|
|
|
|
Year |
|
Amount | |
|
|
| |
2006
|
|
$ |
30 |
|
2007
|
|
|
280 |
|
2008
|
|
|
744 |
|
2009
|
|
|
779 |
|
2010
|
|
|
3,363 |
|
Thereafter
|
|
|
5,433 |
|
|
|
|
|
|
|
$ |
10,629 |
|
|
|
|
|
For the amounts of debt scheduled to mature during 2006, it is
managements intent to fund the repayments from borrowings
on the Companys revolving credit facility. The
accompanying consolidated balance sheet reflects this intent by
presenting all debt balances as long-term while the table above
reflects actual debt maturities as of the stated date.
Minority interest on the Companys consolidated balance
sheets as of December 31, 2005 and 2004 primarily
represents preferred membership interests in CC VIII, LLC
(CC VIII), an indirect subsidiary of
CCH II, of $622 million and $656 million,
respectively. As more fully described in Note 21, this
preferred interest arises from approximately $630 million
of preferred membership units issued by CC VIII in
connection with an acquisition in February 2000 and was the
subject of a dispute between Charter and Mr. Allen,
Charters Chairman and controlling shareholder that was
settled October 31, 2005. In conjunction with the
settlement of this dispute and the related change in ownership
interest, approximately 18.6% of CC VIIIs income or
losses are allocated to minority interest in the Companys
consolidated statements of operations, including amounts
estimated in prior years and the 2% accretion of the preferred
membership interests.
|
|
11. |
Comprehensive Income (Loss) |
Certain marketable equity securities are classified as
available-for-sale and reported at market value with unrealized
gains and losses recorded as accumulated other comprehensive
loss on the accompanying consolidated balance sheets.
Additionally, the Company reports changes in the fair value of
interest rate agreements designated as hedging the variability
of cash flows associated with floating-rate debt obligations,
that meet the effectiveness criteria of SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, in accumulated other comprehensive loss.
Comprehensive loss for the years ended
F-27
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
December 31, 2005 and 2004 was $408 million and
$3.5 billion, respectively. Comprehensive income for the
year ended December 31, 2003 was $33 million.
|
|
12. |
Accounting for Derivative Instruments and Hedging
Activities |
The Company uses interest rate risk management derivative
instruments, such as interest rate swap agreements and interest
rate collar agreements (collectively referred to herein as
interest rate agreements) to manage its interest costs. The
Companys policy is to manage interest costs using a mix of
fixed and variable rate debt. Using interest rate swap
agreements, the Company has agreed to exchange, at specified
intervals through 2007, the difference between fixed and
variable interest amounts calculated by reference to an
agreed-upon notional principal amount.
Interest rate collar agreements are used to limit the
Companys exposure to and benefits from interest rate
fluctuations on variable rate debt to within a certain range of
rates.
The Company does not hold or issue derivative instruments for
trading purposes. The Company does, however, have certain
interest rate derivative instruments that have been designated
as cash flow hedging instruments. Such instruments effectively
convert variable interest payments on certain debt instruments
into fixed payments. For qualifying hedges,
SFAS No. 133 allows derivative gains and losses to
offset related results on hedged items in the consolidated
statement of operations. The Company has formally documented,
designated and assessed the effectiveness of transactions that
receive hedge accounting. For the years ended December 31,
2005, 2004 and 2003, net gain on derivative instruments and
hedging activities includes gains of $3 million,
$4 million and $8 million, respectively, which
represent cash flow hedge ineffectiveness on interest rate hedge
agreements arising from differences between the critical terms
of the agreements and the related hedged obligations. Changes in
the fair value of interest rate agreements designated as hedging
instruments of the variability of cash flows associated with
floating-rate debt obligations that meet the effectiveness
criteria SFAS No. 133 are reported in accumulated
other comprehensive loss. For the years ended December 31,
2005, 2004 and 2003, a gain of $16 million,
$42 million and $48 million, respectively, related to
derivative instruments designated as cash flow hedges, was
recorded in accumulated other comprehensive loss. The amounts
are subsequently reclassified into interest expense as a yield
adjustment in the same period in which the related interest on
the floating-rate debt obligations affects earnings (losses).
Certain interest rate derivative instruments are not designated
as hedges as they do not meet the effectiveness criteria
specified by SFAS No. 133. However, management
believes such instruments are closely correlated with the
respective debt, thus managing associated risk. Interest rate
derivative instruments not designated as hedges are marked to
fair value, with the impact recorded as gain (loss) on
derivative instruments and hedging activities in the
Companys consolidated statement of operations. For the
years ended December 31, 2005, 2004 and 2003, net gain on
derivative instruments and hedging activities includes gains of
$47 million, $65 million and $57 million,
respectively, for interest rate derivative instruments not
designated as hedges.
As of December 31, 2005, 2004 and 2003, the Company had
outstanding $1.8 billion, $2.7 billion and
$3.0 billion and $20 million, $20 million and
$520 million, respectively, in notional amounts of interest
rate swaps and collars, respectively. The notional amounts of
interest rate instruments do not represent amounts exchanged by
the parties and, thus, are not a measure of exposure to credit
loss. The amounts exchanged are determined by reference to the
notional amount and the other terms of the contracts.
F-28
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
|
|
13. |
Fair Value of Financial Instruments |
The Company has estimated the fair value of its financial
instruments as of December 31, 2005 and 2004 using
available market information or other appropriate valuation
methodologies. Considerable judgment, however, is required in
interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented in the accompanying
consolidated financial statements are not necessarily indicative
of the amounts the Company would realize in a current market
exchange.
The carrying amounts of cash, receivables, payables and other
current assets and liabilities approximate fair value because of
the short maturity of those instruments. The Company is exposed
to market price risk volatility with respect to investments in
publicly traded and privately held entities.
The fair value of interest rate agreements represents the
estimated amount the Company would receive or pay upon
termination of the agreements. Management believes that the
sellers of the interest rate agreements will be able to meet
their obligations under the agreements. In addition, some of the
interest rate agreements are with certain of the participating
banks under the Companys 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
Companys consolidated financial condition or results of
operations.
The estimated fair value of the Companys notes and
interest rate agreements at December 31, 2005 and 2004 are
based on quoted market prices, and the fair value of the credit
facilities is based on dealer quotations.
A summary of the carrying value and fair value of the
Companys debt and related interest rate agreements at
December 31, 2005 and 2004 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Carrying | |
|
Fair | |
|
Carrying | |
|
Fair | |
|
|
Value | |
|
Value | |
|
Value | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCH II debt
|
|
$ |
1,601 |
|
|
$ |
1,592 |
|
|
$ |
1,601 |
|
|
$ |
1,698 |
|
|
CCO Holdings debt
|
|
|
1,344 |
|
|
|
1,299 |
|
|
|
1,050 |
|
|
|
1,064 |
|
|
Charter Operating debt
|
|
|
1,833 |
|
|
|
1,821 |
|
|
|
1,500 |
|
|
|
1,563 |
|
|
Credit facilities
|
|
|
5,731 |
|
|
|
5,719 |
|
|
|
5,515 |
|
|
|
5,502 |
|
|
Other
|
|
|
115 |
|
|
|
114 |
|
|
|
229 |
|
|
|
236 |
|
Interest Rate Agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets (Liabilities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
(4 |
) |
|
|
(4 |
) |
|
|
(69 |
) |
|
|
(69 |
) |
|
Collars
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) |
The weighted average interest pay rate for the Companys
interest rate swap agreements was 9.51% and 8.07% at
December 31, 2005 and 2004, respectively.
F-29
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
Revenues consist of the following for the years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Video
|
|
$ |
3,401 |
|
|
$ |
3,373 |
|
|
$ |
3,461 |
|
High-speed Internet
|
|
|
908 |
|
|
|
741 |
|
|
|
556 |
|
Telephone
|
|
|
36 |
|
|
|
18 |
|
|
|
14 |
|
Advertising sales
|
|
|
294 |
|
|
|
289 |
|
|
|
263 |
|
Commercial
|
|
|
279 |
|
|
|
238 |
|
|
|
204 |
|
Other
|
|
|
336 |
|
|
|
318 |
|
|
|
321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,254 |
|
|
$ |
4,977 |
|
|
$ |
4,819 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses consist of the following for the years
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Programming
|
|
$ |
1,417 |
|
|
$ |
1,319 |
|
|
$ |
1,249 |
|
Service
|
|
|
775 |
|
|
|
663 |
|
|
|
615 |
|
Advertising sales
|
|
|
101 |
|
|
|
98 |
|
|
|
88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,293 |
|
|
$ |
2,080 |
|
|
$ |
1,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
16. |
Selling, General and Administrative Expenses |
Selling, general and administrative expenses consist of the
following for the years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
General and administrative
|
|
$ |
889 |
|
|
$ |
849 |
|
|
$ |
833 |
|
Marketing
|
|
|
145 |
|
|
|
122 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,034 |
|
|
$ |
971 |
|
|
$ |
940 |
|
|
|
|
|
|
|
|
|
|
|
Components of selling expense are included in general and
administrative and marketing expense.
|
|
17. |
Stock Compensation Plans |
Charter grants stock options, restricted stock and other
incentive compensation pursuant to the 2001 Stock Incentive Plan
of Charter (the 2001 Plan). Prior to 2001, options
were granted under the 1999 Option Plan of Charter Holdco (the
1999 Plan).
The 1999 Plan provided for the grant of options to purchase
membership units in Charter Holdco to current and prospective
employees and consultants of Charter Holdco and its affiliates
and current and prospective non-employee directors of Charter.
Options granted generally vest over five years from the grant
date, with 25% vesting 15 months after the anniversary of
the grant date and ratably thereafter. Options not exercised
accumulate and are exercisable, in whole or in part, in any
subsequent period, but
F-30
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
not later than 10 years from the date of grant. Membership
units received upon exercise of the options are automatically
exchanged into Class A common stock of Charter on a
one-for-one basis.
The 2001 Plan provides for the grant of non-qualified stock
options, stock appreciation rights, dividend equivalent rights,
performance units and performance shares, share awards, phantom
stock and/or shares of restricted stock (not to exceed
20,000,000), as each term is defined in the 2001 Plan.
Employees, officers, consultants and directors of the Company
and its subsidiaries and affiliates are eligible to receive
grants under the 2001 Plan. Options granted generally vest over
four years from the grant date, with 25% vesting on the
anniversary of the grant date and ratably thereafter. Generally,
options expire 10 years from the grant date.
The 2001 Plan allows for the issuance of up to a total of
90,000,000 shares of Charter Class A common stock (or
units convertible into Charter Class A common stock). The
total shares available reflect a July 2003 amendment to the 2001
Plan approved by the board of directors and the shareholders of
Charter to increase available shares by 30,000,000 shares.
In 2001, any shares covered by options that terminated under the
1999 Plan were transferred to the 2001 Plan, and no new options
can be granted under the 1999 Plan.
In the years ended December 31, 2005, 2004 and 2003,
certain directors were awarded a total of 492,225, 182,932 and
80,603 shares, respectively, of restricted Charter
Class A common stock of which 44,121 shares had been
cancelled as of December 31, 2005. The shares vest one year
from the date of grant. In 2005, 2004 and 2003, in connection
with new employment agreements, certain officers were awarded
2,987,500, 50,000 and 50,000 shares, respectively, of
restricted Charter Class A common stock of which
68,750 shares had been cancelled as of December 31,
2005. The shares vest annually over a one to three-year period
beginning from the date of grant. As of December 31, 2005,
deferred compensation remaining to be recognized in future
period totaled $2 million.
A summary of the activity for Charters stock options,
excluding granted shares of restricted Charter Class A
common stock, for the years ended December 31, 2005, 2004
and 2003, is as follows (amounts in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Average | |
|
|
|
Average | |
|
|
|
Average | |
|
|
|
|
Exercise | |
|
|
|
Exercise | |
|
|
|
Exercise | |
|
|
Shares | |
|
Price | |
|
Shares | |
|
Price | |
|
Shares | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Options outstanding, beginning of period
|
|
|
24,835 |
|
|
$ |
6.57 |
|
|
|
47,882 |
|
|
$ |
12.48 |
|
|
|
53,632 |
|
|
$ |
14.22 |
|
Granted
|
|
|
10,810 |
|
|
|
1.36 |
|
|
|
9,405 |
|
|
|
4.88 |
|
|
|
7,983 |
|
|
|
3.53 |
|
Exercised
|
|
|
(17 |
) |
|
|
1.11 |
|
|
|
(839 |
) |
|
|
2.02 |
|
|
|
(165 |
) |
|
|
3.96 |
|
Cancelled
|
|
|
(6,501 |
) |
|
|
7.40 |
|
|
|
(31,613 |
) |
|
|
15.16 |
|
|
|
(13,568 |
) |
|
|
14.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, end of period
|
|
|
29,127 |
|
|
$ |
4.47 |
|
|
|
24,835 |
|
|
$ |
6.57 |
|
|
|
47,882 |
|
|
$ |
12.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining contractual life
|
|
|
8 years |
|
|
|
|
|
|
|
8 years |
|
|
|
|
|
|
|
8 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, end of period
|
|
|
9,999 |
|
|
$ |
7.80 |
|
|
|
7,731 |
|
|
$ |
10.77 |
|
|
|
22,861 |
|
|
$ |
16.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted
|
|
$ |
0.65 |
|
|
|
|
|
|
$ |
3.71 |
|
|
|
|
|
|
$ |
2.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
The following table summarizes information about stock options
outstanding and exercisable as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted- | |
|
|
|
|
|
Weighted- | |
|
|
|
|
|
|
Average | |
|
Weighted- | |
|
|
|
Average | |
|
Weighted- | |
|
|
|
|
Remaining | |
|
Average | |
|
|
|
Remaining | |
|
Average | |
Range of |
|
Number | |
|
Contractual | |
|
Exercise | |
|
Number | |
|
Contractual | |
|
Exercise | |
Exercise Prices |
|
Outstanding | |
|
Life | |
|
Price | |
|
Exercisable | |
|
Life | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
|
|
|
|
|
(In thousands) | |
|
|
|
|
$ 1.11 $ 1.60
|
|
|
12,565 |
|
|
|
9 years |
|
|
$ |
1.39 |
|
|
|
1,297 |
|
|
|
9 years |
|
|
$ |
1.49 |
|
$ 2.85 $ 4.56
|
|
|
5,906 |
|
|
|
7 years |
|
|
|
3.40 |
|
|
|
3,028 |
|
|
|
7 years |
|
|
|
3.33 |
|
$ 5.06 $ 5.17
|
|
|
6,970 |
|
|
|
8 years |
|
|
|
5.15 |
|
|
|
2,187 |
|
|
|
8 years |
|
|
|
5.13 |
|
$ 9.13 $13.68
|
|
|
1,712 |
|
|
|
6 years |
|
|
|
10.96 |
|
|
|
1,513 |
|
|
|
6 years |
|
|
|
11.10 |
|
$13.96 $23.09
|
|
|
1,974 |
|
|
|
4 years |
|
|
|
19.24 |
|
|
|
1,974 |
|
|
|
4 years |
|
|
|
19.24 |
|
On January 1, 2003, the Company adopted the fair value
measurement provisions of SFAS No. 123, under which
the Company recognizes compensation expense of a stock-based
award to an employee over the vesting period based on the fair
value of the award on the grant date. Adoption of these
provisions resulted in utilizing a preferable accounting method
as the consolidated financial statements present the estimated
fair value of stock-based compensation in expense consistently
with other forms of compensation and other expense associated
with goods and services received for equity instruments. In
accordance with SFAS No. 123, the fair value method
will be applied only to awards granted or modified after
January 1, 2003, whereas awards granted prior to such date
will continue to be accounted for under APB No. 25, unless
they are modified or settled in cash. The ongoing effect on
consolidated results of operations or financial condition will
be dependent upon future stock based compensation awards
granted. The Company recorded $14 million, $31 million
and $4 million of option compensation expense for the years
ended December 31, 2005, 2004 and 2003, respectively.
In January 2004, Charter began an option exchange program in
which the Company offered its employees the right to exchange
all stock options (vested and unvested) under the 1999 Charter
Communications Option Plan and 2001 Stock Incentive Plan that
had an exercise price over $10 per share for shares of
restricted Charter Class A common stock or, in some
instances, cash. Based on a sliding exchange ratio, which varied
depending on the exercise price of an employees outstanding
options, if an employee would have received more than
400 shares of restricted stock in exchange for tendered
options, Charter issued that employee shares of restricted stock
in the exchange. If, based on the exchange ratios, an employee
would have received 400 or fewer shares of restricted stock in
exchange for tendered options, Charter instead paid the employee
cash in an amount equal to the number of shares the employee
would have received multiplied by $5.00. The offer applied to
options (vested and unvested) to purchase a total of
22,929,573 shares of Charter Class A common stock, or
approximately 48% of Charters 47,882,365 total options
issued and outstanding as of December 31, 2003.
Participation by employees was voluntary. Those members of
Charters board of directors who were not also employees of
the Company or any of its subsidiaries were not eligible to
participate in the exchange offer.
In the closing of the exchange offer on February 20, 2004,
Charter accepted for cancellation eligible options to purchase
approximately 18,137,664 shares of its Class A common
stock. In exchange, Charter granted 1,966,686 shares of
restricted stock, including 460,777 performance shares to
eligible employees of the rank of senior vice president and
above, and paid a total cash amount of approximately
$4 million (which amount includes applicable withholding
taxes) to those employees who received cash rather than
F-32
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
shares of restricted stock. The restricted stock was granted on
February 25, 2004. Employees tendered approximately 79% of
the options eligible to be exchanged under the program.
The cost to the Company of the stock option exchange program was
approximately $10 million, with a 2004 cash compensation
expense of approximately $4 million and a non-cash
compensation expense of approximately $6 million to be
expensed ratably over the three-year vesting period of the
restricted stock in the exchange.
In January 2004, the Compensation Committee of the board of
directors of Charter approved Charters Long-Term Incentive
Program (LTIP), which is a program administered
under the 2001 Stock Incentive Plan. Under the LTIP, employees
of Charter and its subsidiaries whose pay classifications exceed
a certain level are eligible to receive stock options, and more
senior level employees are eligible to receive stock options and
performance shares. The stock options vest 25% on each of the
first four anniversaries of the date of grant. The performance
shares vest on the third anniversary of the grant date and
shares of Charter Class A common stock are issued,
conditional upon Charters performance against financial
performance measures established by Charters management
and approved by its board of directors as of the time of the
award. Charter granted 3.2 million and 6.9 million
shares in 2005 and 2004, respectively, under this program and
recognized expense of $1 million and $8 million in the
first three quarters of 2005 and 2004, respectively. However, in
the fourth quarter of 2005 and 2004, the Company reversed the
entire $1 million and $8 million, respectively, of
expense based on the Companys assessment of the
probability of achieving the financial performance measures
established by Charter and required to be met for the
performance shares to vest. In February 2006, Charters
Compensation Committee approved a modification to the financial
performance measures required to be met for the 2005 performance
shares to vest after which management believes that a
approximately 2.5 million of the performance shares are
likely to vest. As such, expense of approximately
$3 million will be amortized over the remaining two year
service period.
|
|
18. |
Hurricane Asset Retirement Loss |
Certain of the Companys cable systems in Louisiana
suffered significant plant damage as a result of hurricanes
Katrina and Rita in September 2005. As a result, the Company
wrote off $19 million of its plants net book value in
the third quarter of 2005.
In the fourth quarter of 2002, the Company began a workforce
reduction program and consolidation of its operations from three
divisions and ten regions into five operating divisions,
eliminating redundant practices and streamlining its management
structure. The Company has recorded special charges as a
F-33
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
result of reducing its workforce, executive severance and
consolidating administrative offices in 2003, 2004 and 2005. The
activity associated with this initiative is summarized in the
table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
|
|
|
|
|
|
|
Special | |
|
|
Severance/Leases | |
|
Litigation | |
|
Other | |
|
Charge | |
|
|
| |
|
| |
|
| |
|
| |
Balance at December 31, 2002
|
|
$ |
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Charges
|
|
|
26 |
|
|
$ |
|
|
|
$ |
(5 |
) |
|
$ |
21 |
|
Payments
|
|
|
(43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Charges
|
|
|
12 |
|
|
$ |
92 |
|
|
$ |
|
|
|
$ |
104 |
|
Payments
|
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Charges
|
|
|
6 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
7 |
|
Payments
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2003, the severance and
lease costs were offset by a $5 million settlement from the
Internet service provider Excite@Home related to the conversion
of high-speed Internet customers to Charter Pipeline service in
2001. For the year ended December 31, 2004, special charges
include approximately $85 million, as part of a settlement
of the consolidated federal class action and federal derivative
action lawsuits and approximately $10 million of litigation
costs related to the settlement of a 2004 national class action
suit (see Note 22). For the year ended December 31,
2004, special charges were offset by $3 million received
from a third party in settlement of a legal dispute. For the
year ended December 31, 2005, special charges also include
approximately $1 million related to various legal
settlements.
CCH II is a single member limited liability company not
subject to income tax. CCH II holds all operations through
indirect subsidiaries. The majority of these indirect
subsidiaries are limited liability companies that are also not
subject to income tax. However, certain of CCH IIs
indirect subsidiaries are corporations that are subject to
income tax.
For the years ended December 31, 2005 and 2003, the Company
recorded income tax expense related to increases in deferred tax
liabilities and current federal and state income taxes primarily
related to differences in accounting for franchises at our
indirect corporate subsidiaries. For the year ended
December 31, 2004, the Company recorded income tax benefit
for its indirect corporate subsidiaries primarily related to
differences between book and tax accounting for franchises,
primarily resulting from the impairment recorded during 2004.
F-34
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
Current and deferred income tax (expense) benefit is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Current expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income taxes
|
|
$ |
(2 |
) |
|
$ |
(2 |
) |
|
$ |
(1 |
) |
|
State income taxes
|
|
|
(4 |
) |
|
|
(4 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
Current income tax expense
|
|
|
(6 |
) |
|
|
(6 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred benefit (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income taxes
|
|
|
(3 |
) |
|
|
50 |
|
|
|
(10 |
) |
|
State income taxes
|
|
|
|
|
|
|
7 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred income tax benefit (expense)
|
|
|
(3 |
) |
|
|
57 |
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
Total income benefit (expense)
|
|
$ |
(9 |
) |
|
$ |
51 |
|
|
$ |
(13 |
) |
|
|
|
|
|
|
|
|
|
|
The Company recorded the portion of the income tax benefit
associated with the adoption of EITF Topic
D-108 as a
$16 million reduction of the cumulative effect of
accounting change on the accompanying statement of operations
for the year ended December 31, 2004.
