SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest
event reported): November 30, 2009
Charter Communications,
Inc.
(Exact name of registrant as
specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
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000-27927
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43-1857213
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(Commission File
Number)
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(I.R.S. Employer
Identification Number)
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12405 Powerscourt
Drive
St. Louis, Missouri
63131
(Address of principal executive
offices including zip code)
(314)
965-0555
(Registrant's telephone number,
including area code)
Not
Applicable
(Former name or former address, if
changed since last report)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
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o
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Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
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o
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
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o
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
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ITEM
2.02 RESULTS OF OPERATIONS AND FINANCIAL CONDITION
On
November 30, 2009, Charter Communications, Inc. (the "Company"), its
subsidiaries and certain of its affiliates consummated their Joint Plan of
Reorganization. In connection with its emergence from chapter 11
bankruptcy, the Company issued its financial statements for the year ended
December 31, 2008 to contain an audit report of the Company's registered
independent public accounting firm that does not contain going concern
qualifications. The Company also revised its Management Discussion and Analysis
for the year ended December 31, 2008 to read as provided in Exhibt 99.2
hereto.
In May 2008, the Financial
Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”)
Accounting Principles Board (“APB”) 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) which specifies that issuers of
convertible debt instruments that may be settled in cash upon conversion should
separately account for the liability and equity components in a manner
reflecting their nonconvertible debt borrowing rate when interest costs are
recognized in subsequent periods. The Company adopted FSP APB 14-1
effective January 1, 2009 and applied the effects retrospectively to the
Company's consolidated financial statements for the years ended December 31,
2008, 2007 and 2006. The financial information contained in Item 6, 7 and 8 has
been derived from our revised consolidated financial statements and reflects the
retrospective application of FSP ABP 14-1.
In December 2007, the FASB issued Statement of Financial
Accounting Standards (“SFAS”) No. 160, Noncontrolling
Interests in Consolidated Financial Statements – An Amendment of ARB No. 51,
which requires
noncontrolling interests (previously referred to as minority interests) to be
reported as a component of equity. The Company adopted SFAS No. 160 effective
January 1, 2009. The Company’s adoption of the new standard resulted in the
presentation of Mr. Paul G. Allen’s 5.6% preferred membership interest in CC
VIII, LLC as temporary equity in the Company’s consolidated balance sheets as of
December 31, 2008 and 2007 as presented, which was previously classified as
minority interest.
The
disclosure in this Item 2.02, as well as Exhibits 99.1, 99.2 and 99.3 included
herewith, which revise Items 6, 7 and 8, respectively, of the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2008, are to be
considered “filed” with the Securities and Exchange Commission for all purposes
under the Securities Exchange Act of 1934, as amended.
ITEM 9.01. FINANCIAL STATEMENTS
AND EXHIBITS.
(d)
Exhibits
The
following exhibits are filed pursuant to Item 2.02:
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Exhibit
No.
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Description
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23.1
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Consent of KPMG LLP* | |
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99.1
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Item 6 of the Company’s 2008 Annual Report on Form 10-K, “Selected Financial Data”* | |
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99.2
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Item
7 of the Company’s 2008 Annual Report on Form 10-K “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations”*
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| 99.3 | Item 8 of the Company’s 2008 Annual Report on Form 10-K “Financial Statements and Supplementary Data”* |
* filed
herewith
7
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, Charter
Communications, Inc. has duly caused this Current Report to be signed on its
behalf by the undersigned hereunto duly authorized.
CHARTER COMMUNICATIONS,
INC.
Registrant
Dated:
December 4, 2009
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By:/s/ Eloise E.
Schmitz
Name:
Eloise E. Schmitz
Title: Executive Vice
President and Chief Financial
Officer
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EXHIBIT INDEX
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Exhibit
No.
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Description
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23.1
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Consent of KPMG LLP* | |
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99.1
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Item 6 of the Company’s 2008 Annual Report on Form 10-K, “Selected Financial Data”* | |
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99.2
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Item
7 of the Company’s 2008 Annual Report on Form 10-K “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations”*
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| 99.3 | Item 8 of the Company’s 2008 Annual Report on Form 10-K “Financial Statements and Supplementary Data”* |
* filed
herewith
Exhibit
23.1
Consent
of Independent Registered Public Accounting Firm
The Board
of Directors
Charter
Communications, Inc.:
We
consent to the incorporation by reference in the registration statement (No.
333-163357) on Form S-8 of Charter Communications, Inc. and subsidiaries (the
Company) of our report dated March 13, 2009, except as to Note 25 and Note 28,
as to which the date is November 30, 2009, with respect to the consolidated
balance sheets of the Company as of December 31, 2008 and 2007, and the
related consolidated statements of operations, changes in shareholders’ deficit,
and cash flows for each of the years in the three-year period ended
December 31, 2008, which report appears in the Current Report of Form 8-K
of the Company dated December 4, 2009.
Our
report dated March 13, 2009 except for Note 25 and Note 28, as to which the date
is November 30, 2009, on the consolidated financial statements contains an
explanatory paragraph that refers to the adoption of Statement of Financial
Accounting Standards No. 160, Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51 and
Financial Accounting Standards Board Staff Position APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement).
/s/ KPMG LLP
St.
Louis, Missouri
December
4, 2009
Exhibit
99.1
Explanatory
Note
The
financial information contained in Item 6 has been derived from our revised
consolidated financial statements and reflects the retrospective application of
Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) Accounting
Principles Board (“APB”) 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), which specifies that issuers of convertible debt instruments
that may be settled in cash upon conversion should separately account for the
liability and equity components in a manner reflecting their nonconvertible debt
borrowing rate when interest costs are recognized in subsequent
periods. We adopted FSP APB 14-1 effective January 1, 2009 and
applied the effects retrospectively to our consolidated financial statements for
the years ended December 31, 2008, 2007 and 2006. These reclassifications
are discussed further in Note 25 to the revised consolidated financial
statements contained in Item 8.
In
December 2007, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 160, Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51, which
requires noncontrolling interests (previously referred to as minority interests)
to be reported as a component of equity. We adopted SFAS No. 160 effective
January 1, 2009. The adoption of the new standard resulted in the presentation
of Mr. Paul G. Allen’s 5.6% preferred membership interest in CC VIII, LLC (“CC
VIII”) as temporary equity in our consolidated balance sheets as presented,
which was previously classified as minority interest.
Item 6. Selected
Financial Data.
The
following table presents selected consolidated financial data for the periods
indicated (dollars in millions, except share data):
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Charter
Communications, Inc.
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||||||||||||||||||||
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Year
Ended December 31, (a)
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2008
(c)
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2007
(c)
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2006
(c)
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2005
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2004
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Statement
of Operations Data:
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Revenues
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$ | 6,479 | $ | 6,002 | $ | 5,504 | $ | 5,033 | $ | 4,760 | ||||||||||
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Operating
income (loss) from continuing operations
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$ | (614 | ) | $ | 548 | $ | 367 | $ | 304 | $ | (1,942 | ) | ||||||||
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Interest
expense, net
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$ | (1,905 | ) | $ | (1,861 | ) | $ | (1,901 | ) | $ | (1,818 | ) | $ | (1,669 | ) | |||||
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Loss
from continuing operations before income taxes
and
cumulative effect of accounting change
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$ | (2,554 | ) | $ | (1,325 | ) | $ | (1,483 | ) | $ | (891 | ) | $ | (3,575 | ) | |||||
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Net
loss
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$ | (2,451 | ) | $ | (1,534 | ) | $ | (1,454 | ) | $ | (970 | ) | $ | (4,345 | ) | |||||
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Basic
and diluted loss from continuing operations before
cumulative
effect of accounting change per common share
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$ | (6.56 | ) | $ | (4.17 | ) | $ | (5.03 | ) | $ | (3.24 | ) | $ | (11.47 | ) | |||||
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Basic
and diluted loss per common share
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$ | (6.56 | ) | $ | (4.17 | ) | $ | (4.38 | ) | $ | (3.13 | ) | $ | (14.47 | ) | |||||
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Weighted-average
shares outstanding, basic and diluted
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373,464,920 | 368,240,608 | 331,941,788 | 310,209,047 | 300,341,877 | |||||||||||||||
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Balance
Sheet Data (end of period):
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Investment
in cable properties
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$ | 12,371 | $ | 14,045 | $ | 14,440 | $ | 15,666 | $ | 16,167 | ||||||||||
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Total
assets
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$ | 13,882 | $ | 14,666 | $ | 15,100 | $ | 16,431 | $ | 17,673 | ||||||||||
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Total
debt
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$ | 21,511 | $ | 19,903 | $ | 18,962 | $ | 19,388 | $ | 19,464 | ||||||||||
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Note
payable – related party
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$ | 75 | $ | 65 | $ | 57 | $ | 49 | $ | -- | ||||||||||
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Temporary
equity (b)
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$ | 241 | $ | 215 | $ | 198 | $ | 188 | $ | 648 | ||||||||||
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Preferred
stock — redeemable
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$ | -- | $ | 5 | $ | 4 | $ | 4 | $ | 55 | ||||||||||
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Shareholders’
deficit
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$ | (10,506 | ) | $ | (7,887 | ) | $ | (6,119 | ) | $ | (4,920 | ) | $ | (4,406 | ) | |||||
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(a)
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In
2006, we sold certain cable television systems in West Virginia and
Virginia to Cebridge Connections, Inc. We determined that the
West Virginia and Virginia cable systems comprise operations and cash
flows that for financial reporting purposes meet the criteria for
discontinued operations. Accordingly, the results of operations
for the West Virginia and Virginia cable systems have been presented as
discontinued operations, net of tax, for the year ended December 31, 2006
and all prior periods presented herein have been reclassified to conform
to the current presentation.
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(b)
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Temporary
equity represents Paul G. Allen’s (Charter’s chairman and majority
shareholder) 5.6% preferred membership interests in our indirect
subsidiary, CC VIII, and nonvested shares of restricted stock and
performance shares issued to employees. The preferred membership interest
arises from approximately $630 million of preferred membership units
issued by CC VIII in connection with an acquisition in February
2000. Our 70% interest in the 24,273,943 Class A preferred
membership units (collectively, the "CC VIII interest") is held by
CCH I, LLC (“CCH I”). See Note 3 to our accompanying
consolidated financial statements contained in “Item 8. Financial
Statements and Supplementary Data.” Reported losses
allocated to minority interest on the statement of operations were limited
to the extent of any remaining minority interest on the balance sheet
related to Charter Holdco. Because minority interest in Charter
Holdco was substantially eliminated at December 31, 2003, beginning in
2004, Charter began to absorb substantially all losses before income taxes
that otherwise would have been allocated to minority
interest. On January 1, 2009, Charter adopted Statement of
Financial Accounting Standards (“SFAS”) 160 which requires losses to be
allocated to non-controlling interests even when such amounts are
deficits.
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(c)
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Years
ended December 31, 2008, 2007 and 2006 have been restated to reflect the
retrospective application of FSP APB 14-1. Earlier periods have
not been restated and therefore are not
comparable.
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Comparability
of the above information from year to year is affected by acquisitions and
dispositions completed by us. See Note 4 to our accompanying
consolidated financial statements contained in “Item 8. Financial
Statements and Supplementary Data” and “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations —
Liquidity and Capital Resources.”
Exhibit
99.2
Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
Reference
is made to “Part I. Item 1. Business – Recent Developments” which describes the
Plan and “Part I. Item 1A. Risk Factors” especially “Cautionary Statement
Regarding Forward-Looking Statements,” incorporated by reference from the Annual
Report on Form 10-K of Charter Communications, Inc. (“Charter”) filed
March 16, 2009 and any subsequent updates in risk factors and “Cautionary
Statement Regarding Forward-Looking Statements” contained in Charter’s periodic
reports filed with the Securities and Exchange Commission ("SEC") after the date
of the Annual Report on Form 10-K, which describe important factors that could
cause actual results to differ from expectations and non-historical information
contained herein. In addition, the following discussion should be
read in conjunction with the audited consolidated financial statements of
Charter and subsidiaries as of and for the years ended December 31, 2008,
2007, and 2006. “We,” “us” and “our” refer to Charter, Charter Communications
Holding Company, LLC ("Charter Holdco") and their subsidiaries.
Explanatory
Note and Recent Developments
The
financial information contained in Item 7 has been derived from our revised
consolidated financial statements and reflects the retrospective application of
Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) Accounting
Principles Board (“APB”) 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) ("FSP APB 14-1"),
which specifies that issuers of convertible debt instruments that may be
settled in cash upon conversion should separately account for the liability and
equity components in a manner reflecting their nonconvertible debt borrowing
rate when interest costs are recognized in subsequent periods. We
adopted FSP APB 14-1 effective January 1, 2009 and applied the effects
retrospectively to our consolidated financial statements for the years ended
December 31, 2008, 2007 and 2006. These reclassifications
are discussed further in Note 25 to the revised consolidated financial
statements filed on this Form 8-K as exhibit 99.1.
On March
27, 2009, we and our subsidiaries filed voluntary petitions in the United States
Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”)
seeking relief under the provisions of Chapter 11 of Title 11 of the United
States Code (the “Bankruptcy Code”). The Chapter 11 cases were
jointly administered under the caption In re Charter Communications, Inc.,
et al., Case No. 09-11435 (the “Chapter 11 Cases”). We
continued to operate our businesses and managed our properties as debtors in
possession under the jurisdiction of the Bankruptcy Court and in accordance with
the applicable provisions of the Bankruptcy Code from March 27, 2009 until
emergence from Chapter 11 on November 30, 2009 (the “Effective
Date”).
On
November 17, 2009, the Bankruptcy Court entered an order (the “Confirmation
Order”) confirming our pre-arranged joint plan of reorganization (“the Plan”)
and, on the Effective Date, the Plan was consummated and we emerged from
bankruptcy. As provided in the Plan and the Confirmation Order, (i) the notes
and bank debt of Charter Communications Operating, LLC (“Charter Operating”) and
CCO Holdings, LLC (“CCO Holdings”) remained outstanding; (ii) holders of
approximately $1.5 billion of notes issued by CCH II, LLC (“CCH II”) received
new CCH II notes (the “Notes Exchange”); (iii) holders of notes issued by CCH I,
LLC (“CCH I") received shares of Charter new Class A common
stock; (iv) holders of notes issued by CCH I Holdings, LLC (“CIH”)
received warrants to purchase shares of Charter new Class A common stock; (v)
holders of notes issued by Charter Communications Holdings, LLC (“Charter
Holdings”) received warrants to purchase shares of Charter new Class A common
stock; (vi) holders of convertible notes issued by Charter received cash and
preferred stock issued by Charter; and (vii) all previously outstanding shares
of Charter Class A common stock were cancelled. In addition, as part
of the Plan, the holders of CCH I notes received and transferred to Mr. Allen
$85 million of new CCH II notes.
The
consummation of the Plan was funded with cash on hand, the Notes Exchange, and
proceeds of approximately $1.6 billion of an equity rights offering (the “Rights
Offering”) in which holders of CCH I notes purchased approximately $1.6
billion of Charter’s new Class A common stock.
Under the
Notes Exchange, holders of CCH II Notes were entitled to exchange their CCH II
Notes for new CCH II Notes (“New CCH II Notes”). CCH II Notes that
were not exchanged in the Notes Exchange were paid in cash in an amount equal to
the outstanding principal amount of such CCH II Notes plus accrued but unpaid
interest to the bankruptcy petition date plus post-petition interest, but
excluding any call premiums or prepayment penalties and for the avoidance of
doubt, any unmatured interest. The aggregate principal amount of New
CCH II Notes issued pursuant to the Plan was approximately $1.7 billion
including accrued but unpaid interest to the bankruptcy petition date plus
post-petition interest, but excluding any call premiums or prepayment penalties
plus an additional $85
1
million.
Participants in the Notes Exchange received a commitment fee equal to 1.5% of
the principal amount plus interest on the CCH II Notes exchanged by such
participant in the Notes Exchange.
Charter’s
new Class A Common Stock is not expected to be listed on any public or
over-the-counter exchange or quotation system and will be subject to transfer
restrictions. It is expected, however, that we will apply for listing
of Charter’s new Class A Common Stock on the NASDAQ Stock Market no sooner than
45 days after the Effective Date of the Plan. The Rights Offering
generated proceeds of approximately $1.6 billion and was used to pay holders of
CCH II Notes that did not participate in the Notes Exchange, repay certain
amounts relating to the satisfaction of certain swap agreement claims against
Charter Operating and for general corporate purposes. Parties that
participated in the Rights Offering received a commitment fee equal to 3% of the
purchase price of the Class A Common Stock purchased pursuant to the Rights
Offering.
Pursuant
to a separate restructuring agreement among Charter, Mr. Paul G. Allen ("Mr.
Allen"), and an entity controlled by Mr. Allen (as amended, the “Allen
Agreement”), in settlement and compromise of their legal, contractual and
equitable rights, claims and remedies against Charter and its subsidiaries, and
in addition to any amounts received by virtue of their holding any claims of the
type set forth above, upon the Effective Date of the Plan, Mr. Allen or his
affiliates were issued shares of the new Class B common stock of Charter equal
to 2% of the equity value of Charter, after giving effect to the Rights
Offering, but prior to issuance of warrants and equity-based awards provided for
by the Plan and 35% (determined on a fully diluted basis) of the total voting
power of all new capital stock of Charter. Each share of new Class B
common stock is convertible, at the option of the holder subject to various
restrictions, into one share of new Class A common stock, and is subject to
significant restrictions on transfer. Certain holders of new Class A
common stock and new Class B common stock will receive certain customary
registration rights with respect to their shares. At the Effective
Date of the Plan, Mr. Allen or his affiliates also received (i) warrants to
purchase shares of new Class A common stock of Charter in an aggregate amount
equal to 4% of the equity value of reorganized Charter, after giving effect to
the Rights Offering, but prior to the issuance of warrants and equity-based
awards provided for by the Plan, (ii) $85 million principal amount of new CCH II
notes, (iii) $25 million in cash for amounts owing to CII under a management
agreement, (iv) up to $20 million in cash for reimbursement of fees and expenses
in connection with the Plan, and (v) an additional $150 million in
cash. In addition, on the Effective Date of the Plan, CII retained a
1% equity interest in reorganized Charter Holdco and a right to exchange such
interest into new Class A common stock of Charter. Further, Mr. Allen
transferred his preferred equity interest in CC VIII, LLC ("CC VIII") to
Charter.
The
consummation of the Plan resulted in the reduction of our debt by approximately
$8 billion.
This
discussion should be also read in conjunction with the periodic reports Charter
has filed with the SEC since the filing of the Form 10-K. In particular, the
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” contained in Charter’s quarterly reports on Forms 10-Q filed with
the SEC contain certain important information regarding Charter’s financial
condition and results of operations since December 31, 2008.
Overview
Charter
is a broadband communications company operating in the United States with
approximately 5.5 million customers at December 31, 2008. We offer
our customers traditional cable video programming (basic and digital, which we
refer to as "video" service), high-speed Internet access, and telephone
services, as well as advanced broadband services (such as OnDemand, high
definition television service and DVR). See "Part I. Item 1. Business
— Products and Services" incorporated by reference from the Annual Report on
Form 10-K of Charter Communications, Inc. filed March 16, 2009 for further
description of these services, including "customers."
Approximately
86% of our revenues for each of the years ended December 31, 2008 and 2007
are attributable to monthly subscription fees charged to customers for our
video, high-speed Internet, telephone, and commercial services provided by our
cable systems. Generally, these customer subscriptions may be
discontinued by the customer at any time. The remaining 14% of
revenue for fiscal years 2008 and 2007 is derived primarily from advertising
revenues, franchise fee revenues (which are collected by us but then paid to
local franchising authorities), pay-per-view and OnDemand programming (where
users are charged a fee for individual programs viewed), installation or
reconnection fees charged to customers to commence or reinstate service, and
commissions related to the sale of merchandise by home shopping
services.
The cable
industry's and our most significant competitive challenges stem from DBS
providers and DSL service providers. Telephone companies either
offer, or are making upgrades of their networks that will allow them to offer,
services that provide features and functions similar to our video, high-speed
Internet, and telephone services, and
2
they also
offer them in bundles similar to ours. See "Part I. Item 1. Business
— Competition'' incorporated by reference from the Annual Report on Form 10-K of
Charter Communications, Inc. filed March 16, 2009. We believe that
competition from DBS and telephone companies has resulted in net video customer
losses. In addition, we face increasingly limited opportunities to
upgrade our video customer base now that approximately 62% of our video
customers subscribe to our digital video service. These factors have
contributed to decreased growth rates for digital video
customers. Similarly, competition from high-speed Internet providers
along with increasing penetration of high-speed Internet service in homes with
computers has resulted in decreased growth rates for high-speed Internet
customers. In the recent past, we have grown revenues by offsetting
video customer losses with price increases and sales of incremental services
such as high-speed Internet, OnDemand, DVR, high definition television, and
telephone. We expect to continue to grow revenues through price
increases and high-speed Internet upgrades, increases in the number of our
customers who purchase bundled services including high-speed Internet and
telephone, and through sales of incremental services including wireless
networking, high definition television, OnDemand, and DVR
services. In addition, we expect to increase revenues by expanding
the sales of our services to our commercial customers. However, we
cannot assure you that we will be able to grow revenues at historical rates, if
at all. Dramatic declines in the housing market over the past year,
including falling home prices and increasing foreclosures, together with
significant increases in unemployment, have severely affected consumer
confidence and may cause increased delinquencies or cancellations by our
customers or lead to unfavorable changes in the mix of products
purchased. The general economic downturn also may affect advertising
sales, as companies seek to reduce expenditures and conserve cash. Any of these
events may adversely affect our cash flow, results of operations and financial
condition.
Our
expenses primarily consist of operating costs, selling, general and
administrative expenses, depreciation and amortization expense, impairment of
franchise intangibles and interest expense. Operating costs primarily
include programming costs, the cost of our workforce, cable service related
expenses, advertising sales costs and franchise fees. Selling,
general and administrative expenses primarily include salaries and benefits,
rent expense, billing costs, call center costs, internal network costs, bad debt
expense, and property taxes. We control our costs of operations by
maintaining strict controls on expenses. More specifically, we are
focused on managing our cost structure by improving workforce productivity, and
leveraging our scale, and increasing the effectiveness of our purchasing
activities.
For the
year ended December 31, 2008, our operating loss from continuing operations was
$614 million and for the years ended December 31, 2007 and 2006, income from
continuing operations was $548 million and $367 million,
respectively. We had a negative operating margin (defined as
operating loss from continuing operations divided by revenues) of 9% for the
year ended December 31, 2008 and positive operating margins (defined as
operating income from continuing operations divided by revenues) of 9% and 7%
for the years ended December 31, 2007 and 2006, respectively. For the
year ended December 31, 2008, the operating loss from continuing operations and
negative operating margin is principally due to impairment of franchises
incurred during the fourth quarter. The improvement in operating
income from continuing operations in 2007 as compared to 2006 and positive
operating margin for the years ended December 31, 2007 and 2006 is principally
due to increased sales of our bundled services and improved cost
efficiencies.