The Companys effective tax rate differs from that derived
by applying the applicable federal income tax rate of 35%, and
average state income tax rate of 5% for the years ended
December 31, 2005, 2004 and 2003 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Statutory federal income taxes
|
|
$ |
146 |
|
|
$ |
945 |
|
|
$ |
1 |
|
State income taxes, net of federal benefit
|
|
|
21 |
|
|
|
135 |
|
|
|
|
|
Losses allocated to limited liability companies not subject to
income taxes
|
|
|
(196 |
) |
|
|
(1,009 |
) |
|
|
12 |
|
Valuation allowance used (provided)
|
|
|
20 |
|
|
|
(20 |
) |
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
|
(9 |
) |
|
|
51 |
|
|
|
(13 |
) |
Less: cumulative effect of accounting change
|
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
$ |
(9 |
) |
|
$ |
35 |
|
|
$ |
(13 |
) |
|
|
|
|
|
|
|
|
|
|
F-35
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(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, 2005 and 2004 for the indirect
corporate subsidiaries of the Company which are included in
long-term liabilities are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$ |
80 |
|
|
$ |
95 |
|
|
Other
|
|
|
6 |
|
|
|
8 |
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
86 |
|
|
|
103 |
|
Less: valuation allowance
|
|
|
(51 |
) |
|
|
(71 |
) |
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
35 |
|
|
$ |
32 |
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Property, plant & equipment
|
|
$ |
(41 |
) |
|
$ |
(39 |
) |
|
Franchises
|
|
|
(207 |
) |
|
|
(201 |
) |
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(248 |
) |
|
|
(240 |
) |
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$ |
(213 |
) |
|
$ |
(208 |
) |
|
|
|
|
|
|
|
As of December 31, 2005 and 2004, the Company has deferred
tax assets of $86 million and $103 million,
respectively, which primarily relate to net operating loss
carryforwards of certain of its indirect corporate subsidiaries.
These net operating loss carryforwards (generally expiring in
years 2006 through 2025), are subject to certain return
limitations. Valuation allowances of $51 million and
$71 million exist with respect to these carryforwards as of
December 31, 2005 and 2004, 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.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning
strategies in making this assessment. Management believes that
the deferred tax assets will be realized prior to the expiration
of the tax net operating loss carryforwards in 2006 through
2025, except for those tax net operating loss carryforwards that
may be subject to certain limitations. Because of the
uncertainty associated in realizing the deferred tax assets
associated with the potentially limited tax net operating loss
carryforwards, valuation allowances have been established except
for deferred tax assets available to offset deferred tax
liabilities.
Charter Holdco is currently under examination by the Internal
Revenue Service for the tax years ending December 31, 2002
and 2003. The results of the Company (excluding the
Companys indirect corporate subsidiaries) for these years
are subject to this examination. Management does not expect the
results of this examination to have a material adverse effect on
the Companys consolidated financial condition or results
of operations.
|
|
21. |
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.
F-36
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
Charter is a party to management arrangements with Charter
Holdco and certain of its subsidiaries. Under these agreements,
Charter provides management services for the cable systems owned
or operated by its subsidiaries. The management services include
such services as centralized customer billing services, data
processing and related support, benefits administration and
coordination of insurance coverage and self-insurance programs
for medical, dental and workers compensation claims. Costs
associated with providing these services are billed and charged
directly to the Companys operating subsidiaries and are
included within operating costs in the accompanying consolidated
statements of operations. Such costs totaled $212 million,
$202 million and $210 million for the years ended
December 31, 2005, 2004 and 2003, respectively. All other
costs incurred on the behalf of Charters operating
subsidiaries are considered a part of the management fee and are
recorded as a component of selling, general and administrative
expense, in the accompanying consolidated financial statements.
For the years ended December 31, 2005, 2004 and 2003, the
management fee charged to the Companys operating
subsidiaries approximated the expenses incurred by Charter
Holdco and Charter on behalf of the Companys operating
subsidiaries. The Companys 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 Charters subsidiaries.
Given the diverse nature of Mr. Allens investment
activities and interests, and to avoid the possibility of future
disputes as to potential business, Charter and Charter Holdco,
under the terms of their respective organizational documents,
may not, and may not allow their subsidiaries to engage in any
business transaction outside the cable transmission business
except for certain existing approved investments. Charter,
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 TechTV L.L.C. (TechTV), Oxygen Media Corporation
(Oxygen Media), Digeo, Inc., Click2learn, Inc.,
Trail Blazer Inc., Action Sports Cable Network (Action
Sports) and Microsoft Corporation. In May 2004, TechTV was
sold to an unrelated third party. Mr. Allen owns 100% of
the equity of Vulcan Ventures Incorporated (Vulcan
Ventures) and Vulcan Inc. and is the president of Vulcan
Ventures. Ms. Jo Allen Patton is a director and the
President and Chief Executive Officer of Vulcan Inc. and is a
director and Vice President of Vulcan Ventures. Mr. Lance
Conn is Executive Vice President of Vulcan Inc. and Vulcan
Ventures. Mr. Savoy was a vice president and a director of
Vulcan Ventures until his resignation in September 2003 and he
resigned as a director of Charter in April 2004. The various
cable, media, Internet and telephone companies in which
Mr. Allen has invested may mutually benefit one another.
The Company can give no assurance, nor should you expect, that
any of these business relationships will be successful, that the
Company will realize any benefits from these relationships or
that the Company will enter into any business relationships in
the future with Mr. Allens affiliated companies.
Mr. Allen and his affiliates have made, and in the future
likely will make, numerous investments outside of the Company
and its business. The Company cannot assure that, in the event
that the Company
F-37
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
or any of its subsidiaries enter into transactions in the future
with any affiliate of Mr. Allen, such transactions will be
on terms as favorable to the Company as terms it might have
obtained from an unrelated third party. Also, conflicts could
arise with respect to the allocation of corporate opportunities
between the Company and Mr. Allen and his affiliates. The
Company has not instituted any formal plan or arrangement to
address potential conflicts of interest.
The Company received or receives programming for broadcast via
its cable systems from TechTV (now G4), Oxygen Media and Trail
Blazers Inc. The Company pays a fee for the programming service
generally based on the number of customers receiving the
service. Such fees for the years ended December 31, 2005,
2004 and 2003 were each less than 1% of total operating expenses.
Tech TV. The Company received from TechTV programming for
distribution via its cable system pursuant to an affiliation
agreement. The affiliation agreement provided, among other
things, that TechTV must offer Charter certain terms and
conditions that are no less favorable in the affiliation
agreement than are given to any other distributor that serves
the same number of or fewer TechTV viewing customers.
Additionally, pursuant to the affiliation agreement, the Company
was entitled to incentive payments for channel launches through
December 31, 2003.
In March 2004, Charter Holdco entered into agreements with
Vulcan Programming and TechTV, which provide for
(i) Charter Holdco and TechTV to amend the affiliation
agreement which, among other things, revises the description of
the TechTV network content, provides for Charter Holdco to waive
certain claims against TechTV relating to alleged breaches of
the affiliation agreement and provides for TechTV to make
payment of outstanding launch receivables due to Charter Holdco
under the affiliation agreement, (ii) Vulcan Programming to
pay approximately $10 million and purchase over a
24-month period, at
fair market rates, $2 million of advertising time across
various cable networks on Charter cable systems in consideration
of the agreements, obligations, releases and waivers under the
agreements and in settlement of the aforementioned claims and
(iii) TechTV to be a provider of content relating to
technology and video gaming for Charters interactive
television platforms through December 31, 2006 (exclusive
for the first year). For the years ended December 31, 2005
and 2004, the Company recognized approximately $1 million
and $5 million, respectively, of the Vulcan Programming
payment as an offset to programming expense.
Oxygen. Oxygen Media LLC (Oxygen) provides
programming content aimed at the female audience for
distribution over cable systems and satellite. On July 22,
2002, Charter Holdco entered into a carriage agreement with
Oxygen whereby the Company agreed to carry programming content
from Oxygen. Under the carriage agreement, the Company currently
makes Oxygen programming available to approximately
5 million of its video customers. In August 2004, Charter
Holdco and Oxygen entered into agreements that amended and
renewed the carriage agreement. The amendment to the carriage
agreement (a) revised the number of the Companys
customers to which Oxygen programming must be carried and for
which the Company must pay, (b) released Charter Holdco
from any claims related to the failure to achieve distribution
benchmarks under the carriage agreement, (c) required
Oxygen to make payment on outstanding receivables for launch
incentives due to the Company under the carriage agreement; and
(d) requires that Oxygen provide its programming content to
the Company on economic terms no less favorable than Oxygen
provides to any other cable or satellite operator having fewer
subscribers than the Company. The renewal of the carriage
agreement (a) extends the period that the Company will
carry Oxygen programming to its customers through
January 31, 2008, and (b) requires license fees to be
paid based on customers receiving Oxygen programming, rather
than for specific customer benchmarks. For the years ended
December 31, 2005, 2004 and 2003, the Company paid Oxygen
approximately $9 million, $13 million and
$9 million, respectively. In addition, Oxygen pays the
Company launch incentives for
F-38
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
customers launched after the first year of the term of the
carriage agreement up to a total of $4 million. The Company
recorded approximately $0.1 million related to these launch
incentives as a reduction of programming expense for the year
ended December 31, 2005 and $1 million for each of the
years ended December 31, 2004 and 2003, respectively.
In August 2004, Charter Holdco and Oxygen also amended the
equity issuance agreement to provide for the issuance of
1 million shares of Oxygen Preferred Stock with a
liquidation preference of $33.10 per share plus accrued
dividends to Charter Holdco on February 1, 2005 in place of
the $34 million of unregistered shares of Oxygen Media
common stock required under the original equity issuance
agreement. Oxygen Media delivered these shares in March 2005.
The preferred stock is convertible into common stock after
December 31, 2007 at a conversion ratio, the numerator of
which is the liquidation preference and the denominator which is
the fair market value per share of Oxygen Media common stock on
the conversion date.
The Company recognized the guaranteed value of the investment
over the life of the carriage agreement as a reduction of
programming expense. For the years ended December 31, 2005,
2004 and 2003, the Company recorded approximately
$2 million, $13 million, and $9 million,
respectively, as a reduction of programming expense. The
carrying value of the Companys investment in Oxygen was
approximately $33 million and $32 million as of
December 31, 2005 and 2004, respectively.
Digeo, Inc. In March 2001, Charter Communications
Ventures, LLC (Charter Ventures) and Vulcan Ventures
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. The equity interest is
subject to a priority return of capital to Vulcan Ventures up to
the amount contributed by Vulcan Ventures on Charter
Ventures behalf. After Vulcan Ventures recovers its amount
contributed and any cumulative loss allocations, Charter
Ventures has a 100% profit interest in DBroadband Holdings, LLC.
Charter Ventures is not required to make any capital
contributions, including capital calls to Digeo. DBroadband
Holdings, LLC is therefore not included in the Companys
consolidated financial statements. Pursuant to an amended
version of this arrangement, in 2003, Vulcan Ventures
contributed a total of $29 million to Digeo,
$7 million of which was contributed on Charter
Ventures behalf, subject to Vulcan Ventures
aforementioned priority return. Since the formation of
DBroadband Holdings, LLC, Vulcan Ventures has contributed
approximately $56 million on Charter Ventures behalf.
On September 27, 2001, Charter and Digeo Interactive
amended the broadband carriage agreement. According to the
amendment, Digeo Interactive would provide to Charter the
content for enhanced Wink interactive television
services, known as Charter Interactive Channels
(i-channels). In order to provide the i-channels,
Digeo Interactive sublicensed certain Wink technologies to
Charter. Charter is entitled to share in the revenues generated
by the i-channels. Currently, the Companys digital video
customers who receive i-channels receive the service at no
additional charge.
On September 28, 2002, Charter entered into a second
amendment to its broadband carriage agreement with Digeo
Interactive. This amendment superseded the amendment of
September 27, 2001. It provided for the development by
Digeo Interactive of future features to be included in the Basic
i-TV service to be
provided by Digeo and for Digeos development of an
interactive toolkit to enable Charter to develop
interactive local content. Furthermore, Charter could request
that Digeo Interactive manage local content for a fee. The
amendment provided for Charter to pay for development of the
Basic i-TV service as
well as license fees for customers who would receive the
service, and for Charter and Digeo to split certain revenues
earned from the service. The Company paid Digeo Interactive
approximately $3 million, $3 million and
$4 million for the years ended December 31, 2005, 2004
and 2003, respectively,
F-39
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
for customized development of the i-channels and the local
content tool kit. This amendment expired pursuant to its terms
on December 31, 2003. Digeo Interactive is continuing to
provide the Basic i-TV
service on a
month-to-month basis.
On 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. Under the license
agreement Digeo Interactive granted to Charter Holdco the right
to use Digeos proprietary software for the number of DVR
units that Charter deployed from a maximum of 10 headends
through year-end 2004. This maximum number of headends
restriction was expanded and eventually eliminated through
successive agreement amendments and the date for entering into
license agreements for units deployed was extended. The license
granted for each unit deployed under the agreement is valid for
five years. In addition, Charter will pay certain other fees
including a per-headend license fee and maintenance fees.
Maximum license and maintenance fees during the term of the
agreement are expected to be approximately $7 million. The
agreement provides that Charter is entitled to receive contract
terms, considered on the whole, and license fees, considered
apart from other contract terms, no less favorable than those
accorded to any other Digeo customer. The Company paid
approximately $1 million in license and maintenance fees in
2005.
In April 2004, the Company launched DVR service using units
containing the Digeo software in its Rochester, Minnesota market
using a broadband media center that is an integrated set-top
terminal with a cable converter, DVR hard drive and connectivity
to other consumer electronics devices (such as stereos, MP3
players, and digital cameras).
In May 2004, Charter Holdco entered into a binding term sheet
with Digeo Interactive for the development, testing and purchase
of 70,000 Digeo PowerKey DVR units. The term sheet provided that
the parties would proceed in good faith to negotiate, prior to
year-end 2004, definitive agreements for the development,
testing and purchase of the DVR units and that the parties would
enter into a license agreement for Digeos proprietary
software on terms substantially similar to the terms of the
license agreement described above. In November 2004, Charter
Holdco and Digeo Interactive executed the license agreement and
in December 2004, the parties executed the purchase agreement,
each on terms substantially similar to the binding term sheet.
Product development and testing has been completed. Total
purchase price and license and maintenance fees during the term
of the definitive agreements are expected to be approximately
$41 million. The definitive agreements are terminable at no
penalty to Charter in certain circumstances. The Company paid
approximately $10 million and $1 million for the years
ended December 31, 2005 and 2004, respectively, in capital
purchases under this agreement.
CC VIII. As part of the acquisition of the cable
systems owned by Bresnan Communications Company Limited
Partnership in February 2000, CC VIII, LLC, CCH IIs
indirect limited liability company subsidiary, issued, after
adjustments, 24,273,943 Class A preferred membership units
(collectively, the CC VIII interest) with a
value and an initial capital account of approximately
$630 million to certain sellers affiliated with AT&T
Broadband, subsequently owned by Comcast Corporation (the
Comcast sellers). Mr. Allen granted the Comcast
sellers the right to sell to him the CC VIII interest for
approximately $630 million plus 4.5% interest annually from
February 2000 (the Comcast put right). In April
2002, the Comcast sellers exercised the Comcast put right in
full, and this transaction was consummated on June 6, 2003.
Accordingly, Mr. Allen became the holder of the
CC VIII interest, indirectly through an affiliate. In the
event of a liquidation of CC VIII, Mr. Allen would be
entitled to a priority distribution with respect to a 2%
priority return (which will continue to accrete). Any remaining
distributions in liquidation would be distributed to CC V
Holdings, LLC and Mr. Allen in proportion to CC V
Holdings, LLCs capital account and Mr. Allens
capital account (which will equal the initial
F-40
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
capital account of the Comcast sellers of approximately
$630 million, increased or decreased by
Mr. Allens pro rata share of CC VIIIs
profits or losses (as computed for capital account purposes)
after June 6, 2003).
An issue arose as to whether the documentation for the Bresnan
transaction was correct and complete with regard to the ultimate
ownership of the CC VIII interest following consummation of
the Comcast put right. Thereafter, the board of directors of
Charter formed a Special Committee of independent directors to
investigate the matter and take any other appropriate action on
behalf of Charter with respect to this matter. After conducting
an investigation of the relevant facts and circumstances, the
Special Committee determined that a scriveners
error had occurred in February 2000 in connection with the
preparation of the last-minute revisions to the Bresnan
transaction documents and that, as a result, Charter should seek
the reformation of the Charter Holdco limited liability company
agreement, or alternative relief, in order to restore and ensure
the obligation that the CC VIII interest be automatically
exchanged for Charter Holdco units. The Special Committee
further determined that, as part of such contract reformation or
alternative relief, Mr. Allen should be required to
contribute the CC VIII interest to Charter Holdco in
exchange for 24,273,943 Charter Holdco membership units. The
Special Committee also recommended to the board of directors of
Charter that, to the extent the contract reformation is
achieved, the board of directors should consider whether the
CC VIII interest should ultimately be held by Charter
Holdco or Charter Holdings or another entity owned directly or
indirectly by them.
Mr. Allen disagreed with the Special Committees
determinations described above and so notified the Special
Committee. Mr. Allen contended that the transaction was
accurately reflected in the transaction documentation and
contemporaneous and subsequent company public disclosures. The
Special Committee and Mr. Allen determined to utilize the
Delaware Court of Chancerys program for mediation of
complex business disputes in an effort to resolve the
CC VIII interest dispute.
As of October 31, 2005, Mr. Allen, the Special
Committee, Charter, Charter Holdco and certain of their
affiliates, agreed to settle the dispute, and execute certain
permanent and irrevocable releases pursuant to the Settlement
Agreement and Mutual Release agreement dated October 31,
2005 (the Settlement). Pursuant to the Settlement,
Charter Investment, Inc. (CII) has retained 30% of
its CC VIII interest (the Remaining Interests).
The Remaining Interests are subject to certain drag along, tag
along and transfer restrictions as detailed in the revised
CC VIII Limited Liability Company Agreement. CII
transferred the other 70% of the CC VIII interest directly
and indirectly, through Charter Holdco, to a newly formed
entity, CCHC (a direct subsidiary of Charter Holdco and the
direct parent of Charter Holdings). Of the 70% of the
CC VIII preferred interests, 7.4% has been transferred by
CII to CCHC for a subordinated exchangeable note with an initial
accreted value of $48 million, accreting at 14%, compounded
quarterly, with a
15-year maturity (the
Note). The remaining 62.6% has been transferred by
CII to Charter Holdco, in accordance with the terms of the
settlement for no additional monetary consideration. Charter
Holdco contributed the 62.6% interest to CCHC.
As part of the Settlement, CC VIII issued approximately
49 million additional Class B units to CC V in
consideration for prior capital contributions to CC VIII by
CC V, with respect to transactions that were unrelated to
the dispute in connection with CIIs membership units in
CC VIII. As a result, Mr. Allens pro rata share
of the profits and losses of CC VIII attributable to the
Remaining Interests is approximately 5.6%.
The Note is exchangeable, at CIIs option, at any time, for
Charter Holdco Class A Common units at a rate equal to the
then accreted value, divided by $2.00 (the Exchange
Rate). Customary anti-dilution protections have been
provided that could cause future changes to the Exchange Rate.
Additionally, the Charter Holdco Class A Common units
received will be exchangeable by the holder into Charter common
F-41
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
stock in accordance with existing agreements between CII,
Charter and certain other parties signatory thereto. Beginning
February 28, 2009, if the closing price of Charter common
stock is at or above the Exchange Rate for a certain period of
time as specified in the Exchange Agreement, Charter Holdco may
require the exchange of the Note for Charter Holdco Class A
Common units at the Exchange Rate.
CCHC has the right to redeem the Note under certain
circumstances, for cash in an amount equal to the then accreted
value, such amount, if redeemed prior to February 28, 2009,
would also include a make whole up to the accreted value through
February 28, 2009. CCHC must redeem the Note at its
maturity for cash in an amount equal to the initial stated value
plus the accreted return through maturity.
Charters Board of Directors has determined that the
transferred CC VIII interests remain at CCHC.
Helicon. In 1999, the Company purchased the Helicon cable
systems. As part of that purchase, Mr. Allen entered into a
put agreement with a certain seller of the Helicon cable systems
that received a portion of the purchase price in the form of a
preferred membership interest in Charter Helicon, LLC with a
redemption price of $25 million plus accrued interest.
Under the Helicon put agreement, such holder had the right to
sell any or all of the interest to Mr. Allen prior to its
mandatory redemption in cash on July 30, 2009. On
August 31, 2005, 40% of the preferred membership interest
was put to Mr. Allen. The remaining 60% of the preferred
interest in Charter Helicon, LLC remained subject to the put to
Mr. Allen. Such preferred interest was recorded in other
long-term liabilities. On October 6, 2005, Charter Helicon,
LLC redeemed all of the preferred membership interest for the
redemption price of $25 million plus accrued interest.
|
|
22. |
Commitments and Contingencies |
The following table summarizes the Companys payment
obligations as of December 31, 2005 for its contractual
obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and Capital Lease Obligations(1)
|
|
$ |
94 |
|
|
$ |
20 |
|
|
$ |
15 |
|
|
$ |
12 |
|
|
$ |
10 |
|
|
$ |
13 |
|
|
$ |
24 |
|
Programming Minimum Commitments(2)
|
|
|
1,253 |
|
|
|
342 |
|
|
|
372 |
|
|
|
306 |
|
|
|
233 |
|
|
|
|
|
|
|
|
|
Other(3)
|
|
|
301 |
|
|
|
146 |
|
|
|
49 |
|
|
|
21 |
|
|
|
21 |
|
|
|
21 |
|
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1,648 |
|
|
$ |
508 |
|
|
$ |
436 |
|
|
$ |
339 |
|
|
$ |
264 |
|
|
$ |
34 |
|
|
$ |
67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The Company leases certain facilities and equipment under
noncancelable operating leases. Leases and rental costs charged
to expense for the years ended December 31, 2005, 2004 and
2003, were $23 million, $23 million and
$30 million, respectively. |
|
(2) |
The Company pays programming fees under multi-year contracts
ranging from three to ten years typically based on a flat fee
per customer, which may be fixed for the term or may in some
cases, escalate over the term. Programming costs included in the
accompanying statement of operations were $1.4 billion,
$1.3 billion and $1.2 billion for the years ended
December 31, 2005, 2004 and 2003, respectively. Certain of
the Companys 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 Companys programming contracts. |
F-42
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
|
|
(3) |
Other represents other guaranteed minimum
commitments, which consist primarily of commitments to the
Companys billing services vendors. |
The following items are not included in the contractual
obligation table due to various factors discussed below.
However, the Company incurs these costs as part of its
operations:
|
|
|
|
|
The Company also rents utility poles used in its operations.
Generally, pole rentals are cancelable on short notice, but the
Company anticipates that such rentals will recur. Rent expense
incurred for pole rental attachments for the years ended
December 31, 2005, 2004 and 2003, was $46 million,
$43 million and $40 million, respectively. |
|
|
|
The Company pays franchise fees under multi-year franchise
agreements based on a percentage of revenues earned from video
service per year. The Company also pays other franchise related
costs, such as public education grants under multi-year
agreements. Franchise fees and other franchise-related costs
included in the accompanying statement of operations were
$170 million, $164 million and $162 million for
the years ended December 31, 2005, 2003 and 2002,
respectively. |
|
|
|
The Company also has $165 million in letters of credit,
primarily to its various workers compensation, property
casualty and general liability carriers as collateral for
reimbursement of claims. These letters of credit reduce the
amount the Company may borrow under its credit facilities. |
|
|
|
Securities Class Actions and Derivative Suits |
In 2002 and 2003, Charter had a series of lawsuits filed against
Charter and certain of its former and present officers and
directors (collectively the Actions). In general,
the lawsuits alleged that Charter utilized misleading accounting
practices and failed to disclose these accounting practices
and/or issued false and misleading financial statements and
press releases concerning Charters operations and
prospects.
Charter and the individual defendants entered into a Memorandum
of Understanding on August 5, 2004 setting forth agreements
in principle regarding settlement of the Actions. Charter and
various other defendants in those actions subsequently entered
into Stipulations of Settlement dated as of January 24,
2005, setting forth a settlement of the Actions in a manner
consistent with the terms of the Memorandum of Understanding. On
June 30, 2005, the Court issued its final approval of the
settlements. At the end of September 2005, after the period for
appeals of the settlements expired, Stipulations of Dismissal
were filed with the Eighth Circuit Court of Appeals resulting in
the dismissal of the two appeals with prejudice. Procedurally
therefore, the settlements are final.
As amended, the Stipulations of Settlement provided that, in
exchange for a release of all claims by plaintiffs against
Charter and its former and present officers and directors named
in the Actions, Charter would pay to the plaintiffs a
combination of cash and equity collectively valued at
$144 million, which was to include the fees and expenses of
plaintiffs counsel. Of this amount, $64 million was
to be paid in cash (by Charters insurance carriers) and
the $80 million balance was to be paid in shares of Charter
Class A common stock having an aggregate value of
$40 million and ten-year warrants to purchase shares of
Charter Class A common stock having an aggregate warrant
value of $40 million, with such values in each case being
determined pursuant to formulas set forth in the Stipulations of
Settlement. However, Charter had the right, in its sole
discretion, to substitute cash for some or all of the
aforementioned securities on a dollar for dollar basis. Pursuant
to that right, Charter elected to fund the $80 million
obligation with 13.4 million shares of Charter Class A
common stock (having an aggregate value of approximately
F-43
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
$15 million pursuant to the formula set forth in the
Stipulations of Settlement) with the remaining balance (less an
agreed upon $2 million discount in respect of that portion
allocable to plaintiffs attorneys fees) to be paid
in cash. In addition, Charter had agreed to issue additional
shares of its Class A common stock to its insurance carrier
having an aggregate value of $5 million; however, by
agreement with its carrier, Charter paid $4.5 million in
cash in lieu of issuing such shares. As a result in 2004, the
Company recorded an $85 million special charge on its
consolidated statement of operations. Charter delivered the
settlement consideration to the claims administrator on
July 8, 2005, and it was held in escrow pending resolution
of the appeals. Those appeals are now resolved.
In October 2001 and 2002, two class action lawsuits were filed
against Charter alleging that Charter Holdco improperly charged
them a wire maintenance fee without request or permission. They
also claimed that Charter Holdco improperly required them to
rent analog and/or digital set-top terminals even though their
television sets were cable ready. In April 2004, the
parties participated in a mediation which resulted in settlement
of the lawsuits. As a result of the settlement, we recorded a
special charge of $9 million in our consolidated statement
of operations in 2004. In December 2004 the court entered a
written order formally approving that settlement.
Furthermore, the Company is also party to, other lawsuits and
claims that arose in the ordinary course of conducting its
business. In the opinion of management, after taking into
account recorded liabilities, the outcome of these other
lawsuits and claims are not expected to have a material adverse
effect on the Companys consolidated financial condition,
results of operations or its liquidity.
|
|
|
Regulation in the Cable Industry |
The operation of a cable system is extensively regulated by the
Federal Communications Commission (FCC), some state
governments and most local governments. The FCC has the
authority to enforce its regulations through the imposition of
substantial fines, the issuance of cease and desist orders
and/or the imposition of other administrative sanctions, such as
the revocation of FCC licenses needed to operate certain
transmission facilities used in connection with cable
operations. The 1996 Telecom Act altered the regulatory
structure governing the nations communications providers.
It removed barriers to competition in both the cable television
market and the local telephone market. Among other things, it
reduced the scope of cable rate regulation and encouraged
additional competition in the video programming industry by
allowing local telephone companies to provide video programming
in their own telephone service areas.
Future legislative and regulatory changes could adversely affect
the Companys operations, including, without limitation,
additional regulatory requirements the Company may be required
to comply with as it offers new services such as telephone.
|
|
23. |
Employee Benefit Plan |
The Companys employees may participate in the Charter
Communications, Inc. 401(k) Plan. Employees that qualify for
participation can contribute up to 50% of their salary, on a
pre-tax basis, subject to a maximum contribution limit as
determined by the Internal Revenue Service. The Company matches
50% of the first 5% of participant contributions. The Company
made contributions to the 401(k) plan totaling $6 million,
$7 million and $7 million for the years ended
December 31, 2005, 2004 and 2003, respectively.
F-44
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
|
|
24. |
Recently Issued Accounting Standards |
In November 2004, the FASB issued SFAS No. 153,
Exchanges of Non-monetary Assets An Amendment of
APB No. 29. This statement eliminates the exception to
fair value for exchanges of similar productive assets and
replaces it with a general exception for exchange transactions
that do not have commercial substance that is,
transactions that are not expected to result in significant
changes in the cash flows of the reporting entity. The Company
adopted this pronouncement effective April 1, 2005. The
exchange transaction discussed in Note 3 was accounted for
under this standard.
In December 2004, the FASB issued the revised
SFAS No. 123, Share Based Payment,
which addresses the accounting for share-based payment
transactions in which a company receives employee services in
exchange for (a) equity instruments of that company or
(b) liabilities that are based on the fair value of the
companys equity instruments or that may be settled by the
issuance of such equity instruments. This statement will be
effective for the Company beginning January 1, 2006.
Because the Company adopted the fair value recognition
provisions of SFAS No. 123 on January 1, 2003,
the Company does not expect this revised standard to have a
material impact on its financial statements.
In March 2005, the FASB issued FIN No. 47,
Accounting for Conditional Asset Retirement Obligations.
This interpretation clarifies that the term conditional
asset retirement obligation as used in FASB Statement
No. 143, Accounting for Asset Retirement
Obligations, refers to a legal obligation to perform an
asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not
be within the control of the entity. This pronouncement is
effective for fiscal years ending after December 15, 2005.
The adoption of this interpretation did not have a material
impact on the Companys 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 Companys accompanying financial
statements.
|
|
25. |
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
CCH II, the parent company. The following condensed
parent-only financial statements of CCH II account for the
investment in its subsidiaries 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.
F-45
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
CCH II, LLC (Parent Company Only)
Condensed Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
ASSETS |
Investment in subsidiaries
|
|
$ |
5,044 |
|
|
$ |
6,553 |
|
Other assets
|
|
|
13 |
|
|
|
15 |
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
5,057 |
|
|
$ |
6,568 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY |
Current liabilities
|
|
$ |
54 |
|
|
$ |
54 |
|
Long-term debt
|
|
|
1,601 |
|
|
|
1,601 |
|
Members equity
|
|
|
3,402 |
|
|
|
4,913 |
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$ |
5,057 |
|
|
$ |
6,568 |
|
|
|
|
|
|
|
|
Condensed Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Interest expense
|
|
$ |
(167 |
) |
|
$ |
(166 |
) |
|
$ |
(45 |
) |
Equity in income (losses) of subsidiaries
|
|
|
(258 |
) |
|
|
(3,340 |
) |
|
|
30 |
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(425 |
) |
|
$ |
(3,506 |
) |
|
$ |
(15 |
) |
|
|
|
|
|
|
|
|
|
|
F-46
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004 AND 2003
(dollars in millions, except where indicated)
Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(425 |
) |
|
$ |
(3,506 |
) |
|
$ |
(15 |
) |
|
Noncash interest expense
|
|
|
2 |
|
|
|
3 |
|
|
|
|
|
|
Equity in losses of subsidiaries
|
|
|
258 |
|
|
|
3,340 |
|
|
|
(30 |
) |
|
Changes in operating assets and liabilities
|
|
|
|
|
|
|
6 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities
|
|
|
(165 |
) |
|
|
(157 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
Distributions from subsidiaries
|
|
|
925 |
|
|
|
738 |
|
|
|
545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from investing activities
|
|
|
925 |
|
|
|
738 |
|
|
|
535 |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt
|
|
|
|
|
|
|
|
|
|
|
30 |
|
|
Capital contributions
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
Distributions to parent companies
|
|
|
(760 |
) |
|
|
(578 |
) |
|
|
(562 |
) |
|
Payments for debt issuance costs
|
|
|
|
|
|
|
(3 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities
|
|
|
(760 |
) |
|
|
(581 |
) |
|
|
(538 |
) |
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of year
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
In February 2006, the Company signed two separate definitive
agreements to sell certain cable television systems serving a
total of approximately 316,000 analog video customers in West
Virginia, Virginia, Illinois and Kentucky for a total of
approximately $896 million. The closings of these
transactions are expected to occur in the third quarter of 2006.
Under the terms of the Bridge Loan, bridge availability will be
reduced by the proceeds of asset sales. The Company expects to
use the net proceeds from the asset sales to repay (but not
reduce permanently) amounts outstanding under the Companys
revolving credit facility and that the asset sale proceeds,
along with other existing sources of funds, will provide
additional liquidity supplementing the Companys cash
availability in 2006 and beyond.
F-47
CCH II, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(Unaudited) | |
|
|
|
|
(dollars in millions) | |
ASSETS |
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
26 |
|
|
$ |
3 |
|
|
Accounts receivable, less allowance for doubtful accounts of $15
and $17, respectively
|
|
|
148 |
|
|
|
212 |
|
|
Prepaid expenses and other current assets
|
|
|
23 |
|
|
|
22 |
|
|
Assets held for sale
|
|
|
754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
951 |
|
|
|
237 |
|
|
|
|
|
|
|
|
INVESTMENT IN CABLE PROPERTIES:
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net of accumulated depreciation
of $6,679 and $6,712, respectively
|
|
|
5,402 |
|
|
|
5,800 |
|
|
Franchises, net
|
|
|
9,287 |
|
|
|
9,826 |
|
|
|
|
|
|
|
|
|
|
Total investment in cable properties, net
|
|
|
14,689 |
|
|
|
15,626 |
|
|
|
|
|
|
|
|
OTHER NONCURRENT ASSETS
|
|
|
249 |
|
|
|
238 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
15,889 |
|
|
$ |
16,101 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS EQUITY |
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$ |
871 |
|
|
$ |
923 |
|
|
Payables to related party
|
|
|
99 |
|
|
|
102 |
|
|
Liabilities held for sale
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
989 |
|
|
|
1,025 |
|
|
|
|
|
|
|
|
LONG-TERM DEBT
|
|
|
10,720 |
|
|
|
10,624 |
|
|
|
|
|
|
|
|
LOANS PAYABLE RELATED PARTY
|
|
|
129 |
|
|
|
22 |
|
|
|
|
|
|
|
|
DEFERRED MANAGEMENT FEES RELATED PARTY
|
|
|
14 |
|
|
|
14 |
|
|
|
|
|
|
|
|
OTHER LONG-TERM LIABILITIES
|
|
|
369 |
|
|
|
392 |
|
|
|
|
|
|
|
|
MINORITY INTEREST
|
|
|
626 |
|
|
|
622 |
|
|
|
|
|
|
|
|
MEMBERS EQUITY:
|
|
|
|
|
|
|
|
|
|
Members equity
|
|
|
3,041 |
|
|
|
3,400 |
|
|
Accumulated other comprehensive income
|
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
Total members equity
|
|
|
3,042 |
|
|
|
3,402 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$ |
15,889 |
|
|
$ |
16,101 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-48
CCH II, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(dollars in millions) | |
|
|
Unaudited | |
REVENUES
|
|
$ |
1,374 |
|
|
$ |
1,271 |
|
|
|
|
|
|
|
|
COSTS AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
Operating (excluding depreciation and amortization)
|
|
|
626 |
|
|
|
559 |
|
|
Selling, general and administrative
|
|
|
281 |
|
|
|
241 |
|
|
Depreciation and amortization
|
|
|
358 |
|
|
|
381 |
|
|
Asset impairment charges
|
|
|
99 |
|
|
|
31 |
|
|
Other operating expenses, net
|
|
|
3 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
1,367 |
|
|
|
1,220 |
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
7 |
|
|
|
51 |
|
|
|
|
|
|
|
|
OTHER INCOME AND (EXPENSES):
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(239 |
) |
|
|
(198 |
) |
|
Other income, net
|
|
|
6 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
(233 |
) |
|
|
(178 |
) |
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(226 |
) |
|
|
(127 |
) |
INCOME TAX EXPENSE
|
|
|
(2 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(228 |
) |
|
$ |
(133 |
) |
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-49
CCH II, LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(dollars in millions) | |
|
|
Unaudited | |
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(228 |
) |
|
$ |
(133 |
) |
|
Adjustments to reconcile net loss to net cash flows from
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
358 |
|
|
|
381 |
|
|
|
Asset impairment charges
|
|
|
99 |
|
|
|
31 |
|
|
|
Noncash interest expense
|
|
|
9 |
|
|
|
7 |
|
|
|
Deferred income taxes
|
|
|
|
|
|
|
5 |
|
|
|
Other, net
|
|
|
(2 |
) |
|
|
(17 |
) |
|
Changes in operating assets and liabilities, net of effects from
acquisitions and dispositions:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
60 |
|
|
|
33 |
|
|
|
Prepaid expenses and other assets
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
Accounts payable, accrued expenses and other
|
|
|
(52 |
) |
|
|
(113 |
) |
|
|
Receivables from and payables to related party, including
management fees
|
|
|
(3 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash flows from operating activities
|
|
|
239 |
|
|
|
187 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(241 |
) |
|
|
(211 |
) |
|
Change in accrued expenses related to capital expenditures
|
|
|
(7 |
) |
|
|
16 |
|
|
Proceeds from sale of assets
|
|
|
9 |
|
|
|
6 |
|
|
Purchase of cable system
|
|
|
(42 |
) |
|
|
|
|
|
Purchases of investments
|
|
|
|
|
|
|
(1 |
) |
|
Proceeds from investments
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from investing activities
|
|
|
(276 |
) |
|
|
(190 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Borrowings of long-term debt
|
|
|
415 |
|
|
|
200 |
|
|
Borrowings from related parties
|
|
|
|
|
|
|
139 |
|
|
Repayments of long-term debt
|
|
|
(759 |
) |
|
|
(740 |
) |
|
Repayments to related parties
|
|
|
|
|
|
|
(7 |
) |
|
Proceeds from issuance of debt
|
|
|
440 |
|
|
|
|
|
|
Payments for debt issuance costs
|
|
|
(10 |
) |
|
|
(3 |
) |
|
Distributions
|
|
|
(26 |
) |
|
|
(106 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities
|
|
|
60 |
|
|
|
(517 |
) |
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
23 |
|
|
|
(520 |
) |
CASH AND CASH EQUIVALENTS, beginning of period
|
|
|
3 |
|
|
|
546 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period
|
|
$ |
26 |
|
|
$ |
26 |
|
|
|
|
|
|
|
|
CASH PAID FOR INTEREST
|
|
$ |
214 |
|
|
$ |
188 |
|
|
|
|
|
|
|
|
NONCASH TRANSACTIONS:
|
|
|
|
|
|
|
|
|
|
Issuance of debt by Charter Communications Operating, LLC
|
|
$ |
37 |
|
|
$ |
271 |
|
|
|
|
|
|
|
|
|
Retirement of Renaissance Media Group LLC debt
|
|
$ |
(37 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
Distribution of intercompany note to related party
|
|
$ |
(105 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
Retirement of Charter Communications Holdings, LLC notes and
accrued interest
|
|
$ |
|
|
|
$ |
(280 |
) |
|
|
|
|
|
|
|
|
Transfer of property, plant and equipment from parent company
|
|
$ |
|
|
|
$ |
139 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-50
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in millions, except where indicated)
|
|
1. |
Organization and Basis of Presentation |
CCH II, LLC (CCH II) is a holding company
whose principal assets at March 31, 2006 are equity
interests in its operating subsidiaries. CCH II is a direct
subsidiary of CCH I, LLC (CCH I), which is an
indirect subsidiary of Charter Communications Holdings, LLC
(Charter Holdings). Charter Holdings is an indirect
subsidiary of Charter Communications, Inc.
(Charter). The condensed consolidated financial
statements include the accounts of CCH II and all of its
subsidiaries where the underlying operations reside, which are
collectively referred to herein as the Company. All
significant intercompany accounts and transactions among
consolidated entities have been eliminated. The Company is a
broadband communications company operating in the United States.
The Company offers its customers traditional cable video
programming (analog and digital video) as well as high-speed
Internet services and, in some areas, advanced broadband
services such as high definition television, video on demand and
telephone. The Company sells its cable video programming,
high-speed Internet and advanced broadband services on a
subscription basis. The Company also sells local advertising on
satellite-delivered networks.
The accompanying condensed consolidated financial statements of
the Company have been prepared in accordance with accounting
principles generally accepted in the United States for interim
financial information and the rules and regulations of the
Securities and Exchange Commission (the SEC).
Accordingly, certain information and footnote disclosures
typically included in CCH IIs Annual Report on
Form 10-K have
been condensed or omitted for this quarterly report. The
accompanying condensed consolidated financial statements are
unaudited and are subject to review by regulatory authorities.
However, in the opinion of management, such financial statements
include all adjustments, which consist of only normal recurring
adjustments, necessary for a fair presentation of the results
for the periods presented. Interim results are not necessarily
indicative of results for a full year.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Areas involving
significant judgments and estimates include capitalization of
labor and overhead costs; depreciation and amortization costs;
impairments of property, plant and equipment, franchises and
goodwill; income taxes; and contingencies. Actual results could
differ from those estimates.
Certain 2005 amounts have been reclassified to conform with the
2006 presentation.
|
|
2. |
Liquidity and Capital Resources |
The Company had net loss of $228 million and
$133 million for the three months ended March 31, 2006
and 2005, respectively. The Companys net cash flows from
operating activities were $239 million and
$187 million for the three months ended March 31, 2006
and 2005, respectively.
|
|
|
Recent Financing Transactions |
On January 30, 2006, CCH II and CCH II Capital
Corp. issued $450 million in debt securities, the proceeds
of which were provided, directly or indirectly, to Charter
Communications Operating, LLC (Charter Operating),
which used such funds to reduce borrowings, but not commitments,
under the revolving portion of its credit facilities.
F-51
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in millions, except where indicated)
In April 2006, Charter Operating completed a $6.85 billion
refinancing of its credit facilities including a new
$350 million revolving/term facility (which converts to a
term loan in one year), a $5.0 billion term loan due in
2013 and certain amendments to the existing $1.5 billion
revolving credit facility. In addition, the refinancing reduced
margins on Eurodollar rate Term A & B loans to 2.625%
from a weighted average of 3.15% previously and margins on base
rate term loans to 1.625% from a weighted average of 2.15%
previously. Concurrent with this refinancing, the CCO Holdings,
LLC (CCO Holdings) bridge loan was terminated.
The Companys long-term financing as of March 31, 2006
consists of $5.4 billion of credit facility debt and
$5.3 billion accreted value of high-yield notes. Pro forma
for the completion of the credit facility refinancing discussed
above, none of the Companys debt matures in the remainder
of 2006, and in 2007 and 2008, $25 million and $128 million
mature, respectively. In 2009 and beyond, significant additional
amounts will become due under the Companys 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, equity contributions from its parent companies,
sales of assets, issuances of debt securities and cash on hand.
However, the mix of funding sources changes from period to
period. For the three months ended March 31, 2006, the
Company generated $239 million of net cash flows from
operating activities, after paying cash interest of
$214 million. In addition, the Company used approximately
$241 million for purchases of property, plant and
equipment. Finally, the Company had net cash flows from
financing activities of $60 million.
The Company expects that cash on hand, cash flows from operating
activities, proceeds from sales of assets and the amounts
available under its credit facilities will be adequate to meet
its and its parent companies cash needs through 2007. The
Company believes that cash flows from operating activities and
amounts available under the Companys credit facilities may
not be sufficient to fund the Companys operations and
satisfy its and its parent companies interest and debt
repayment obligations in 2008 and will not be sufficient to fund
such needs in 2009 and beyond. The Company has been advised that
Charter continues to work with its financial advisors in its
approach to addressing liquidity, debt maturities and the
Companys overall balance sheet leverage.
The Companys 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 Companys indentures,
contain certain restrictive covenants, some of which require the
Company to maintain specified financial ratios and meet
financial tests and to provide annual audited financial
statements with an unqualified opinion from the Companys
independent auditors. As of March 31, 2006, the Company is
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 March 31,
2006, the Companys potential availability under its credit
facilities totaled approximately $904 million, although the
actual availability at that time was only $516 million
because of limits imposed by covenant restrictions. However, pro
forma for the completion of the credit facility refinancing
discussed above, the Companys potential availability under
its credit facilities as of March 31, 2006 would have been
approximately $1.3 billion, although actual covenanted
availability of $516 million would remain unchanged.
Continued access to the Companys credit facilities is
subject to the Company remaining in compliance with these
covenants, including covenants tied to the Companys
operating performance. If any events of non-compliance occur,
funding under the credit facilities may not be available and
defaults on
F-52
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in millions, except where indicated)
some or potentially all of the Companys debt obligations
could occur. An event of default under any of the Companys
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 Companys
consolidated financial condition and results of operations.
|
|
|
Parent Company Debt Obligations |
Any financial or liquidity problems of the Companys parent
companies could cause serious disruption to the Companys
business and have a material adverse effect on the
Companys business and results of operations. A failure by
Charter Holdings, CCH I Holdings, LLC (CIH) or CCH I
to satisfy their debt payment obligations or a bankruptcy filing
with respect to Charter Holdings, CIH or CCH I would give the
lenders under the Companys credit facilities the right to
accelerate the payment obligations under these facilities. Any
such acceleration would be a default under the indenture
governing the Companys notes. On a consolidated basis, the
Companys parent companies have a significant level of
debt, which, including the Companys debt, totaled
approximately $19.5 billion as of March 31, 2006, as
discussed below.
Charters ability to make interest payments on its
convertible senior notes, and, in 2006 and 2009, to repay the
outstanding principal of its convertible senior notes of
$20 million and $863 million, respectively, will
depend on its ability to raise additional capital and/or on
receipt of payments or distributions from Charter Holdco and its
subsidiaries. As of March 31, 2006, Charter Holdco was owed
$24 million in intercompany loans from its subsidiaries,
which were available to pay interest and principal on
Charters convertible senior notes. In addition, Charter
has $99 million of governmental securities pledged as
security for the next four scheduled semi-annual interest
payments on Charters 5.875% convertible senior notes.