We have a
history of net losses. Our net losses are principally attributable to
insufficient revenue to cover the combination of operating expenses and interest
expenses we incur because of our high amounts of debt, depreciation expenses
resulting from the capital investments we have made and continue to make in our
cable properties, and the impairment of our franchise intangibles.
Beginning
in 2004 and continuing through 2008, we sold several cable systems to divest
geographically non-strategic assets and allow for more efficient operations,
while also reducing debt and increasing our liquidity. In 2006, 2007,
and 2008, we closed the sale of certain cable systems representing a total of
approximately 390,300, 85,100, and 14,100 video customers,
respectively. As a result of these sales we have improved our
geographic footprint by reducing our number of headends, increasing the number
of customers per headend, and reducing the number of states in which the
majority of our customers reside. We also made certain geographically
strategic acquisitions in 2006 and 2007, adding 17,600 and 25,500 video
customers, respectively.
In 2006,
we determined that the West Virginia and Virginia cable systems, which were part
of the system sales disclosed above, comprised operations and cash flows that
for financial reporting purposes met the criteria for discontinued
operations. Accordingly, the results of operations for the West
Virginia and Virginia cable systems (including a gain on sale of approximately
$200 million recorded in the third quarter of 2006), have been presented as
discontinued operations, net of tax, for the year ended December 31,
2006. Tax expense of $18 million associated with this gain on sale
was recorded in the fourth quarter of 2006.
3
Critical Accounting Policies and
Estimates
Certain
of our accounting policies require our management to make difficult, subjective
or complex judgments. Management has discussed these policies with the Audit
Committee of Charter’s board of directors, and the Audit Committee has reviewed
the following disclosure. We consider the following policies to be
the most critical in understanding the estimates, assumptions and judgments that
are involved in preparing our financial statements, and the uncertainties that
could affect our results of operations, financial condition and cash
flows:
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·
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capitalization
of labor and overhead costs;
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·
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useful
lives of property, plant and
equipment;
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·
|
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 that are not deemed critical, such as the allowance for
doubtful accounts and valuations of our derivative instruments, but changes in
estimates or judgment in these other items could also have a material impact on
our financial statements.
Capitalization of
labor and overhead costs. The cable industry is capital
intensive, and a large portion of our resources are spent on capital activities
associated with extending, rebuilding, and upgrading our cable
network. As of December 31, 2008 and 2007, the net carrying
amount of our property, plant and equipment (consisting primarily of cable
network assets) was approximately $5.0 billion (representing 36% of total
assets) and $5.1 billion (representing 35% of total assets), respectively.
Total capital expenditures for the years ended December 31, 2008, 2007, and
2006 were approximately $1.2 billion, $1.2 billion, and $1.1 billion,
respectively. Effective December 1, 2009, we will apply fresh start
accounting in accordance with Statement of Position 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code (“SOP 90-7”), which requires
assets and liabilities to be reflected at fair value. Upon
application of fresh start accounting, we will adjust our property, plant and
equipment to reflect fair value. We expect these fresh start
adjustments will result in material increases to total property, plant and
equipment.
Costs associated with network construction, initial customer installations (including initial installations of new or advanced services), installation refurbishments, and the addition of network equipment necessary to provide new or advanced services, are capitalized. While our capitalization is based on specific activities, once capitalized, we track these costs by fixed asset category at the cable system level, and not on a specific asset basis. For assets that are sold or retired, we remove the estimated applicable cost and accumulated depreciation. Costs capitalized as part of initial customer installations include materials, direct labor, and certain indirect costs. These indirect costs are associated with the activities of personnel who assist in connecting and activating the new service, and consist of compensation and overhead costs associated with these support functions. The costs of disconnecting service at a customer’s dwelling or reconnecting service to a previously installed dwelling are charged to operating expense in the period incurred. As our service offerings mature and our reconnect activity increases, our capitalizable installations will continue to decrease and therefore our service expenses will increase. Costs for repairs and maintenance are charged to operating expense as incurred, while equipment replacement, including replacement of certain components, and betterments, including replacement of cable drops from the pole to the dwelling, are capitalized.
We make
judgments regarding the installation and construction activities to be
capitalized. We capitalize direct labor and overhead using standards
developed from actual costs and applicable operational data. We
calculate standards annually (or more frequently if circumstances dictate) for
items such as the labor rates, overhead rates, and the actual amount of time
required to perform a capitalizable activity. For example, the
standard amounts of time required to perform capitalizable activities are based
on studies of the time required to perform such activities. Overhead
rates are established based on an analysis of the nature of costs incurred in
support of capitalizable activities, and a determination of the portion of costs
that is directly attributable to capitalizable activities. The impact
of changes that resulted from these studies were not material in the periods
presented.
Labor
costs directly associated with capital projects are
capitalized. Capitalizable activities performed in connection with
customer installations include such activities as:
|
·
|
Dispatching
a “truck roll” to the customer’s dwelling for service
connection;
|
4
|
·
|
Verification
of serviceability to the customer’s dwelling (i.e., determining whether
the customer’s dwelling is capable of receiving service by our cable
network and/or receiving advanced or Internet
services);
|
|
·
|
Customer
premise activities performed by in-house field technicians and third-party
contractors in connection with customer installations, installation of
network equipment in connection with the installation of expanded
services, and equipment replacement and betterment;
and
|
|
·
|
Verifying
the integrity of the customer’s network connection by initiating test
signals downstream from the headend to the customer’s digital set-top
box.
|
Judgment
is required to determine the extent to which overhead costs incurred result from
specific capital activities, and therefore should be capitalized. The
primary costs that are included in the determination of the overhead rate are
(i) employee benefits and payroll taxes associated with capitalized direct
labor, (ii) direct variable costs associated with capitalizable activities,
consisting primarily of installation and construction vehicle costs,
(iii) the cost of support personnel, such as dispatchers, who directly
assist with capitalizable installation activities, and (iv) indirect costs
directly attributable to capitalizable activities.
While we
believe our existing capitalization policies are appropriate, a significant
change in the nature or extent of our system activities could affect
management’s judgment about the extent to which we should capitalize direct
labor or overhead in the future. We monitor the appropriateness of
our capitalization policies, and perform updates to our internal studies on an
ongoing basis to determine whether facts or circumstances warrant a change to
our capitalization policies. We capitalized internal direct labor and
overhead of $199 million, $194 million, and $204 million, respectively, for the
years ended December 31, 2008, 2007, and 2006.
Useful lives of
property, plant and equipment. We evaluate the appropriateness
of estimated useful lives assigned to our property, plant and equipment, based
on annual analyses of such useful lives, and revise such lives to the extent
warranted by changing facts and circumstances. Any changes in
estimated useful lives as a result of these analyses are reflected prospectively
beginning in the period in which the study is completed. Our analysis
completed in the fourth quarter of 2007 indicated changes in the useful lives of
certain of our property, plant, and equipment based on technological changes in
our plant. As a result, depreciation expense decreased in 2008 by
approximately $81 million. The impact of such changes to our results
in 2007 was not material. Our analysis of useful lives in 2008 did
not indicate a change in useful lives. The effect of a one-year
decrease in the weighted average remaining useful life of our property, plant
and equipment would be an increase in depreciation expense for the year ended
December 31, 2008 of approximately $356 million. The effect of a
one-year increase in the weighted average remaining useful life of our property,
plant and equipment would be a decrease in depreciation expense for the year
ended December 31, 2008 of approximately $244 million.
Depreciation
expense related to property, plant and equipment totaled $1.3 billion for each
of the years ended December 31, 2008, 2007, and 2006, representing approximately
18%, 24%, and 26% of costs and expenses for the years ended December 31,
2008, 2007, and 2006, respectively. Depreciation is recorded using
the straight-line composite method over management’s estimate of the estimated
useful lives of the related assets as listed below:
|
Cable
distribution systems………………………………
|
7-20
years
|
|
Customer
equipment and installations…………………
|
3-5
years
|
|
Vehicles
and equipment…………………………………
|
1-5
years
|
|
Buildings
and leasehold improvements………………
|
5-15
years
|
|
Furniture,
fixtures and equipment….……………………
|
5
years
|
Impairment of
property, plant and equipment, franchises and goodwill. As
discussed above, the net carrying value of our property, plant and equipment is
significant. We also have recorded a significant amount of cost
related to franchises, pursuant to which we are granted the right to operate our
cable distribution network throughout our service areas. The net
carrying value of franchises as of December 31, 2008 and 2007 was
approximately $7.4 billion (representing 53% of total assets) and $8.9 billion
(representing 61% of total assets), respectively. Furthermore, our
noncurrent assets included approximately $68 million and $67 million of
goodwill as of December 31, 2008 and 2007, respectively.
SFAS No. 142, Goodwill and Other Intangible
Assets, requires that franchise intangible assets that meet specified
indefinite-life criteria no longer be amortized against earnings, but instead
must be tested for impairment annually based on valuations, or more frequently
as warranted by events or changes in circumstances. In determining
whether our franchises have an indefinite-life, we considered the likelihood of
franchise renewals, the expected costs
5
of
franchise renewals, and the technological state of the associated cable systems,
with a view to whether or not we are in compliance with any technology upgrading
requirements specified in a franchise agreement. We have concluded
that as of December 31, 2008, 2007, and 2006 substantially all of our franchises
qualify for indefinite-life treatment under SFAS No. 142. Costs
associated with franchise renewals are amortized on a straight-line basis over
10 years, which represents management’s best estimate of the average term of the
franchises. Franchise amortization expense was $2 million, $3
million, and $2 million for the years ended December 31, 2008, 2007, and
2006, respectively. We expect that amortization expense on franchise
assets will be approximately $2 million annually for each of the next five
years. Actual amortization expense in future periods could differ
from these estimates as a result of new intangible asset acquisitions or
divestitures, changes in useful lives, and other relevant factors.
SFAS
No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets, requires that we evaluate
the recoverability of our property, plant and equipment and amortizing franchise
assets upon the occurrence of events or changes in circumstances indicating that
the carrying amount of an asset may not be recoverable. Such events
or changes in circumstances could include such factors as the impairment of our
indefinite-life franchises under SFAS No. 142, changes in technological
advances, fluctuations in the fair value of such assets, adverse changes in
relationships with local franchise authorities, adverse changes in market
conditions, or a deterioration of current or expected future operating
results. Under SFAS No. 144, a long-lived asset is deemed impaired
when the carrying amount of the asset exceeds the projected undiscounted future
cash flows associated with the asset. No impairments of long-lived
assets to be held and used were recorded in the years ended December 31, 2008,
2007, and 2006. However, approximately $56 million and $159 million
of impairment on assets held for sale were recorded for the years ended December
31, 2007, and 2006, respectively.
Under
both SFAS No. 144 and SFAS No. 142, if an asset is determined to be impaired, it
is required to be written down to its estimated fair value as determined in
accordance with accounting principles generally accepted in the United States
(“GAAP”). We determine fair value based on estimated discounted
future cash flows, using reasonable and appropriate assumptions that are
consistent with internal forecasts. Our assumptions include these and
other factors: penetration rates for basic and digital video, high-speed
Internet, and telephone; revenue growth rates; and expected operating margins
and capital expenditures. Considerable management judgment is
necessary to estimate future cash flows, and such estimates include inherent
uncertainties, including those relating to the timing and amount of future cash
flows, and the discount rate used in the calculation. We are also
required to evaluate the recoverability of our indefinite-life franchises, as
well as goodwill, on an annual basis or more frequently as deemed
necessary.
Franchises
were aggregated into essentially inseparable asset groups to conduct the
valuations. We have historically assessed that our divisional
operations were the appropriate level at which our franchises should be
evaluated. Based on certain organizational changes in 2008, we
determined that the appropriate units of accounting for franchises are now the
individual market area, which is a level below our geographic divisional
groupings previously used. The organizational change in 2008
consolidated our three divisions to two operating groups and put more management
focus on the individual market areas. These asset groups generally
represent geographic clustering of our cable systems into groups by which such
systems are managed. Management believes that as a result of the
organizational changes, such groupings represent the highest and best use of
those assets.
Franchises,
for SFAS No. 142 valuation purposes, are defined as the future economic benefits
of the right to solicit and service potential customers (customer marketing
rights), and the right to deploy and market new services (service marketing
rights). Fair value is determined based on estimated discounted
future cash flows using assumptions consistent with internal
forecasts. The franchise after-tax cash flow is calculated as the
after-tax cash flow generated by the potential customers obtained (less the
anticipated customer churn) and the new services added to those customers in
future periods. The sum of the present value of the franchises’
after-tax cash flow in years 1 through 10 and the continuing value of the
after-tax cash flow beyond year 10 yields the fair value of the
franchise.
Customer
relationships, for SFAS No. 142 valuation purposes, represent the value of the
business relationship with our existing customers (less the anticipated customer
churn), and are calculated by projecting future after-tax cash flows from these
customers, including the right to deploy and market additional services to these
customers. The present value of these after-tax cash flows yields the
fair value of the customer relationships. Substantially all our
acquisitions occurred prior to January 1, 2002. We did not
record any value associated with the customer relationship intangibles related
to those acquisitions. For acquisitions subsequent to January 1,
2002, we did assign a value to the customer relationship intangible, which is
amortized over its estimated useful life.
6
Our SFAS
No. 142 valuations, which are based on the present value of projected after tax
cash flows, result in a value of property, plant and equipment, franchises,
customer relationships, and our total entity value. The value of
goodwill is the difference between the total entity value and amounts assigned
to the other assets. The use of different valuation assumptions or
definitions of franchises or customer relationships, such as our inclusion of
the value of selling additional services to our current customers within
customer relationships versus franchises, could significantly impact our
valuations and any resulting impairment.
We
completed our impairment assessment as of December 31, 2008 upon completion of
our 2009 budgeting process. Largely driven by the impact of the current economic
downturn along with increased competition, we lowered our projected revenue and
expense growth rates, and accordingly revised our estimates of future cash flows
as compared to those used in prior valuations. See “Part 1. Item 1.
Business — Competition” incorporated by reference from the Annual Report on Form
10-K of Charter Communications, Inc. filed March 16, 2009. As a result, we
recorded $1.5 billion of impairment for the year ended December 31,
2008.
We
recorded $178 million of impairment for the year ended December 31,
2007. The valuation completed for 2006 showed franchise values in
excess of book value, and thus resulted in no impairment.
The
valuations used in our impairment assessments involve numerous assumptions as
noted above. While economic conditions, applicable at the time of the
valuation, indicate the combination of assumptions utilized in the valuations
are reasonable, as market conditions change so will the assumptions, with a
resulting impact on the valuation and consequently the potential impairment
charge. In addition, future franchise valuations could be impacted by
the risks discussed in “Part 1. Item 1A. Risk Factors – Risks Relating to
Bankruptcy” incorporated by reference from the Annual Report on Form 10-K
of Charter Communications, Inc. filed March 16, 2009. At December 31,
2008, a 10% and 5% decline in the estimated fair value of our franchise assets
in each of our units of accounting would have increased our impairment charge by
approximately $733 million and $363 million, respectively. A 10% and
5% increase in the estimated fair value of our franchise assets in each of our
units of accounting would have reduced our impairment charge by approximately
$586 million and $317 million, respectively.
During
the quarter ended September 30, 2009, we performed an interim franchise
impairment analysis and recorded a preliminary non-cash franchise impairment
charge of $2.9 billion which represented our best estimate of the impairment of
our franchise assets as of the date of filing the third quarter Form 10-Q. We
currently expect to finalize our franchise impairment analysis during the
quarter ended December 31, 2009, which could potentially result in an impairment
charge that materially differs from the estimate. In addition, upon the
effectiveness of the our Plan, we will apply fresh start accounting in
accordance with SOP 90-7 and as such will adjust our franchise assets to reflect
fair value. In addition, we will adjust our goodwill and other
intangible assets to reflect fair value and will also establish any previously
unrecorded intangible assets at their fair values. We expect these fresh start
adjustments will result in increases to total intangible assets, primarily as a
result of adjustments to goodwill and customer relationships.
Income
Taxes. All operations are held through Charter Holdco and its
direct and indirect subsidiaries. Charter Holdco and the majority of
its subsidiaries are generally limited liability companies that are not subject
to income tax. However, certain of these limited liability companies
are subject to state income tax. In addition, the subsidiaries that
are corporations are subject to federal and state income tax. All of
the remaining taxable income, gains, losses, deductions and credits of Charter
Holdco are passed through to its members: Charter, Charter Investment, Inc.
(“CII”), and Vulcan Cable III Inc. (“Vulcan Cable”). Charter is
responsible for its share of taxable income or loss of Charter Holdco allocated
to it in accordance with the Charter Holdco limited liability company agreement
(“LLC Agreement”) and partnership tax rules and regulations.
The LLC
Agreement provides for certain special allocations of net tax profits and net
tax losses (such net tax profits and net tax losses being determined under the
applicable federal income tax rules for determining capital
accounts). Under the LLC Agreement, through the end of 2003, net tax
losses of Charter Holdco that would otherwise have been allocated to Charter
based generally on its percentage ownership of outstanding common units were
allocated instead to membership units held by Vulcan Cable and CII (the “Special
Loss Allocations”) to the extent of their respective capital account
balances. After 2003, under the LLC Agreement, net tax losses of
Charter Holdco were allocated to Charter, Vulcan Cable, and CII based generally
on their respective percentage ownership of outstanding common units to the
extent of their respective capital account balances. Allocations of
net tax losses in excess of the members’ aggregate capital account balances are
allocated under the rules governing Regulatory Allocations, as described below.
Subject to the Curative Allocation Provisions described below, the LLC Agreement
further provides that, beginning at the time Charter Holdco generates net tax
profits, the net tax profits that would otherwise have been allocated to Charter
based generally on its percentage ownership of outstanding common membership
7
units,
will instead generally be allocated to Vulcan Cable and CII (the “Special Profit
Allocations”). The Special Profit Allocations to Vulcan Cable and CII
will generally continue until the cumulative amount of the Special Profit
Allocations offsets the cumulative amount of the Special Loss
Allocations. The amount and timing of the Special Profit Allocations
are subject to the potential application of, and interaction with, the Curative
Allocation Provisions described in the following paragraph. The LLC
Agreement generally provides that any additional net tax profits are to be
allocated among the members of Charter Holdco based generally on their
respective percentage ownership of Charter Holdco common membership
units.
Because
the respective capital account balances of each of Vulcan Cable and CII were
reduced to zero by December 31, 2002, certain net tax losses of Charter
Holdco that were to be allocated for 2002, 2003, 2004 and 2005, to Vulcan Cable
and CII, instead have been allocated to Charter (the “Regulatory
Allocations”). As a result of the allocation of net tax losses to
Charter in 2005, Charter’s capital account balance was reduced to zero during
2005. The LLC Agreement provides that once the capital account
balances of all members have been reduced to zero, net tax losses are to be
allocated to Charter, Vulcan Cable, and CII based generally on their respective
percentage ownership of outstanding common units. Such allocations are also
considered to be Regulatory Allocations. The LLC Agreement further
provides that, to the extent possible, the effect of the Regulatory Allocations
is to be offset over time pursuant to certain curative allocation provisions
(the “Curative Allocation Provisions”) so that, after certain offsetting
adjustments are made, each member’s capital account balance is equal to the
capital account balance such member would have had if the Regulatory Allocations
had not been part of the LLC Agreement. The cumulative amount of the
actual tax losses allocated to Charter as a result of the Regulatory Allocations
in excess of the amount of tax losses that would have been allocated to Charter
had the Regulatory Allocations not been part of the LLC Agreement through the
year ended December 31, 2008 is approximately
$4.1 billion.
As a
result of the Special Loss Allocations and the Regulatory Allocations referred
to above (and their interaction with the allocations related to assets
contributed to Charter Holdco with differences between book and tax basis), the
cumulative amount of losses of Charter Holdco allocated to Vulcan Cable and CII
is in excess of the amount that would have been allocated to such entities if
the losses of Charter Holdco had been allocated among its members in proportion
to their respective percentage ownership of Charter Holdco common membership
units. The cumulative amount of such excess losses was approximately
$1.0 billion through December 31, 2008.
In
certain situations, the Special Loss Allocations, Special Profit Allocations,
Regulatory Allocations, and Curative Allocation Provisions described above could
result in Charter paying taxes in an amount that is more or less than if Charter
Holdco had allocated net tax profits and net tax losses among its members based
generally on the number of common membership units owned by such
members. This could occur due to differences in (i) the
character of the allocated income (e.g., ordinary versus capital), (ii) the
allocated amount and timing of tax depreciation and tax amortization expense due
to the application of section 704(c) under the Internal Revenue Code,
(iii) the potential interaction between the Special Profit Allocations and
the Curative Allocation Provisions, (iv) the amount and timing of
alternative minimum taxes paid by Charter, if any, (v) the apportionment of
the allocated income or loss among the states in which Charter Holdco does
business, and (vi) future federal and state tax laws. Further,
in the event of new capital contributions to Charter Holdco, it is possible that
the tax effects of the Special Profit Allocations, Special Loss Allocations,
Regulatory Allocations and Curative Allocation Provisions will change
significantly pursuant to the provisions of the income tax regulations or the
terms of a contribution agreement with respect to such contributions. Such
change could defer the actual tax benefits to be derived by Charter with respect
to the net tax losses allocated to it or accelerate the actual taxable income to
Charter with respect to the net tax profits allocated to it. As a
result, it is possible under certain circumstances that Charter could receive
future allocations of taxable income in excess of its currently allocated tax
deductions and available tax loss carryforwards. The ability to utilize net
operating loss carryforwards is potentially subject to certain limitations as
discussed below.