As of March 31, 2006, Charter Holdings, CIH and CCH I had
approximately $7.8 billion principal amount of high-yield
notes outstanding with approximately $105 million, $0,
$684 million and $7.0 billion maturing in 2007, 2008,
2009 and thereafter, respectively. Charter, Charter Holdings,
CIH and CCH I will need to raise additional capital or receive
distributions or payments from the Company in order to satisfy
their debt obligations. However, because of their significant
indebtedness, the Companys ability and the ability of the
parent companies to raise additional capital at reasonable rates
or at all is uncertain. During the three months ended
March 31, 2006, the Company distributed $26 million of
cash to its parent company.
Distributions by Charters subsidiaries to a parent company
(including Charter, CCHC, LLC (CCHC), Charter
Holdco, Charter Holdings, CIH and CCH I) for payment of
principal on parent company notes are restricted under the
indentures governing the CIH notes, CCH I notes, CCH II
notes, CCO Holdings notes and Charter Operating notes unless
there is no default, each applicable subsidiarys leverage
ratio test is met at the time of such distribution and, in the
case of Charters convertible senior notes, other specified
tests are met. For the quarter ended March 31, 2006, there
was no default under any of these indentures and the other
specified tests were met. However, certain of the Companys
subsidiaries did not meet their respective leverage ratio tests
based on March 31, 2006 financial results. As a result,
distributions from certain of the Companys subsidiaries to
their parent companies have been restricted and will continue to
be restricted until those tests are met. Distributions by
Charter Operating for payment of principal on parent company
notes are further restricted by the covenants in the credit
facilities.
Distributions by CIH, CCH I, CCH II, CCO Holdings and
Charter Operating to a parent company for payment of parent
company interest are permitted if there is no default under the
aforementioned indentures. However, distributions for payment of
interest on Charters convertible senior notes are further
F-53
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in millions, except where indicated)
limited to when each applicable subsidiarys leverage ratio
test is met and other specified tests are met. There can be no
assurance that they will satisfy these tests at the time of such
distribution.
|
|
|
Specific Limitations at Charter Holdings |
The indentures governing the Charter Holdings notes permit
Charter Holdings to make distributions to Charter Holdco for
payment of interest or principal on Charters 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 March 31, 2006, there was no default
under Charter Holdings indentures and the other specified
tests were met. However, Charter Holdings did not meet the
leverage ratio test of 8.75 to 1.0 based on March 31, 2006
financial results. As a result, distributions from Charter
Holdings to Charter or Charter Holdco have been restricted and
will continue to be restricted until that test is met. During
this restriction period, 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 February 2006, the Company signed three separate definitive
agreements to sell certain cable television systems serving a
total of approximately 360,000 analog video customers in West
Virginia, Virginia, Illinois, Kentucky, Nevada, Colorado, New
Mexico and Utah for a total of approximately $971 million.
As of March 31, 2006, those cable systems met the criteria
for assets held for sale under Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. As such, the
assets were written down to fair value less estimated costs to
sell resulting in asset impairment charges during the three
months ended March 31, 2006 of approximately
$99 million. In addition, assets and liabilities to be sold
were reclassified as held for sale. Assets held for sale on the
Companys balance sheet as of March 31, 2006 included
current assets of approximately $5 million, property, plant
and equipment of approximately $312 million and franchises
of approximately $437 million. Liabilities held for sale on
the Companys balance sheet as of March 31, 2006
included current liabilities of approximately $6 million
and other long-term liabilities of approximately
$13 million.
In 2005, the Company closed the sale of certain cable systems in
Texas, West Virginia and Nebraska representing a total of
approximately 33,000 analog video customers. During the three
months ended March 31, 2005, certain of those cable systems
met the criteria for assets held for sale. As such, the assets
were written down to fair value less estimated costs to sell
resulting in asset impairment charges during the three months
ended March 31, 2005 of approximately $31 million.
|
|
4. |
Franchises and Goodwill |
Franchise rights represent the value attributed to agreements
with local authorities that allow access to homes in cable
service areas acquired through the purchase of cable systems.
Management estimates the fair value of franchise rights at the
date of acquisition and determines if the franchise has a finite
life or an indefinite-life as defined by SFAS No. 142,
Goodwill and Other Intangible Assets. Franchises that
qualify for indefinite-life treatment under
SFAS No. 142 are tested for impairment annually each
October 1 based on valuations, or more frequently as
warranted by events or changes in circumstances. Franchises are
aggregated into essentially inseparable asset groups to conduct
the valuations. The asset groups generally represent geographic
clustering of the Companys cable systems into groups by
which
F-54
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in millions, except where indicated)
such systems are managed. Management believes such grouping
represents the highest and best use of those assets.
As of March 31, 2006 and December 31, 2005,
indefinite-lived and finite-lived intangible assets are
presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 | |
|
December 31, 2005 | |
|
|
| |
|
| |
|
|
Gross | |
|
|
|
Net | |
|
Gross | |
|
|
|
Net | |
|
|
Carrying | |
|
Accumulated | |
|
Carrying | |
|
Carrying | |
|
Accumulated | |
|
Carrying | |
|
|
Amount | |
|
Amortization | |
|
Amount | |
|
Amount | |
|
Amortization | |
|
Amount | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchises with indefinite lives
|
|
$ |
9,270 |
|
|
$ |
|
|
|
$ |
9,270 |
|
|
$ |
9,806 |
|
|
$ |
|
|
|
$ |
9,806 |
|
|
Goodwill
|
|
|
52 |
|
|
|
|
|
|
|
52 |
|
|
|
52 |
|
|
|
|
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,322 |
|
|
$ |
|
|
|
$ |
9,322 |
|
|
$ |
9,858 |
|
|
$ |
|
|
|
$ |
9,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchises with finite lives
|
|
$ |
23 |
|
|
$ |
6 |
|
|
$ |
17 |
|
|
$ |
27 |
|
|
$ |
7 |
|
|
$ |
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2006, the net carrying
amount of indefinite-lived and finite-lived franchises was
reduced by $434 million and $3 million, respectively,
related to franchises reclassified as assets held for sale. For
the three months ended March 31, 2006, franchises with
indefinite lives also decreased $3 million related to a
cable asset sale completed in the first quarter of 2006 and
$99 million as a result of the asset impairment charges
recorded related to assets held for sale (see Note 3).
Franchise amortization expense for the three months ended
March 31, 2006 and 2005 was approximately $0 and
$1 million, respectively, which represents the amortization
relating to franchises that did not qualify for indefinite-life
treatment under SFAS No. 142, including costs
associated with franchise renewals. The Company expects that
amortization expense on franchise assets will be approximately
$2 million annually for each of the next five years. Actual
amortization expense in future periods could differ from these
estimates as a result of new intangible asset acquisitions or
divestitures, changes in useful lives and other relevant factors.
|
|
5. |
Accounts Payable and Accrued Expenses |
Accounts payable and accrued expenses consist of the following
as of March 31, 2006 and December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, | |
|
December 31, | |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Accounts payable trade
|
|
$ |
81 |
|
|
$ |
100 |
|
Accrued capital expenditures
|
|
|
66 |
|
|
|
73 |
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
180 |
|
|
|
166 |
|
|
Programming costs
|
|
|
288 |
|
|
|
272 |
|
|
Franchise-related fees
|
|
|
44 |
|
|
|
67 |
|
|
Compensation
|
|
|
54 |
|
|
|
60 |
|
|
Other
|
|
|
158 |
|
|
|
185 |
|
|
|
|
|
|
|
|
|
|
$ |
871 |
|
|
$ |
923 |
|
|
|
|
|
|
|
|
F-55
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in millions, except where indicated)
Long-term debt consists of the following as of March 31,
2006 and December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 | |
|
December 31, 2005 | |
|
|
| |
|
| |
|
|
Principal | |
|
Accreted | |
|
Principal | |
|
Accreted | |
|
|
Amount | |
|
Value | |
|
Amount | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
Long-Term Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCH II, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.250% senior notes due 2010
|
|
$ |
2,051 |
|
|
$ |
2,041 |
|
|
$ |
1,601 |
|
|
$ |
1,601 |
|
|
CCO Holdings, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83/4
% senior notes due 2013
|
|
|
800 |
|
|
|
795 |
|
|
|
800 |
|
|
|
794 |
|
|
|
Senior floating notes due 2010
|
|
|
550 |
|
|
|
550 |
|
|
|
550 |
|
|
|
550 |
|
|
Charter Communications Operating, LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8% senior second lien notes due 2012
|
|
|
1,100 |
|
|
|
1,100 |
|
|
|
1,100 |
|
|
|
1,100 |
|
|
|
83/8
% senior second lien notes due 2014
|
|
|
770 |
|
|
|
770 |
|
|
|
733 |
|
|
|
733 |
|
|
Renaissance Media Group LLC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.000% senior discount notes due 2008
|
|
|
77 |
|
|
|
78 |
|
|
|
114 |
|
|
|
115 |
|
Credit Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter Operating
|
|
|
5,386 |
|
|
|
5,386 |
|
|
|
5,731 |
|
|
|
5,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,734 |
|
|
$ |
10,720 |
|
|
$ |
10,629 |
|
|
$ |
10,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
On January 30, 2006, CCH II and CCH II Capital
Corp. issued $450 million in debt securities, the proceeds
of which were provided, directly or indirectly, to Charter
Operating, which used such funds to reduce borrowings, but not
commitments, under the revolving portion of its credit
facilities.
On March 13, 2006, the Company exchanged $37 million
of Renaissance Media Group LLC 10% senior discount notes
due 2008 for $37 million principal amount of new Charter
Operating
83/8% senior
second-lien notes due 2014 issued in a private transaction under
Rule 144A. The terms and conditions of the new Charter
Operating
83/8% senior
second-lien notes due 2014 are identical to Charter
Operatings currently outstanding
83/8
% senior second-lien notes due 2014.
In March 2005, Charter Operating consummated exchange
transactions with a small number of institutional holders of
Charter Holdings 8.25% senior notes due 2007 pursuant to
which Charter Operating issued, in private placements,
approximately $271 million principal amount of new notes
with terms identical to Charter Operatings
8.375% senior second lien notes due 2014 in exchange for
approximately $284 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 canceled.
|
|
|
Loss on extinguishment of debt |
In March 2005, CCH IIs subsidiary, CC V Holdings,
LLC, redeemed all of its 11.875% notes due 2008, at
103.958% of principal amount, plus accrued and unpaid interest
to the date of redemption. The total cost of redemption was
approximately $122 million and was funded through
borrowings under the Charter Operating credit facilities. The
redemption resulted in a loss on extinguishment of debt for the
F-56
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in millions, except where indicated)
three months ended March 31, 2005 of approximately
$5 million included in other expense on the Companys
condensed consolidated statements of operations.
|
|
7. |
Loans Payable-Related Party |
Loans payable-related party as of March 31, 2006 consists
of loans from Charter Holdco and Charter Holdings to the Company
of $24 million and $105 million, respectively. Loans
payable-related party as of December 31, 2005 consists of
loans from Charter Holdco to the Company of $22 million.
These loans bear interest at a rate of LIBOR plus 3.0%, reset
quarterly. These loans are subject to certain limitations and
may be repaid with borrowings under the Companys revolving
credit facility.
Minority interest on the Companys consolidated balance
sheets as of March 31, 2006 and December 31, 2005
primarily represents preferred membership interests in CC VIII,
LLC (CC VIII), an indirect subsidiary of
CCH II, of $626 million and $622 million,
respectively. As more fully described in Note 19, this
preferred interest is held by CCHC and Mr. Allen,
Charters Chairman and controlling shareholder. Minority
interest in the accompanying condensed consolidated statements
of operations includes the 2% accretion of the preferred
membership interests plus approximately 18.6% of CC VIIIs
income, net of accretion.
Certain marketable equity securities are classified as
available-for-sale and reported at market value with unrealized
gains and losses recorded as accumulated other comprehensive
loss on the accompanying condensed consolidated balance sheets.
Additionally, the Company reports changes in the fair value of
interest rate agreements designated as hedging the variability
of cash flows associated with floating-rate debt obligations,
that meet the effectiveness criteria of SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, in accumulated other comprehensive loss.
Comprehensive loss for the three months ended March 31,
2006 and 2005 was $229 million and $124 million,
respectively.
|
|
10. |
Accounting for Derivative Instruments and Hedging
Activities |
The Company uses interest rate risk management derivative
instruments, such as interest rate swap agreements and interest
rate collar agreements (collectively referred to herein as
interest rate agreements) to manage its interest costs. The
Companys policy is to manage interest costs using a mix of
fixed and variable rate debt. Using interest rate swap
agreements, the Company has agreed to exchange, at specified
intervals through 2007, the difference between fixed and
variable interest amounts calculated by reference to an
agreed-upon notional principal amount. Interest rate collar
agreements are used to limit the Companys exposure to and
benefits from interest rate fluctuations on variable rate debt
to within a certain range of rates.
The Company does not hold or issue derivative instruments for
trading purposes. The Company does, however, have certain
interest rate derivative instruments that have been designated
as cash flow hedging instruments. Such instruments effectively
convert variable interest payments on certain debt instruments
into fixed payments. For qualifying hedges,
SFAS No. 133 allows derivative gains and losses to
offset related results on hedged items in the consolidated
statement of operations. The Company has formally documented,
designated and assessed the effectiveness of transactions that
receive hedge accounting. For the three months ended
March 31, 2006 and 2005, other income includes gains of
$2 million and $1 million, respectively, which
represent cash flow hedge ineffectiveness on interest rate hedge
agreements
F-57
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in millions, except where indicated)
arising from differences between the critical terms of the
agreements and the related hedged obligations. Changes in the
fair value of interest rate agreements designated as hedging
instruments of the variability of cash flows associated with
floating-rate debt obligations that meet the effectiveness
criteria of SFAS No. 133 are reported in accumulated
other comprehensive loss. For the three months ended
March 31, 2006 and 2005, a loss of $1 million and a
gain $9 million, respectively, related to derivative
instruments designated as cash flow hedges, was recorded in
accumulated other comprehensive loss. The amounts are
subsequently reclassified into interest expense as a yield
adjustment in the same period in which the related interest on
the floating-rate debt obligations affects earnings (losses).
Certain interest rate derivative instruments are not designated
as hedges as they do not meet the effectiveness criteria
specified by SFAS No. 133. However, management
believes such instruments are closely correlated with the
respective debt, thus managing associated risk. Interest rate
derivative instruments not designated as hedges are marked to
fair value, with the impact recorded as other income in the
Companys condensed consolidated statements of operations.
For the three months ended March 31, 2006 and 2005, other
income includes gains of $6 million and $26 million,
respectively, for interest rate derivative instruments not
designated as hedges.
As of March 31, 2006 and December 31, 2005, the
Company had outstanding $1.8 billion and $1.8 billion
and $20 million and $20 million, respectively, in
notional amounts of interest rate swaps and collars,
respectively. The notional amounts of interest rate instruments
do not represent amounts exchanged by the parties and, thus, are
not a measure of exposure to credit loss. The amounts exchanged
are determined by reference to the notional amount and the other
terms of the contracts.
Revenues consist of the following for the three months ended
March 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Video
|
|
$ |
869 |
|
|
$ |
842 |
|
High-speed Internet
|
|
|
254 |
|
|
|
215 |
|
Telephone
|
|
|
20 |
|
|
|
6 |
|
Advertising sales
|
|
|
70 |
|
|
|
64 |
|
Commercial
|
|
|
76 |
|
|
|
65 |
|
Other
|
|
|
85 |
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
$ |
1,374 |
|
|
$ |
1,271 |
|
|
|
|
|
|
|
|
F-58
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in millions, except where indicated)
Operating expenses consist of the following for the three months
ended March 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Programming
|
|
$ |
391 |
|
|
$ |
358 |
|
Service
|
|
|
209 |
|
|
|
176 |
|
Advertising sales
|
|
|
26 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
$ |
626 |
|
|
$ |
559 |
|
|
|
|
|
|
|
|
|
|
13. |
Selling, General and Administrative Expenses |
Selling, general and administrative expenses consist of the
following for the three months ended March 31, 2006 and
2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
General and administrative
|
|
$ |
243 |
|
|
$ |
206 |
|
Marketing
|
|
|
38 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
$ |
281 |
|
|
$ |
241 |
|
|
|
|
|
|
|
|
Components of selling expense are included in general and
administrative and marketing expense.
|
|
14. |
Other Operating Expenses |
Other operating expenses consist of the following for the three
months ended March 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Loss on sale of assets, net
|
|
$ |
|
|
|
$ |
4 |
|
Special charges, net
|
|
|
3 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
$ |
3 |
|
|
$ |
8 |
|
|
|
|
|
|
|
|
Special charges for the three months ended March 31, 2006
and 2005 primarily represent severance costs as a result of
reducing workforce, consolidating administrative offices and
executive severance.
F-59
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in millions, except where indicated)
Other income consists of the following for the three months
ended March 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months | |
|
|
Ended March 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Gain on derivative instruments and hedging activities, net
|
|
$ |
8 |
|
|
$ |
27 |
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
(5 |
) |
Minority interest
|
|
|
(4 |
) |
|
|
(3 |
) |
Other, net
|
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
$ |
6 |
|
|
$ |
20 |
|
|
|
|
|
|
|
|
CCH II is a single member limited liability company not
subject to income tax. CCH II holds all operations through
indirect subsidiaries. The majority of these indirect
subsidiaries are limited liability companies that are also not
subject to income tax. However, certain of CCH IIs
indirect subsidiaries are corporations that are subject to
income tax.
As of March 31, 2006 and December 31, 2005, the
Company had net deferred income tax liabilities of approximately
$213 million. The net deferred income tax liabilities
relate to certain of the Companys indirect subsidiaries,
which file separate income tax returns.
During the three months ended March 31, 2006 and 2005, the
Company recorded $2 million and $6 million of income
tax expense, respectively. The income tax expense is recognized
through current federal and state income tax expense as well as
increases to the deferred tax liabilities of certain of the
Companys indirect corporate subsidiaries.
Charter Holdco is currently under examination by the Internal
Revenue Service for the tax years ending December 31, 2002
and 2003. The results of the Company (excluding the indirect
corporate subsidiaries) for these years are subject to this
examination. Management does not expect the results of this
examination to have a material adverse effect on the
Companys condensed consolidated financial condition or
results of operations.
The Company is a party to lawsuits and claims that arise in the
ordinary course of conducting its business. In the opinion of
management, after taking into account recorded liabilities, the
outcome of these lawsuits and claims are not expected to have a
material adverse effect on the Companys consolidated
financial condition, results of operations or its liquidity.
|
|
18. |
Stock Compensation Plans |
Charter has stock option plans (the Plans) which
provide for the grant of non-qualified stock options, stock
appreciation rights, dividend equivalent rights, performance
units and performance shares, share awards, phantom stock and/or
shares of restricted stock (not to exceed 20,000,000), as each
term is defined in the Plans. Employees, officers, consultants
and directors of Charter and its subsidiaries and affiliates are
eligible to receive grants under the Plans. Options granted
generally vest over four to five years from the grant date, with
25% generally vesting on the anniversary of the grant date and
ratably
F-60
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in millions, except where indicated)
thereafter. Generally, options expire 10 years from the
grant date. The Plans allow for the issuance of up to a total of
90,000,000 shares of Charter Class A common stock (or
units convertible into Charter Class A common stock).
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 three months ended March 31, 2006 and 2005,
respectively: risk-free interest rates of 4.5% and 3.7%;
expected volatility of 91.8% and 72.5%; and expected lives of
6.25 years and 4.5 years, respectively. The valuations
assume no dividends are paid. During the three months ended
March 31, 2006, Charter granted 4.8 million stock
options with a weighted average exercise price of $1.07. As of
March 31, 2006, Charter had 30.7 million and
10.7 million options outstanding and exercisable,
respectively, with weighted average exercise prices of $3.96 and
$7.39, respectively, and weighted average remaining contractual
lives of 8 years and 7 years, respectively.
On January 1, 2006, the Company adopted revised
SFAS No. 123, Share Based payment,
which addresses the accounting for share-based payment
transactions in which a company receives employee services in
exchange for (a) equity instruments of that company or
(b) liabilities that are based on the fair value of the
companys 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 $4 million of option compensation expense which is
included in general and administrative expense for each of the
three months ended March 31, 2006 and 2005, respectively.
In February 2006, the Compensation Committee of Charters
Board of Directors approved a modification to the financial
performance measures under Charters Long-Term Incentive
Program (LTIP) required to be met for the
performance shares to vest. After the modification, management
believes that approximately 2.5 million of the performance
shares are likely to vest. As such, expense of approximately
$3 million will be amortized over the remaining two year
service period. During the three months ended March 31,
2006, Charter granted an additional 7.9 million performance
shares under the LTIP. The impacts of such grant and the
modification of the 2005 awards were de minimis to the
Companys results of operations for the three months ended
March 31, 2006.
|
|
19. |
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.
As part of the acquisition of the cable systems owned by Bresnan
Communications Company Limited Partnership in February 2000, CC
VIII, CCH IIs indirect limited liability company
subsidiary, issued, after adjustments, 24,273,943 Class A
preferred membership units (collectively, the CC VIII
interest) with a value and an initial capital account of
approximately $630 million to certain sellers affiliated
with AT&T Broadband, subsequently owned by Comcast
Corporation (the Comcast sellers). Mr. Allen
granted the Comcast sellers the right to sell to him the CC VIII
interest for approximately $630 million plus 4.5% interest
annually from February 2000 (the Comcast put right).
In April 2002, the Comcast sellers exercised the Comcast put
right in full, and this transaction was consummated on
June 6, 2003. Accordingly, Mr. Allen has become the
holder of the CC VIII interest, indirectly through an affiliate.
In the event of a liquidation of CC VIII, Mr. Allen would
be entitled to a priority distribution with respect to
F-61
CCH II, LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(dollars in millions, except where indicated)
a 2% priority return (which will continue to accrete). Any
remaining distributions in liquidation would be distributed to
CC V Holdings, LLC and Mr. Allen in proportion to CC V
Holdings, LLCs capital account and Mr. Allens
capital account (which would have equaled the initial capital
account of the Comcast sellers of approximately
$630 million, increased or decreased by
Mr. Allens pro rata share of CC VIIIs profits
or losses (as computed for capital account purposes) after
June 6, 2003).
An issue arose as to whether the documentation for the Bresnan
transaction was correct and complete with regard to the ultimate
ownership of the CC VIII interest following consummation of the
Comcast put right. Thereafter, the board of directors of Charter
formed a Special Committee of independent directors to
investigate the matter and take any other appropriate action on
behalf of Charter with respect to this matter. After conducting
an investigation of the relevant facts and circumstances, the
Special Committee determined that a scriveners
error had occurred in February 2000 in connection with the
preparation of the last-minute revisions to the Bresnan
transaction documents and that, as a result, Charter should seek
the reformation of the Charter Holdco limited liability company
agreement, or alternative relief, in order to restore and ensure
the obligation that the CC VIII interest be automatically
exchanged for Charter Holdco units.
As of October 31, 2005, Mr. Allen, the Special
Committee, Charter, Charter Holdco and certain of their
affiliates, agreed to settle the dispute, and execute certain
permanent and irrevocable releases pursuant to the Settlement
Agreement and Mutual Release agreement dated October 31,
2005 (the Settlement). Pursuant to the Settlement,
CII has retained 30% of its CC VIII interest (the
Remaining Interests). The Remaining Interests are
subject to certain drag along, tag along and transfer
restrictions as detailed in the revised CC VIII Limited
Liability Company Agreement. CII transferred the other 70% of
the CC VIII interest directly and indirectly, through Charter
Holdco, to a newly formed entity, CCHC (a direct subsidiary of
Charter Holdco and the direct parent of Charter Holdings). Of
the 70% of the CC VIII preferred interests, 7.4% has been
transferred by CII to CCHC for a subordinated exchangeable note
with an initial accreted value of $48 million, accreting at
14%, compounded quarterly, with a
15-year maturity (the
Note). The remaining 62.6% has been transferred by
CII to Charter Holdco, in accordance with the terms of the
settlement for no additional monetary consideration. Charter
Holdco contributed the 62.6% interest to CCHC.
As part of the Settlement, CC VIII issued approximately
49 million additional Class B units to CC V in
consideration for prior capital contributions to CC VIII by
CC V, with respect to transactions that were unrelated to
the dispute in connection with CIIs membership units in CC
VIII. As a result, Mr. Allens pro rata share of the
profits and losses of CC VIII attributable to the Remaining
Interests is approximately 5.6%.
The Note is exchangeable, at CIIs option, at any time, for
Charter Holdco Class A Common units at a rate equal to the
then accreted value, divided by $2.00 (the Exchange
Rate). Customary anti-dilution protections have been
provided that could cause future changes to the Exchange Rate.
Additionally, the Charter Holdco Class A Common units
received will be exchangeable by the holder into Charter common
stock in accordance with existing agreements between CII,
Charter and certain other parties signatory thereto. Beginning
February 28, 2009, if the closing price of Charter common
stock is at or above the Exchange Rate for a certain period of
time as specified in the Exchange Agreement, Charter Holdco may
require the exchange of the Note for Charter Holdco Class A
Common units at the Exchange Rate.
CCHC has the right to redeem the Note under certain
circumstances, for cash in an amount equal to the then accreted
value, such amount, if redeemed prior to February 28, 2009,
would also include a make whole up to the accreted value through
February 28, 2009. CCHC must redeem the Note at its
maturity for cash in an amount equal to the initial stated value
plus the accreted return through maturity.
Charters Board of Directors has determined that the
transferred CC VIII interests remain at CCHC.
F-62
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
|
|
Item 20. |
Indemnification of Directors and Officers |
Indemnification Under the Limited Liability Company
Agreement of CCH II
The limited liability company agreement of CCH II provides
that the members, the manager, the directors, their affiliates
or any person who at any time serves or has served as a
director, officer, employee or other agent of any member or any
such affiliate, and who, in such capacity, engages or has
engaged in activities on behalf of CCH II, shall be
indemnified and held harmless by CCH II to the fullest
extent permitted by law from and against any losses, damages,
expenses, including attorneys fees, judgments and amounts
paid in settlement actually and reasonably incurred by or in
connection with any claim, action, suit or proceeding arising
out of or incidental to such indemnifiable persons acts or
omissions on behalf of CCH II. Notwithstanding the
foregoing, no indemnification is available under the limited
liability company agreement in respect of any such claim
adjudged to be primarily the result of bad faith, willful
misconduct or fraud of an indemnifiable person. Payment of these
indemnification obligations shall be made from the assets of
CCH II and the members shall not be personally liable to an
indemnifiable person for payment of indemnification.
Indemnification Under the Delaware Limited Liability
Company Act
Section 18-108 of the Delaware Limited Liability Company
Act authorizes a limited liability company to indemnify and hold
harmless any member or manager or other person from and against
any and all claims and demands whatsoever, subject to such
standards and restrictions, if any, as are set forth in its
limited liability company agreement.
Indemnification Under the By-Laws of CCH II
Capital
The bylaws of CCH II Capital require CCH II Capital,
to the fullest extent authorized by the Delaware General
Corporation Law, to indemnify any person who was or is made a
party or is threatened to be made a party or is otherwise
involved in any action, suit or proceeding by reason of the fact
that he is or was a director or officer of CCH II Capital
or is or was serving at the request of CCH II Capital as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or
other entity or enterprise, in each case, against all expense,
liability and loss (including attorneys fees, judgments,
amounts paid in settlement, fines, ERISA excise taxes or
penalties) reasonably incurred or suffered by such person in
connection therewith.
Indemnification Under the Delaware General Corporation
Law
Section 145 of the Delaware General Corporation Law,
authorizes a corporation to indemnify any person who was or is a
party, or is threatened to be made a party, to any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact
that the person is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys fees,
judgments, fines and amounts paid in settlement actually and
reasonably incurred by the person in connection with such
action, suit or proceeding, if the person acted in good faith
and in a manner the person reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable
cause to believe the persons conduct was unlawful. In
addition, the Delaware General Corporation Law does not permit
indemnification in any threatened, pending or completed action
or suit by or in the right of the corporation in respect of any
claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation, unless and only to the
extent that the court in which such action or suit was brought
shall determine upon application that, despite the adjudication
of liability, but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity
II-1
for such expenses, which such court shall deem proper. To the
extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to above, or
in defense of any claim, issue or matter, such person shall be
indemnified against expenses, including attorneys fees,
actually and reasonably incurred by such person. Indemnity is
mandatory to the extent a claim, issue or matter has been
successfully defended. The Delaware General Corporation Law also
allows a corporation to provide for the elimination or limit of
the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty
as a director, provided that such provision shall not eliminate
or limit the liability of a director
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(i) for any breach of the directors duty of loyalty
to the corporation or its stockholders, |
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(ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, |
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(iii) for unlawful payments of dividends or unlawful stock
purchases or redemptions, or |
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(iv) for any transaction from which the director derived an
improper personal benefit. These provisions will not limit the
liability of directors or officers under the federal securities
laws of the United States. |
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Item 21. |
Exhibits and Financial Schedules. |
Exhibits
Exhibits are listed by numbers corresponding to the
Exhibit Table of Item 601 in
Regulation S-K.
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|
|
Exhibit |
|
Description |
|
|
|
|
2 |
.1 |
|
Purchase Agreement, dated May 29, 2003, by and between
Falcon Video Communications, L.P. and WaveDivision Holdings, LLC
(incorporated by reference to Exhibit 2.1 to Charter
Communications, Inc.s current report on Form 8-K
filed on May 30, 2003 (File No. 000-27927)). |
|
2 |
.2 |
|
Asset Purchase Agreement, dated September 3, 2003, by and
between Charter Communications VI, LLC, The Helicon Group, L.P.,
Hornell Television Service, Inc., Interlink Communications
Partners, LLC, Charter Communications Holdings, LLC and Atlantic
Broadband Finance, LLC (incorporated by reference to
Exhibit 2.1 to Charter Communications, Inc.s current
report on Form 8-K/ A filed on September 3, 2003 (File
No. 000-27927)). |
|
|
2 |
.3 |
|
Purchase Agreement, dated August 11, 2005 by and among CCO
Holdings, LLC, CCO Holdings Capital Corp. and J.P. Morgan
Securities Inc., Credit Suisse First Boston LLC, and Banc of
America Securities LLC as representatives of the purchasers
(incorporated by reference to Exhibit 10.1 to the current
report on Form 8-K of CCO Holdings, LLC and CCO Holdings
Capital Corp. filed on August 17, 2005 (File
No. 333-112593)). |
|
|
2 |
.4 |
|
Purchase Agreement dated as of January 26, 2006, by and
between CCH II, LLC, CCH II Capital Corp and
J.P. Morgan Securities, Inc as Representative of several
Purchasers for $450,000,000 10.25% Senior Notes Due 2010
(incorporated by reference to Exhibit 10.3 to the current
report on Form 8-K of Charter Communications, Inc. filed on
January 27, 2006 (File No. 000-27927)). |
|
|
2 |
.5 |
|
Asset Purchase Agreement dated February 27, 2006, by and
between Charter Communications Operating, LLC and Cebridge
Acquisition Co., LLC (incorporated by reference to
Exhibit 2.2 to the quarterly report on Form 10-Q of
Charter Communications, Inc. filed on May 2, 2006 (File
No. 000-27927)). |
|
|
3 |
.1 |
|
Certificate of Formation of CCH II, LLC (incorporated by
reference to Exhibit 3.1 to Amendment No. 1 to the
registration statement on Form S-4 of CCH II, LLC and
CCH II Capital Corporation filed on March 24, 2004
(File No. 333-111423)). |
|
|
3 |
.2 |
|
Amended and Restated Limited Liability Company Agreement of CCH
II, LLC, dated as of July 10, 2003 (incorporated by
reference to Exhibit 3.2 to Amendment No. 1 to the
registration statement on Form S-4 of CCH II, LLC and
CCH II Capital Corporation filed on March 24, 2004
(File No. 333-111423)). |
II-2
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|
|
|
|
Exhibit |
|
Description |
|
|
|
|
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3 |
.3 |
|
Certificate of Incorporation of CCH II Capital Corporation
(incorporated by reference to Exhibit 3.3 to Amendment
No. 1 to the registration statement on Form S-4 of
CCH II, LLC and CCH II Capital Corporation filed on
March 24, 2004 (File No. 333-111423)). |
|
|
3 |
.4 |
|
Amended and Reinstated By-laws of CCH II Capital
Corporation (incorporated by reference to Exhibit 3.4 to
Amendment No. 1 to the registration statement on
Form S-4 of CCH II, LLC and CCH II Capital
Corporation filed on March 24, 2004 (File
No. 333-111423)). |
|
|
4 |
.1 |
|
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)). |
|
|
4 |
.2 |
|
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)). |
|
|
5 |
.1** |
|
Opinion of Gibson, Dunn & Crutcher regarding legality. |
|
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10 |
.1 |
|
Indenture, dated as of April 9, 1998, by among Renaissance
Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC,
Renaissance Media Capital Corporation, Renaissance Media Group
LLC and United States Trust Company of New York, as trustee
(incorporated by reference to Exhibit 4.1 to the
registration statement on Forms S-4 of Renaissance Media
Group LLC, Renaissance Media (Tennessee) LLC, Renaissance Media
(Louisiana) LLC and Renaissance Media Capital Corporation filed
on June 12, 1998 (File No. 333-56679)). |
|
|
10 |
.2 |
|
Indenture relating to the
83/4
% 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 |
.3 |
|
Indenture relating to the 8% senior second lien notes due
2012 and
83/8
% 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 |
.4 |
|
Indenture dated as of December 15, 2004 among CCO Holdings,
LLC, CCO Holdings Capital Corp. and Wells Fargo Bank, N.A., as
trustee (incorporated by reference to Exhibit 10.1 to the
current report on Form 8-K of CCO Holdings, LLC filed on
December 21, 2004 (File No. 333-112593)). |
|
|
10 |
.5 |
|
First Supplemental Indenture dated August 17, 2005 by and
among CCO Holdings, LLC, CCO Holdings Capital Corp. and Wells
Fargo Bank, L.A., as trustee (incorporated by reference to
Exhibit 10.1 to the current report on Form 8-K of CCO
Holdings, LLC and CCO Holdings Capital Corp. filed on
August 23, 2005 (File No. 333-112593)). |
|
|
10 |
.6 |
|
Exchange and Registration Rights Agreement dated August 17,
2005 by and among CCO Holdings, LLC, CCO Holdings Capital Corp.
and J.P. Morgan Securities Inc., Credit Suisse First Boston
LLC, and Banc of America Securities LLC as representatives of
the purchasers (incorporated by reference to Exhibit 10.2
to the current report on Form 8-K of CCO Holdings, LLC and
CCO Holdings Capital Corp. filed on August 23, 2005 (File
No. 333-112593)). |
|
|
10 |
.7(a) |
|
Senior Bridge Loan Agreement dated as of October 17, 2005
by and among CCO Holdings, LLC, CCO Holdings Capital Corp.,
certain lenders, JPMorgan Chase Bank, N.A., as Administrative
Agent, J.P. Morgan Securities Inc. and Credit Suisse,
Cayman Islands Branch, as joint lead arrangers and joint
bookrunners, and Deutsche Bank Securities Inc., as documentation
agent. (incorporated by reference to Exhibit 99.1 to the
current report on Form 8-K of Charter Communications, Inc.
filed on October 19, 2005 (File No. 000-27927)). |
II-3
|
|
|
|
|
Exhibit |
|
Description |
|
|
|
|
|
10 |
.7(b) |
|
Waiver and Amendment Agreement to the Senior Bridge Loan
Agreement dated as of January 26, 2006 by and among CCO
Holdings, LLC, CCO Holdings Capital Corp., certain lenders,
JPMorgan Chase Bank, N.A., as Administrative Agent,
J.P. Morgan Securities Inc. and Credit Suisse, Cayman
Islands Branch, as joint lead arrangers and joint bookrunners,
and Deutsche Bank Securities Inc., as documentation agent
(incorporated by reference to Exhibit 10.2 to the current
report on Form 8-K of Charter Communications, Inc. filed on
January 27, 2006 (File No. 000-27927)). |
|
|
10 |
.8 |
|
Settlement Agreement and Mutual Releases, dated as of
October 31, 2005, by and among Charter Communications,
Inc., Special Committee of the Board of Directors of Charter
Communications, Inc., Charter Communications Holding Company,
LLC, CCHC, LLC, CC VIII, LLC, CC V, LLC, Charter
Investment, Inc., Vulcan Cable III, LLC and Paul G. Allen
(incorporated by reference to Exhibit 10.17 to the
quarterly report on Form 10-Q of Charter Communications,
Inc. filed on November 2, 2005 (File No. 000-27927)). |
|
|
10 |
.9 |
|
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 |
.10 |
|
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 |
.11(a) |
|
First Amended and Restated Mutual Services Agreement, dated as
of December 21, 2000, by and between Charter
Communications, Inc., Charter Investment, Inc. and Charter
Communications Holding Company, LLC (incorporated by reference
to Exhibit 10.2(b) to the registration statement on
Form S-4 of Charter Communications Holdings, LLC and
Charter Communications Holdings Capital Corporation filed on
February 2, 2001 (File No. 333-54902)). |
|
|
10 |
.11(b) |
|
Letter Agreement, dated June 19, 2003, by and among Charter
Communications, Inc., Charter Communications Holding Company,
LLC and Charter Investment, Inc. regarding Mutual Services
Agreement (incorporated by reference to
Exhibit No. 10.5(b) to the quarterly report on
Form 10-Q filed by Charter Communications, Inc. on
August 5, 2003 (File No. 000-27927)). |
|
|
10 |
.11(c) |
|
Second Amended and Restated Mutual Services Agreement, dated as
of June 19, 2003 between Charter Communications, Inc. and
Charter Communications Holding Company, LLC (incorporated by
reference to Exhibit 10.5(a) to the quarterly report on
Form 10-Q filed by Charter Communications, Inc. on
August 5, 2003 (File No. 000-27927)). |
|
|
10 |
.12(a) |
|
Amended and Restated Limited Liability Company Agreement for CC
VIII, LLC, dated as of March 31, 2003 (incorporated by
reference to Exhibit 10.27 to the annual report on
Form 10-K of Charter Communications, Inc. filed on
April 15, 2003 (File No. 000-27927)). |
|
|
10 |
.12(b) |
|
Third Amended and Restated Limited Liability Company Agreement
for CC VIII, LLC, dated as of October 31, 2005
(incorporated by reference to Exhibit 10.20 to the
quarterly report on Form 10-Q filed by Charter
Communications, Inc. on November 2, 2005 (File
No. 000-27927)). |
|
|
10 |
.13(a) |
|
Amended and Restated Limited Liability Company Agreement of
Charter Communications Operating, LLC, dated as of June 19,
2003 (incorporated by reference to Exhibit No. 10.2 to
the quarterly report on Form 10-Q filed by Charter
Communications, Inc. on August 5, 2003 (File
No. 000-27927)). |
|
|
10 |
.13(b) |
|
First Amendment to the Amended and Restated Limited Liability
Company Agreement of Charter Communications Operating, LLC,
adopted as of June 22, 2004 (incorporated by reference to
Exhibit 10.16(b) to the annual report on Form 10-K
filed by Charter Communications, Inc. on February 28, 2006
(File No. 000-27927)). |
|
|
10 |
.14 |
|
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)). |
II-4
|
|
|
|
|
Exhibit |
|
Description |
|
|
|
|
|
10 |
.15 |
|
Amended and Restated Credit Agreement among Charter
Communications Operating, LLC, CCO Holdings, LLC and certain
lenders and agents named therein dated April 27, 2004
(incorporated by reference to Exhibit 10.25 to Amendment
No. 2 to the registration statement on Form S-4 of
CCH II, LLC filed on May 5, 2004 (File
No. 333-111423)). |
|
|
10 |
.16(a) |
|
Stipulation of Settlement, dated as of January 24, 2005,
regarding settlement of Consolidated Federal Class Action
entitled in Re Charter Communications, Inc. Securities
Litigation. (incorporated by reference to Exhibit 10.48 to
the Annual Report on Form 10-K filed by Charter
Communications, Inc. on March 3, 2005 (File No. 000-27927)). |
|
|
10 |
.16(b) |
|
Amendment to Stipulation of Settlement, dated as of May 23,
2005, regarding settlement of Consolidated Federal
Class Action entitled In Re Charter Communications, Inc.
Securities Litigation (incorporated by reference to
Exhibit 10.35(b) to Amendment No. 3 to the
registration statement on Form S-1 filed by Charter
Communications, Inc. on June 8, 2005 (File
No. 333-121186)). |
|
|
10 |
.17 |
|
Settlement Agreement and Mutual Release, dated as of
February 1, 2005, by and among Charter Communications, Inc.
and certain other insureds, on the other hand, and Certain
Underwriters at Lloyds of London and certain subscribers,
on the other hand. (incorporated by reference to
Exhibit 10.49 to the annual report on Form 10-K filed
by Charter Communications, Inc. on March 3, 2005 (File
No. 000-27927)). |
|
|
10 |
.18 |
|
Stipulation of Settlement, dated as of January 24, 2005,
regarding settlement of Federal Derivative Action, Arthur J.
Cohn v. Ronald L. Nelson et al and Charter
Communications, Inc. (incorporated by reference to
Exhibit 10.50 to the annual report on Form 10-K filed
by Charter Communications, Inc. on March 3, 2005 (File No.
000-27927)). |
|
|
10 |
.19(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 |
.19(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 |
.19(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 |
.19(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 |
.19(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 |
.19(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 |
.20(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 |
.20(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 |
.20(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)). |
II-5
|
|
|
|
|
Exhibit |
|
Description |
|
|
|
|
|
10 |
.20(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 |
.20(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 |
.20(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 |
.20(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 |
.20(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 |
.20(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 |
.21 |
|
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 |
.22 |
|
2005 Executive Cash Award Plan dated as of June 9, 2005
(incorporated by reference to Exhibit 99.1 to the current
report on Form 8-K of Charter Communications, Inc. filed
June 15, 2005 (File No. 000-27927)). |
|
|
10 |
.23 |
|
Executive Services Agreement, dated as of January 17, 2005,
between Charter Communications, Inc. and Robert P. May
(incorporated by reference to Exhibit 99.1 to the current
report on Form 8-K of Charter Communications, Inc. filed on
January 21, 2005 (File No. 000-27927)). |
|
|
10 |
.24 |
|
Employment Agreement, dated as of October 8, 2001, by and
between Carl E. Vogel and Charter Communications, Inc.
(Incorporated by reference to Exhibit 10.4 to the quarterly
report on Form 10-Q filed by Charter Communications, Inc.
on November 14, 2001 (File No. 000-27927)). |
|
|
10 |
.25 |
|
Separation Agreement and Release for Carl E. Vogel, dated as of
February 17, 2005 (incorporated by reference to
Exhibit 99.1 to the current report on Form 8-K filed
by Charter Communications, Inc. on February 22, 2005 (File
No. 000-27927)). |
|
|
10 |
.26 |
|
Letter Agreement, dated April 15, 2005, by and between
Charter Communications, Inc. and Paul E. Martin (incorporated by
reference to Exhibit 99.1 to the current report on
Form 8-K of Charter Communications, Inc. filed
April 19, 2005 (File No. 000-27927)). |
|
|
10 |
.27 |
|
Restricted Stock Agreement, dated as of July 13, 2005, by
and between Robert P. May and Charter Communications, Inc.
(incorporated by reference to Exhibit 99.1 to the current
report on Form 8-K of Charter Communications, Inc. filed
July 13, 2005 (File No. 000-27927)). |
|
|
10 |
.28 |
|
Restricted Stock Agreement, dated as of July 13, 2005, by
and between Michael J. Lovett and Charter Communications, Inc.
(incorporated by reference to Exhibit 99.2 to the current
report on Form 8-K of Charter Communications, Inc. filed
July 13, 2005 (File No. 000-27927)). |
|
|
10 |
.29 |
|
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)). |
II-6
|
|
|
|
|
Exhibit |
|
Description |
|
|
|
|
|
10 |
.30 |
|
Employment Agreement dated as of September 2, 2005, by and
between Paul E. Martin and Charter Communications, Inc.
(incorporated by reference to Exhibit 99.1 to the current
report on Form 8-K of Charter Communications, Inc. filed on
September 9, 2005 (File No. 000-27927)). |
|
|
10 |
.31 |
|
Employment Agreement dated as of September 2, 2005, by and
between Wayne H. Davis and Charter Communications, Inc.
(incorporated by reference to Exhibit 99.2 to the current
report on Form 8-K of Charter Communications, Inc. filed on
September 9, 2005 (File No. 000-27927)). |
|
|
10 |
.32 |
|
Employment Agreement dated as of October 31, 2005, by and
between Sue Ann Hamilton and Charter Communications, Inc.
(incorporated by reference to Exhibit 10.21 to the
quarterly report on Form 10-Q of Charter Communications,
Inc. filed on November 2, 2005 (File No. 000-27927)). |
|
|
10 |
.33 |
|
Employment Agreement effective as of October 10, 2005, by
and between Grier C. Raclin and Charter Communications, Inc.
(incorporated by reference to Exhibit 99.1 to the current
report on Form 8-K of Charter Communications, Inc. filed on
November 14, 2005 (File No. 000-27927)). |
|
|
10 |
.34 |
|
Employment Offer Letter, dated November 22, 2005, by and
between Charter Communications, Inc. and Robert A. Quigley
(incorporated by reference to 10.68 to Amendment No. 1 to
the registration statement on Form S-1 of Charter
Communications, Inc. filed on February 2, 2006 (File
No. 333-130898)). |
|
|
10 |
.35 |
|
Employment Agreement dated as of December 9, 2005, by and
between Robert A. Quigley and Charter Communications, Inc.