In
addition, under their exchange agreement with Charter, Vulcan Cable and CII have
the right at any time to exchange some or all of their membership units in
Charter Holdco for Charter’s Class B common stock, be merged with Charter
in exchange for Charter’s Class B common stock, or be acquired by Charter in a
non-taxable reorganization in exchange for Charter’s Class B common
stock. If such an exchange were to take place prior to the date that
the Special Profit Allocation provisions had fully offset the Special Loss
Allocations, Vulcan Cable and CII could elect to cause Charter Holdco to make
the remaining Special Profit Allocations to Vulcan Cable and CII immediately
prior to the consummation of the exchange. In the event Vulcan Cable
and CII choose not to make such election or to the extent such allocations are
not possible, Charter would then be allocated tax profits attributable to the
membership units received in such exchange pursuant to the Special Profit
Allocation provisions. Mr. Allen has generally agreed to reimburse Charter
for any incremental income taxes that Charter would owe as a result of such an
exchange and any resulting future Special Profit Allocations to
Charter. The ability of Charter to
8
utilize
net operating loss carryforwards is potentially subject to certain limitations
(see “Part 1. Item 1A. Risk Factors — For tax purposes, there is a risk
that we will experience a deemed ownership change resulting in a material
limitation on our future ability to use a substantial amount of our existing net
operating loss carryforwards, our future transactions, and the timing of such
transactions could cause a deemed ownership change for U.S. federal income tax
purposes” incorporated by reference from the Annual Report on Form 10-K of
Charter Communications, Inc. filed March 16, 2009). If Charter were
to become subject to such limitations (whether as a result of an exchange
described above or otherwise), and as a result were to owe taxes resulting from
the Special Profit Allocations, then Mr. Allen may not be obligated to reimburse
Charter for such income taxes. Further, Mr. Allen’s obligation to
reimburse Charter for taxes attributable to the Special Profit Allocation to
Charter ceases upon a subsequent change of control of Charter.
As of
December 31, 2008 and 2007, we have recorded net deferred income tax
liabilities of $558 million and $665 million, respectively. As
part of our net liability, on December 31, 2008 and 2007, we had deferred
tax assets of $6.0 billion and $5.1 billion, respectively, which primarily
relate to financial and tax losses allocated to Charter from Charter
Holdco. We are required to record a valuation allowance when it is
more likely than not that some portion or all of the deferred income tax assets
will not be realized. Given the uncertainty surrounding our ability
to utilize our deferred tax assets, these items have been offset with a
corresponding valuation allowance of $5.8 billion and $4.8 billion at
December 31, 2008 and 2007, respectively.
No tax
years for Charter or Charter Holdco are currently under examination by the
Internal Revenue Service. Tax years ending 2006 and 2007 remain subject to
examination.
Litigation. Legal contingencies
have a high degree of uncertainty. When a loss from a contingency
becomes estimable and probable, a reserve is established. The reserve
reflects management's best estimate of the probable cost of ultimate resolution
of the matter and is revised as facts and circumstances change. A
reserve is released when a matter is ultimately brought to closure or the
statute of limitations lapses. We have established reserves for
certain matters. If any of these matters are resolved unfavorably,
resulting in payment obligations in excess of management's best estimate of the
outcome, such resolution could have a material adverse effect on our
consolidated financial condition, results of operations, or our
liquidity.
9
Results of
Operations
The
following table sets forth the percentages of revenues that items in the
accompanying consolidated statements of operations constituted for the periods
presented (dollars in millions, except per share data):
|
Year
Ended December 31,
|
|||||||||||||||
|
2008
|
2007
|
2006
|
|||||||||||||
|
Revenues
|
$
|
6,479
|
100%
|
$
|
6,002
|
100%
|
$
|
5,504
|
100%
|
||||||
|
Costs
and Expenses:
|
|||||||||||||||
|
Operating
(excluding depreciation and amortization)
|
2,792
|
43%
|
2,620
|
44%
|
2,438
|
44%
|
|||||||||
|
Selling,
general and administrative
|
1,401
|
22%
|
1,289
|
21%
|
1,165
|
21%
|
|||||||||
|
Depreciation
and amortization
|
1,310
|
20%
|
1,328
|
22%
|
1,354
|
25%
|
|||||||||
|
Impairment
of franchises
|
1,521
|
23%
|
178
|
3%
|
--
|
--
|
|||||||||
|
Asset
impairment charges
|
--
|
--
|
56
|
1%
|
159
|
3%
|
|||||||||
|
Other
operating (income) expenses, net
|
69
|
1%
|
(17)
|
--
|
21
|
--
|
|||||||||
|
7,093
|
109%
|
5,454
|
91%
|
5,137
|
93%
|
||||||||||
|
Operating
income (loss) from continuing operations
|
(614)
|
(9%)
|
548
|
9%
|
367
|
7%
|
|||||||||
|
Interest
expense, net
|
(1,905)
|
(1,861)
|
(1,901)
|
||||||||||||
|
Change
in value of derivatives
|
(29)
|
52
|
(4)
|
||||||||||||
|
Gain
(loss) on extinguishment of debt
|
4
|
(56)
|
41
|
||||||||||||
|
Other
income (expense), net
|
(10)
|
(8)
|
14
|
||||||||||||
|
Loss
from continuing operations, before income tax
expense
|
(2,554)
|
(1,325)
|
(1,483)
|
||||||||||||
|
Income
tax benefit (expense)
|
103
|
(209)
|
(187)
|
||||||||||||
|
Loss
from continuing operations
|
(2,451)
|
(1,534)
|
(1,670)
|
||||||||||||
|
Income
from discontinued operations, net of tax
|
--
|
--
|
216
|
||||||||||||
|
Net
loss
|
$
|
(2,451)
|
$
|
(1,534)
|
$
|
(1,454)
|
|||||||||
|
Loss
per common share, basic and diluted:
|
|||||||||||||||
|
Loss
from continuing operations
|
$
|
(6.56)
|
$
|
(4.17)
|
$
|
(5.03)
|
|||||||||
|
Net
loss
|
$
|
(6.56)
|
$
|
(4.17)
|
$
|
(4.38)
|
|||||||||
|
Weighted
average common shares outstanding
|
373,464,920
|
368,240,608
|
331,941,788
|
||||||||||||
Revenues. Average monthly
revenue per basic video customer, measured on an annual basis, has increased
from $82 in 2006 to $93 in 2007 and $105 in 2008. Average monthly
revenue per video customer represents total annual revenue, divided by twelve,
divided by the average number of basic video customers during the respective
period. Revenue growth primarily reflects increases in the number of
telephone, high-speed Internet, and digital video customers, price increases,
and incremental video revenues from OnDemand, DVR, and high-definition
television services, offset by a decrease in basic video
customers. Cable system sales, net of acquisitions, in 2006, 2007,
and 2008 reduced the increase in revenues in 2008 as compared to 2007 by
approximately $31 million and in 2007 as compared to 2006 by approximately $90
million.
10
Revenues
by service offering were as follows (dollars in millions):
|
Year
Ended December 31,
|
||||||||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2008
over 2007
|
2007
over 2006
|
||||||||||||||||||||||||||||||||||||
|
Revenues
|
%
of Revenues
|
Revenues
|
%
of Revenues
|
Revenues
|
%
of Revenues
|
Change
|
%
Change
|
Change
|
%
Change
|
|||||||||||||||||||||||||||||||
|
Video
|
$ | 3,463 | 53 | % | $ | 3,392 | 56 | % | $ | 3,349 | 61 | % | $ | 71 | 2 | % | $ | 43 | 1 | % | ||||||||||||||||||||
|
High-speed
Internet
|
1,356 | 21 | % | 1,243 | 21 | % | 1,047 | 19 | % | 113 | 9 | % | 196 | 19 | % | |||||||||||||||||||||||||
|
Telephone
|
555 | 9 | % | 345 | 6 | % | 137 | 2 | % | 210 | 61 | % | 208 | 152 | % | |||||||||||||||||||||||||
|
Commercial
|
392 | 6 | % | 341 | 6 | % | 305 | 6 | % | 51 | 15 | % | 36 | 12 | % | |||||||||||||||||||||||||
|
Advertising
sales
|
308 | 5 | % | 298 | 5 | % | 319 | 6 | % | 10 | 3 | % | (21 | ) | (7 | %) | ||||||||||||||||||||||||
|
Other
|
405 | 6 | % | 383 | 6 | % | 347 | 6 | % | 22 | 6 | % | 36 | 10 | % | |||||||||||||||||||||||||
| $ | 6,479 | 100 | % | $ | 6,002 | 100 | % | $ | 5,504 | 100 | % | $ | 477 | 8 | % | $ | 498 | 9 | % | |||||||||||||||||||||
Video
revenues consist primarily of revenues from basic and digital video services
provided to our non-commercial customers. Basic video customers
decreased by 174,200 and 213,400 customers in 2008 and 2007, respectively, of
which 16,700 in 2008 and 97,100 in 2007 were related to asset sales, net of
acquisitions. Digital video customers increased by 213,000 and
112,000 customers in 2008 and 2007, respectively. The increase in
2008 and 2007 was reduced by the sale, net of acquisitions, of 7,600 and 38,100
digital customers, respectively. The increases in video revenues are
attributable to the following (dollars in millions):
|
2008
compared
to
2007
|
2007
compared
to
2006
|
|||||||
|
Incremental
video services and rate adjustments
|
$ | 87 | $ | 88 | ||||
|
Increase
in digital video customers
|
77 | 59 | ||||||
|
Decrease
in basic video customers
|
(72 | ) | (41 | ) | ||||
|
Asset
sales, net of acquisitions
|
(21 | ) | (63 | ) | ||||
| $ | 71 | $ | 43 | |||||
High-speed
Internet customers grew by 192,700 and 280,300 customers in 2008 and 2007,
respectively. The increase in 2008 and 2007 was reduced by asset
sales, net of acquisitions, of 5,600 and 8,800 high-speed Internet customers,
respectively. The increases in high-speed Internet revenues from our
residential customers are attributable to the following (dollars in
millions):
|
2008
compared
to
2007
|
2007
compared
to
2006
|
|||||||
|
Increase
in high-speed Internet customers
|
$ | 113 | $ | 149 | ||||
|
Rate
adjustments and service upgrades
|
3 | 58 | ||||||
|
Asset
sales, net of acquisitions
|
(3 | ) | (11 | ) | ||||
| $ | 113 | $ | 196 | |||||
Revenues
from telephone services increased by $220 million and $209 million in 2008 and
2007, respectively, as a result of an increase of 389,500 and 513,500 telephone
customers in 2008 and 2007, respectively, offset by a decrease of $10 million
and $1 million in 2008 and 2007, respectively, related to lower average
rates.
Commercial
revenues consist primarily of revenues from services provided to our commercial
customers. Commercial revenues increased primarily as a result of
increased sales of the Charter Business Bundle® primarily to small and
medium-sized businesses. The increases were reduced by approximately
$2 million in 2008 and $6 million in 2007 as a result of asset
sales.
Advertising
sales revenues consist primarily of revenues from commercial advertising
customers, programmers and other vendors. In 2008, advertising sales
revenues increased primarily as a result of increases in political advertising
sales and advertising sales to vendors offset by significant decreases in
revenues from the automotive and furniture sectors, and a decrease of $2 million
related to asset sales. In 2007, advertising sales revenues decreased
primarily
11
as a
result of a decrease in national advertising sales, including political
advertising, and as a result of decreases in advertising sales revenues from
vendors and a decrease of $3 million as a result of system sales. For
the years ended December 31, 2008, 2007, and 2006, we received $39 million, $15
million, and $17 million, respectively, in advertising sales revenues from
vendors.
Other
revenues consist of franchise fees, regulatory fees, customer installations,
home shopping, late payment fees, wire maintenance fees and other miscellaneous
revenues. For the years ended December 31, 2008, 2007, and 2006,
franchise fees represented approximately 46%, 46%, and 51%, respectively, of
total other revenues. The increase in other revenues in 2008 was
primarily the result of increases in franchise and other regulatory fees and
wire maintenance fees. The increase in other revenues in 2007 was
primarily the result of increases in regulatory fee revenues, wire maintenance
fees, and late payment fees. The increases were reduced by
approximately $3 million in 2008 and $7 million in 2007 as a result of asset
sales.
Operating
expenses. The increases in
our operating expenses are attributable to the following (dollars in
millions):
|
2008
compared to 2007
|
2007
compared to 2006
|
|||||||
|
Programming
costs
|
$ | 90 | $ | 106 | ||||
|
Labor
costs
|
44 | 49 | ||||||
|
Franchise
and regulatory fees
|
23 | 16 | ||||||
|
Maintenance
costs
|
19 | 20 | ||||||
|
Costs
of providing high-speed Internet and telephone services
|
5 | 33 | ||||||
|
Other,
net
|
13 | 7 | ||||||
|
Asset
sales, net of acquisitions
|
(22 | ) | (49 | ) | ||||
| $ | 172 | $ | 182 | |||||
Programming
costs were approximately $1.6 billion, $1.6 billion, and $1.5 billion,
representing 59%, 60%, and 61% of total operating expenses for the years ended
December 31, 2008, 2007, and 2006, respectively. Programming
costs consist primarily of costs paid to programmers for basic, premium,
digital, OnDemand, and pay-per-view programming. The increases in
programming costs are primarily a result of annual contractual rate adjustments,
offset in part by asset sales and customer losses. Programming costs
were also offset by the amortization of payments received from programmers of
$33 million, $25 million, and $32 million in 2008, 2007, and 2006,
respectively. We expect programming expenses to continue to increase,
and at a higher rate than in 2008, due to a variety of factors, including
amounts paid for retransmission consent, annual increases imposed by
programmers, and additional programming, including high-definition, OnDemand,
and pay-per-view programming, being provided to our customers.
Labor
costs increased primarily due to an increase in employee base salary and
benefits.
Selling, general
and administrative expenses. The increases in
selling, general and administrative expenses are attributable to the following
(dollars in millions):
|
2008
compared
to
2007
|
2007
compared
to
2006
|
|||||||
|
Marketing
costs
|
$ | 32 | $ | 60 | ||||
|
Customer
care costs
|
23 | 37 | ||||||
|
Bad
debt and collection costs
|
17 | 36 | ||||||
|
Stock
compensation costs
|
14 | 5 | ||||||
|
Employee
costs
|
7 | 17 | ||||||
|
Other,
net
|
24 | (16 | ) | |||||
|
Asset
sales, net of acquisitions
|
(5 | ) | (15 | ) | ||||
| $ | 112 | $ | 124 | |||||
Depreciation and
amortization. Depreciation and
amortization expense decreased by $18 million and $26 million in 2008 and 2007,
respectively. During 2008 and 2007, the decrease in depreciation was
primarily the result of asset
12
sales,
certain assets becoming fully depreciated, and an $81 million and $8 million
decrease in 2008 and 2007, respectively, due to the impact of changes in the
useful lives of certain assets during 2007, offset by depreciation on capital
expenditures.
Impairment of
franchises. We recorded impairment of $1.5 billion and $178 million for
the years ended December 31, 2008 and 2007, respectively. The impairment
recorded in 2008 was largely driven by lower expected revenue growth resulting
from the current economic downturn and increased competition. The
impairment recorded in 2007 was largely driven by increased competition. The
valuation completed in 2006 showed franchise values in excess of book value, and
thus resulted in no impairment.
Asset impairment
charges. Asset impairment charges for the years ended December 31, 2007
and 2006 represent the write-down of assets related to cable asset sales to fair
value less costs to sell. See Note 4 to the accompanying consolidated
financial statements contained in “Item 8. Financial Statements and
Supplementary Data.”
Other operating
(income) expenses, net. The change in other operating (income)
expenses, net are attributable to the following (dollars in
millions):
|
2008
compared
to
2007
|
2007
compared
to
2006
|
|||||||
|
Increases
(decreases) in losses on sales of assets
|
$ | 16 | $ | (11 | ) | |||
|
Increases
(decreases) in special charges, net
|
70 | (27 | ) | |||||
| $ | 86 | $ | (38 | ) | ||||
For more
information, see Note 17 to the accompanying consolidated financial statements
contained in “Item 8. Financial Statements and Supplementary Data.”
Interest expense,
net. Net
interest expense increased by $44 million in 2008 from 2007 and decreased by $40
million in 2007 from 2006. The increase in net interest expense from
2007 to 2008 was a result of average debt outstanding increasing from $19.6
billion in 2007 to $20.3 billion in 2008, offset by a decrease in our average
borrowing rate from 9.2% in 2007 to 8.8% in 2008. The decrease in net
interest expense from 2006 to 2007 was a result of a decrease in our average
borrowing rate from 9.5% in 2006 to 9.2% in 2007. This was offset by
an increase in average debt outstanding from $19.4 billion in 2006 to $19.6
billion in 2007. We restated current year and prior year amounts as a
result of the adoption of FSP ABP 14-1. See “—Recently Issued
Accounting Standards.”
Change in value
of derivatives. Interest rate swaps are held to manage our
interest costs and reduce our exposure to increases in floating interest
rates. We expense the change in fair value of derivatives that do not
qualify for hedge accounting and cash flow hedge ineffectiveness on interest
rate swap agreements. Additionally, certain provisions of our 5.875%
and 6.50% convertible senior notes issued in November 2004 and October 2007,
respectively, were considered embedded derivatives for accounting purposes and
were required to be accounted for separately from the convertible senior notes
and marked to fair value at the end of each reporting period. Change
in value of derivatives consists of the following for the years ended December
31, 2008, 2007, and 2006.
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Interest
rate swaps
|
$ | (62 | ) | $ | (46 | ) | $ | 6 | ||||
|
Embedded
derivatives from convertible senior notes
|
33 | 98 | (10 | ) | ||||||||
| $ | (29 | ) | $ | 52 | $ | (4 | ) | |||||
13
Gain (loss) on
extinguishment of debt. Gain (loss) on
extinguishment of debt consists of the following for the years ended December
31, 2008, 2007, and 2006.
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Charter
Holdings debt notes repurchases / exchanges
|
$ | 3 | $ | (3 | ) | $ | 108 | |||||
|
CCO
Holdings notes redemption
|
-- | (19 | ) | -- | ||||||||
|
Charter
Operating credit facilities refinancing
|
-- | (13 | ) | (27 | ) | |||||||
|
Charter
convertible note repurchases / exchanges
|
5 | (21 | ) | (40 | ) | |||||||
|
CCH
II tender offer
|
(4 | ) | -- | -- | ||||||||
| $ | 4 | $ | (56 | ) | $ | 41 | ||||||
We
restated current year and prior year amounts as a result of the adoption of FSP
ABP 14-1. For more information, see Notes 9 and 18 to the
accompanying consolidated financial statements contained in “Item 8. Financial
Statements and Supplementary Data.” See “—Recently
Issued Accounting Standards.”
Other income
(expense), net. The change in other income (expense), net are
attributable to the following (dollars in millions):
|
2008
compared to 2007
|
2007
compared to 2006
|
|||||||
|
Change
in CC VIII preferred interest (See Note 3)
|
$ | 3 | $ | (3 | ) | |||
|
Decreases
in investment income
|
(1 | ) | (16 | ) | ||||
|
Other,
net
|
(4 | ) | (3 | ) | ||||
| $ | (2 | ) | $ | (22 | ) | |||
For more
information, see Note 19 to the accompanying consolidated financial statements
contained in “Item 8. Financial Statements and Supplementary Data.”
Income tax
benefit (expense). Income tax benefit for
the year ended December 31, 2008 was realized as a result of the decreases in
certain deferred tax liabilities related to our investment in Charter Holdco and
certain of our subsidiaries, attributable to the write-down of franchise assets
for financial statement purposes and not for tax purposes. However,
the actual tax provision calculations in future periods will be the result of
current and future temporary differences, as well as future operating
results. Income tax benefit for the year ended December 31, 2008
included $325 million of deferred tax benefit related to the impairment of
franchises. Income tax expense in 2007 and 2006 was recognized
through increases in deferred tax liabilities related to our investment in
Charter Holdco and certain of our subsidiaries, in addition to current federal
and state income tax expense. Income tax benefit (expense) included
$2 million, $15 million, and $23 million of deferred tax benefit related to
asset acquisitions and sales occurring in 2008, 2007, and 2006,
respectively.
Income from
discontinued operations, net of tax. In 2006, income from
discontinued operations, net of tax, was recognized due to a gain of $182
million (net of $18 million of tax recorded in the fourth quarter of 2006)
recognized on the sale of the West Virginia and Virginia systems.
Net
loss. The
impact to net loss in 2008, 2007, and 2006 as a result of asset impairment
charges, impairment of franchises, extinguishment of debt, and gain on
discontinued operations, net of tax, was to increase net loss by approximately
$1.2 billion and $255 million and decrease net loss by approximately $64
million, respectively.
Loss per common
share. During 2008 and 2007,
net loss per common share increased by $2.39, or 57%, and decreased by $0.21, or
5%, respectively, as a result of the factors described above.
14
Liquidity and Capital
Resources
Introduction
This
section contains a discussion of our liquidity and capital resources, including
a discussion of our cash position, sources and uses of cash, access to credit
facilities and other financing sources, historical financing activities, cash
needs, capital expenditures and outstanding debt.