(incorporated by reference to Exhibit 99.1 to the current
report on Form 8-K of Charter Communications, Inc. filed on
December 13, 2005 (File No. 000-27927)). |
|
|
10 |
.36 |
|
Retention Agreement dated as of January 9, 2006, by and
between Paul E. Martin and Charter Communications, Inc.
(incorporated by reference to Exhibit 99.1 to the current
report on Form 8-K of Charter Communications, Inc. filed on
January 10, 2006 (File No. 000-27927)). |
|
|
10 |
.37 |
|
Employment Agreement dated as of January 20, 2006 by and
between Jeffrey T. Fisher and Charter Communications, Inc.
(incorporated by reference to Exhibit 10.1 to the current
report on Form 8-K of Charter Communications, Inc. filed on
January 27, 2006 (File No. 000-27927)). |
|
|
10 |
.38 |
|
Employment Agreement dated as of February 28, 2006 by and
between Michael J. Lovett and Charter Communications, Inc.
(incorporated by reference to Exhibit 99.2 to the current
report on Form 8-K of Charter Communications, Inc. filed on
March 3, 2006 (File No. 000-27927)). |
|
|
10 |
.39 |
|
Separation Agreement of Wayne H. Davis, dated as of
March 23, 2006 (Incorporated by reference to
Exhibit 99.1 to the current report on Form 8-K of
Charter Communications, Inc. filed on April 6, 2006 (File
No. 000-27927)). |
|
|
10 |
.40 |
|
Consulting Agreement of Wayne H. Davis, dated as of
March 23, 2006 (Incorporated by reference to
Exhibit 99.2 to the current report on Form 8-K of
Charter Communications, Inc. filed on April 6, 2006 (File
No. 000-27927)). |
|
|
10 |
.41 |
|
Amended and Restated Credit Agreement, dated as of
April 28, 2006, among Charter Communications Operating,
LLC, CCO) Holdings, LLC, the lenders from time to time parties
thereto and JPMorgan Chase Bank, N.A., as administrative agent
(Incorporated by reference to Exhibit 10.1 to the current
report on Form 8-K of Charter Communications, Inc. filed on
May 1, 2006(File No. 000-27927)). |
|
|
12 |
.1* |
|
Computation of Ratio of Earnings to Fixed Charges. |
|
|
21 |
.1* |
|
Subsidiaries of CCH II, LLC. |
|
|
23 |
.1** |
|
Consent of Gibson, Dunn & Crutcher LLP (included with
Exhibit 5.1). |
|
|
23 |
.2** |
|
Consent of KPMG LLP. |
|
|
24 |
.1* |
|
Power of attorney (included in signature page). |
|
|
25 |
.1** |
|
Statement of eligibility of trustee. |
|
|
99 |
.1** |
|
Letter of Transmittal. |
II-7
|
|
|
|
|
Exhibit |
|
Description |
|
|
|
|
|
99 |
.2** |
|
Letter to Registered Holders and the Depository Trust Company
Participants. |
|
|
99 |
.3** |
|
Letter to Clients. |
|
99 |
.4** |
|
Notice of Guaranteed Delivery. |
|
|
|
|
|
Management compensatory plan or arrangement |
|
|
|
Financial Statement Schedules |
Schedules not listed above are omitted because of the absence of
the conditions under which they are required or because the
information required by such omitted schedules is set forth in
the financial statements or the notes thereto.
The undersigned registrants hereby undertake that:
|
|
|
(1) Prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part
of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the
applicable registration form with respect to the reofferings by
persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form. |
|
|
(2) Every prospectus: (i) that is filed pursuant to
the immediately preceding paragraph or (ii) that purports
to meet the requirements of Section 10(a)(3) of the
Securities Act of 1933 and is used in connection with an
offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will
not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof. |
The undersigned registrants hereby undertake to respond to
requests for information that is incorporated by reference into
the prospectus pursuant to Item 4, 10(b), 11 or 13 of this
form, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the
registration statement through the date of responding to the
request.
The undersigned registrants hereby undertake to supply by means
of a post-effective amendment all information concerning a
transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration
statement when it became effective.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers,
and controlling persons of the registrants pursuant to the
foregoing provisions, or otherwise, the registrants have been
advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities, other than the payment by the
registrants of expenses incurred or paid by a director, officer,
or controlling person of the registrants in the successful
defense of any action, suit or proceeding, is asserted by such
director, officer, or controlling person in connection with the
securities being registered, the registrants will, unless in the
opinion of their counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by them
is against public policy as expressed in the Securities Act of
1933 and will be governed by the final adjudication of such
issue.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement on
Form S-4 to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Saint Louis, State of Missouri, on
May 23, 2006.
|
|
|
CCH II, LLC, |
|
Registrant |
|
|
By: CHARTER COMMUNICATIONS, INC., |
|
Sole Manager |
|
|
|
|
|
Kevin D. Howard |
|
Vice President and |
|
Chief Accounting Officer |
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following
persons in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
*
Paul
G. Allen |
|
Chairman of the Board of Directors of Charter Communications,
Inc. |
|
May 23, 2006 |
|
*
Neil
Smit |
|
President and Chief Executive Officer, Director (Principal
Executive Officer) Charter Communications, Inc. |
|
May 23, 2006 |
|
*
Jeffrey
T. Fisher |
|
Executive Vice President
and Chief Financial Officer (Principal Financial Officer)
Charter Communications, Inc. |
|
May 23, 2006 |
|
/s/ Kevin D. Howard
Kevin
D. Howard |
|
Vice President and
Chief Accounting Officer
(Principal Accounting Officer) Charter Communications, Inc. |
|
May 23, 2006 |
|
*
W. Lance
Conn |
|
Director of Charter Communications, Inc. |
|
May 23, 2006 |
|
*
Nathaniel
A. Davis |
|
Director of Charter Communications, Inc. |
|
May 23, 2006 |
|
*
Jonathan
L. Dolgen |
|
Director of Charter Communications, Inc. |
|
May 23, 2006 |
II-9
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
*
Rajive
Johri |
|
Director of Charter Communications, Inc. |
|
May 23, 2006 |
|
*
Robert
P. May |
|
Director of Charter Communications, Inc. |
|
May 23, 2006 |
|
*
David
C. Merritt |
|
Director of Charter Communications, Inc. |
|
May 23, 2006 |
|
*
Marc
B. Nathanson |
|
Director of Charter Communications, Inc. |
|
May 23, 2006 |
|
*
Jo
Allen Patton |
|
Director of Charter Communications, Inc. |
|
May 23, 2006 |
|
*
John
H. Tory |
|
Director of Charter Communications, Inc. |
|
May 23, 2006 |
|
*
Larry
W. Wangberg |
|
Director of Charter Communications, Inc. |
|
May 23, 2006 |
|
*By: |
|
/s/ Kevin D. Howard
Kevin
D. Howard
Attorney-in-Fact |
|
|
|
|
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
CCH II Capital Corp. has duly caused this registration
statement on
Form S-4 to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Saint Louis, State of Missouri on
May 23, 2006.
|
|
|
CCH II CAPITAL CORP. |
|
Registrant |
|
|
|
|
|
Kevin D. Howard |
|
Vice President and |
|
Chief Accounting Officer |
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following
persons and in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
*
Neil
Smit |
|
Director, President and Chief Executive Officer, (Principal
Executive Officer), CCH II Capital Corp. |
|
May 23, 2006 |
|
*
Jeffrey
T. Fisher |
|
Executive Vice President and Chief Financial Officer (Principal
Financial Officer) CCH II Capital Corp. |
|
May 23, 2006 |
|
/s/ Kevin D. Howard
Kevin
D. Howard |
|
Vice President and Chief Accounting Officer, (Principal
Accounting Officer) CCH II Capital Corp. |
|
May 23, 2006 |
|
*By: |
|
/s/ Kevin D. Howard
Kevin
D. Howard
Attorney-in-Fact |
|
|
|
|
II-11
EX-5.1
Exhibit 5.1
GIBSON, DUNN & CRUTCHER LLP
Lawyers
A REGISTERED LIMITED LIABILITY PARTNERSHIP
INCLUDING PROFESSIONAL CORPORATIONS
200 Park Avenue, New York, New York 10166-0193
(212) 351-4000
www.gibsondunn.com
May 17, 2006
|
|
|
Direct Dial
(212) 351-4000
|
|
|
Fax No.
(212) 351-4035
CCH II, LLC
CCH II Capital Corp.
12405 Powerscourt Drive
St. Louis, Missouri 63131
|
|
|
|
|
|
|
Re:
|
|
CCH II, LLC |
|
|
|
|
CCH II Capital Corp. |
|
|
|
|
Registration Statement on Form S-4 (Registration No. 333-133616) |
Ladies and Gentlemen:
As counsel for CCH II, LLC, a Delaware limited liability company (CCH II) and CCH II Capital
Corp., a Delaware corporation (CCH II Capital and together with CCH II, the Issuers), we have
examined the Registration Statement on Form S-4 (Registration No. 333-133616) (the Registration
Statement), filed on April 27, 2006 with the Securities and Exchange Commission (the Commission)
pursuant to the Securities Act of 1933, as amended (the Securities Act), in connection with the
offering of $450,000,000 aggregate principal amount of 10.250% Senior Notes due 2010 issued by the
CCH II Issuers (the Notes).
The Notes will be issued pursuant to an indenture, dated as of September 23, 2003 among the
Issuers and Wells Fargo Bank, N.A., as trustee (the Trustee), as supplemented by a supplemental
indenture, dated as of January 30, 2006 (as supplemented, the Indenture). The Notes and the
Indenture are referred to herein as the Note Documents. The Notes are being issued in exchange
for certain outstanding notes of the Issuers (the Outstanding Notes), as described in the
Registration Statement.
We have examined the originals, or photostatic or certified copies, of the Note Documents and
such records of the Issuers and certificates of officers of the Issuers and of public officials and
such other documents as we have deemed relevant and necessary as the basis for the opinion set
forth below. In our examination, we have assumed the genuineness of all signatures, the legal
capacity and competency of all natural persons, the authenticity of all documents
CCH II, LLC
CCH II Capital Corp.
May 17, 2006
Page 2
submitted to us as originals and the conformity to original documents of all documents
submitted to us as copies.
Based upon the foregoing examination and in reliance thereon, and subject to the assumptions,
qualifications and limitations stated therein, we are of the opinion that the Notes, when executed
and authenticated in accordance with the provisions of the Indenture, and offered in exchange for
the Outstanding Notes, as described in the Registration Statement, will be legal, valid and binding
obligations of the Issuers, enforceable against them in accordance with their respective terms.
The opinion set forth herein is subject to the following assumptions, qualifications,
limitations and exceptions:
|
A. |
|
The effectiveness of the Registration Statement under the Act will not have been
terminated or rescinded. |
|
|
B. |
|
We render no opinion herein as to matters involving the laws of any jurisdiction
other than the State of New York, the United States of America and the Delaware General
Corporation Law and the Delaware Limited Liability Company Act. We are not admitted to
practice in the State of Delaware; however, we are generally familiar with the Delaware
General Corporation Law and the Delaware Limited Liability Company Act as currently in effect
and have made such inquiries as we consider necessary to render the opinion set forth above.
This opinion is limited to the effect of the current state of the laws of the State of New
York, the United States of America and, to the limited extent set forth above, the Delaware
General Corporation Law and the Delaware Limited Liability Company Act and the facts as they
currently exist. We assume no obligation to revise or supplement this opinion in the event
of future changes in such laws or the interpretations thereof or such facts. |
|
|
C. |
|
Our opinion set forth herein is subject to (i) the effect of any bankruptcy,
insolvency, reorganization, moratorium, arrangement or similar laws affecting the enforcement
of creditors rights generally (including, without limitation, the effect of statutory or
other laws regarding fraudulent transfers or preferential transfers) and (ii) general
principles of equity, regardless of whether a matter is considered in a proceeding in equity
or at law, including, without limitation, concepts of materiality, reasonableness, good faith
and fair dealing and the possible unavailability of specific performance, injunctive relief
or other equitable remedies. |
|
|
D. |
|
We express no opinion regarding the effectiveness of (i) any waiver of stay,
extension or usury laws or of unknown future rights or (ii) provisions relating to
|
CCH II, LLC
CCH II Capital Corp.
May 17, 2006
Page 3
|
|
|
indemnification or contribution, to the extent such provisions may be contrary to
public policy or federal or state securities laws. |
We consent to the filing of this opinion as an exhibit to the Registration Statement, and we
further consent to the use of our name under the caption Legal Matters in the Registration
Statement and the prospectus that forms a part thereof. In giving these consents, we do not
thereby admit that we are within the category of persons whose consent is required under Section 7
of the Securities Act or the Rules and Regulations of the Commission.
|
|
|
|
|
|
Very truly yours,
|
|
|
/s/ Gibson, Dunn & Crutcher LLP
|
|
|
|
|
|
|
|
|
EX-23.2
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
The Board of Directors
CCH II, LLC:
We consent to the use of our report dated February 27, 2006, with respect to the consolidated
balance sheets of CCH II, LLC and subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of operations, changes in members equity, and cash flows for each of the
years in the three-year period ended December 31, 2005, included herein and to the reference to our
firm under the heading Experts in the prospectus.
Our report on the consolidated financial statements refers to the Companys adoption of EITF Topic
D-108, Use of the Residual Method to Value Acquired Assets Other than Goodwill, effective September
30, 2004, and Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, as amended by Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation Transition and Disclosure an amendment of FASB Statement No. 123,
effective January 1, 2003.
/s/ KPMG LLP
St. Louis, MO
May 23, 2006
EX-25.1
Exhibit 25.1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)
WELLS FARGO BANK, NATIONAL ASSOCIATION
(Exact name of trustee as specified in its charter)
|
|
|
A National Banking Association
|
|
94-1347393 |
(Jurisdiction of incorporation or
|
|
(I.R.S. Employer |
organization if not a U.S. national
|
|
Identification No.) |
bank) |
|
|
|
|
|
101 North Phillips Avenue |
|
|
Sioux Falls, South Dakota
|
|
57104 |
(Address of principal executive offices)
|
|
(Zip code) |
Wells Fargo & Company
Law Department, Trust Section
MAC N9305-175
Sixth Street and Marquette Avenue, 17th Floor
Minneapolis, Minnesota 55479
(612) 667-4608
(Name, address and telephone number of agent for service)
CCH
II, LLC and CCH II Capital Corp.
(Exact name of obligor as specified in its charter)
|
|
|
Delaware
|
|
03-0511293 |
Delaware
|
|
13-4257703 |
(State or other jurisdiction of
|
|
(I.R.S. Employer |
incorporation or organization)
|
|
Identification No.) |
|
|
|
12405 POWERSCOURT DRIVE |
|
|
ST. LOUIS, MISSOURI
|
|
63131 |
(Address of principal executive offices)
|
|
(Zip code) |
10.25% Senior Notes
due 2010
(Title of the indenture securities)
TABLE OF CONTENTS
Item 1. General Information. Furnish the following information as to the trustee:
|
(a) |
|
Name and address of each examining or supervising authority to which it is subject. |
|
|
|
|
Comptroller of the Currency
Treasury Department
Washington, D.C. |
|
|
|
|
Federal Deposit Insurance Corporation
Washington, D.C. |
|
|
|
|
Federal Reserve Bank of San Francisco
San Francisco, California 94120 |
|
|
(b) |
|
Whether it is authorized to exercise corporate trust powers. |
|
|
|
|
The trustee is authorized to exercise corporate trust powers. |
Item 2. Affiliations with Obligor. If the obligor is an affiliate of the trustee, describe each such affiliation.
None with respect to the trustee.
No responses are included for Items 3-14 of this Form T-1 because the obligor is not in default as
provided under Item 13.
Item 15. Foreign Trustee. Not applicable.
Item 16. List of Exhibits. List below all exhibits filed as a part of this Statement of Eligibility.
|
|
|
|
|
|
|
Exhibit 1.
|
|
A copy of the Articles of Association of the trustee now in effect.* |
|
|
|
|
|
|
|
Exhibit 2.
|
|
A copy of the Comptroller of the Currency Certificate of Corporate
Existence and Fiduciary Powers for Wells Fargo Bank, National Association,
dated February 4, 2004.** |
|
|
|
|
|
|
|
Exhibit 3.
|
|
See Exhibit 2 |
|
|
|
|
|
|
|
Exhibit 4.
|
|
Copy of By-laws of the trustee as now in effect.*** |
|
|
|
|
|
|
|
Exhibit 5.
|
|
Not applicable. |
|
|
|
|
|
|
|
Exhibit 6.
|
|
The consent of the trustee required by Section 321(b) of the Act. |
|
|
|
|
|
|
|
Exhibit 7.
|
|
A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining
authority .**** |
|
|
|
|
|
|
|
Exhibit 8.
|
|
Not applicable. |
|
|
|
|
|
|
|
Exhibit 9.
|
|
Not applicable. |
* Incorporated by reference to the exhibit of the same number to the trustees Form T-1 filed as
exhibit 25 to the Form S-4 dated December 30, 2005 of Hornbeck Offshore Services LLC file number
333-130784-06.
** Incorporated by reference to the exhibit of the same number to the trustees Form T-1 filed
as exhibit 25 to the Form T-3 dated March 3, 2004 of Trans-Lux Corporation file number
022-28721.
*** Incorporated by reference to the exhibit of the same number to the trustees Form T-1 filed
as exhibit 25 to the Form S-4 dated May 26, 2005 of Penn National Gaming Inc. file number
333-125274.
**** Incorporated by reference to the exhibit of the same number to the trustees Form T-1 filed
as exhibit 25 to the Form S-1 dated April 19, 2006 of Winmark Corporation file number
333-133393.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, Wells
Fargo Bank, National Association, a national banking association organized and existing under the
laws of the United States of America, has duly caused this statement of eligibility to be signed on
its behalf by the undersigned, thereunto duly authorized, all in the City of Minneapolis and State
of Minnesota on the 17th day of May 2006.
|
|
|
|
|
|
WELLS FARGO BANK, NATIONAL ASSOCIATION
|
|
|
/s/ Jane Schweiger
|
|
|
Jane Schweiger |
|
|
Vice President |
|
|
EXHIBIT 6
May 17, 2006
Securities and Exchange Commission
Washington, D.C. 20549
Gentlemen:
In accordance with Section 321(b) of the Trust Indenture Act of 1939, as amended, the
undersigned hereby consents that reports of examination of the undersigned made by Federal,
State, Territorial, or District authorities authorized to make such examination may be
furnished by such authorities to the Securities and Exchange Commission upon its request
therefore.
|
|
|
|
|
|
Very truly yours,
WELLS FARGO BANK, NATIONAL ASSOCIATION
|
|
|
/s/ Jane Schweiger
|
|
|
Jane Schweiger |
|
|
Vice President |
|
|
EX-99.1
Exhibit 99.1
LETTER OF TRANSMITTAL
CCH II, LLC and CCH II CAPITAL CORP.
Offer to exchange
new 10.250% Senior Notes due 2013,
which have been registered under the Securities Act of
1933,
for
outstanding 10.250% Senior Notes due 2013,
which are not registered under the Securities Act of 1933
PURSUANT TO THE PROSPECTUS DATED MAY 18, 2006
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 PM, NEW YORK CITY
TIME, ON JUNE 19, 2006, UNLESS EXTENDED (THE
EXPIRATION DATE).
The Exchange Agent for the Exchange Offer is
Wells Fargo Bank, N.A.
|
|
|
|
|
By Facsimile:
(612) 667-6282
Confirm Receipt of Facsimile by
Telephone:
(800) 344-5128
|
|
By Registered or Certified Mail:
Wells Fargo Bank, N.A.
MAC #N9303-121
Corporate Trust Operations
P.O. Box 1517
Minneapolis, MN 55480-1517 |
|
In Person By Hand:
Wells Fargo Bank, N.A.
608 Second Avenue South
Corporate Trust Operations,
12th Floor
Minneapolis, MN 55402 |
By Regular Mail or Overnight Couriers:
Wells Fargo Bank, N.A.
MAC #N9303-121
Corporate Trust Operations
6th & Marquette Avenue
Minneapolis, MN 55479
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER
THAN AS SET FORTH ABOVE OR TRANSMISSION OF THIS LETTER OF
TRANSMITTAL VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS
CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF
TRANSMITTAL IS COMPLETED.
This Letter of Transmittal is to be completed by holders of
Original Notes (as defined below) either if Original Notes are
to be forwarded herewith or if tenders of Original Notes are to
be made by book-entry transfer to an account maintained by Wells
Fargo Bank, N.A. (the Exchange Agent) at The
Depository Trust Company (DTC) pursuant to the
procedures set forth in The Exchange Offer
Terms of the Exchange Offer Procedures for
Tendering in the Prospectus (as defined below).
Holders of Original Notes whose certificates (the
Certificates) for such Original Notes are not
immediately available or who cannot deliver their Certificates
and all other required documents to the Exchange Agent on or
prior to the Expiration Date or who cannot complete the
procedures for book-entry transfer on a timely basis, must
tender their Original Notes according to the guaranteed delivery
procedures set forth in The Exchange Offer
Guaranteed Delivery Procedures in the Prospectus.
SEE INSTRUCTION 1. DELIVERY OF DOCUMENTS TO DTC DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
ALL TENDERING HOLDERS COMPLETE
THIS BOX:
|
|
|
|
|
|
|
|
DESCRIPTION OF ORIGINAL NOTES TENDERED |
|
If Blank, please print Name and |
|
Original Notes Tendered |
Address of Registered Holder |
|
(Attach Additional List of Notes) |
|
|
|
Principal Amount |
|
|
of Original |
|
|
Principal |
|
Notes Tendered |
|
|
Certificate |
|
Amount of |
|
(If Less Than |
|
|
Number(s)* |
|
Original Notes |
|
All)** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Amount Tendered: |
|
* Need not be completed by book-entry holders. |
** Original Notes may be tendered in whole or in part in
denominations of $1,000 and integral multiples thereof. All
Original Notes held shall be deemed tendered unless a lesser
number is specified in this column. |
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BOXES BELOW TO BE CHECKED BY
ELIGIBLE INSTITUTIONS ONLY:
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CHECK HERE IF TENDERED ORIGINAL NOTES ARE BEING DELIVERED
BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE
EXCHANGE AGENT WITH DTC AND COMPLETE THE FOLLOWING: |
Name of Tendering Institution:
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DTC Account No. |
Transaction Code No. |
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CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED
DELIVERY IF TENDERED ORIGINAL NOTES ARE BEING DELIVERED
PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO
THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: |
Name(s) of Registered Holder(s):
Window Ticket Number (if any):
Date of Execution of Notice of Guaranteed Delivery:
-2-
IF GUARANTEED DELIVERY IS TO BE MADE BY BOOK-ENTRY
TRANSFER:
Name of Tendering Institution:
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DTC Account No. |
Transaction Code No. |
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CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED
ORIGINAL NOTES ARE TO BE RETURNED BY CREDITING THE DTC
ACCOUNT NUMBER SET FORTH ABOVE. |
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CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE ORIGINAL
NOTES FOR ITS OWN ACCOUNT AS A RESULT OF MARKET MAKING OR
OTHER TRADING ACTIVITIES (A PARTICIPATING
BROKER-DEALER) AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF
THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO. |
-3-
Ladies and Gentlemen:
The undersigned hereby tenders to CCH II, LLC, a Delaware
limited liability company, and CCH II Capital Corp., a
Delaware corporation (together, the Issuers), the
above described aggregate principal amount of the Issuers
issued and outstanding 10.250% senior notes due 2010 (the
Original Notes), which are not registered under the
Securities Act of 1933, in exchange for a like aggregate
principal amount of the Issuers new 10.250% senior notes
due 2010 (the New Notes), which have been registered
under the Securities Act of 1933, upon the terms and subject to
the conditions set forth in that certain prospectus of the
Issuers, dated May 18, 2006 (as the same may be amended or
supplemented from time to time, the Prospectus),
receipt of which is acknowledged, and in this Letter of
Transmittal (which, together with the Prospectus, constitute the
Exchange Offer).
Subject to and effective upon the acceptance for exchange of all
or any portion of the Original Notes tendered herewith in
accordance with the terms and conditions of the Exchange Offer
(including, if the Exchange Offer is extended or amended, the
terms and conditions of any such extension or amendment), the
undersigned hereby sells, assigns and transfers to or upon the
order of the Issuers, free and clear of all liens, restrictions,
charges and encumbrances, all right, title and interest in and
to such Original Notes as are being tendered herewith. The
undersigned hereby irrevocably constitutes and appoints the
Exchange Agent as its agent and
attorney-in-fact (with
full knowledge that the Exchange Agent is also acting as agent
of the Issuers in connection with the Exchange Offer) with
respect to the tendered Original Notes, with full power of
substitution (such power of attorney being deemed to be an
irrevocable power coupled with an interest), subject only to the
right of withdrawal described in the Prospectus, to
(i) deliver Certificates for Original Notes to the Issuers
together with all accompanying evidences of transfer and
authenticity to, or upon the order of, the Issuers, upon receipt
by the Exchange Agent, as the undersigneds agent, of the
New Notes to be issued in exchange for such Original Notes,
(ii) present Certificates for such Original Notes for
transfer, and to transfer the Original Notes on the books of the
Issuers, and (iii) receive for the account of the Issuers
all benefits and otherwise exercise all rights of beneficial
ownership of such Original Notes, all in accordance with the
terms and conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE
UNDERSIGNED HAS FULL POWER AND AUTHORITY TO TENDER, EXCHANGE,
SELL, ASSIGN AND TRANSFER THE ORIGINAL NOTES TENDERED HEREBY AND
THAT, WHEN THE SAME ARE ACCEPTED FOR EXCHANGE, THE ISSUERS WILL
ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE
AND CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES,
AND THAT THE ORIGINAL NOTES TENDERED HEREBY ARE NOT SUBJECT TO
ANY ADVERSE CLAIMS OR PROXIES. THE UNDERSIGNED WILL, UPON
REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL DOCUMENTS DEEMED BY
THE ISSUERS OR THE EXCHANGE AGENT TO BE NECESSARY OR DESIRABLE
TO COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF THE
ORIGINAL NOTES TENDERED HEREBY, AND THE UNDERSIGNED WILL COMPLY
WITH ITS OBLIGATIONS UNDER THE EXCHANGE AND REGISTRATION RIGHTS
AGREEMENTS. THE UNDERSIGNED HAS READ AND AGREES TO ALL OF THE
TERMS OF THE EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) of the
Original Notes tendered hereby should be printed above, if they
are not already set forth above, as they appear on the
Certificates representing such Original Notes. The Certificate
number(s) and the Original Notes that the undersigned wishes to
tender should be indicated in the appropriate boxes above.
If any tendered Original Notes are not exchanged pursuant to the
Exchange Offer for any reason, or if Certificates are submitted
for more Original Notes than are tendered or accepted for
exchange, Certificates for such nonexchanged or nontendered
Original Notes will be returned (or, in the case of Original
Notes tendered by book-entry transfer, such Original Notes will
be credited to an account maintained at DTC), without expense to
the tendering holder, promptly following the expiration or
termination of the Exchange Offer.
The undersigned understands that tenders of Original Notes
pursuant to any one of the procedures described in The
Exchange Offer Terms of the Exchange
Offer Procedures for Tendering in the
Prospectus and in the instructions hereto will, upon the
Issuers acceptance for exchange of such tendered Original
Notes, constitute a binding agreement between the undersigned
and the Issuers upon the terms and subject to the conditions of
the
-4-
Exchange Offer. The undersigned recognizes that, under certain
circumstances set forth in the Prospectus, the Issuers may not
be required to accept for exchange any of the Original Notes
tendered hereby.
Unless otherwise indicated herein in the box entitled
Special Issuance Instructions below, the undersigned
hereby directs that the New Notes be issued in the name(s) of
the undersigned or, in the case of a book-entry transfer of
Original Notes, that such New Notes be credited to the account
indicated above maintained at DTC. If applicable, substitute
Certificates representing Original Notes not exchanged or not
accepted for exchange will be issued to the undersigned or, in
the case of a book-entry transfer of Original Notes, will be
credited to the account indicated above maintained at DTC.
Similarly, unless otherwise indicated under Special
Delivery Instructions, please deliver New Notes to the
undersigned at the address shown below the undersigneds
signature.
By tendering Original Notes and executing this Letter of
Transmittal, the undersigned hereby represents and agrees that
(i) the undersigned is not an affiliate (as
defined in Rule 405 under the Securities Act) of the
Issuers or any of their subsidiaries, or, if the undersigned is
an affiliate, that the undersigned will comply with
the registration and prospectus delivery requirements of the
Securities Act of 1933 to the extent applicable, (ii) any
New Notes to be received by the undersigned are being acquired
in the ordinary course of its business, (iii) the
undersigned has no arrangement or understanding with any person
to participate in a distribution (within the meaning of the
Securities Act of 1933) of New Notes to be received in the
Exchange Offer, and (iv) if the undersigned is not a
broker-dealer, the undersigned is not engaged in, and does not
intend to engage in, a distribution (within the meaning of the
Securities Act of 1933) of such New Notes. By tendering Original
Notes pursuant to the Exchange Offer and executing this Letter
of Transmittal, a holder of Original Notes which is a
broker-dealer represents and agrees, consistent with certain
interpretive letters issued by the staff of the Division of
Corporation Finance of the Securities and Exchange Commission to
third parties, that (a) such Original Notes held by the
broker-dealer are held only as a nominee, or (b) such
Original Notes were acquired by such broker-dealer for its own
account as a result of market-making activities or other trading
activities and it will deliver the Prospectus (as amended or
supplemented from time to time) meeting the requirements of the
Securities Act of 1933 in connection with any resale of such New
Notes (provided that, by so acknowledging and by delivering a
prospectus meeting the requirements of the Securities Act of
1933, such broker-dealer will not be deemed to admit that it is
an underwriter within the meaning of the Securities
Act of 1933). See The Exchange Offer Terms of
the Exchange Offer and Plan of Distribution in
the Prospectus.
The Issuers have agreed that, subject to the provisions of the
Exchange and Registration Rights Agreement dated as of
January 30, 2006 by and among the Issuers and the
purchasers named therein (the Exchange and Registration
Rights Agreement), the Prospectus, as it may be amended or
supplemented from time to time, may be used by a participating
broker-dealer in connection with resales of New Notes received
in exchange for Original Notes, where such Original Notes were
acquired by such participating broker-dealer for its own account
as a result of market-making activities or other trading
activities, for a period ending 180 days after the
Expiration Date (subject to extension under certain limited
circumstances described in the Prospectus) or, if earlier, when
all such New Notes have been disposed of by such participating
broker-dealer. However, a participating broker-dealer who
intends to use the Prospectus in connection with the resale of
New Notes received in exchange for Original Notes pursuant to
the Exchange Offer must notify the Issuers, or cause the Issuers
to be notified, on or prior to the Expiration Date, that it is a
participating broker-dealer. Such notice may be given in the
space provided herein for that purpose or may be delivered to
the Exchange Agent at one of the addresses set forth in the
Prospectus under The Exchange Offer Exchange
Agent. In that regard, each participating broker-dealer,
by tendering such Original Notes and executing this Letter of
Transmittal, agrees that, upon receipt of notice from the
Issuers of the occurrence of any event or the discovery of any
fact which makes any statement contained or incorporated by
reference in the Prospectus untrue in any material respect or
which causes the Prospectus to omit to state a material fact
necessary in order to make the statements contained or
incorporated by reference therein, in light of the circumstances
under which they were made, not misleading or of the occurrence
of certain other events specified in the Exchange and
Registration Rights Agreement, such participating broker-dealer
will suspend the sale of New Notes pursuant to the Prospectus
until the Issuers have amended or supplemented the Prospectus to
correct such misstatement or omission and have furnished copies
of the amended or supplemented Prospectus to the participating
broker-dealer or the Issuers have given notice that the sale of
the New Notes may be resumed, as the case may be.
-5-
If the Issuers give such notice to suspend the sale of the New
Notes, the 180-day
period referred to above during which participating
broker-dealers are entitled to use the Prospectus in connection
with the resale of New Notes shall be extended by the number of
days in the period from and including the date of the giving of
such notice to and including the date when the Issuers shall
have made available to participating broker-dealers copies of
the supplemented or amended Prospectus necessary to resume
resales of the New Notes or to and including the date on which
the Issuers have given notice that the use of the applicable
Prospectus may be resumed, as the case may be.
Holders of Original Notes whose Original Notes are accepted for
exchange will not receive accrued interest on such Original
Notes for any period from and after the last interest payment
date to which interest has been paid or duly provided for on
such Original Notes prior to the original issue date of the New
Notes, or if no such date has occurred, the issue date, and the
undersigned waives the right to receive any interest on such
Original Notes accrued from and after such date.
All authority herein conferred or agreed to be conferred in this
Letter of Transmittal shall survive the death or incapacity of
the undersigned and any obligation of the undersigned hereunder
shall be binding upon the heirs, executors, administrators,
personal representatives, trustees in bankruptcy, legal
representatives, successors and assigns of the undersigned.
Except as stated in the Prospectus, this tender is irrevocable.
-6-
HOLDER(S) SIGN HERE
(SEE INSTRUCTIONS 2, 5 AND 6)
(PLEASE COMPLETE SUBSTITUTE FORM
W-9 BELOW)
(NOTE: SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY
INSTRUCTION 2)
Must be signed by registered holder(s) exactly as name(s)
appear(s) on Certificate(s) for the Original Notes hereby
tendered or on a security position listing, or by any person(s)
authorized to become the registered holder(s) by endorsements
and documents transmitted herewith (including such opinions of
counsel, certifications and other information as may be required
by the Issuers or the Trustee for the Original Notes to comply
with the restrictions on transfer applicable to the Original
Notes). If the signature is by an
attorney-in-fact,
executor, administrator, trustee, guardian, officer of a
corporation or another acting in a fiduciary capacity or
representative capacity, please set forth the signers full
title. See Instruction 5.
(SIGNATURE(S) OF HOLDER(S))
Name(s):
(Please Print)
Address:
(Include Zip Code)
Area Code and Telephone Number:
TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER(S)
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 2 AND 5)
Authorized Signature:
Name:
(Please Print)
Date: ______________________________ , 2006
Capacity or Title:
Name of Firm:
Address:
(Include Zip Code)
Area Code and Telephone Number:
-7-
SPECIAL ISSUANCE INSTRUCTIONS
(See Instructions 1, 5 and 6)
To be completed ONLY if the New Notes are to be issued in the
name of someone other than the registered holder of the Original
Notes whose name(s) appear(s) above:
Issue New Notes to:
Name:
(Please Print)
Address:
(Include Zip Code)
(Taxpayer Identification or Social Security No.)
SPECIAL DELIVERY INSTRUCTIONS
(See, Instructions 1, 5 and 6)
To be completed ONLY if the New Notes are to be sent to someone
other than the registered holder of the Original Notes whose
name(s) appear(s) above, or to such registered holder(s) at an
address other than that shown above.
Mail New Notes to:
Name:
(Please Print)
Address:
(Include Zip Code)
-8-
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. Delivery of Letter of
Transmittal and Certificates; Guaranteed Delivery
Procedures. This Letter of Transmittal is to be completed
either if (a) Certificates are to be forwarded herewith or
(b) tenders are to be made pursuant to the procedures for
tender by book-entry transfer set forth in The Exchange
Offer Terms of the Exchange Offer
Procedures for Tendering in the Prospectus. Certificates,
or timely confirmation of a book-entry transfer of such Original
Notes into the Exchange Agents account at DTC, as well as
this Letter of Transmittal (or manually signed facsimile
thereof), properly completed and duly executed, with any
required signature guarantees, or an Agents Message in the
case of a book-entry delivery, and any other documents required
by this Letter of Transmittal, must be received by the Exchange
Agent at one of its addresses set forth herein on or prior to
the Expiration Date. Original Notes may be tendered in whole or
in part in the principal amount of $1,000 and integral multiples
thereof.
Holders who wish to tender their Original Notes and
(i) whose Original Notes are not immediately available or
(ii) who cannot deliver their Original Notes, this Letter
of Transmittal and all other required documents to the Exchange
Agent on or prior to the Expiration Date or (iii) who
cannot complete the procedures for delivery by book-entry
transfer on a timely basis, may tender their Original Notes by
properly completing and duly executing a Notice of Guaranteed
Delivery pursuant to the guaranteed delivery procedures set
forth in The Exchange Offer Guaranteed
Delivery Procedures in the Prospectus. Pursuant to such
procedures: (i) such tender must be made by or through an
Eligible Institution (as defined below); (ii) a properly
completed and duly executed Notice of Guaranteed Delivery,
substantially in the form made available by the Issuers, must be
received by the Exchange Agent on or prior to the Expiration
Date; and (iii) the Certificates (or a book-entry
confirmation) representing all tendered Original Notes, in
proper form for transfer, together with a Letter of Transmittal
(or manually signed facsimile thereof), properly completed and
duly executed, with any required signature guarantees, or an
Agents Message in the case of a book-entry delivery, and
any other documents required by this Letter of Transmittal, must
be received by the Exchange Agent within three New York Stock
Exchange trading days after the date of execution of such Notice
of Guaranteed Delivery, all as provided in The Exchange
Offer Guaranteed Delivery Procedures in the
Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or
transmitted by facsimile or mail to the Exchange Agent, and must
include a guarantee by an Eligible Institution in the form set
forth in such Notice. For Original Notes to be properly tendered
pursuant to the guaranteed delivery procedure, the Exchange
Agent must receive a Notice of Guaranteed Delivery on or prior
to the Expiration Date. As used herein and in the Prospectus,
Eligible Institution means a firm or other entity
identified in
Rule 17Ad-15 under
the Exchange Act as an eligible guarantor
institution, including (as such terms are defined therein)
(i) a bank; (ii) a broker, dealer, municipal
securities broker or dealer or government securities broker or
dealer, (iii) a credit union; (iv) a national
securities exchange, registered securities association or
clearing agency; or (v) a savings association.
THE METHOD OF DELIVERY OF CERTIFICATES, THIS LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION
AND SOLE RISK OF THE TENDERING HOLDER, AND THE DELIVERY WILL BE
DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT.
IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED AND PROPERLY INSURED OR OVERNIGHT DELIVERY SERVICE IS
RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ENSURE TIMELY DELIVERY.
The Issuers will not accept any alternative, conditional or
contingent tenders. Each tendering holder, by execution of a
Letter of Transmittal (or manually signed facsimile thereof),
waives any right to receive any notice of the acceptance of such
tender.
2. Guarantee of Signatures.
No signature guarantee on this Letter of Transmittal is required
if:
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(i) this Letter of Transmittal is signed by the registered
holder (which term, for purposes of this document, shall include
any participant in DTC whose name appears on a security position
listing as the owner of the |
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Original Notes) of Original Notes tendered herewith, unless such
holder(s) has completed either the box entitled Special
Issuance Instructions or the box entitled Special
Delivery Instructions above, or |
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(ii) such Original Notes are tendered for the account of a
firm that is an Eligible Institution. |
In all other cases, an Eligible Institution must guarantee the
signature(s) on this Letter of Transmittal. See
Instruction 5.
3. Inadequate Space. If the
space provided in the box captioned Description of
Original Notes is inadequate, the Certificate number(s)
and/or the principal amount of Original Notes and any other
required information should be listed on a separate signed
schedule which is attached to this Letter of Transmittal.
4. Partial Tenders and
Withdrawal Rights. Tenders of Original Notes will be
accepted only in the principal amount of $1,000 and integral
multiples thereof. If less than all the Original Notes evidenced
by any Certificate submitted are to be tendered, fill in the
principal amount of Original Notes which are to be tendered in
the box entitled Principal Amount of Original
Notes Tendered (if less than all). In such case, new
Certificate(s) for the remainder of the Original Notes that were
evidenced by your old Certificate(s) will only be sent to the
holder of the Original Notes, promptly after the Expiration
Date. All Original Notes represented by Certificates delivered
to the Exchange Agent will be deemed to have been tendered
unless otherwise indicated.
Except as otherwise provided herein, tenders of Original Notes
may be withdrawn at any time on or prior to the Expiration Date.
In order for a withdrawal to be effective on or prior to that
time, a written, telegraphic, telex or facsimile transmission of
such notice of withdrawal must be timely received by the
Exchange Agent at one of its addresses set forth above or in the
Prospectus on or prior to the Expiration Date. Any such notice
of withdrawal must specify the name of the person who tendered
the Original Notes to be withdrawn, the aggregate principal
amount of Original Notes to be withdrawn, and (if Certificates
for Original Notes have been tendered) the name of the
registered holder of the Original Notes as set forth on the
Certificate for the Original Notes, if different from that of
the person who tendered such Original Notes. If Certificates for
the Original Notes have been delivered or otherwise identified
to the Exchange Agent, then prior to the physical release of
such Certificates for the Original Notes, the tendering holder
must submit the serial numbers shown on the particular
Certificates for the Original Notes to be withdrawn and the
signature on the notice of withdrawal must be guaranteed by an
Eligible Institution, except in the case of Original Notes
tendered for the account of an Eligible Institution. If Original
Notes have been tendered pursuant to the procedures for
book-entry transfer set forth in The Exchange
Offer Procedures for Tendering, the notice of
withdrawal must specify the name and number of the account at
DTC to be credited with the withdrawal of Original Notes, in
which case a notice of withdrawal will be effective if delivered
to the Exchange Agent by written, telegraphic, telex or
facsimile transmission. Withdrawals of tenders of Original Notes
may not be rescinded. Original Notes properly withdrawn will not
be deemed validly tendered for purposes of the Exchange Offer,
but may be retendered at any subsequent time on or prior to the
Expiration Date by following any of the procedures described in
the Prospectus under The Exchange Offer
Procedures for Tendering.
All questions as to the validity, form and eligibility
(including time of receipt) of such withdrawal notices will be
determined by the Issuers, in their sole discretion, whose
determination shall be final and binding on all parties. None of
the Issuers, any affiliates or assigns of the Issuers, the
Exchange Agent or any other person shall be under any duty to
give any notification of any irregularities in any notice of
withdrawal or incur any liability for failure to give any such
notification. Any Original Notes which have been tendered but
which are withdrawn will be returned to the holder thereof
without cost to such holder promptly after withdrawal.
5. Signatures on Letter of
Transmittal, Assignments and Endorsements. If this Letter of
Transmittal is signed by the registered holder(s) of the
Original Notes tendered hereby, the signature(s) must correspond
exactly with the name(s) as written on the face of the
Certificate(s) without alteration, enlargement or any change
whatsoever.
If any of the Original Notes tendered hereby are owned of record
by two or more joint owners, all such owners must sign this
Letter of Transmittal.
If any tendered Original Notes are registered in different
name(s) on several Certificates, it will be necessary to
complete, sign and submit as many separate Letters of
Transmittal (or manually signed facsimiles thereof) as there are
different registrations of Certificates.
-10-
If this Letter of Transmittal or any Certificates or bond powers
are signed by trustees, executors, administrators, guardians,
attorneys-in-fact,
officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when
signing and must submit proper evidence satisfactory to the
Issuers, in their sole discretion, of such person(s)
authority to so act.
When this Letter of Transmittal is signed by the registered
owner(s) of the Original Notes listed and transmitted hereby, no
endorsement(s) of Certificate(s) or separate bond power(s) are
required unless New Notes are to be issued in the name of a
person other than the registered holder(s), Signature(s) on such
Certificate(s) or bond power(s) must be guaranteed by an
Eligible Institution.
If this Letter of Transmittal is signed by a person other than
the registered owner(s) of the Original Notes listed, the
Certificates must be endorsed or accompanied by appropriate bond
powers, signed exactly as the name or names of the registered
owner(s) appear(s) on the Certificates, and also must be
accompanied by such opinions of counsel, certifications and
other information as the Issuer or the Trustee for the Original
Notes may require in accordance with the restrictions on
transfer applicable to the Original Notes. Signatures on such
Certificates or bond powers must be guaranteed by an Eligible
Institution.
6. Special Issuance and Delivery
Instructions. If New Notes are to be issued in the name of a
person other than the signer of this Letter of Transmittal, or
if New Notes are to be sent to someone other than the signer of
this Letter of Transmittal or to an address other than that
shown above, the appropriate boxes on this Letter of Transmittal
should be completed. Certificates for Original Notes not
exchanged will be returned by mail or, if tendered by book-entry
transfer, by crediting the account indicated above maintained at
DTC. See Instruction 4.
7. Irregularities. The
Issuers determine, in their sole discretion, all questions as to
the form of documents, validity, eligibility (including time of
receipt) and acceptance for exchange of any tender of Original
Notes, which determination shall be final and binding on all
parties. The Issuers reserve the absolute right to reject any
and all tenders determined by it not to be in proper form or the
acceptance of which, or exchange for, may, in the view of
counsel to the Issuers, be unlawful. The Issuers also reserves
the absolute right, subject to applicable law, to waive any of
the conditions of the Exchange Offer set forth in the Prospectus
under The Exchange Offer Conditions or
any conditions or irregularity in any tender of Original Notes
of any particular holder whether or not similar conditions or
irregularities are waived in the case of other holders. The
Issuers interpretation of the terms and conditions of the
Exchange Offer (including this Letter of Transmittal and the
instructions hereto) will be final and binding. No tender of
Original Notes will be deemed to have been validly made until
all irregularities with respect to such tender have been cured
or waived. None of the Issuers, any affiliates or assigns of the
Issuers, the Exchange Agent, or any other person shall be under
any duty to give notification of any irregularities in tenders
or incur any liability for failure to give such notification.