Overview
of Our Debt and Liquidity
We have
significant amounts of debt. As of December 31, 2008, the
accreted value of our total debt was approximately $21.7 billion, as summarized
below (dollars in millions):
|
December
31, 2008
|
||||||||||||||||
|
Pro
Forma
|
Semi-Annual
|
|||||||||||||||
|
Principal
|
Accreted
|
Principal
|
Interest
Payment
|
Maturity
|
||||||||||||
|
Amount
|
Value
(a)
|
Amount
(b)
|
Dates
|
Date
(c)
|
||||||||||||
|
Charter
Communications, Inc.:
|
||||||||||||||||
|
5.875%
convertible senior notes due 2009 (d)
|
$ | 3 | $ | 3 | $ | -- |
5/16
& 11/16
|
11/16/09
|
||||||||
|
6.50%
convertible senior notes due 2027 (d)
|
479 | 373 | -- |
4/1
& 10/1
|
10/1/27
|
|||||||||||
|
Charter
Communications Holdings, LLC:
|
||||||||||||||||
|
10.000%
senior notes due 2009
|
53 | 53 | -- |
4/1
& 10/1
|
4/1/09
|
|||||||||||
|
10.750%
senior notes due 2009
|
4 | 4 | -- |
4/1
& 10/1
|
10/1/09
|
|||||||||||
|
9.625%
senior notes due 2009
|
25 | 25 | -- |
5/15
& 11/15
|
11/15/09
|
|||||||||||
|
10.250%
senior notes due 2010
|
1 | 1 | -- |
1/15
& 7/15
|
1/15/10
|
|||||||||||
|
11.750%
senior discount notes due 2010
|
1 | 1 | -- |
1/15
& 7/15
|
1/15/10
|
|||||||||||
|
11.125%
senior notes due 2011
|
47 | 47 | -- |
1/15
& 7/15
|
1/15/11
|
|||||||||||
|
13.500%
senior discount notes due 2011
|
60 | 60 | -- |
1/15
& 7/15
|
1/15/11
|
|||||||||||
|
9.920%
senior discount notes due 2011
|
51 | 51 | -- |
4/1
& 10/1
|
4/1/11
|
|||||||||||
|
10.000%
senior notes due 2011
|
69 | 69 | -- |
5/15
& 11/15
|
5/15/11
|
|||||||||||
|
11.750%
senior discount notes due 2011
|
54 | 54 | -- |
5/15
& 11/15
|
5/15/11
|
|||||||||||
|
12.125%
senior discount notes due 2012
|
75 | 75 | -- |
1/15
& 7/15
|
1/15/12
|
|||||||||||
|
CCH
I Holdings, LLC:
|
||||||||||||||||
|
11.125%
senior notes due 2014
|
151 | 151 | -- |
1/15
& 7/15
|
1/15/14
|
|||||||||||
|
13.500%
senior discount notes due 2014
|
581 | 581 | -- |
1/15
& 7/15
|
1/15/14
|
|||||||||||
|
9.920%
senior discount notes due 2014
|
471 | 471 | -- |
4/1
& 10/1
|
4/1/14
|
|||||||||||
|
10.000%
senior notes due 2014
|
299 | 299 | -- |
5/15
& 11/15
|
5/15/14
|
|||||||||||
|
11.750%
senior discount notes due 2014
|
815 | 815 | -- |
5/15
& 11/15
|
5/15/14
|
|||||||||||
|
12.125%
senior discount notes due 2015
|
217 | 217 | -- |
1/15
& 7/15
|
1/15/15
|
|||||||||||
|
CCH
I, LLC:
|
||||||||||||||||
|
11.00%
senior notes due 2015
|
3,987 | 4,072 | -- |
4/1
& 10/1
|
10/1/15
|
|||||||||||
|
CCH
II, LLC:
|
||||||||||||||||
|
10.250%
senior notes due 2010
|
1,860 | 1,857 | -- |
3/15
& 9/15
|
9/15/10
|
|||||||||||
|
10.250%
senior notes due 2013
|
614 | 598 | -- |
4/1
& 10/1
|
10/1/13
|
|||||||||||
|
13.5%
senior notes due 2016
|
-- | -- | 1,766 |
2/15
& 8/15
|
11/30/16
|
|||||||||||
|
CCO
Holdings, LLC:
|
||||||||||||||||
|
8
3/4% senior notes due 2013
|
800 | 796 | 800 |
5/15
& 11/15
|
11/15/13
|
|||||||||||
|
Credit
facility
|
350 | 350 | 350 |
9/6/14
|
||||||||||||
|
Charter
Communications Operating, LLC:
|
||||||||||||||||
|
8.000%
senior second-lien notes due 2012
|
1,100 | 1,100 | 1,100 |
4/30
& 10/30
|
4/30/12
|
|||||||||||
|
8
3/8% senior second-lien notes due 2014
|
770 | 770 | 770 |
4/30
& 10/30
|
4/30/14
|
|||||||||||
|
10.875%
senior second-lien notes due 2014
|
546 | 527 | 546 |
3/15
& 9/15
|
9/15/14
|
|||||||||||
|
Credit
facilities
|
8,246 | 8,246 | 8,246 |
varies
|
||||||||||||
| $ | 21,729 | $ | 21,666 |
(e)
|
$ | 13,578 | ||||||||||
|
(a)
|
The
accreted values presented above generally represent the principal amount
of the notes less the original issue discount at the time of sale, plus
the accretion to the balance sheet date. However, the current
accreted value for
|
15
|
|
legal
purposes and notes indenture purposes (the amount that is currently
payable if the debt becomes immediately due) is equal to the principal
amount of notes.
|
|
(b)
|
The
Pro forma Principal Amount reflects the amount outstanding pro forma for
the consummation of the Plan through which the notes issued by Charter,
Charter Holdings, CIH and CCH I were eliminated. The debt of
CCH II was refinanced in accordance with the Plan, by paying a portion of
the principal and interest with the proceeds from the Rights Offering and
by exchanging the CCH II Notes for New CCH II Notes in the Exchange
Offer. Upon application of fresh start accounting in accordance
with SOP 90-7, the Company will adjust its long-term debt to reflect fair
value. This adjustment may be
material.
|
|
(c)
|
In
general, the obligors have the right to redeem all of the notes set forth
in the above table (except with respect to the 5.875% convertible senior
notes due 2009, the 6.50% convertible senior notes due 2027, the 10.000%
Charter Holdings notes due 2009, the 10.75% Charter Holdings notes due
2009, and the 9.625% Charter Holdings notes due 2009) in whole or in part
at their option, beginning at various times prior to their stated maturity
dates, subject to certain conditions, upon the payment of the outstanding
principal amount (plus a specified redemption premium) and all accrued and
unpaid interest. The 5.875% and 6.50% convertible senior notes
are redeemable if the closing price of Charter’s Class A common stock
exceeds the conversion price by certain percentages as described
below. For additional information see Note 9 to the
accompanying consolidated financial statements contained in “Item 8.
Financial Statements and Supplementary
Data.”
|
|
(d)
|
The
5.875% and 6.50% convertible senior notes are convertible at the option of
the holders into shares of Class A common stock at a conversion rate,
subject to certain adjustments, of 413.2231 and 293.3868 shares per $1,000
principal amount of notes, which is equivalent to a price of $2.42 and
$3.41 per share, respectively. Certain anti-dilutive provisions
cause adjustments to occur automatically upon the occurrence of specified
events. Additionally, the conversion ratio may be adjusted by
us under certain circumstances. Each holder of 6.50%
convertible notes will have the right to require us to purchase some or
all of that holder’s 6.50% convertible notes for cash on October 1,
2012, October 1, 2017 and October 1, 2022 at a purchase price
equal to 100% of the principal amount of the 6.50% convertible notes plus
any accrued interest, if any, on the 6.50% convertible notes to but
excluding the purchase date.
|
|
(e)
|
Not
included within total long-term debt is the $75 million CCHC, LLC (“CCHC”)
accreting note, which is included in “note payable-related party” on our
accompanying consolidated balance sheets. See Note 10 to the
accompanying consolidated financial statements contained in “Item 8.
Financial Statements and Supplementary
Data.”
|
The
following table summarizes our payment obligations as of December 31, 2008 under
our long-term debt and certain other contractual obligations and commitments
(dollars in millions.) The table does not reflect consummation of the Plan
and the resulting elimination of approximately $8 billion of debt or the
expected reduction of interest expense by approximately $830 million
annualy. Following consummation of the Plan, $70 million of our debt
matures in each of 2010 and 2011. In 2012 and beyond, significant
additional amounts will become due under our remaining long-term debt
obligations.
|
Payments
by Period
|
||||||||||||||||||||
|
Less
than
|
1-3 | 3-5 |
More
than
|
|||||||||||||||||
|
Total
|
1
year
|
years
|
years
|
5
years
|
||||||||||||||||
|
Contractual
Obligations
|
||||||||||||||||||||
|
Long-Term
Debt Principal Payments (1)
|
$ | 21,729 | $ | 155 | $ | 2,283 | $ | 4,523 | $ | 14,768 | ||||||||||
|
Long-Term
Debt Interest Payments (2)
|
8,834 | 1,714 | 3,147 | 2,817 | 1,156 | |||||||||||||||
|
Payments
on Interest Rate Instruments (3)
|
443 | 127 | 257 | 59 | -- | |||||||||||||||
|
Capital
and Operating Lease Obligations (4)
|
103 | 24 | 40 | 21 | 18 | |||||||||||||||
|
Programming
Minimum Commitments (5)
|
687 | 315 | 206 | 166 | -- | |||||||||||||||
|
Other
(6)
|
475 | 368 | 88 | 19 | -- | |||||||||||||||
|
Total
|
$ | 32,271 | $ | 2,703 | $ | 6,021 | $ | 7,605 | $ | 15,942 | ||||||||||
|
(1)
|
The
table presents maturities of long-term debt outstanding as of
December 31, 2008. Refer to Notes 9 and 23 to our
accompanying consolidated financial statements contained in “Item 8.
Financial Statements and Supplementary Data” for a description of our
long-term debt and other contractual obligations and
commitments. The table above does not include the $75 million
CCHC accreting note which is included in note payable – related
party. See Note 10 to the accompanying consolidated financial
statements contained in “Item 8. Financial Statements and Supplementary
Data. If not redeemed prior to maturity in 2020, $380
|
16
|
|
million
would be due under this note.
|
|
|
(2)
|
Interest
payments on variable debt are estimated using amounts outstanding at
December 31, 2008 and the average implied forward London Interbank
Offering Rate (LIBOR) rates applicable for the quarter during the interest
rate reset based on the yield curve in effect at December 31,
2008. Actual interest payments will differ based on actual
LIBOR rates and actual amounts outstanding for applicable
periods.
|
|
|
(3)
|
Represents
amounts we will be required to pay under our interest rate swap agreements
estimated using the average implied forward LIBOR applicable rates for the
quarter during the interest rate reset based on the yield curve in effect
at December 31, 2008. Upon filing of a Chapter 11 bankruptcy,
the counterparties to the interest rate swap agreements terminated
the underlying contract and, upon emergence of Charter from bankruptcy,
received payment for the market value of the interest rate swap agreement
as measured on the date a counterparty so terminates.
|
|
|
(4)
|
We
lease certain facilities and equipment under noncancelable operating
leases. Leases and rental costs charged to expense for the
years ended December 31, 2008, 2007, and 2006, were $24 million, $23
million, and $23 million, respectively.
|
|
|
(5)
|
We
pay programming fees under multi-year contracts ranging from three to ten
years, typically based on a flat fee per customer, which may be fixed for
the term, or may in some cases escalate over the
term. Programming costs included in the accompanying statement
of operations were approximately $1.6 billion, $1.6 billion, and $1.5
billion, for the years ended December 31, 2008, 2007, and 2006,
respectively. Certain of our programming agreements are based
on a flat fee per month or have guaranteed minimum
payments. The table sets forth the aggregate guaranteed minimum
commitments under our programming contracts.
|
|
|
(6)
|
“Other”
represents other guaranteed minimum commitments, which consist primarily
of commitments to our billing services
vendors.
|
The following items are not included in the contractual obligations table because the obligations are not fixed and/or determinable due to various factors discussed below. However, we incur these costs as part of our operations:
|
|
·
|
We
rent utility poles used in our operations. Generally, pole
rentals are cancelable on short notice, but we anticipate that such
rentals will recur. Rent expense incurred for pole rental
attachments for the years ended December 31, 2008, 2007, and 2006,
was $47 million, $47 million, and $44 million,
respectively.
|
|
|
·
|
We
pay franchise fees under multi-year franchise agreements based on a
percentage of revenues generated from video service per
year. We also pay other franchise related costs, such as public
education grants, under multi-year agreements. Franchise fees
and other franchise-related costs included in the accompanying statement
of operations were $179 million, $172 million, and $175 million for the
years ended December 31, 2008, 2007, and 2006,
respectively.
|
|
|
·
|
We
also have $158 million in letters of credit, primarily to our various
worker’s compensation, property and casualty, and general liability
carriers, as collateral for reimbursement of claims. These
letters of credit reduce the amount we may borrow under our credit
facilities.
|
Our
business requires significant cash to fund debt service costs, capital
expenditures and ongoing operations. We have historically funded
these requirements through cash flows from operating activities, borrowings
under our credit facilities, proceeds from sales of assets, issuances of debt
and equity securities, and cash on hand. However, the mix of funding
sources changes from period to period. For the year ended December
31, 2008, we generated $399 million of net cash flows from operating activities,
after paying cash interest of $1.8 billion. In addition, we used $1.2
billion for purchases of property, plant and equipment. Finally, we
generated net cash flows from financing activities of $1.7 billion, as a result
of financing transactions and credit facility borrowings completed during the
year ended December 31, 2008. As of December 31, 2008, we had cash on
hand of $960 million. We expect that our mix of sources of funds will
continue to change in the future based on overall needs relative to our cash
flow and on the availability of funds under the credit facilities of our
subsidiaries, our access to the debt and equity markets, the timing of possible
asset sales, and based on our ability to generate cash flows from operating
activities.
During the fourth quarter of 2008,
Charter Operating drew down all except $27 million of amounts available under
the revolving credit facility. During the first quarter of 2009,
Charter Operating presented a qualifying draw notice to the banks under the
revolving credit facility but was refused those funds. See “Part I.
Item 1. Business – Recent Developments – Charter Operating Credit
Facility” incorporated by reference from the Annual Report on Form
17
10-K of Charter Communications, Inc.
filed March 16, 2009. Additionally, upon filing bankruptcy, Charter
Operating no longer has access to the revolving credit facility and will rely on
cash on hand and cash flows from operating activities to fund our projected cash
needs.
Following consummation of the Plan, we
expect that cash on hand and cash flows from operating activities will be
adequate to meet our projected cash needs through at least the next 24
months. Our projected cash needs and projected sources of liquidity
depend upon, among other things, our actual results, and the timing and amount
of our expenditures. We continue to monitor the capital markets and we
expect to undertake refinancing transactions and utilize cash flows from
operating activities to further extend or reduce the maturities of our principal
obligations.
Limitations
on Distributions
Following
the Consumation of the Plan, distributions by Charter’s subsidiaries to a
parent company for payment of
principal on parent company notes are restricted under any indentures and
credit facilities governing the indebtedness of the subsidiaries, unless there is no default under the
applicable indenture and credit facilities, and unless each applicable
subsidiary’s leverage ratio test is met at the time of such
distribution. For the quarter ended December 31,
2008, there was no default under any of these indentures or credit
facilities. However, certain of our subsidiaries did not meet their
applicable leverage ratio tests based on December 31, 2008 financial
results. As a result, distributions from certain of our subsidiaries
to their parent companies would have been restricted at such time and will
continue to be restricted unless those tests are met. Distributions
by Charter Operating for payment of principal on parent company notes are
further restricted by the covenants in its credit facilities.
Following
the Consumation of the Plan, distributions by CCH II, CCO Holdings, and
Charter Operating to a parent company for payment of parent company interest are
permitted if there is no default under the aforementioned indentures and CCO
Holdings and Charter Operating credit facilities.
In
addition to the limitation on distributions under the various indentures
discussed above, distributions by our subsidiaries may be limited by applicable
law, including the Delaware Limited Liability Company Act, under which our
subsidiaries may only make distributions if they have “surplus” as defined in
the act. It is uncertain whether we will have sufficient surplus at
the relevant subsidiaries to make distributions, including for payment of
interest and principal on the debts of the parents of such
entities. See “Part I. Item 1A. Risk Factors — Because of our holding
company structure, our outstanding notes are structurally subordinated in right
of payment to all liabilities of our subsidiaries. Restrictions in
our subsidiaries’ debt instruments and under applicable law limit their ability
to provide funds to us or our various debt issuers” incorporated by reference
from the Annual Report on Form 10-K of Charter Communications, Inc. filed March
16, 2009.
Historical Operating, Investing, and
Financing Activities
Cash and Cash
Equivalents. We held $960 million in cash and cash equivalents
as of December 31, 2008 compared to $75 million as of December 31,
2007. The increase in cash was the result of a draw-down on our
revolving credit facility.
Operating
Activities. Net cash provided by
operating activities increased $72 million from $327 million for the year ended
December 31, 2007 to $399 million for the year ended December 31, 2008,
primarily as a result of revenue growth from high-speed Internet and telephone
driven by bundled services, as well as improved cost efficiencies, offset by an
increase of $33 million in interest on cash pay obligations and changes in
operating assets and liabilities that provided $71 million less cash during the
same period.
Net cash
provided by operating activities increased $4 million from $323 million for the
year ended December 31, 2006 to $327 million for the year ended December 31,
2007, primarily as a result of revenues increasing at a faster rate than cash
operating expenses, offset by an increase of $62 million in interest on cash pay
obligations and changes in operating assets and liabilities that provided $67
million less cash during the same period.
Investing
Activities. Net cash used in
investing activities for the years ended December 31, 2008, 2007, and 2006, was
$1.2 billion, $1.1 billion, and $65 million, respectively. The
increase in 2008 compared to 2007 is primarily due to a decrease in proceeds
received from the sale of assets, including cable systems. Investing
activities used $1.1 billion more cash during the year ended December 31, 2007
than the corresponding period in 2006 primarily due to $1.0 billion of proceeds
received in 2006 from the sale of assets, including cable systems.
18
Financing
Activities. Net cash provided by
financing activities was $1.7 billion and $826 million for the years ended
December 31, 2008 and 2007, respectively, and net cash used in financing
activities was $219 million for the year ended December 31,
2006. The increase in cash provided during the year ended December
31, 2008 compared to the corresponding period in 2007 and in 2007 as compared to
the corresponding period in 2006, was primarily the result of an increase in the
amount by which borrowings exceeded repayments of long-term debt.
Capital
Expenditures
We have
significant ongoing capital expenditure requirements. Capital
expenditures were $1.2 billion, $1.2 billion, and $1.1 billion for the years
ended December 31, 2008, 2007, and 2006, respectively. See the table
below for more details.
Our
capital expenditures are funded primarily from cash flows from operating
activities and the issuance of debt. In addition, our liabilities
related to capital expenditures decreased by $39 million and $2 million for the
years ended December 31, 2008 and 2007, respectively, and increased by $24
million for the year ended December 31, 2006.
During
2009, we expect capital expenditures to be approximately $1.2
billion. We expect the nature of these expenditures will continue to
be composed primarily of purchases of customer premise equipment related to
telephone and other advanced services, support capital, and scalable
infrastructure. The actual amount of our capital expenditures depends
on the deployment of advanced broadband services and offerings. We
may need additional capital if there is accelerated growth in high-speed
Internet, telephone or digital customers or there is an increased need to
respond to competitive pressures by expanding the delivery of other advanced
services.
We have
adopted capital expenditure disclosure guidance, which was developed by eleven
then publicly traded cable system operators, including Charter, with the support
of the National Cable & Telecommunications Association
("NCTA"). The disclosure is intended to provide more consistency in
the reporting of capital expenditures among peer companies in the cable
industry. These disclosure guidelines are not required disclosures
under GAAP, nor do they impact our accounting for capital expenditures under
GAAP.
The
following table presents our major capital expenditures categories in accordance
with NCTA disclosure guidelines for the years ended December 31, 2008,
2007, and 2006 (dollars in millions):
|
For
the years ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Customer
premise equipment (a)
|
$ | 595 | $ | 578 | $ | 507 | ||||||
|
Scalable
infrastructure (b)
|
251 | 232 | 214 | |||||||||
|
Line
extensions (c)
|
80 | 105 | 107 | |||||||||
|
Upgrade/rebuild
(d)
|
40 | 52 | 45 | |||||||||
|
Support
capital (e)
|
236 | 277 | 230 | |||||||||
|
Total
capital expenditures
|
$ | 1,202 | $ | 1,244 | $ | 1,103 | ||||||
|
(a)
|
Customer
premise equipment includes costs incurred at the customer residence to
secure new customers, revenue units and additional bandwidth
revenues. It also includes customer installation costs in
accordance with SFAS No. 51, Financial Reporting by Cable
Television Companies, and customer premise equipment (e.g., set-top
boxes and cable modems, etc.).
|
|
(b)
|
Scalable
infrastructure includes costs not related to customer premise equipment or
our network, to secure growth of new customers, revenue units, and
additional bandwidth revenues, or provide service enhancements (e.g.,
headend equipment).
|
|
(c)
|
Line
extensions include network costs associated with entering new service
areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment,
make-ready and design engineering).
|
|
(d)
|
Upgrade/rebuild
includes costs to modify or replace existing fiber/coaxial cable networks,
including betterments.
|
|
(e)
|
Support
capital includes costs associated with the replacement or enhancement of
non-network assets due to technological and physical obsolescence (e.g.,
non-network equipment, land, buildings and
vehicles).
|
19
Description
of Our Outstanding Debt
Overview
As of
December 31, 2008 and 2007, the blended weighted average interest rate on our
debt was 8.4% and 9.0%, respectively. The interest rate on
approximately 80% and 85% of the total principal amount of our debt was
effectively fixed, including the effects of our interest rate hedge agreements,
as of December 31, 2008 and 2007, respectively. The fair value of our
high-yield notes was $4.4 billion and $10.3 billion at December 31, 2008 and
2007, respectively. The fair value of our convertible senior notes
was $12 million and $332 million at December 31, 2008 and 2007,
respectively. The fair value of our credit facilities was $6.2
billion and $6.7 billion at December 31, 2008 and 2007,
respectively. The fair value of high-yield and convertible notes was
based on quoted market prices, and the fair value of the credit facilities was
based on dealer quotations.
The
following description is a summary of certain provisions of our credit
facilities and our notes that remain outstanding upon the consummation of the
Plan (the “Debt Agreements”). The summary does not restate the terms of
the Debt Agreements in their entirety, nor does it describe all terms of the
Debt Agreements. The agreements and instruments governing each of the Debt
Agreements are complicated and you should consult such agreements and
instruments for more detailed information regarding the Debt
Agreements.
Credit
Facilities – General
Charter
Operating Credit Facilities
Following
consummation of the Plan, the Charter Operating credit facilities remain
outstanding although the revolving line of credit will no longer be available
for new borrowings and remains substantially drawn with the same maturity and
interest terms. The Charter Operating credit facilities provide
borrowing availability of up to $8.0 billion as follows:
|
•
|
a
term loan with an initial total principal amount of $6.5 billion, which is
repayable in equal quarterly installments, commencing March 31, 2008, and
aggregating in each loan year to 1% of the original amount of the term
loan, with the remaining balance due at final maturity on March 6, 2014;
and
|
|
|
•
|
a
revolving line of credit of $1.5 billion, with a maturity date on
March 6, 2013.
|
The Charter Operating
credit facilities also allow us to enter into incremental term loans in the
future with an aggregate amount of up to $1.0 billion, with amortization as set
forth in the notices establishing such term loans, but with no amortization
greater than 1% prior to the final maturity of the existing term
loan. In March 2008, Charter Operating borrowed $500 million
principal amount of incremental term loans (the “Incremental Term Loans”) under
the Charter Operating credit facilities. The Incremental Term Loans have a final
maturity of March 6, 2014 and prior to that date will amortize in quarterly
principal installments totaling 1% annually beginning on June 30, 2008.
The Incremental Term Loans bear interest at LIBOR plus 5.0%, with a LIBOR
floor of 3.5%, and are otherwise governed by and subject to the existing terms
of the Charter Operating credit facilities. Net proceeds from the
Incremental Term Loans were used for general corporate purposes. Although the
Charter Operating credit facilities allow for the incurrence of up to an
additional $500 million in incremental term loans, no assurance can be given
that we could obtain additional incremental term loans in the future if Charter
Operating sought to do so.
Amounts
outstanding under the Charter Operating credit facilities bear interest, at
Charter Operating’s election, at a base rate or the Eurodollar rate, as defined,
plus a margin for Eurodollar loans of up to 2.00% for the revolving credit
facility and 2.00% for the term loan, and quarterly commitment fees of 0.5% per
annum is payable on the average daily unborrowed balance of the revolving credit
facility. If an event of default were to occur, such as a bankruptcy
filing, Charter Operating would not be able to elect the Eurodollar rate and
would have to pay interest at the base rate plus the applicable
margin.