8. Questions, Requests for
Assistance and Additional Copies. Questions and requests for
assistance may be directed to the Exchange Agent at one of its
addresses and telephone number set forth on the front of this
Letter of Transmittal. Additional copies of the Prospectus, the
Notice of Guaranteed Delivery and the Letter of Transmittal may
be obtained from the Exchange Agent or from your broker, dealer,
commercial bank, trust company or other nominee.
9. 28% Backup Withholding;
Substitute
Form W-9.
Under U.S. Federal income tax law, a holder whose tendered
Original Notes are accepted for exchange is required to provide
the Exchange Agent with such holders correct taxpayer
identification number (TIN) on Substitute
Form W-9 below. If
the Exchange Agent is not provided with the correct TIN, the
Internal Revenue Service (the IRS) may subject the
holder or other payee to a $50 penalty. In addition, payments to
such holders or other payees with respect to Original Notes
exchanged pursuant to the Exchange Offer may be subject to a 28%
backup withholding.
The box in Part 2 of the Substitute
Form W-9 may be
checked if the tendering holder has not been issued a TIN and
has applied for a TIN or intends to apply for a TIN in the near
future. If the box in Part 2 is checked, the holder or
other payee must also complete the Certificate of Awaiting
Taxpayer Identification Number below in order to avoid backup
withholding. Notwithstanding that the box in Part 2 is
checked and the Certificate of Awaiting Taxpayer Identification
Number is completed, the Exchange Agent will withhold 28% of all
payments made prior to the time a properly certified TIN is
provided to the Exchange Agent. The Exchange Agent will retain
such amounts
-11-
withheld during the 60 day period following the date of the
Substitute
Form W-9. If the
holder furnishes the Exchange Agent with its TIN within
60 days after the date of the Substitute
Form W-9, the
amounts retained during the 60 day period will be remitted
to the holder and no further amounts shall be retained or
withheld from payments made to the holder thereafter. If,
however, the holder has not provided the Exchange Agent with its
TIN within such 60 day period, amounts withheld will be
remitted to the IRS as backup withholding. In addition, 28% of
all payments made thereafter will be withheld and remitted to
the IRS until a correct TIN is provided
The holder is required to give the Exchange Agent the TIN (e.g.,
social security number or employer identification number) of the
registered owner of the Original Notes or of the last transferee
appearing on the transfers attached to, or endorsed on, the
Original Notes. If the Original Notes are registered in more
than one name or are not in the name of the actual owner,
consult the enclosed Guidelines for Certification of
Taxpayer Identification Number on Substitute
Form W-9 for
additional guidance on which number to report.
Certain holders (including, among others, corporations,
financial institutions and certain foreign persons) may not be
subject to these backup withholding and reporting requirements.
Such holders should nevertheless complete the attached
Substitute
Form W-9 below,
and write exempt on the face thereof, to avoid
possible erroneous backup withholding. A foreign person may
qualify as an exempt recipient by submitting an appropriate
properly completed IRS Form W-8, signed under penalties of
perjury, attesting to that holders exempt status. Please
consult the enclosed Substitute
Form W-9 for
additional guidance on which holders are exempt from backup
withholding.
Backup withholding is not an additional U.S. Federal income
tax. Rather, the U.S. Federal income tax liability of a
person subject to backup withholding will be reduced by the
amount of tax withheld. If withholding results in an overpayment
of taxes, a refund may be obtained.
10. Lost, Destroyed or Stolen
Certificates. If any Certificate(s) representing Original
Notes has been lost, destroyed or stolen, the holder should
promptly notify the Exchange Agent. The holder will then be
instructed as to the steps that must be taken in order to
replace the Certificate(s). This Letter of Transmittal and
related documents cannot be processed until the procedures for
replacing lost, destroyed or stolen Certificate(s) have been
followed.
11. Security Transfer Taxes.
Holders who tender their Original Notes for exchange will not be
obligated to pay any transfer taxes in connection therewith. If,
however, New Notes are to be delivered to, or are to be issued
in the name of, any person other than the registered holder of
the Original Notes tendered, or if a transfer tax is imposed for
any reason other than the exchange of Original Notes in
connection with the Exchange Offer, then the amount of any such
transfer tax (whether imposed on the registered holder or any
other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the
amount of such transfer taxes will be billed directly to such
tendering holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR MANUALLY SIGNED
FACSIMILE THEREOF) AND ALL OTHER REQUIRED DOCUMENTS MUST BE
RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION
DATE.
-12-
TO BE COMPLETED BY ALL TENDERING NOTEHOLDERS
(SEE INSTRUCTION 9)
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PAYERS NAME: Wells Fargo Bank, N.A. |
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SUBSTITUTE
FORM W-9
Department of the Treasury, Internal Revenue Service |
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Part 1 PLEASE PROVIDE YOUR TIN IN THE
BOX AT RIGHT AND CERTIFY BY SIGNING AND DATING BELOW |
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Social Security Number
OR
Employer Identification Number |
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Payers Request for Taxpayer Identification Number
(TIN) and Certification |
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CERTIFICATION UNDER THE PENALTIES OF PERJURY, I
CERTIFY THAT:
(1) the number shown on this form is my correct Taxpayer
Identification Number (or that I am waiting and Certification
for a number to be issued to me).
(2) I am not subject to backup withholding because:
(a) I am exempt from backup withholding, (b) I have
not been notified by the Internal Revenue Service (the
IRS) that I am subject to backup withholding as a
result of a failure to report all interest or dividends, or
(C) the IRS has notified me that I am no longer subject to
withholding.
(3) any other information provided an this form is true and
correct |
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Certification Instructions You must
cross out item (2) above if you have been notified by the
IRS that you are currently subject to backup withholding because
of underreporting interest or dividends on your tax return.
However, if after being notified by the IRS that you were
subject to backup withholding, you received another notification
from the IRS that you are no longer subject to backup
withholding, do not cross out item (2). |
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Signature Date |
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Part 2 AWAITING
TIN o
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NOTE: |
FAILURE TO COMPLETE AND RETURN THIS FORM MAY IN CERTAIN
CIRCUMSTANCES RESULT IN BACKUP WITHHOLDING OF 28% OF ANY AMOUNTS
PAID TO YOU PURSUANT TO THE EXCHANGE OFFER PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM
W-9 FOR ADDITIONAL
DETAILS. |
-13-
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF
YOU CHECKED THE BOX IN PART 2 OF SUBSTITUTE FORM
W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a Taxpayer
Identification Number has not been issued to me, and either
(1) I have mailed or delivered an application to receive a
Taxpayer Identification Number to the appropriate Internal
Revenue Service Center or Social Security Administration Once or
(2) I intend to mail or deliver an application in the near
future. I understand that if I do not provide a Taxpayer
Identification Number by the time of payment, 28% of all
payments made to me on account, of the New Notes shall be
retained until I provide a Taxpayer Identification Number to the
Exchange Agent and that, if I do not provide my Taxpayer
Identification Number within 60 days, such retained amounts
shall be remitted to the Internal Revenue Service as backup
withholding and 28% of all reportable payments made to me
thereafter will be withheld and remitted to the Internal Revenue
Service until I provide a Taxpayer Identification Number.
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Signature |
Date _________________________ , 2006 |
-14-
EX=99.2
Exhibit 99.2
CCH II, LLC
CCH II CAPITAL CORP.
Offer to exchange
new 10.250% Senior Notes due 2010,
which have been registered under the Securities Act of
1933,
for
outstanding 10.250% Senior Notes due 2010,
which are not registered under the Securities Act of 1933
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON
JUNE 19, 2006, UNLESS EXTENDED (THE EXPIRATION
DATE). ORIGINAL NOTES
TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME
PRIOR TO THE
EXPIRATION DATE. AFTER THE EXPIRATION DATE HAS BEEN EXTENDED,
ORIGINAL NOTES
TENDERED PURSUANT TO THE EXCHANGE OFFER AS OF THE PREVIOUSLY
SCHEDULED
EXPIRATION DATE MAY NOT BE WITHDRAWN AFTER THE DATE OF THE
PREVIOUSLY
SCHEDULED EXPIRATION DATE.
To Registered Holders and The Depository Trust Company
Participants:
We are enclosing herewith the materials listed below relating to
the offer by CCH II, LLC, a Delaware limited liability company,
and CCH II Capital Corp., a Delaware corporation (together, the
Issuers), to exchange their 10.250% senior notes due
2010 (the Original Notes), which are not registered
under the Securities Act of 1933, for a like aggregate principal
amount of the Issuers new 10.250% senior notes due 2010
(the New Notes), which have been registered under
the Securities Act of 1933, upon the terms and subject to the
conditions set forth in the Issuers Prospectus, dated
May 18, 2006 (the Prospectus) and the related
Letter of Transmittal (which, together with the Prospectus
constitute the Exchange Offer).
Enclosed herewith are copies of the following documents:
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1. Prospectus; |
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2. Letter of Transmittal; |
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3. Notice of Guaranteed Delivery; and |
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4. Letter which may be sent to your clients for whose
account you hold Original Notes in your name or in the name of
your nominee, with space provided for obtaining such
clients instruction with regard to the Exchange Offer. |
We urge you to contact your clients promptly. Please note that
the Exchange Offer will expire on the Expiration Date unless
extended.
The Exchange Offer is not conditioned upon any minimum number of
Original Notes being tendered.
The Issuers will not pay any fee or commissions to any broker or
dealer or to any other persons (other than the Exchange Agent)
in connection with the solicitation of tenders of Original Notes
pursuant to the Exchange Offer. The Issuers will pay or cause to
be paid any transfer taxes payable on the transfer of Original
Notes to it, except as otherwise provided in Instruction 11
of the enclosed Letter of Transmittal.
Additional copies of the enclosed material may be obtained from
the Exchange Agent.
EX-99.3
Exhibit 99.3
CCH II, LLC
CCH II CAPITAL CORP.
Offer to exchange
new 10.250% Senior Notes due 2010,
which have been registered under the Securities Act of
1933,
for
outstanding 10.250% Senior Notes due 2010,
which are not registered under the Securities Act of 1933
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON JUNE 19, 2006, UNLESS EXTENDED (THE
EXPIRATION DATE). ORIGINAL NOTES TENDERED IN
THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE
EXPIRATION DATE. AFTER THE EXPIRATION DATE HAS BEEN EXTENDED,
ORIGINAL NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER AS
OF THE PREVIOUSLY SCHEDULED EXPIRATION DATE MAY NOT BE WITHDRAWN
AFTER THE DATE OF THE PREVIOUSLY SCHEDULED EXPIRATION DATE.
To Our Clients:
We are enclosing herewith a Prospectus, dated May 18, 2006
(the Prospectus), of CCH II, LLC, a Delaware
limited liability company, and CCH II Capital Corp., a
Delaware corporation (together, the Issuers), and
related Letter of Transmittal (which, together with the
Prospectus, constitute the Exchange Offer) relating
to the offer by the Issuers to exchange their new 10.250% senior
notes due 2010 (the New Notes), registered under the
Securities Act of 1933, for a like aggregate principal amount of
their issued and outstanding 10.250% senior notes due 2010 (the
Original Notes), which are not registered under the
Securities Act of 1933, upon the terms and subject to the
conditions set forth in the Exchange Offer.
The Exchange Offer is not conditioned upon any minimum number of
Original Notes being tendered.
We are the holder of record of Original Notes held by us for
your own account. A tender of such Original Notes can be made
only by us as the record holder and pursuant to your
instructions. The Letter of Transmittal is furnished to you for
your information only and cannot be used by you to tender
Original Notes held by us for your account.
We request instructions as to whether you wish to tender any or
all of the Original Notes held by us for your account pursuant
to the terms and conditions of the Exchange Offer. We also
request that you confirm that we may on your behalf make the
representations contained in the Letter of Transmittal.
Pursuant to the Letter of Transmittal, each holder of Original
Notes will represent to the Issuers that (i) the New Notes
acquired pursuant to the Exchange Offer are being acquired in
the ordinary course of business, (ii) neither the holder
nor any such other person is engaging in or intends to engage in
the distribution of the New Notes, (iii) neither the holder
nor any such person has an arrangement or understanding with any
person to participate in the distribution of such New Notes, and
(iv) neither the holder nor any such other person is an
affiliate of the Issuers as defined in Rule 405
under the Securities Act or, if the holder is an
affiliate, that the holder will comply with the
registration and prospectus delivery requirements of the
Securities Act of 1933 to the extent applicable. If the holder
is a broker-dealer (whether or not it is also an
affiliate) that will receive New Notes for its own
account in exchange for Original Notes that were acquired as a
result of market-making activities or other trading activities,
it acknowledges that it will deliver a prospectus meeting the
requirements of the Securities Act of 1933 in connection with
any resale of such New Notes. By acknowledging that it will
deliver and by delivering a prospectus meeting the requirements
of the Securities Act of 1933
in connection with any resale of such New Notes, the holder is
not deemed to admit that it is an underwriter within
the meaning of the Securities Act of 1933.
Instructions with Respect to the Exchange Offer
The undersigned hereby acknowledges receipt of the Prospectus
and the accompanying Letter of Transmittal relating to the
exchange of the Original Notes for the New Notes, which have
been registered under the Securities Act of 1933, respectively,
upon the terms and subject to the conditions set forth in the
Exchange Offer.
This will instruct you, the registered holder and/or book-entry
transfer facility participant, as to the action to be taken by
you relating to the Exchange Offer with respect to the Original
Notes held by you for the account of the undersigned.
The aggregate face amount of the Original Notes held by you for
the account of the undersigned is (fill in an amount):
$ of
the 10.250% Senior Notes due 2010
With respect to the Exchange Offer, the undersigned hereby
instructs you (check appropriate box):
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To tender the following Original Notes held by you for the
account of the undersigned (insert amount of Original Notes
to be tendered (if any)): |
$ of
the 10.250% Senior Notes due 2010
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Not to tender any Original
Notes held by you for the account of the undersigned.
If the undersigned instructs you to tender the Original Notes
held by you for the account of the undersigned, it is understood
that you are authorized to make, on behalf of the undersigned
(and the undersigned, by its signature below, hereby makes to
you), the representations and warranties contained in the Letter
of Transmittal that are to be made with respect to the
undersigned as a beneficial owner, including but not limited to
the representations, that (i) the New Notes acquired
pursuant to the Exchange Offer are being acquired in the
ordinary course of business of the undersigned,
(ii) neither the undersigned nor any such other person is
engaging in or intends to engage in the distribution of the New
Notes, (iii) neither the undersigned nor any such other
person has an arrangement or understanding with any person to
participate in the distribution of such New Notes, and
(iv) neither the undersigned nor any such other person is
an affiliate of the Issuers as defined in
Rule 405 under the Securities Act or, if the undersigned is
an affiliate, that the undersigned will comply with
the registration and prospectus delivery requirements of the
Securities Act of 1933 to the extent applicable. If the
undersigned is a broker-dealer (whether or not it is also an
affiliate) that will receive New Notes for its own
account in exchange for Original Notes that were acquired as a
result of market-making activities or other trading activities,
it acknowledges that it will deliver a prospectus meeting the
requirements of the Securities Act of 1933 in connection with
any resale of such New Notes. By acknowledging that it will
deliver and by delivering a prospectus meeting the requirements
of the Securities Act of 1933 in connection with any resale of
such New Notes, the undersigned is not deemed to admit that it
is an underwriter within the meaning of the
Securities Act of 1933.
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Name of beneficial
owner(s):
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Signature(s):
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Name(s)(please
print):
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Address:
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Telephone
Number:
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Taxpayer Identification or
Social Security
Number:
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Date:
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2
EX-99.4
Exhibit 99.4
NOTICE OF GUARANTEED DELIVERY
CCH II, LLC
CCH II CAPITAL CORP.
Offer to Exchange
new 10.250% Senior Notes due 2010,
which have been registered under the Securities Act of
1933,
for
outstanding 10.250% Senior Notes due 2010,
which are not registered under the Securities Act of 1933
This Notice of Guaranteed Delivery, or one substantially
equivalent to this form, must be used to accept the Exchange
Offer (as defined below) if (i) certificates for the
Issuers (as defined below) issued and outstanding 10.250%
senior notes due 2010 (the Original Notes) are not
immediately available, (ii) Original Notes, the Letter of
Transmittal and all other required documents cannot be delivered
to Wells Fargo Bank, N.A. (the Exchange Agent) on or
prior to the Expiration Date (as defined below) or
(iii) the procedures for delivery by book-entry transfer
cannot be completed on a timely basis. This Notice of Guaranteed
Delivery may be delivered by hand, overnight courier or mail, or
transmitted by facsimile transmission, to the Exchange Agent.
See The Exchange Offer Terms of the Exchange
Offer Procedures for Tendering in the
Prospectus.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME ON JUNE 19, 2006 UNLESS EXTENDED (THE
EXPIRATION DATE). ORIGINAL NOTES TENDERED IN THE
EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE
EXPIRATION DATE. AFTER THE EXPIRATION DATE HAS BEEN EXTENDED,
ORIGINAL NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER AS
OF THE PREVIOUSLY SCHEDULED EXPIRATION DATE MAY NOT BE WITHDRAWN
AFTER THE DATE OF THE PREVIOUSLY SCHEDULED EXPIRATION DATE.
The Exchange Agent for the Exchange Offer is:
Wells Fargo Bank, N.A.
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By Registered/Certified Mail:
Wells Fargo Bank, N.A.
MAC #N9303-121
Corporate Trust Operations
P.O. Box 1517
Minneapolis, MN 55480-1517
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By Hand:
Wells Fargo Bank, N.A.
608 Second Avenue South
Corporate Trust Operations
12th Floor
Minneapolis, MN 55402 |
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By Regular Mail or Overnight Couriers:
Wells Fargo Bank, N.A.
MAC #N9303-121
Corporate Trust Operations
6th & Marquette Avenue
Minneapolis, MN 55479 |
By Facsimile:
Wells Fargo Bank, N.A.
(612) 667-6282
Confirm Receipt of Facsimile by Telephone:
(800) 344-5128
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS
OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF
GUARANTEED DELIVERY VIA FACSIMILE TO A NUMBER OTHER THAN AS SET
FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO
GUARANTEE SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL
IS REQUIRED TO BE GUARANTEED BY AN ELIGIBLE
INSTITUTION UNDER THE INSTRUCTIONS THERETO, SUCH SIGNATURE
GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
THE GUARANTEE ON THE NEXT PAGE MUST BE COMPLETED.
Ladies and Gentlemen:
The undersigned hereby tenders to CCH II, LLC, a Delaware
limited liability company, and CCH II Capital Corp., a
Delaware corporation (together, the Issuers), upon
the terms and subject to the conditions set forth in the
Prospectus dated May 18, 2006 (as the same may be amended
or supplemented from time to time, the Prospectus),
and the related Letter of Transmittal (which, together with the
Prospectus, constitute the Exchange Offer), receipt
of which is hereby acknowledged, the aggregate principal amount
of Original Notes set forth below pursuant to the guaranteed
delivery procedures set forth in the Prospectus under the
caption The Exchange Offer Terms of the
Exchange Offer Procedures for Tendering.
Aggregate Principal Amount Tendered:*
Name(s) of Registered Holder(s):
Certificate No.(s) (if available):
Addresses:
If Original Notes will be tendered by book-entry transfer,
provide the following information:
DTC Account Number:
Area Code and Telephone Number(s):
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Original Notes may be tendered in whole or in part in
denominations of $1,000 and integral multiples thereof. All
Original Notes held shall be deemed tendered unless a lesser
number is specified here. |
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GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in
Rule 17Ad-15 under
the Securities Exchange Act of 1934, as amended, as an
eligible guarantor institution, including (as such
terms are defined therein): (i) a bank; (ii) a broker,
dealer, municipal securities broker, municipal securities
dealer, government securities broker, government securities
dealer; (iii) a credit union; (iv) a national
securities exchange, registered securities association or
clearing agency; or (v) a savings association (each, an
Eligible Institution), hereby guarantees to deliver
to the Exchange Agent, at one of its addresses set forth above,
either the Original Notes tendered hereby in proper form for
transfer, or confirmation of the book-entry transfer of such
Original Notes to the Exchange Agents account at The
Depository Trust Company (DTC), pursuant to the
procedures for book-entry transfer set forth in the Prospectus,
in either case together with one or more properly completed and
duly executed Letter(s) of Transmittal (or manually signed
facsimile(s) thereof), or an Agents Message in the case of
a book-entry delivery, and any other required documents within
three New York Stock Exchange trading days after the date of
execution of this Notice of Guaranteed Delivery.
The undersigned acknowledges that it must deliver the Letter(s)
of Transmittal and the Original Notes tendered hereby to the
Exchange Agent within the time period set forth above, and that
failure to do so could result in a financial loss to the
undersigned.
Name of Firm:
Address:
Area Code and Telephone Number:
(Authorized
Signature)
Title:
Name:
(Please Type or Print)
Date:
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DO NOT SEND ORIGINAL NOTES WITH THIS NOTICE OF
GUARANTEED DELIVERY. ACTUAL SURRENDER OF ORIGINAL
NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A
PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL AND
ANY OTHER REQUIRED DOCUMENTS. |
-3-
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. Delivery of this Notice of
Guaranteed Delivery. A properly completed and duly executed
copy of this Notice of Guaranteed Delivery and any other
documents required by this Notice of Guaranteed Delivery must be
received by the Exchange Agent at its address set forth herein
prior to the Expiration Date. The method of delivery of this
Notice of Guaranteed Delivery and any other required documents
to the Exchange Agent is at the election and sole risk of the
holder, and the delivery will be deemed made only when actually
received by the Exchange Agent. If delivery is by mail,
registered mail with return receipt requested, properly insured,
is recommended. As an alternative to delivery by mail the
holders may wish to consider using an overnight or hand delivery
service. In all cases, sufficient time should be allowed to
assure timely delivery. For a description of the guaranteed
delivery procedures, see Instruction 1 of the Letter of
Transmittal.
2. Signatures on this Notice of
Guaranteed Delivery. If this Notice of Guaranteed Delivery
is signed by the registered holder(s) of the Original Notes, the
signature must correspond with the name(s) written on the face
of the Original Notes without alteration, enlargement, or any
change whatsoever. If this Notice of Guaranteed Delivery is
signed by a participant of the Book-Entry Transfer Facility
whose name appears on a security position listing as the owner
of the Original Notes, the signature must correspond with the
name shown on the security position listing as the owner of the
Original Notes.
If this Notice of Guaranteed Delivery is signed by a person
other than the registered holder(s) of any Original Notes listed
or a participant of the Book-Entry Transfer Facility, this
Notice of Guaranteed Delivery must be accompanied by appropriate
bond powers, signed as the name of the registered holder(s)
appears on the Original Notes or signed as the name of the
participant shown on the Book-Entry Transfer Facilitys
security position listing.
3. Requests for Assistance or
Additional Copies. Questions and requests for assistance for
additional copies of the Prospectus may be directed to the
Exchange Agent at the address specified in the Prospectus.
Holders may also contact their broker, dealer, commercial bank,
trust company, or other nominee for assistance concerning the
Exchange Offer.
-4-