The
obligations of Charter Operating under the Charter Operating credit facilities
(the “Obligations”) are guaranteed by Charter Operating’s immediate parent
company, CCO Holdings, and subsidiaries of Charter Operating, except for certain
subsidiaries, including immaterial subsidiaries and subsidiaries precluded from
guaranteeing by reason of the provisions of other indebtedness to which they are
subject (the “non-guarantor subsidiaries”). The Obligations are also
secured by (i) a lien on substantially all of the assets of Charter
Operating and its subsidiaries (other than assets of the non-guarantor
subsidiaries), to the extent such lien can be perfected under the Uniform
Commercial Code by the filing of a financing statement, and (ii) a pledge
by CCO Holdings of the equity interests owned by it in
20
Charter
Operating or any of Charter Operating’s subsidiaries, as well as intercompany
obligations owing to it by any of such entities.
CCO
Holdings Credit Facility
In March
2007, CCO Holdings entered into a credit agreement (the “CCO Holdings credit
facility”) which consists of a $350 million term loan
facility. Following consummation of the Plan, the CCO Holdings credit
facility remains outstanding. The facility matures in September
2014. The CCO Holdings credit facility also allows us to enter into
incremental term loans in the future, maturing on the dates set forth in the
notices establishing such term loans, but no earlier than the maturity date of
the existing term loans. However, no assurance can be given that we
could obtain such incremental term loans if CCO Holdings sought to do
so. Borrowings under the CCO Holdings credit facility bear interest
at a variable interest rate based on either LIBOR or a base rate plus, in either
case, an applicable margin. The applicable margin for LIBOR term
loans, other than incremental loans, is 2.50% above LIBOR. If an
event of default were to occur, such as a bankruptcy filing, CCO Holdings would
not be able to elect the Eurodollar rate and would have to pay interest at the
base rate plus the applicable margin. The applicable margin with
respect to incremental loans is to be agreed upon by CCO Holdings and the
lenders when the incremental loans are established. The CCO Holdings
credit facility is secured by the equity interests of Charter Operating, and all
proceeds thereof.
Credit
Facilities — Restrictive Covenants
Charter
Operating Credit Facilities
The
Charter Operating credit facilities contain representations and warranties, and
affirmative and negative covenants customary for financings of this type. The
financial covenants measure performance against standards set for leverage to be
tested as of the end of each quarter. Additionally, the Charter
Operating credit facilities contain provisions requiring mandatory loan
prepayments under specific circumstances, including in connection with certain
sales of assets, so long as the proceeds have not been reinvested in the
business.
The
Charter Operating credit facilities permit Charter Operating and its
subsidiaries to make distributions to pay interest on the indebtedness of its
parents and the Charter Operating second-lien notes, provided that, among other
things, no default has occurred and is continuing under the credit facilities.
Conditions to future borrowings include absence of a default or an event of
default under the credit facilities, and the continued accuracy in all material
respects of the representations and warranties, including the absence since
December 31, 2005 of any event, development, or circumstance that has had
or could reasonably be expected to have a material adverse effect on our
business.
The
events of default under the Charter Operating credit facilities include among
other things:
|
•
|
the
failure to make payments when due or within the applicable grace
period;
|
|
|
•
|
the
failure to comply with specified covenants, including, but not limited to,
a covenant to deliver audited financial statements for Charter Operating
with an unqualified opinion from our independent accountants and without a
“going concern” or like qualification or exception;
|
|
|
•
|
the
failure to pay or the occurrence of events that cause or permit the
acceleration of other indebtedness owing by CCO Holdings, Charter
Operating, or Charter Operating’s subsidiaries in amounts in excess of
$100 million in aggregate principal amount;
|
|
|
•
|
the
failure to pay or the occurrence of events that result in the acceleration
of other indebtedness owing by certain of CCO Holdings’ direct and
indirect parent companies in amounts in excess of $200 million in
aggregate principal amount;
|
|
|
•
|
Paul
Allen and/or certain of his family members and/or their exclusively owned
entities (collectively, the “Paul Allen Group”) ceasing to have the power,
directly or indirectly, to vote at least 35% of the ordinary voting power
of Charter Operating;
|
|
|
•
|
the
consummation of any transaction resulting in any person or group (other
than the Paul Allen Group) having power, directly or indirectly, to vote
more than 35% of the ordinary voting power of Charter Operating, unless
the Paul Allen Group holds a greater share of ordinary voting power of
Charter Operating; and
|
|
|
•
|
Charter
Operating ceasing to be a wholly-owned direct subsidiary of CCO Holdings,
except in certain very limited
circumstances.
|
21
CCO
Holdings Credit Facility
The CCO
Holdings credit facility contains covenants that are substantially similar to
the restrictive covenants for the CCO Holdings notes except that the leverage
ratio is 5.50 to 1.0. See “—Summary
of Restricted Covenants of Our High Yield Notes.” The CCO Holdings
credit facility contains provisions requiring mandatory loan prepayments under
specific circumstances, including in connection with certain sales of assets, so
long as the proceeds have not been reinvested in the business. The
CCO Holdings credit facility permits CCO Holdings and its subsidiaries to make
distributions to pay interest on the Charter convertible senior notes, the CCHC
notes, the Charter Holdings notes, the CIH notes, the CCH I notes, the CCH II
notes, the CCO Holdings notes, and the Charter Operating second-lien notes,
provided that, among other things, no default has occurred and is continuing
under the CCO Holdings credit facility.
Notes
Provided
below is a brief description of the notes in place after giving effect to the
consummation of the Plan.
CCH
II Notes
On
November 30, 2009, CCH II and CCH II Capital Corp. issued approximately $1.8
billion in total principal amount of new 13.5% senior notes. The New CCH II
Notes pay interest in cash semi-annually in arrears at the rate of 13.5% per
annum and are unsecured. The New CCH II Notes will mature on November 30,
2016.
CCO
Holdings, LLC Notes
In
November 2003 and August 2005, CCO Holdings and CCO Holdings Capital Corp.
jointly issued $500 million and $300 million, respectively, total principal
amount of 8¾% senior notes due 2013 (the “CCOH 2013 Notes”). The CCOH
2013 Notes are senior debt obligations of CCO Holdings and CCO Holdings Capital
Corp. They rank equally with all other current and future unsecured,
unsubordinated obligations of CCO Holdings and CCO Holdings Capital Corp.,
including the CCO Holdings credit facility. The CCOH 2013 Notes are
structurally subordinated to all obligations of subsidiaries of CCO Holdings,
including the Charter Operating notes and the Charter Operating credit
facilities. Following consummation of the Plan, the CCO Holdings
notes remain outstanding.
Charter
Communications Operating, LLC Notes
In April
2004, Charter Operating and Charter Communications Operating Capital Corp.
jointly issued $1.1 billion of 8% senior second-lien notes due 2012 and $400
million of 8 3/8% senior second-lien notes due 2014. In March and
June 2005, Charter Operating consummated exchange transactions with a small
number of institutional holders of Charter Holdings 8.25% senior notes due 2007
pursuant to which Charter Operating issued, in private placement transactions,
approximately $333 million principal amount of its 8 3/8% senior second-lien
notes due 2014 in exchange for approximately $346 million of the Charter
Holdings 8.25% senior notes due 2007. In March 2006, Charter
Operating exchanged $37 million of Renaissance Media Group LLC 10% senior
discount notes due 2008 for $37 million principal amount of Charter Operating 8
3/8% senior second-lien notes due 2014. In March 2008, Charter
Operating issued $546 million principal amount of 10.875% senior second-lien
notes due 2014, guaranteed by CCO Holdings and certain other subsidiaries of
Charter Operating, in a private transaction. Net proceeds from the
senior second-lien notes were used to reduce borrowings, but not commitments,
under the revolving portion of the Charter Operating credit
facilities.
Subject
to specified limitations, CCO Holdings and those subsidiaries of Charter
Operating that are guarantors of, or otherwise obligors with respect to,
indebtedness under the Charter Operating credit facilities and related
obligations are required to guarantee the Charter Operating
notes. The note guarantee of each such guarantor is:
|
|
·
|
a
senior obligation of such
guarantor;
|
|
|
·
|
structurally
senior to the outstanding CCO Holdings notes (except in the case of CCO
Holdings’ note guarantee, which is structurally pari passu with such
senior notes), the outstanding CCH II notes, the outstanding CCH I notes,
the outstanding CIH notes, the outstanding Charter Holdings notes and the
outstanding Charter convertible senior
notes;
|
|
|
·
|
senior
in right of payment to any future subordinated indebtedness of such
guarantor; and
|
22
|
|
·
|
effectively
senior to the relevant subsidiary’s unsecured indebtedness, to the extent
of the value of the collateral but subject to the prior lien of the credit
facilities.
|
The
Charter Operating notes and related note guarantees are secured by a
second-priority lien on all of Charter Operating’s and its subsidiaries’ assets
that secure the obligations of Charter Operating or any subsidiary of Charter
Operating with respect to the Charter Operating credit facilities and the
related obligations. The collateral currently consists of the capital
stock of Charter Operating held by CCO Holdings, all of the intercompany
obligations owing to CCO Holdings by Charter Operating or any subsidiary of
Charter Operating, and substantially all of Charter Operating’s and the
guarantors’ assets (other than the assets of CCO Holdings) in which security
interests may be perfected under the Uniform Commercial Code by filing a
financing statement (including capital stock and intercompany obligations),
including, but not limited to:
|
|
·
|
with
certain exceptions, all capital stock (limited in the case of capital
stock of foreign subsidiaries, if any, to 66% of the capital stock of
first tier foreign Subsidiaries) held by Charter Operating or any
guarantor; and
|
|
|
·
|
with
certain exceptions, all intercompany obligations owing to Charter
Operating or any guarantor.
|
In the
event that additional liens are granted by Charter Operating or its subsidiaries
to secure obligations under the Charter Operating credit facilities or the
related obligations, second priority liens on the same assets will be granted to
secure the Charter Operating notes, which liens will be subject to the
provisions of an intercreditor agreement (to which none of Charter Operating or
its affiliates are parties). Notwithstanding the foregoing sentence,
no such second priority liens need be provided if the time such lien would
otherwise be granted is not during a guarantee and pledge availability period
(when the Leverage Condition is satisfied), but such second priority liens will
be required to be provided in accordance with the foregoing sentence on or prior
to the fifth business day of the commencement of the next succeeding guarantee
and pledge availability period.
The
Charter Operating notes are senior debt obligations of Charter Operating and
Charter Communications Operating Capital Corp. To the extent of the
value of the collateral (but subject to the prior lien of the credit
facilities), they rank effectively senior to all of Charter Operating’s future
unsecured senior indebtedness. Following consummation of the Plan,
the Charter Operating notes remain outstanding.
Redemption
Provisions of Our High Yield Notes
The
various notes issued by our subsidiaries that remain outstanding pursuant to the
Plan included in the table may be redeemed in accordance with the following
table or are not redeemable until maturity as indicated:
|
Note
Series
|
Redemption
Dates
|
Percentage
of Principal
|
||||
|
CCH
II:
|
||||||
|
13.5%
senior notes due 2016
|
December
1, 2012 – November 30, 2013
|
106.75
|
%
|
|||
|
December
1, 2103 – November 30, 2014
|
103.375
|
%
|
||||
|
December
1, 2014 – November 30, 2015
|
101.6875
|
%
|
||||
|
Thereafter
|
100.000
|
%
|
||||
|
CCO
Holdings:
|
||||||
|
8
3/4% senior notes due 2013
|
November
15, 2008 – November 14, 2009
|
104.375
|
%
|
|||
|
November
15, 2009 – November 14, 2010
|
102.917
|
%
|
||||
|
November
15, 2010 – November 14, 2011
|
101.458
|
%
|
||||
|
Thereafter
|
100.000
|
%
|
||||
|
Charter
Operating:
|
||||||
|
8%
senior second-lien notes due 2012
|
At
any time
|
*
|
||||
|
8
3/8% senior second-lien notes due 2014
|
April
30, 2009 – April 29, 2010
|
104.188
|
%
|
|||
|
April
30, 2010 – April 29, 2011
|
102.792
|
%
|
||||
|
April
30, 2011 – April 29, 2012
|
101.396
|
%
|
||||
|
Thereafter
|
100.000
|
%
|
||||
|
10.875%
senior second-lien notes due 2014
|
At
any time
|
**
|
||||
|
|
*
|
Charter
Operating may, at any time and from time to time, at their option, redeem
the outstanding 8%
|
23
|
|
|
second
lien notes due 2012, in whole or in part, at a redemption price equal to
100% of the principal amount thereof plus accrued and unpaid interest, if
any, to the redemption date, plus the Make-Whole Premium. The
Make-Whole Premium is an amount equal to the excess of (a) the present
value of the remaining interest and principal payments due on an 8% senior
second-lien notes due 2012 to its final maturity date, computed using a
discount rate equal to the Treasury Rate on such date plus 0.50%, over (b)
the outstanding principal amount of such
Note.
|
|
|
**
|
Charter
Operating may redeem the outstanding 10.875% second lien notes due 2014,
at their option, on or after varying dates, in each case at a premium,
plus the Make-Whole Premium. The Make-Whole Premium is an amount
equal to the excess of (a) the present value of the remaining interest and
principal payments due on a 10.875% senior second-lien note due 2014 to
its final maturity date, computed using a discount rate equal to the
Treasury Rate on such date plus 0.50%, over (b) the outstanding principal
amount of such note. The Charter Operating 10.875% senior
second-lien notes may be redeemed at any time on or after March 15, 2012
at specified prices.
|
In the
event that a specified change of control event occurs, each of the respective
issuers of the notes must offer to repurchase any then outstanding notes at 101%
of their principal amount or accrued value, as applicable, plus accrued and
unpaid interest, if any.
Summary
of Restrictive Covenants of Our High Yield Notes
The
following description is a summary of certain restrictions of our Debt
Agreements that remain outstanding following consummation of the Plan. The
summary does not restate the terms of the Debt Agreements in their entirety, nor
does it describe all restrictions of the Debt Agreements. The agreements
and instruments governing each of the Debt Agreements are complicated and you
should consult such agreements and instruments for more detailed information
regarding the Debt Agreements.
The notes
issued certain of our subsidiaries (together, the “note issuers”) were issued
pursuant to indentures that contain covenants that restrict the ability of the
note issuers and their subsidiaries to, among other things:
|
·
|
incur
indebtedness;
|
|
·
|
pay
dividends or make distributions in respect of capital stock and other
restricted payments;
|
|
·
|
issue
equity;
|
|
·
|
make
investments;
|
|
·
|
create
liens;
|
|
·
|
sell
assets;
|
|
·
|
consolidate,
merge, or sell all or substantially all
assets;
|
|
·
|
enter
into sale leaseback transactions;
|
|
·
|
create
restrictions on the ability of restricted subsidiaries to make certain
payments; or
|
|
·
|
enter
into transactions with affiliates.
|
However,
such covenants are subject to a number of important qualifications and
exceptions. Below we set forth a brief summary of certain of the
restrictive covenants.
24
Restrictions
on Additional Debt
The
limitations on incurrence of debt and issuance of preferred stock contained in
various indentures permit each of the respective notes issuers and its
restricted subsidiaries to incur additional debt or issue preferred stock, so
long as, after giving pro forma effect to the incurrence, the leverage ratio
would be below a specified level for each of the note issuers. The
leverage ratios for CCH II, CCO Holdings and Charter Operating are as
follows:
|
Issuer
|
Leverage
Ratio
|
|
|
CCH
II
|
5.75
to 1
|
|
|
CCOH
|
4.5
to 1
|
|
|
CCO
|
4.25
to 1
|
In
addition, regardless of whether the leverage ratio could be met, so long as no
default exists or would result from the incurrence or issuance, each issuer and
their restricted subsidiaries are permitted to issue among other permitted
indebtedness:
|
|
·
|
up
to an amount of debt under credit facilities not otherwise allocated as
indicated below:
|
|
·
|
CCH
II: $1 billion
|
|
·
|
CCO
Holdings: $9.75 billion
|
|
·
|
Charter
Operating: $6.8 billion
|
|
|
·
|
up
to $75 million of debt incurred to finance the purchase or capital lease
of new assets;
|
|
|
·
|
up
to $300 million of additional debt for any purpose;
and
|
|
|
·
|
other
items of indebtedness for specific purposes such as intercompany debt,
refinancing of existing debt, and interest rate swaps to provide
protection against fluctuation in interest
rates.
|
Indebtedness
under a single facility or agreement may be incurred in part under one of the
categories listed above and in part under another, and generally may also later
be reclassified into another category including as debt incurred under the
leverage ratio. Accordingly, indebtedness under our credit facilities
is incurred under a combination of the categories of permitted indebtedness
listed above. The restricted subsidiaries of note issuers are
generally not permitted to issue subordinated debt securities.
Restrictions
on Distributions
Generally,
under the various indentures each of the note issuers and their respective
restricted subsidiaries are permitted to pay dividends on or repurchase equity
interests, or make other specified restricted payments, only if the applicable
issuer can incur $1.00 of new debt under the applicable leverage ratio test
after giving effect to the transaction and if no default exists or would exist
as a consequence of such incurrence. If those conditions are met,
restricted payments may be made in a total amount of up to the following amounts
for the applicable issuer as indicated below:
|
·
|
CCH
II: the sum of 100% of CCH II’s Consolidated EBITDA, as defined,
minus 1.3 times its Consolidated Interest Expense, as defined,
cumulatively from October 1, 2009 plus 100% of new cash and appraised
non-cash equity proceeds received by CCH II and not allocated to certain
investments, cumulatively from November 30, 2009
;
|
|
·
|
CCO
Holdings: the sum of 100% of CCO Holdings’ Consolidated EBITDA,
as defined, minus 1.3 times its Consolidated Interest Expense, as defined,
plus 100% of new cash and appraised non-cash equity proceeds received by
CCO Holdings and not allocated to certain investments, cumulatively from
October 1, 2003, plus $100 million;
and
|
|
·
|
Charter
Operating: the sum of 100% of Charter Operating’s Consolidated
EBITDA, as defined, minus 1.3 times its Consolidated Interest Expense, as
defined, plus 100% of new cash and appraised non-cash equity proceeds
received by Charter Operating and not allocated to certain investments,
cumulatively from April 1, 2004, plus $100
million.
|
In
addition, each of the note issuers may make distributions or restricted
payments, so long as no default exists or would be caused by transactions among
other distributions or restricted payments:
|
|
·
|
to
repurchase management equity interests in amounts not to exceed $10
million per fiscal year;
|
25
|
|
·
|
regardless
of the existence of any default, to pay pass-through tax liabilities in
respect of ownership of equity interests in the applicable issuer or its
restricted subsidiaries; or
|
|
|
·
|
to
make other specified restricted payments including merger fees up to 1.25%
of the transaction value, repurchases using concurrent new issuances, and
certain dividends on existing subsidiary preferred equity
interests.
|
Each of CCO Holdings and Charter Operating and their respective restricted subsidiaries may make distributions or restricted payments: (i) so long as certain defaults do not exist and even if the applicable leverage test referred to above is not met, to enable certain of its parents to pay interest on certain of their indebtedness or (ii) so long as the applicable issuer could incur $1.00 of indebtedness under the applicable leverage ratio test referred to above, to enable certain of its parents to purchase, redeem or refinance certain indebtedness.
Restrictions
on Investments
Each of
the note issuers and their respective restricted subsidiaries may not make
investments except (i) permitted investments or (ii) if, after giving effect to
the transaction, their leverage would be above the applicable leverage
ratio.
Permitted
investments include, among others:
|
·
|
investments in and generally among restricted subsidiaries or by
restricted subsidiaries in the applicable
issuer;
|
|
·
|
For
CCH II:
|
|
·
|
investments
aggregating up to $650 million at any time
outstanding;
|
|
·
|
investments
aggregating up to 100% of new cash equity proceeds received by CCH II
since November 30, 2009 to the extent the proceeds have not been allocated
to the restricted payments
covenant;
|
|
·
|
For
CCO Holdings:
|
|
·
|
investments
aggregating up to $750 million at any time
outstanding;
|
|
·
|
investments
aggregating up to 100% of new cash equity proceeds received by CCO
Holdings since November 10, 2003 to the extent the proceeds have not been
allocated to the restricted payments
covenant;
|
|
·
|
For
Charter Operating:
|
|
·
|
investments
aggregating up to $750 million at any time
outstanding;
|
|
·
|
investments
aggregating up to 100% of new cash equity proceeds received by CCO
Holdings since April 27, 2004 to the extent the proceeds have not been
allocated to the restricted payments
covenant.
|
Restrictions
on Liens
Charter
Operating and its restricted subsidiaries are not permitted to grant liens
senior to the liens securing the Charter Operating notes, other than permitted
liens, on their assets to secure indebtedness or other obligations, if, after
giving effect to such incurrence, the senior secured leverage ratio (generally,
the ratio of obligations secured by first priority liens to four times EBITDA,
as defined, for the most recent fiscal quarter for which internal financial
reports are available) would exceed 3.75 to 1.0. The restrictions on
liens for each of the other note issuers only applies to liens on assets of the
issuers themselves and does not restrict liens on assets of
subsidiaries. With respect to all of the note issuers, permitted
liens include liens securing indebtedness and other obligations under credit
facilities (subject to specified limitations in the case of Charter Operating),
liens securing the purchase price of financed new assets, liens securing
indebtedness of up to $50 million and other specified liens.
Restrictions
on the Sale of Assets; Mergers
The note
issuers are generally not permitted to sell all or substantially all of their
assets or merge with or into other companies unless their leverage ratio after
any such transaction would be no greater than their leverage ratio immediately
prior to the transaction, or unless after giving effect to the transaction,
leverage would be below the applicable leverage ratio for the applicable issuer,
no default exists, and the surviving entity is a U.S. entity that assumes the
applicable notes.
The note
issuers and their restricted subsidiaries may generally not otherwise sell
assets or, in the case of restricted subsidiaries, issue equity interests, in
excess of $100 million unless they receive consideration at least equal to the
fair market value of the assets or equity interests, consisting of at least 75%
in cash, assumption of liabilities,
26
securities converted into cash within 60 days, or productive
assets. The note issuers and their restricted subsidiaries are then
required within 365 days after any asset sale either to use or commit to use the
net cash proceeds over a specified threshold to acquire assets used or useful in
their businesses or use the net cash proceeds to repay specified debt, or to
offer to repurchase the issuer’s notes with any remaining proceeds.
Restrictions
on Sale and Leaseback Transactions
The note
issuers and their restricted subsidiaries may generally not engage in sale and
leaseback transactions unless, at the time of the transaction, the applicable
issuer could have incurred secured indebtedness under its leverage ratio test in
an amount equal to the present value of the net rental payments to be made under
the lease, and the sale of the assets and application of proceeds is permitted
by the covenant restricting asset sales.
Prohibitions
on Restricting Dividends
The note
issuers’ restricted subsidiaries may generally not enter into arrangements
involving restrictions on their ability to make dividends or distributions or
transfer assets to the applicable note issuer unless those restrictions with
respect to financing arrangements are on terms that are no more restrictive than
those governing the credit facilities existing when they entered into the
applicable indentures or are not materially more restrictive than customary
terms in comparable financings and will not materially impair the applicable
note issuers’ ability to make payments on the notes.
Affiliate
Transactions
The
indentures also restrict the ability of the note issuers and their restricted
subsidiaries to enter into certain transactions with affiliates involving
consideration in excess of $15 million without a determination by the board of
directors of the applicable note issuer that the transaction
complies with this covenant, or transactions with affiliates involving over $50
million without receiving an opinion as to the fairness to the holders of such
transaction from a financial point of view issued by an accounting, appraisal or
investment banking firm of national standing.
Cross
Acceleration
Our
indentures and those of certain of our subsidiaries include various events of
default, including cross acceleration provisions. Under these
provisions, a failure by any of the issuers or any of their restricted
subsidiaries to pay at the final maturity thereof the principal amount of other
indebtedness having a principal amount of $100 million or more (or any other
default under any such indebtedness resulting in its acceleration) would result
in an event of default under the indenture governing the applicable
notes. As a result, an event of default related to the failure to
repay principal at maturity or the acceleration of the indebtedness under the
New CCH II notes, CCO Holdings notes, Charter Operating notes or the Charter
Operating credit facilities could cause cross-defaults under our subsidiaries’
indentures.
Recently Issued Accounting
Standards
In
December 2007, the FASB issued SFAS No. 141R, Business Combinations: Applying the
Acquisition Method, which provides guidance on the accounting and
reporting for business combinations. SFAS No. 141R is effective for
fiscal years beginning after December 15, 2008. We adopted SFAS No.
141R effective January 1, 2009. The adoption of SFAS No. 141R has not
had a material impact on our financial statements.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51, which
provides guidance on the accounting and
reporting for minority interests in consolidated financial
statements. SFAS No. 160 requires losses to be allocated to
non-controlling (minority) interests even when such amounts are
deficits. As such, future losses will be allocated between Charter
and the Charter Holdco non-controlling interest. SFAS No. 160 is
effective for fiscal years beginning after December 15, 2008. We
adopted SFAS No. 160 effective January 1, 2009 and applied the effects
retrospectively to all periods presented to the extent prescribed by the
standard. Had SFAS No. 160 been effective for our financial
statements for the year ended December 31, 2008, our net loss to Charter
shareholders would have been reduced by $1.2 billion. The adoption
resulted in the presentation of Mr. Allen’s 5.6% preferred membership interest
in CC VIII as temporary equity in our consolidated balance sheets as of December
31, 2008 and 2007 as presented, which was previously classified as minority
interest. See Note 3 to the accompanying consolidated financial
statements contained in “Item 8. Financial Statements and Supplementary
Data.”
27
In
February 2008, the FASB issued FASB Staff Position (FSP) 157-2, Effective Date of FASB Statement No.
157, which deferred the effective date of SFAS No. 157 to fiscal years
beginning after November 15, 2008 for nonfinancial assets and nonfinancial
liabilities. We applied SFAS No. 157 to nonfinancial assets
and nonfinancial liabilities beginning January 1, 2009. The adoption
of SFAS No. 157 has not had a material impact on our financial
statements.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133, which requires companies to disclose their objectives and strategies
for using derivative instruments, whether or not designated as hedging
instruments under SFAS No. 133. SFAS No. 161 is effective for interim
periods and fiscal years beginning after November 15, 2008. We
adopted SFAS No. 161 effective January 1, 2009. The adoption of SFAS
No. 161 has not had a material impact on our financial statements.
In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets, which amends the factors to be considered in renewal
or extension assumptions used to determine the useful life of a recognized
intangible asset. FSP FAS 142-3 is effective for interim periods and
fiscal years beginning after December 15, 2008. We adopted FSP FAS
142-3 effective January 1, 2009. The adoption of FSP FAS 142-3 has
not had a material impact on our financial statements.
In May
2008, the FASB issued FSP Accounting Principles Board (“APB”) 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), which specifies that issuers of convertible debt instruments
that may be settled in cash upon conversion should separately account for the
liability and equity components in a manner reflecting their nonconvertible debt
borrowing rate when interest costs are recognized in subsequent
periods. FSP APB 14-1 is effective for interim periods and fiscal
years beginning after December 15, 2008. We adopted FSP APB 14-1
effective January 1, 2009 and applied the effects retrospectively to all prior
periods presented. The adoption of FSP APB 14-1 resulted in us
recording a cumulative adjustment as of December 31, 2005 of an increase in
additional paid-in capital of $302 million and an increase in accumulated
deficit of $48 million. The adoption of FSP APB 14-1 did not have an
impact on net loss or net loss per common share for the year ended December 31,
2008. The adoption of FSP APB
14-1 resulted in a decrease in net loss and net loss per common share of $82
million and $0.22 for the year ended December 31, 2007 and an increase in net
loss and net loss per common share of $84 million and $0.25 for the year ended
December 31, 2006. Our consolidated financial statements and relevant
financial information in the footnotes herein have been updated to reflect the
changes required by FSP APB 14-1.
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.
28
Exhibit
99.3
|
Page
|
||
|
Audited
Financial Statements
|
||
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
F-3
|
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2008, 2007,
and 2006
|
F-4
|
|
|
Consolidated
Statements of Changes in Shareholders’ Deficit for the Years Ended
December 31, 2008, 2007, and 2006
|
F-5
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007,
and 2006
|
F-6
|
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
F-1
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareholders
Charter
Communications, Inc.:
We have
audited the accompanying consolidated balance sheets of Charter Communications,
Inc. and subsidiaries as of December 31, 2008 and 2007, and the
related consolidated statements of operations, changes in shareholders’ deficit,
and cash flows for each of the years in the three-year period ended
December 31, 2008. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Charter Communications, Inc.
and subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles.
As
discussed in Note 25 to the consolidated financial statements,
effective January 1, 2009, the Company adopted Statement of Financial Accounting
Standards No. 160, Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No. 51, and FASB
Staff Position APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement).
/s/ KPMG
LLP
St.
Louis, Missouri
March 13,
2009, except as to Note 25 and Note 28, which are as of November 30,
2009
F-2
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(dollars
in millions, except share data)
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 960 | $ | 75 | ||||
|
Accounts
receivable, less allowance for doubtful accounts of
|
||||||||
|
$18
and $18, respectively
|
222 | 225 | ||||||
|
Prepaid
expenses and other current assets
|
36 | 36 | ||||||
|
Total
current assets
|
1,218 | 336 | ||||||
|
INVESTMENT
IN CABLE PROPERTIES:
|
||||||||
|
Property,
plant and equipment, net of accumulated
|
||||||||
|
depreciation
of $7,225 and $6,462, respectively
|
4,987 | 5,103 | ||||||
|
Franchises,
net
|
7,384 | 8,942 | ||||||
|
Total
investment in cable properties, net
|
12,371 | 14,045 | ||||||
|
OTHER
NONCURRENT ASSETS
|
293 | 285 | ||||||
|
Total
assets
|
$ | 13,882 | $ | 14,666 | ||||
|
|
||||||||
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Accounts
payable and accrued expenses
|
$ | 1,310 | $ | 1,332 | ||||
|
Current
portion of long-term debt
|
155 | -- | ||||||
|
Total
current liabilities
|
1,465 | 1,332 | ||||||
|
LONG-TERM
DEBT
|
21,511 | 19,903 | ||||||
|
NOTE
PAYABLE – RELATED PARTY
|
75 | 65 | ||||||
|
DEFERRED
MANAGEMENT FEES – RELATED PARTY
|
14 | 14 | ||||||
|
OTHER
LONG-TERM LIABILITIES
|
1,082 | 1,019 | ||||||
|
TEMPORARY
EQUITY
|
241 | 215 | ||||||
|
PREFERRED
STOCK – REDEEMABLE; $.001 par value; 1 million
|
||||||||
|
shares
authorized; 0 and 36,713 shares issued and outstanding,
respectively
|
-- | 5 | ||||||
|
SHAREHOLDERS’
DEFICIT:
|
||||||||
|
Class
A common stock; $.001 par value; 10.5 billion shares
authorized;
|
||||||||
|
411,737,894
and 398,226,468 shares issued and outstanding,
respectively
|
-- | -- | ||||||
|
Class
B common stock; $.001 par value; 4.5 billion
|
||||||||
|
shares
authorized; 50,000 shares issued and outstanding
|
-- | -- | ||||||
|
Preferred
stock; $.001 par value; 250 million shares
|
||||||||
|
authorized;
no non-redeemable shares issued and outstanding
|
-- | -- | ||||||
|
Additional
paid-in capital
|
5,394 | 5,382 | ||||||
|
Accumulated
deficit
|
(15,597 | ) | (13,146 | ) | ||||
|
Accumulated
other comprehensive loss
|
(303 | ) | (123 | ) | ||||
|
Total
shareholders’ deficit
|
(10,506 | ) | (7,887 | ) | ||||
|
Total
liabilities and shareholders’ deficit
|
$ | 13,882 | $ | 14,666 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(dollars
in millions, except per share and share data)
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
REVENUES
|
$ | 6,479 | $ | 6,002 | $ | 5,504 | ||||||
|
COSTS
AND EXPENSES:
|
||||||||||||
|
Operating
(excluding depreciation and amortization)
|
2,792 | 2,620 | 2,438 | |||||||||
|
Selling,
general and administrative
|
1,401 | 1,289 | 1,165 | |||||||||
|
Depreciation
and amortization
|
1,310 | 1,328 | 1,354 | |||||||||
|
Impairment
of franchises
|
1,521 | 178 | -- | |||||||||
|
Asset
impairment charges
|
-- | 56 | 159 | |||||||||
|
Other
operating (income) expenses, net
|
69 | (17 | ) | 21 | ||||||||
| 7,093 | 5,454 | 5,137 | ||||||||||
|
Operating
income (loss) from continuing operations
|
(614 | ) | 548 | 367 | ||||||||
|
OTHER
INCOME (EXPENSES):
|
||||||||||||
|
Interest
expense, net
|
(1,905 | ) | (1,861 | ) | (1,901 | ) | ||||||
|
Change
in value of derivatives
|
(29 | ) | 52 | (4 | ) | |||||||
|
Gain
(loss) on extinguishment of debt
|
4 | (56 | ) | 41 | ||||||||
|
Other
income (expense), net
|
(10 | ) | (8 | ) | 14 | |||||||
| (1,940 | ) | (1,873 | ) | (1,850 | ) | |||||||
|
Loss
from continuing operations, before income tax expense
|
(2,554 | ) | (1,325 | ) | (1,483 | ) | ||||||
|
INCOME
TAX BENEFIT (EXPENSE)
|
103 | (209 | ) | (187 | ) | |||||||
|
Loss
from continuing operations
|
(2,451 | ) | (1,534 | ) | (1,670 | ) | ||||||
|
INCOME
FROM DISCONTINUED OPERATIONS,
NET
OF TAX
|
-- | -- | 216 | |||||||||
|
Net
loss
|
$ | (2,451 | ) | $ | (1,534 | ) | $ | (1,454 | ) | |||
|
LOSS
PER COMMON SHARE, basic and diluted:
|
||||||||||||
|
Loss
from continuing operations
|
$ | (6.56 | ) | $ | (4.17 | ) | $ | (5.03 | ) | |||
|
Net
loss
|
$ | (6.56 | ) | $ | (4.17 | ) | $ | (4.38 | ) | |||
|
Weighted
average common shares outstanding, basic and diluted
|
373,464,920 | 368,240,608 | 331,941,788 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ DEFICIT
(dollars
in millions)
|
Accumulated
|
||||||||||||||||||||||||
|
Class
A
|
Class
B
|
Additional
|
Other
|
Total
|
||||||||||||||||||||
|
Common
|
Common
|
Paid-In
|
Accumulated
|
Comprehensive
|
Shareholders'
|
|||||||||||||||||||
|
Stock
|
Stock
|
Capital
|
Deficit
|
Income
(Loss)
|
Deficit
|
|||||||||||||||||||
|
BALANCE,
December 31, 2005, as previously
|
||||||||||||||||||||||||
|
recorded
|
$ | -- | $ | -- | $ | 5,241 | $ | (10,166 | ) | $ | 5 | $ | (4,920 | ) | ||||||||||
|
Cumulative
adjustment for the adoption of
|
||||||||||||||||||||||||
|
FSP
APB 14-1
|
-- | -- | 302 | (48 | ) | -- | 254 | |||||||||||||||||
|
BALANCE,
December 31, 2005, as adjusted
|
-- | -- | 5,543 | (10,214 | ) | 5 | (4,666 | ) | ||||||||||||||||
|
Changes
in fair value of interest rate
|
||||||||||||||||||||||||
|
agreements
|
-- | -- | -- | -- | (1 | ) | (1 | ) | ||||||||||||||||
|
Option
compensation expense, net
|
-- | -- | 6 | -- | -- | 6 | ||||||||||||||||||
|
Issuance
of common stock in exchange for
|
||||||||||||||||||||||||
|
convertible
notes
|
-- | -- | 66 | -- | -- | 66 | ||||||||||||||||||
|
Reacquisition
of equity component of
|
||||||||||||||||||||||||
|
convertible
notes
|
-- | -- | (70 | ) | -- | -- | (70 | ) | ||||||||||||||||
|
Net
loss
|
-- | -- | -- | (1,454 | ) | -- | (1,454 | ) | ||||||||||||||||
|
BALANCE,
December 31, 2006
|
-- | -- | 5,545 | (11,668 | ) | 4 | (6,119 | ) | ||||||||||||||||
|
Changes
in fair value of interest rate
|
||||||||||||||||||||||||
|
agreements
|
-- | -- | -- | -- | (123 | ) | (123 | ) | ||||||||||||||||
|
Option
compensation expense, net
|
-- | -- | 12 | -- | -- | 12 | ||||||||||||||||||
|
Cumulative
adjustment to Accumulated
|
||||||||||||||||||||||||
|
Deficit
for the adoption of FIN48
|
-- | -- | -- | 56 | -- | 56 | ||||||||||||||||||
|
Reacquisition
of equity component of
|
||||||||||||||||||||||||
|
convertible
notes
|
-- | -- | (177 | ) | -- | -- | (177 | ) | ||||||||||||||||
|
Other
|
-- | -- | 2 | -- | (4 | ) | (2 | ) | ||||||||||||||||
|
Net
loss
|
-- | -- | -- | (1,534 | ) | -- | (1,534 | ) | ||||||||||||||||
|
BALANCE,
December 31, 2007
|
-- | -- | 5,382 | (13,146 | ) | (123 | ) | (7,887 | ) | |||||||||||||||
|
Changes
in fair value of interest rate
|
||||||||||||||||||||||||
|
agreements
|
-- | -- | -- | -- | (180 | ) | (180 | ) | ||||||||||||||||
|
Option
compensation expense, net
|
-- | -- | 12 | -- | -- | 12 | ||||||||||||||||||
|
Preferred
stock redemption
|
-- | -- | 5 | -- | -- | 5 | ||||||||||||||||||
|
Reacquisition
of equity component of
|
||||||||||||||||||||||||
|
convertible
notes
|
-- | -- | (5 | ) | -- | -- | (5 | ) | ||||||||||||||||
|
Net
loss
|
-- | -- | -- | (2,451 | ) | -- | (2,451 | ) | ||||||||||||||||
|
BALANCE,
December 31, 2008
|
$ | -- | $ | -- | $ | 5,394 | $ | (15,597 | ) | $ | (303 | ) | $ | (10,506 | ) | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(dollars
in millions)
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net
loss
|
$ | (2,451 | ) | $ | (1,534 | ) | $ | (1,454 | ) | |||
|
Adjustments
to reconcile net loss to net cash flows from operating
activities:
|
||||||||||||
|
Depreciation
and amortization
|
1,310 | 1,328 | 1,362 | |||||||||
|
Impairment
of franchises
|
1,521 | 178 | -- | |||||||||
|
Asset
impairment charges
|
-- | 56 | 159 | |||||||||
|
Noncash
interest expense
|
61 | 50 | 152 | |||||||||
|
Change
in value of derivatives
|
29 | (52 | ) | 4 | ||||||||
|
Deferred
income taxes
|
(107 | ) | 198 | 202 | ||||||||
|
(Gain)
loss on sale of assets, net
|
13 | (3 | ) | (192 | ) | |||||||
|
(Gain)
loss on extinguishment of debt
|
(5 | ) | 44 | (41 | ) | |||||||
|
Other,
net
|
39 | 2 | 4 | |||||||||
|
Changes
in operating assets and liabilities, net of effects from acquisitions and
dispositions:
|
||||||||||||
|
Accounts
receivable
|
3 | (36 | ) | 24 | ||||||||
|
Prepaid
expenses and other assets
|
(1 | ) | 45 | 55 | ||||||||
|
Accounts
payable, accrued expenses and other
|
(13 | ) | 51 | 48 | ||||||||
|
Net
cash flows from operating activities
|
399 | 327 | 323 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Purchases
of property, plant and equipment
|
(1,202 | ) | (1,244 | ) | (1,103 | ) | ||||||
|
Change
in accrued expenses related to capital expenditures
|
(39 | ) | (2 | ) | 24 | |||||||
|
Proceeds
from sale of assets, including cable systems
|
43 | 104 | 1,020 | |||||||||
|
Other,
net
|
(12 | ) | 4 | (6 | ) | |||||||
|
Net
cash flows from investing activities
|
(1,210 | ) | (1,138 | ) | (65 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Borrowings
of long-term debt
|
3,105 | 7,877 | 6,322 | |||||||||
|
Repayments
of long-term debt
|
(1,354 | ) | (7,017 | ) | (6,938 | ) | ||||||
|
Proceeds
from issuance of debt
|
-- | -- | 440 | |||||||||
|
Payments
for debt issuance costs
|
(42 | ) | (42 | ) | (44 | ) | ||||||
|
Other,
net
|
(13 | ) | 8 | 1 | ||||||||
|
Net
cash flows from financing activities
|
1,696 | 826 | (219 | ) | ||||||||
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
885 | 15 | 39 | |||||||||
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
75 | 60 | 21 | |||||||||
|
CASH
AND CASH EQUIVALENTS, end of period
|
$ | 960 | $ | 75 | $ | 60 | ||||||
|
CASH
PAID FOR INTEREST
|
$ | 1,847 | $ | 1,792 | $ | 1,671 | ||||||
|
NONCASH
TRANSACTIONS:
|
||||||||||||
|
Cumulative
adjustment to Accumulated Deficit for the adoption of FIN
48
|
$ | -- | $ | 56 | $ | -- | ||||||
|
Issuance
of Charter 6.50% convertible notes
|
$ | -- | $ | 479 | $ | -- | ||||||
|
Issuances
of Charter Class A common stock
|
$ | -- | $ | -- | $ | 68 | ||||||
|
Issuance
of debt by CCH I, LLC
|
$ | -- | $ | -- | $ | 419 | ||||||
|
Issuance
of debt by CCH II, LLC
|
$ | -- | $ | -- | $ | 410 | ||||||
|
Issuance
of debt by Charter Communications Operating, LLC
|
$ | -- | $ | -- | $ | 37 | ||||||
|
Retirement
of Charter 5.875% convertible notes
|
$ | -- | $ | (364 | ) | $ | (255 | ) | ||||
|
Retirement
of Charter Communications Holdings, LLC debt
|
$ | -- | $ | -- | $ | (796 | ) | |||||
|
Retirement
of Renaissance Media Group LLC debt
|
$ | -- | $ | -- | $ | (37 | ) | |||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007 AND 2006
(dollars
in millions, except where indicated)
|
1.
|
|
Organization
and Basis of Presentation
|
Charter
Communications, Inc. (“Charter”) is a holding company whose principal assets at
December 31, 2008 are the 55% controlling common equity interest (53% for
accounting purposes) in Charter Communications Holding Company, LLC (“Charter
Holdco”) and “mirror” notes which are payable by Charter Holdco to Charter and
have the same principal amount and terms as those of Charter’s convertible
senior notes. Charter Holdco is the sole owner of CCHC, LLC ("CCHC"),
which is the sole owner of Charter Communications Holdings, LLC ("Charter
Holdings"). The consolidated financial statements include the
accounts of Charter, Charter Holdco, CCHC, Charter Holdings and all of their
subsidiaries where the underlying operations reside, which are collectively
referred to herein as the "Company." All significant intercompany
accounts and transactions among consolidated entities have been
eliminated.
The
Company is a broadband communications company operating in the United
States. The Company offers to residential and commercial customers
traditional cable video programming (basic and digital video), high-speed
Internet services, and telephone services, as well as advanced broadband
services such as high definition television, Charter OnDemand™, and digital
video recorder (“DVR”) service. The Company sells its cable video
programming, high-speed Internet, telephone, and advanced broadband services
primarily on a subscription basis. The Company also sells local
advertising on cable networks.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States (“GAAP”) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Areas involving significant judgments
and estimates include capitalization of labor and overhead costs; depreciation
and amortization costs; impairments of property, plant and equipment, franchises
and goodwill; income taxes; and contingencies. Actual results could
differ from those estimates.
Reclassifications. Certain
prior year amounts have been reclassified to conform with the 2008
presentation.
|
2.
|
|
Liquidity
and Capital Resources
|
The
Company’s consolidated financial statements have been prepared assuming that it
will continue as a going concern. The conditions noted below raise
substantial doubt about the Company’s ability to continue as a going
concern. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
On
February 12, 2009, Charter announced that it had reached an agreement in
principle with certain holders of certain of its subsidiaries’ notes (the
“Noteholders”) holding approximately $4.1 billion in aggregate principal amount
of notes issued by Charter’s subsidiaries, CCH I, LLC (“CCH I”) and CCH II, LLC
(“CCH II”). Pursuant to separate restructuring agreements, dated
February 11, 2009, entered into with each Noteholder (as amended, the
“Restructuring Agreements”), on or prior to April 1, 2009, Charter and its
subsidiaries expect to file voluntary petitions for relief under Chapter 11 of
the United States Bankruptcy Code to implement a restructuring pursuant to a
joint plan of reorganization (the “Plan”) aimed at improving its capital
structure (the “Proposed Restructuring”). Refer to discussion of
subsequent events regarding the Proposed Restructuring in Note 28.
During
the fourth quarter of 2008, Charter Operating drew down all except $27 million
of amounts available under the revolving credit facility. During the
first quarter of 2009, Charter Operating presented a qualifying draw notice to
the banks under the revolving credit facility but was refused those
funds. Additionally, upon filing bankruptcy, Charter Operating will
no longer have access to the revolving credit facility and will rely on cash on
hand and cash flows from operating activities to fund our projected cash
needs. The Company’s projected cash needs and projected sources of
liquidity depend upon, among other things, its actual results, the timing and
amount of its expenditures, and the outcome of various matters in its expected
Chapter 11 bankruptcy proceedings and financial restructuring. The
outcome of the Proposed Restructuring is subject to substantial
risks. See Note 28.
F-7
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
The
Company incurred net losses of $2.5 billion, $1.5 billion, and $1.5 billion in
2008, 2007, and 2006, respectively. The Company’s net cash flows from
operating activities were $399 million, $327 million, and $323 million for the
years ending December 31, 2008, 2007, and 2006, respectively.
The
Company has a significant amount of debt. The Company's total debt as
of December 31, 2008 totaled $21.7 billion, consisting of $8.6 billion of credit
facility debt, $12.7 billion accreted value of high-yield notes, and $376
million accreted value of convertible senior notes. In 2009, $155
million of the Company’s debt matures and in 2010, an additional $1.9 billion
matures. In 2011 and beyond, significant additional amounts will
become due under the Company’s remaining long-term debt
obligations.
The
Company requires significant cash to fund debt service costs, capital
expenditures and ongoing operations. The Company has historically
funded these requirements through cash flows from operating activities,
borrowings under its credit facilities, proceeds from sales of assets, issuances
of debt and equity securities, and cash on hand. However, the mix of
funding sources changes from period to period. For the year ended
December 31, 2008, the Company generated $399 million of net cash flows from
operating activities, after paying cash interest of $1.8 billion. In addition, the Company
used $1.2 billion for purchases of property, plant and
equipment. Finally, the Company generated net cash flows from
financing activities of $1.7 billion, as a result of financing transactions and
credit facility borrowings completed during the year ended December 31,
2008. As of December 31, 2008, the Company had cash on hand of $960
million.
Although
the Company has been able to refinance or otherwise fund the repayment of debt
in the past, it may not be able to access additional sources of refinancing on
similar terms or pricing as those that are currently in place, or at all, or
otherwise obtain other sources of funding, especially given the recent
volatility and disruption of the capital and credit markets and the
deterioration of general economic conditions in recent months.
Limitations
on Distributions
As long
as Charter’s convertible senior notes remain outstanding and are not otherwise
converted into shares of common stock, Charter must pay interest on the
convertible senior notes and repay the principal amount. Charter’s
ability to make interest payments on its convertible senior notes, and to repay
the outstanding principal of its convertible senior notes will depend on its
ability to raise additional capital and/or on receipt of payments or
distributions from Charter Holdco and its subsidiaries. As of December 31,
2008, Charter Holdco was owed $13 million in intercompany loans from Charter
Communications Operating, LLC (“Charter Operating”) and had $1 million in cash,
which amounts were available to pay interest and principal on Charter's
convertible senior notes to the extent not otherwise used, for example, to
satisfy maturities at Charter Holdings. In addition, as long as Charter
Holdco continues to hold the $137 million of Charter Holdings’ notes due 2009
and 2010 (as discussed further below), Charter Holdco will receive interest and
principal payments from Charter Holdings to the extent Charter Holdings is able
to make such payments. Such amounts may be available to pay interest
and principal on Charter’s convertible senior notes, although Charter Holdco may
use those amounts for other purposes.
Distributions
by Charter’s subsidiaries to a parent company (including Charter, Charter Holdco
and CCHC) for payment of principal on parent company notes, are restricted under
the indentures governing the CCH I Holdings, LLC (“CIH”) notes, CCH I notes, CCH
II notes, CCO Holdings, LLC (“CCO Holdings”) notes, Charter Operating notes, and
under the CCO Holdings credit facility, unless there is no default under the
applicable indenture and credit facilities, and unless each applicable
subsidiary’s leverage ratio test is met at the time of such
distribution. For the quarter ended December 31, 2008, there was no
default under any of these indentures or credit facilities. However,
certain of the Company’s subsidiaries did not meet their applicable leverage
ratio tests based on December 31, 2008 financial results. As a
result, distributions from certain of the Company’s subsidiaries to their parent
companies would have been restricted at such time and will continue to be
restricted unless those tests are met. Distributions by Charter
Operating for payment of principal on parent company notes are further
restricted by the covenants in its credit facilities.
F-8
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
Distributions
by CIH, CCH I, CCH II, CCO Holdings, and Charter Operating to a parent company
for payment of parent company interest are permitted if there is no default
under the aforementioned indentures and CCO Holdings and Charter Operating
credit facilities.
The
indentures governing the Charter Holdings notes permit Charter Holdings to make
distributions to Charter Holdco for payment of interest or principal on
Charter’s convertible senior notes, only if, after giving effect to the
distribution, Charter Holdings can incur additional debt under the leverage
ratio of 8.75 to 1.0, there is no default under Charter Holdings’ indentures,
and other specified tests are met. For the quarter ended December 31,
2008, there was no default under Charter Holdings’ indentures, the other
specified tests were met, and Charter Holdings met its leverage ratio test based
on December 31, 2008 financial results. Such distributions would be
restricted, however, if Charter Holdings fails to meet these tests at the time
of the contemplated distribution. In the past, Charter Holdings has
from time to time failed to meet this leverage ratio test. There can
be no assurance that Charter Holdings will satisfy these tests at the time of
the contemplated distribution. During periods in which
distributions are restricted, the indentures governing the Charter Holdings
notes permit Charter Holdings and its subsidiaries to make specified investments
(that are not restricted payments) in Charter Holdco or Charter, up to an amount
determined by a formula, as long as there is no default under the
indentures.
In
addition to the limitation on distributions under the various indentures
discussed above, distributions by the Company’s subsidiaries may be limited by
applicable law. Under the Delaware Limited Liability Company Act, the
Company’s subsidiaries may only make distributions if they have “surplus” as
defined in the act. Under fraudulent transfer laws, the Company’s
subsidiaries may not pay dividends if they are insolvent or are rendered
insolvent thereby. The measures of insolvency for purposes of these
fraudulent transfer laws vary depending upon the law applied in any proceeding
to determine whether a fraudulent transfer has occurred. Generally, however, an
entity would be considered insolvent if:
|
·
|
the
sum of its debts, including contingent liabilities, was greater than the
fair saleable value of all its
assets;
|
|
·
|
the
present fair saleable value of its assets was less than the amount that
would be required to pay its probable liability on its existing debts,
including contingent liabilities, as they become absolute and mature;
or
|
|
·
|
it
could not pay its debts as they became
due.
|
It is
uncertain whether the Company will have, at the relevant times, sufficient
surplus at the relevant subsidiaries to make distributions, including for
payments of interest and principal on the debts of the parents of such entities,
and there can otherwise be no assurance that the Company’s subsidiaries will not
become insolvent or will be permitted to make distributions in the future in
compliance with these restrictions in amounts needed to service the Company’s
indebtedness.
|
3.
|
|
Summary
of Significant Accounting Policies
|
Consolidation
of Variable Interest Entities
The
Company consolidates variable interest entities according to the principles and
guidance contained in FIN 46(R), based upon evaluation of the Company’s ability
to make decisions about another entity’s activities, its obligation to absorb
the expected losses of the entity, and its right to receive the expected
residual returns of the entity.
The
Company has a 55% controlling common equity interest (53% for accounting
purposes) in Charter Holdco. The Company is the sole manager of
Charter Holdco and has 100% of its voting membership units. The
Company determined that Charter Holdco is a variable interest entity based upon
Charter Holdco’s owners holding voting rights disproportionate to their economic
interest and the Company’s obligation to absorb all of the expected losses of
Charter Holdco. At December 31, 2008, membership units of Charter
Holdco were also owned by Vulcan Cable III Inc. (“Vulcan Cable”) and Charter
Investment, Inc. (“CII”), which were both owned by Mr. Paul G. Allen, the
Company’s chairman and majority shareholder, and were considered related parties
of the Company.
F-9
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
There are
no restrictions over the Company’s control of Charter Holdco’s operations or
assets. As a result of being the most closely associated with Charter
Holdco, the Company has determined that it is the primary beneficiary within the
related party group and that the financial results of Charter Holdco should be
consolidated with the Company. For the year ended December 31, 2008,
the Company has not experienced any reconsideration events that would indicate
any other variable interest entities that would require consolidation under FIN
46(R).
Charter
Holdco holds broadband communication businesses that are managed by the
Company. All income and expenses generated by Charter Holdco are
consolidated into the Company. Charter Holdco also holds all of the
cash flows reported by the Company. All liabilities held by Charter
Holdco are consolidated into the Company. The Company has not
provided financial or other support to Charter Holdco that it was not previously
contractually required to provide.
Cash Equivalents
The
Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. These investments are
carried at cost, which approximates market value. Cash and cash
equivalents consist primarily of money market funds and commercial
paper.
Property, Plant and
Equipment
Property,
plant and equipment are recorded at cost, including all material, labor and
certain indirect costs associated with the construction of cable transmission
and distribution facilities. While the Company’s capitalization is
based on specific activities, once capitalized, costs are tracked by fixed asset
category at the cable system level and not on a specific asset
basis. For assets that are sold or retired, the estimated historical
cost and related accumulated depreciation is removed. Costs
associated with initial customer installations and the additions of network
equipment necessary to enable advanced services are
capitalized. Costs capitalized as part of initial customer
installations include materials, labor, and certain indirect
costs. Indirect costs are associated with the activities of the
Company’s personnel who assist in connecting and activating the new service and
consist of compensation and indirect costs associated with these support
functions. Indirect costs primarily include employee benefits and
payroll taxes, direct variable costs associated with capitalizable activities,
consisting primarily of installation and construction vehicle costs, the cost of
dispatch personnel and indirect costs directly attributable to capitalizable
activities. The costs of disconnecting service at a customer’s
dwelling or reconnecting service to a previously installed dwelling are charged
to operating expense in the period incurred. Costs for repairs and
maintenance are charged to operating expense as incurred, while plant and
equipment replacement and betterments, including replacement of cable drops from
the pole to the dwelling, are capitalized.
Depreciation
is recorded using the straight-line composite method over management’s estimate
of the useful lives of the related assets as follows:
|
Cable
distribution systems
|
7-20 years
|
|
Customer
equipment and installations
|
3-5 years
|
|
Vehicles
and equipment
|
1-5 years
|
|
Buildings
and leasehold improvements
|
5-15 years
|
|
Furniture,
fixtures and equipment
|
5 years
|
Asset
Retirement Obligations
Certain
of the Company’s franchise agreements and leases contain provisions requiring
the Company to restore facilities or remove equipment in the event that the
franchise or lease agreement is not renewed. The Company expects to
continually renew its franchise agreements and have concluded that substantially
all of the related franchise rights are indefinite lived intangible
assets. Accordingly, the possibility is remote that the Company would
be required to incur significant restoration or removal costs related to these
franchise agreements in the foreseeable future. Statement of
Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement
Obligations, as interpreted by Financial Accounting Standards Board
(“FASB”) Interpretation (“FIN”) No. 47, Accounting for Conditional Asset
Retirement Obligations – an Interpretation of FASB Statement No. 143,
requires
F-10
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
that a
liability be recognized for an asset retirement obligation in the period in
which it is incurred if a reasonable estimate of fair value can be
made. The Company has not recorded an estimate for potential
franchise related obligations but would record an estimated liability in the
unlikely event a franchise agreement containing such a provision were no longer
expected to be renewed. The Company also expects to renew many of its
lease agreements related to the continued operation of its cable business in the
franchise areas. For the Company’s lease agreements, the estimated
liabilities related to the removal provisions, where applicable, have been
recorded and are not significant to the financial statements.
Franchises
Franchise
rights represent the value attributed to agreements with local authorities that
allow access to homes in cable service areas acquired through the purchase of
cable systems. Management estimates the fair value of franchise
rights at the date of acquisition and determines if the franchise has a finite
life or an indefinite-life as defined by SFAS No. 142, Goodwill and Other Intangible
Assets. All franchises that qualify for indefinite-life treatment under
SFAS No. 142 are no longer amortized against earnings but instead are
tested for impairment annually or more frequently as warranted by events or
changes in circumstances (see Note 7). The Company concluded that
substantially all of its franchises qualify for indefinite-life
treatment. Costs incurred in renewing cable franchises are deferred
and amortized over 10 years.
Other Noncurrent
Assets
Other
noncurrent assets primarily include deferred financing costs, investments in
equity securities and goodwill. Costs related to borrowings are
deferred and amortized to interest expense over the terms of the related
borrowings.
Investments
in equity securities are accounted for at cost, under the equity method of
accounting or in accordance with SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. Charter recognizes losses for
any decline in value considered to be other than temporary.
Valuation of Property, Plant and
Equipment
The
Company evaluates the recoverability of long-lived assets to be held and used
for impairment when events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Such events or
changes in circumstances could include such factors as impairment of the
Company’s indefinite life franchise under SFAS No. 142, changes in technological
advances, fluctuations in the fair value of such assets, adverse changes in
relationships with local franchise authorities, adverse changes in market
conditions or a deterioration of operating results. If a review
indicates that the carrying value of such asset is not recoverable from
estimated undiscounted cash flows, the carrying value of such asset is reduced
to its estimated fair value. While the Company believes that its
estimates of future cash flows are reasonable, different assumptions regarding
such cash flows could materially affect its evaluations of asset
recoverability. No impairments of long-lived assets to be held and
used were recorded in 2008, 2007, and 2006; however, approximately $56 million
and $159 million of impairment on assets held for sale was recorded for the
years ended December 31, 2007 and 2006, respectively (see Note 4).
Derivative Financial
Instruments
The
Company accounts for derivative financial instruments in accordance with SFAS
No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended. For
those instruments which qualify as hedging activities, related gains or losses
are recorded in accumulated other comprehensive income (loss). For
all other derivative instruments, the related gains or losses are recorded in
the statements of operations. The Company uses interest rate swap
agreements to manage its interest costs and reduce the Company’s exposure to
increases in floating interest rates. The Company’s policy is to
manage its exposure to fluctuations in interest rates by maintaining a mix of
fixed and variable rate debt within a targeted range. Using interest
rate swap agreements, the Company agrees to exchange, at specified intervals
through 2013, the difference between fixed and variable interest amounts
calculated by reference to agreed-upon notional principal amounts. At
the banks’ option, certain interest rate swap agreements may be extended through
2014. The Company does not hold or issue any derivative financial
instruments for trading purposes.
F-11
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
Certain
provisions of the Company’s 5.875% and 6.50% convertible senior notes issued in
November 2004 and October 2007, respectively, were considered embedded
derivatives for accounting purposes and were required to be accounted for
separately from the convertible senior notes. In accordance with SFAS
No. 133, these derivatives are marked to market with gains or losses recorded as
the change in value of derivatives on the Company’s consolidated statements of
operations. For the years ended December 31, 2008, 2007, and 2006,
the Company recognized $33 million and $98 million in gains, and $10 million in
losses, respectively, related to these derivatives. At December 31,
2008 and 2007, $0 and $33 million is recorded on the Company’s balance sheets
related to these derivatives.
Revenue
Recognition
Revenues
from residential and commercial video, high-speed Internet and telephone
services are recognized when the related services are
provided. Advertising sales are recognized at estimated realizable
values in the period that the advertisements are broadcast. Franchise
fees imposed by local governmental authorities are collected on a monthly basis
from the Company’s customers and are periodically remitted to local franchise
authorities. Franchise fees of $187 million, $177 million, and $179
million for the years ended December 31, 2008, 2007, and 2006, respectively, are
reported in other revenues, on a gross basis with a corresponding operating
expense. Sales taxes
collected and remitted to state and local authorities are recorded on a net
basis.
The
Company’s revenues by product line are as follows:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Video
|
$ | 3,463 | $ | 3,392 | $ | 3,349 | ||||||
|
High-speed
Internet
|
1,356 | 1,243 | 1,047 | |||||||||
|
Telephone
|
555 | 345 | 137 | |||||||||
|
Commercial
|
392 | 341 | 305 | |||||||||
|
Advertising
sales
|
308 | 298 | 319 | |||||||||
|
Other
|
405 | 383 | 347 | |||||||||
| $ | 6,479 | $ | 6,002 | $ | 5,504 | |||||||
Programming
Costs
The
Company has various contracts to obtain basic, digital and premium video
programming from program suppliers whose compensation is typically based on a
flat fee per customer. The cost of the right to exhibit network
programming under such arrangements is recorded in operating expenses in the
month the programming is available for exhibition. Programming costs
are paid each month based on calculations performed by the Company and are
subject to periodic audits performed by the programmers. Certain
programming contracts contain incentives to be paid by the
programmers. The Company receives these payments related to the
activation of the programmer’s cable television channel and recognizes the
incentives on a straight-line basis over the life of the programming agreement
as a reduction of programming expense. This offset to programming
expense was $33 million, $25 million, and $32 million for the years ended
December 31, 2008, 2007, and 2006, respectively. As of
December 31, 2008 and 2007, the deferred amounts of such economic
consideration, included in other long-term liabilities, were $61 million and $90
million, respectively. Programming costs included in the accompanying
statement of operations were $1.6 billion, $1.6 billion, and $1.5 billion for
the years ended December 31, 2008, 2007, and 2006,
respectively.
Advertising
Costs
Advertising
costs associated with marketing the Company’s products and services are
generally expensed as costs are incurred. Such advertising expense
was $229 million, $187 million, and $131 million for the years ended
December 31, 2008, 2007, and 2006, respectively.
F-12
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
Multiple-Element
Transactions
In the
normal course of business, the Company enters into multiple-element transactions
where it is simultaneously both a customer and a vendor with the same
counterparty or in which it purchases multiple products and/or services, or
settles outstanding items contemporaneous with the purchase of a product or
service from a single counterparty. Transactions, although negotiated
contemporaneously, may be documented in one or more contracts. The
Company’s policy for accounting for each transaction negotiated
contemporaneously is to record each element of the transaction based on the
respective estimated fair values of the products or services purchased and the
products or services sold. In determining the fair value of the
respective elements, the Company refers to quoted market prices (where
available), historical transactions or comparable cash
transactions.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with SFAS No.
123(R), Share – Based
Payment, which addresses the accounting for share-based payment
transactions in which a company receives employee services in exchange for (a)
equity instruments of that company or (b) liabilities that are based on the fair
value of the company’s equity instruments or that may be settled by the issuance
of such equity instruments. The Company recorded $33 million, $18
million, and $13 million of option compensation expense which is included in
general and administrative expenses for the years ended December 31, 2008, 2007,
and 2006, respectively.
The fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted average
assumptions were used for grants during the years ended December 31, 2008, 2007,
and 2006, respectively; risk-free interest rates of 3.5%, 4.6%, and 4.6%;
expected volatility of 88.1%, 70.3%, and 87.3% based on historical volatility;
and expected lives of 6.3 years, 6.3 years, and 6.3 years,
respectively. The valuations assume no dividends are
paid.
Income Taxes
The
Company recognizes deferred tax assets and liabilities for temporary differences
between the financial reporting basis and the tax basis of the Company’s assets
and liabilities and expected benefits of utilizing net operating loss
carryforwards. The impact on deferred taxes of changes in tax rates
and tax law, if any, applied to the years during which temporary differences are
expected to be settled, are reflected in the consolidated financial statements
in the period of enactment (see Note 21).
Temporary Equity
Temporary
equity on the consolidated balance sheets represents Mr. Allen’s 5.6% preferred
membership interest in CC VIII, LLC (“CC VIII”), an indirect subsidiary of
Charter Holdco of $203 million and $199 million as of December 31, 2008 and
2007, respectively, and $38 million and $16 million, respectively, of nonvested
shares of restricted stock and performance shares issued to
employees. Mr. Allen’s CC VIII interest is classified as temporary
equity as a result of Mr. Allen’s ability to put his interest to the Company
upon a change in control. Mr. Allen’s 5.6% preferred membership interest
was previously classified in minority interest in the Company’s consolidated
balance sheets. The nonvested shares of restricted stock and
performance shares issued to employees were previously classified in other
long-term liabilities in the Company’s consolidated balance
sheets. Current year and prior year amounts have been
reclassified.
Loss per Common
Share
Basic
loss per common share is computed by dividing the net loss by 373,464,920
shares, 368,240,608 shares, and 331,941,788 shares for the years ended December
31, 2008, 2007, and 2006, representing the weighted-average common shares
outstanding during the respective periods. Diluted loss per common
share equals basic loss per common share for the periods presented, as the
effect of stock options and other convertible securities are antidilutive
because the Company incurred net losses. All membership units of
Charter Holdco are exchangeable on a one-for-one basis into common stock of
Charter at the option of the holders. As of December 31, 2008,
Charter
F-13
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
Holdco
had 750,919,925 membership units outstanding. Should the holders
exchange units for shares, the effect would not be dilutive to earnings per
share because the Company incurred net losses.
The 21.8
million and 24.8 million shares outstanding as of December 31, 2008 and 2007,
respectively, pursuant to the share lending agreement described in Note 12 are
required to be returned, in accordance with the contractual arrangement, and are
treated in basic and diluted earnings per share as if they were already returned
and retired. Consequently, there is no impact of the shares of common
stock lent under the share lending agreement in the earnings per share
calculation.
Segments
SFAS
No. 131, Disclosure about
Segments of an Enterprise and Related Information, established standards
for reporting information about operating segments in annual financial
statements and in interim financial reports issued to
shareholders. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated on a regular basis by the chief operating decision maker, or decision
making group, in deciding how to allocate resources to an individual segment and
in assessing performance of the segment.
The
Company’s operations are managed on the basis of geographic operating
segments. The Company has evaluated the criteria for aggregation of
the geographic operating segments under paragraph 17 of SFAS No. 131 and
believes it meets each of the respective criteria set forth. The
Company delivers similar products and services within each of its geographic
operations. Each geographic service area utilizes similar means for
delivering the programming of the Company’s services; have similarity in the
type or class of customer receiving the products and services; distributes the
Company’s services over a unified network; and operates within a consistent
regulatory environment. In addition, each of the geographic operating
segments has similar economic characteristics. In light of the
Company’s similar services, means for delivery, similarity in type of customers,
the use of a unified network and other considerations across its geographic
operating structure, management has determined that the Company has one
reportable segment, broadband services.
|
4.
|
Sale
of Assets
|
In 2006, the Company sold certain cable
television systems serving approximately 356,000 video customers in 1) West
Virginia and Virginia to
Cebridge Connections, Inc. (the “Cebridge Transaction”); 2) Illinois and
Kentucky to Telecommunications Management, LLC, doing business as New Wave
Communications (the “New Wave Transaction”) and 3) Nevada, Colorado, New Mexico
and Utah to Orange Broadband Holding Company, LLC (the “Orange Transaction”) for a total
sales price of approximately $971 million. The Company used the net
proceeds from the asset sales to reduce borrowings, but not commitments, under
the revolving portion of the Company’s credit facilities. These cable
systems met the criteria for assets held for sale. As such, the
assets were written down to fair value less estimated costs to sell, resulting
in asset impairment charges during the year ended December 31, 2006 of
approximately $99 million related to the New Wave Transaction and the Orange
Transaction. The Company determined that the West Virginia and
Virginia cable systems comprise operations and cash flows that for financial
reporting purposes meet the criteria for discontinued
operations. Accordingly, the results of operations for the West
Virginia and Virginia cable systems have been presented as discontinued
operations, net of tax, for the year ended December 31, 2006, including a gain
of $200 million on the sale of cable systems.
F-14
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
Summarized
consolidated financial information for the years ended December 31, 2006 for the
West Virginia and Virginia cable systems is as follows:
|
Year
Ended
December
31, 2006
|
||||
|
Revenues
|
$ | 109 | ||
|
Income
before income taxes
|
$ | 238 | ||
|
Income
tax expense
|
$ | (22 | ) | |
|
Net
income
|
$ | 216 | ||
|
Earnings
per common share, basic and diluted
|
$ | 0.65 | ||
In 2007
and 2006, the Company recorded asset impairment charges of $56 million and $60
million, respectively, related to other cable systems meeting the criteria of
assets held for sale.
5. Allowance
for Doubtful Accounts
Activity
in the allowance for doubtful accounts is summarized as follows for the years
presented:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Balance,
beginning of year
|
$ | 18 | $ | 16 | $ | 17 | ||||||
|
Charged
to expense
|
122 | 107 | 89 | |||||||||
|
Uncollected
balances written off, net of recoveries
|
(122 | ) | (105 | ) | (90 | ) | ||||||
|
Balance,
end of year
|
$ | 18 | $ | 18 | $ | 16 | ||||||
|
6.
|
Property,
Plant and Equipment
|
Property,
plant and equipment consists of the following as of December 31, 2008 and
2007:
|
2008
|
2007
|
|||||||||||||
|
Cable
distribution systems
|
$
|
7,008
|
$
|
6,697
|
||||||||||
|
Customer
equipment and installations
|
4,057
|
3,740
|
||||||||||||
|
Vehicles
and equipment
|
256
|
257
|
||||||||||||
|
Buildings
and leasehold improvements
|
497
|
483
|
||||||||||||
|
Furniture,
fixtures and equipment
|
394
|
388
|
||||||||||||
|
12,212
|
11,565
|
|||||||||||||
|
Less:
accumulated depreciation
|
(7,225)
|
(6,462)
|
||||||||||||
|
$
|
4,987
|
$
|
5,103
|
|||||||||||
The
Company periodically evaluates the estimated useful lives used to depreciate its
assets and the estimated amount of assets that will be abandoned or have minimal
use in the future. A significant change in assumptions about the
extent or timing of future asset retirements, or in the Company’s use of new
technology and upgrade programs, could materially affect future depreciation
expense. In 2007, the Company changed the useful lives of certain
property, plant, and equipment based on technological changes. The
change in useful lives reduced depreciation expense by approximately $81 million
and $8 million during 2008 and 2007, respectively.
Depreciation
expense for each of the years ended December 31, 2008, 2007, and 2006 was $1.3
billion.
F-15
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
7. Franchises,
Goodwill and Other Intangible Assets
Franchise
rights represent the value attributed to agreements or authorizations with local
and state authorities that allow access to homes in cable service
areas. Management estimates the fair value of franchise rights at the
date of acquisition and determines if the franchise has a finite life or an
indefinite-life as defined by SFAS No. 142, Goodwill and Other Intangible
Assets. Franchises that qualify for indefinite-life treatment
under SFAS No. 142 are tested for impairment annually, or more frequently as
warranted by events or changes in circumstances. Franchises are
aggregated into essentially inseparable units of accounting to conduct the
valuations. The units of accounting generally represent geographical
clustering of the Company’s cable systems into groups by which such systems are
managed. Management believes such grouping represents the highest and
best use of those assets. The Company has historically assessed that
its divisional operations were the appropriate level at which the Company’s
franchises should be evaluated. Based on certain organizational
changes in 2008, the Company determined that the appropriate units of accounting
for franchises are now the individual market area, which is a level below the
Company’s geographic divisional groupings previously used. The
organizational change in 2008 consolidated the Company’s three divisions to two
operating groups and put more management focus on the individual market
areas. The Company completed its impairment assessment as of December
31, 2008 upon completion of its 2009 budgeting process. Largely
driven by the impact of the current economic downturn along with increased
competition, the Company lowered its projected revenue and expense growth rates,
and accordingly revised its estimates of future cash flows as compared to those
used in prior valuations. As a result, the Company recorded $1.5
billion of impairment for the year ended December 31, 2008. The
Company recorded $178 million of impairment for the year ended December 31,
2007. The valuation completed for 2006 showed franchise fair values
in excess of book value, and thus resulted in no impairment.
The
Company’s valuations, which are based on the present value of projected after
tax cash flows, result in a value of property, plant and equipment, franchises,
customer relationships, and its total entity value. The value of
goodwill is the difference between the total entity value and amounts assigned
to the other assets.
Franchises,
for valuation purposes, are defined as the future economic benefits of the right
to solicit and service potential customers (customer marketing rights), and the
right to deploy and market new services, such as interactivity and telephone, to
the potential customers (service marketing rights). Fair value is
determined based on estimated discounted future cash flows using assumptions
consistent with internal forecasts. The franchise after-tax cash flow
is calculated as the after-tax cash flow generated by the potential customers
obtained (less the anticipated customer churn), and the new services added to
those customers in future periods. The sum of the present value of
the franchises' after-tax cash flow in years 1 through 10 and the continuing
value of the after-tax cash flow beyond year 10 yields the fair value of the
franchise.
Customer
relationships, for valuation purposes, represent the value of the business
relationship with existing customers (less the anticipated customer churn), and
are calculated by projecting future after-tax cash flows from these customers,
including the right to deploy and market additional services to these
customers. The present value of these after-tax cash flows yields the
fair value of the customer relationships. Substantially all
acquisitions occurred prior to January 1, 2002. The Company did not
record any value associated with the customer relationship intangibles related
to those acquisitions. For acquisitions subsequent to January 1,
2002, the Company did assign a value to the customer relationship intangible,
which is amortized over its estimated useful life.
F-16
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
As of
December 31, 2008 and 2007, indefinite-lived and finite-lived intangible
assets are presented in the following table:
|
December
31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||
|
Gross
|
Net
|
Gross
|
Net
|
|||||||||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Carrying
|
Accumulated
|
Carrying
|
|||||||||||||||||||
|
Amount
|
Amortization
|
Amount
|
Amount
|
Amortization
|
Amount
|
|||||||||||||||||||
|
Indefinite-lived
intangible assets:
|
||||||||||||||||||||||||
|
Franchises
with indefinite lives
|
$ | 7,377 | $ | -- | $ | 7,377 | $ | 8,929 | $ | -- | $ | 8,929 | ||||||||||||
|
Goodwill
|
68 | -- | 68 | 67 | -- | 67 | ||||||||||||||||||
| $ | 7,445 | $ | -- | $ | 7,445 | $ | 8,996 | $ | -- | $ | 8,996 | |||||||||||||
|
Finite-lived
intangible assets:
|
||||||||||||||||||||||||
|
Franchises
with finite lives
|
$ | 16 | $ | 9 | $ | 7 | $ | 23 | $ | 10 | $ | 13 | ||||||||||||
|
Other
intangible assets
|
71 | 41 | 30 | 97 | 73 | 24 | ||||||||||||||||||
| $ | 87 | $ | 50 | $ | 37 | $ | 120 | $ | 83 | $ | 37 | |||||||||||||
Franchise
amortization expense represents the amortization relating to franchises that did
not qualify for indefinite-life treatment under SFAS No. 142, including costs
associated with franchise renewals. During the year ended December
31, 2008, the net carrying amount of indefinite-lived franchises was reduced by
$1.5 billion as a result of the impairment of franchises discussed above, $32
million related to cable asset sales completed in 2008, and $4 million as a
result of the finalization of purchase accounting related to cable asset
acquisitions. Additionally, during the year ended December 31, 2008,
approximately $5 million of franchises that were previously classified as
finite-lived were reclassified to indefinite-lived, based on management’s
assessment when these franchises migrated to state-wide
franchising. For the year ended December 31, 2007, the net carrying
amount of indefinite-lived franchises was reduced by $178 million as a result of
the impairment of franchises discussed above, $77 million related to cable asset
sales completed in 2007, and $56 million as a result of the asset impairment
charges recorded related to these cable asset sales. These decreases
were offset by $33 million of franchises added as a result of acquisitions of
cable assets.
Franchise
amortization expense for the years ended December 31, 2008, 2007, and 2006
was $2 million, $3 million, and $2 million, respectively. During the
year ended December 31, 2008, the net carrying amount of finite-lived franchises
increased $1 million as a result of costs incurred associated with franchise
renewals. Other intangible assets amortization expense for the years
ended December 31, 2008, 2007 and 2006 was $5 million, $4 million, and $4
million, respectively. The Company expects that amortization expense
on franchise assets and other intangible assets will be approximately $7 million
annually for each of the next five years. Actual amortization expense
in future periods could differ from these estimates as a result of new
intangible asset acquisitions or divestitures, changes in useful lives and other
relevant factors.
F-17
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
8. Accounts
Payable and Accrued Expenses
Accounts
payable and accrued expenses consist of the following as of December 31, 2008
and 2007:
|
2008
|
2007
|
|||||||
|
Accounts
payable – trade
|
$ | 99 | $ | 127 | ||||
|
Accrued
capital expenditures
|
56 | 95 | ||||||
|
Accrued
expenses:
|
||||||||
|
Interest
|
408 | 418 | ||||||
|
Programming
costs
|
305 | 273 | ||||||
|
Franchise
related fees
|
60 | 66 | ||||||
|
Compensation
|
124 | 116 | ||||||
|
Other
|
258 | 237 | ||||||
| $ | 1,310 | $ | 1,332 | |||||
|
9.
|
Long-Term
Debt
|
Long-term
debt consists of the following as of December 31, 2008 and
2007:
|
2008
|
2007
|
|||||||||||||||
|
Principal
|
Accreted
|
Principal
|
Accreted
|
|||||||||||||
|
Amount
|
Value
|
Amount
|
Value
|
|||||||||||||
|
Charter
Communications, Inc.:
|
||||||||||||||||
|
5.875%
convertible senior notes due November 16, 2009
|
$ | 3 | $ | 3 | $ | 49 | $ | 44 | ||||||||
|
6.50%
convertible senior notes due October 1, 2027
|
479 | 373 | 479 | 353 | ||||||||||||
|
Charter
Communications Holdings, LLC:
|
||||||||||||||||
|
10.000%
senior notes due April 1, 2009
|
53 | 53 | 88 | 88 | ||||||||||||
|
10.750%
senior notes due October 1, 2009
|
4 | 4 | 63 | 63 | ||||||||||||
|
9.625%
senior notes due November 15, 2009
|
25 | 25 | 37 | 37 | ||||||||||||
|
10.250%
senior notes due January 15, 2010
|
1 | 1 | 18 | 18 | ||||||||||||
|
11.750%
senior discount notes due January 15, 2010
|
1 | 1 | 16 | 16 | ||||||||||||
|
11.125%
senior notes due January 15, 2011
|
47 | 47 | 47 | 47 | ||||||||||||
|
13.500%
senior discount notes due January 15, 2011
|
60 | 60 | 60 | 60 | ||||||||||||
|
9.920%
senior discount notes due April 1, 2011
|
51 | 51 | 51 | 51 | ||||||||||||
|
10.000%
senior notes due May 15, 2011
|
69 | 69 | 69 | 69 | ||||||||||||
|
11.750%
senior discount notes due May 15, 2011
|
54 | 54 | 54 | 54 | ||||||||||||
|
12.125%
senior discount notes due January 15, 2012
|
75 | 75 | 75 | 75 | ||||||||||||
|
CCH
I Holdings, LLC:
|
||||||||||||||||
|
11.125%
senior notes due January 15, 2014
|
151 | 151 | 151 | 151 | ||||||||||||
|
13.500%
senior discount notes due January 15, 2014
|
581 | 581 | 581 | 581 | ||||||||||||
|
9.920%
senior discount notes due April 1, 2014
|
471 | 471 | 471 | 471 | ||||||||||||
|
10.000%
senior notes due May 15, 2014
|
299 | 299 | 299 | 299 | ||||||||||||
|
11.750%
senior discount notes due May 15, 2014
|
815 | 815 | 815 | 815 | ||||||||||||
|
12.125%
senior discount notes due January 15, 2015
|
217 | 217 | 217 | 217 | ||||||||||||
|
CCH
I, LLC:
|
||||||||||||||||
|
11.000%
senior notes due October 1, 2015
|
3,987 | 4,072 | 3,987 | 4,083 | ||||||||||||
|
CCH
II, LLC:
|
||||||||||||||||
|
10.250%
senior notes due September 15, 2010
|
1,860 | 1,857 | 2,198 | 2,192 | ||||||||||||
|
10.250%
senior notes due October 1, 2013
|
614 | 598 | 250 | 260 | ||||||||||||
|
CCO
Holdings, LLC:
|
||||||||||||||||
|
8
3/4% senior notes due November 15, 2013
|
800 | 796 | 800 | 795 | ||||||||||||
|
Credit
facility
|
350 | 350 | 350 | 350 | ||||||||||||
F-18
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
|
Charter
Communications Operating, LLC:
|
||||||||||||||||
|
8.000%
senior second-lien notes due April 30, 2012
|
1,100 | 1,100 | 1,100 | 1,100 | ||||||||||||
|
8
3/8% senior second-lien notes due April 30, 2014
|
770 | 770 | 770 | 770 | ||||||||||||
|
10.875%
senior second-lien notes due September 15, 2014
|
546 | 527 | -- | -- | ||||||||||||
|
Credit
facilities
|
8,246 | 8,246 | 6,844 | 6,844 | ||||||||||||
|
Total
Debt
|
$ | 21,729 | $ | 21,666 | $ | 19,939 | $ | 19,903 | ||||||||
|
Less:
Current Portion
|
155 | 155 | -- | -- | ||||||||||||
|
Long-Term
Debt
|
$ | 21,574 | $ | 21,511 | $ | 19,939 | $ | 19,903 | ||||||||
The
accreted values presented above generally represent the principal amount of the
notes less the original issue discount at the time of sale, plus the accretion
to the balance sheet date. However, the current accreted value for
legal purposes and notes indenture purposes (the amount that is currently
payable if the debt becomes immediately due) is equal to the principal amount of
notes. See Note 28 related to the proposed
restructuring.
Charter
Convertible Notes
The
Charter convertible notes rank equally with any of Charter’s future
unsubordinated and unsecured indebtedness, but are structurally subordinated to
all existing and future indebtedness and other liabilities of Charter’s
subsidiaries.
The
5.875% convertible senior notes are convertible at any time at the option of the
holder into shares of Class A common stock at an initial conversion rate of
413.2231 shares per $1,000 principal amount of notes, which is equivalent to a
conversion price of approximately $2.42 per share, subject to certain
adjustments. Specifically, the adjustments include anti-dilutive
provisions, which cause adjustments to occur automatically based on the
occurrence of specified events to provide protection rights to holders of the
notes. The conversion rate may also be increased (but not to exceed
462 shares per $1,000 principal amount of notes) upon a specified change of
control transaction. Additionally, Charter may elect to increase the
conversion rate under certain circumstances when deemed appropriate, and subject
to applicable limitations of the NASDAQ Global Select Market. Upon
conversion, the Company shall have the right to deliver, in lieu of shares of
Class A common stock, cash, or a combination of cash and common
stock.
Charter
may redeem the 5.875% convertible senior notes in whole or in part for cash at
any time at a redemption price equal to 100% of the aggregate principal amount,
plus accrued and unpaid interest, if any, but only if for any 20 trading days in
any 30 consecutive trading day period the closing price has exceeded 150% of the
conversion price. Holders who convert 5.875% convertible senior notes
that Charter has called for redemption shall receive the present value of the
interest on the notes converted that would have been payable for the period from
the redemption date through the scheduled maturity date for the notes, plus any
accrued interest.
In the
second quarter of 2008, Charter Holdco repurchased, in private transactions,
from a small number of institutional holders, a total of approximately $46
million principal amount of Charter’s 5.875% convertible senior notes due 2009,
for approximately $42 million of cash. The purchased 5.875%
convertible senior notes were cancelled resulting in approximately $3 million
principal amount of such notes remaining outstanding. The
transactions resulted in a gain on extinguishment of debt of approximately $5
million for the year ended December 31, 2008, included in gain (loss) on
extinguishment of debt on the Company’s consolidated statements of
operations.
The 6.50%
convertible senior notes are convertible into Class A common stock at the
conversion rate of 293.3868 shares per $1,000 principal amount of notes which is
equivalent to a conversion price of approximately $3.41 per share, subject to
certain adjustments. The adjustments include anti-dilution
provisions, which cause adjustments to occur automatically based on the
occurrence of specified events. If certain transactions that
constitute a change of control occur on or prior to October 1, 2012, under
certain circumstances, Charter will increase the conversion rate by a number of
additional shares for any conversion of 6.50% convertible senior notes in
connection with such transactions. The conversion rate may also be
increased (but not to exceed 381 shares per $1,000 principal amount of notes)
upon a specified change of control transaction. Additionally, Charter
may elect to increase the conversion rate under certain circumstances when
deemed appropriate, and subject to applicable limitations of the NASDAQ Global
Select Market. The 6.50% convertible senior notes provide the holders
with the right to require Charter to
F-19
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
repurchase
some or all of the 6.50% convertible senior notes for cash on October 1, 2012,
2017, and 2022 at a repurchase price equal to the principal amount plus accrued
interest.
Charter
may redeem the 6.50% convertible senior notes in whole or in part for cash at
any time at a redemption price equal to 100% of the principal amount, plus
accrued and unpaid interest, if any, but only if for any 20 trading days in any
30 consecutive trading day period the closing price has exceeded 180% of the
conversion price provided such 30 trading day period begins prior to October 1,
2010, or 150% of the conversion price provided such 30 trading period begins
thereafter and before October 1, 2012, or at the redemption price regardless of
the closing price of Charter’s Class A common stock
thereafter. Holders who convert any 6.50% convertible senior notes
prior to October 1, 2012 that Charter has called for redemption shall receive
the present value of the interest on the notes converted that would have been
payable for the period from the redemption date to, but excluding, October 1,
2012.
Certain
provisions of the Company’s 6.50% convertible senior notes issued in October
2007 were considered embedded derivatives for accounting purposes and were
required to be separately accounted for from the convertible senior notes.
At the time of issuance, the embedded derivative was valued at approximately
$131 million which was bifurcated from the principal amount of the convertible
senior notes and recorded in other long-term liabilities. The convertible
senior notes will accrete to face value over five years (the date holders can
first require Charter to repurchase the notes) and the embedded derivative will
be marked to market with gains or losses recorded as the change in value of
derivatives on the Company’s consolidated statement of
operations.
Upon a
change of control and certain other fundamental changes, subject to certain
conditions and restrictions, Charter may be required to repurchase the notes, in
whole or in part, at 100% of their principal amount plus accrued interest at the
repurchase date.
Charter
Holdings Notes
The
Charter Holdings notes are senior debt obligations of Charter Holdings and
Charter Communications Capital Corporation (“Charter Capital”). They
rank equally with all other current and future unsecured, unsubordinated
obligations of Charter Holdings and Charter Capital. They are
structurally subordinated to the obligations of Charter Holdings’ subsidiaries,
including the CIH notes, the CCH I notes, CCH II notes, the CCO Holdings notes,
the Charter Operating notes, and the Charter Operating credit
facilities.
Except
for the 10.00% notes due April 1, 2009, the 10.75% notes due October 1, 2009 and
the 9.625% notes due November 15, 2009, which notes may not be redeemed prior to
their respective maturity dates, the Charter Holdings notes may be redeemed at
the option of Charter Holdings on or after varying dates, in each case at a
premium. The optional redemption price declines to 100% of the
respective series’ principal amount, plus accrued and unpaid interest, on or
after varying dates in 2008 through 2010.
In the
event that a specified change of control event occurs, Charter Holdings and
Charter Capital must offer to repurchase any then outstanding notes at 101% of
their principal amount or accreted value, as applicable, plus accrued and unpaid
interest, if any.
In the
second quarter of 2008, Charter Holdco repurchased, in private transactions from
a small number of institutional holders, a total of approximately $35 million
principal amount of various Charter Holdings notes due 2009 and 2010 for
approximately $35 million of cash. Charter Holdco continues to hold
the Charter Holdings notes. The transactions resulted in a gain on
extinguishment of debt of approximately $1 million for the year ended December
31, 2008, included in gain (loss) on extinguishment of debt on the Company’s
consolidated statements of operations.
In
October 2008, Charter Holdco completed a tender offer, in which a total of
approximately $102 million principal amount of various Charter Holdings notes
due 2009 and 2010 were exchanged for approximately $99 million of
cash. Charter Holdco continues to hold the Charter Holdings
notes. The transactions resulted in a gain on extinguishment of debt
of approximately $2 million for the year ended December 31, 2008, included in
gain (loss) on extinguishment of debt on the Company’s consolidated statements
of operations.
F-20
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
CCH
I Holdings, LLC Notes
The CIH
notes are senior debt obligations of CIH and CCH I Holdings Capital
Corp. They rank equally with all other current and future unsecured,
unsubordinated obligations of CIH and CCH I Holdings Capital
Corp. The CIH notes are structurally subordinated to all obligations
of subsidiaries of CIH, including the CCH I notes, the CCH II notes, the CCO
Holdings notes, the Charter Operating notes and the Charter Operating credit
facilities. The CIH notes are guaranteed on a senior unsecured basis
by Charter Holdings.
The CIH
notes may be redeemed at any time at a premium. The optional
redemption price declines to 100% of the respective series’ principal amount,
plus accrued and unpaid interest, on or after varying dates generally in 2009
and 2010.
In the
event that a specified change of control event happens, CIH and CCH I Holdings
Capital Corp. must offer to repurchase any outstanding notes at a price equal to
the sum of the accreted value of the notes plus accrued and unpaid interest plus
a premium that varies over time.
CCH I, LLC
Notes
The CCH I
notes are guaranteed on a senior unsecured basis by Charter Holdings and are
secured by a pledge of 100% of the equity interest of CCH I’s wholly owned
direct subsidiary, CCH II, and by a pledge of CCH I’s 70% interest in the
24,273,943 Class A preferred membership units of CC VIII (collectively,
the "CC VIII interest"), and the proceeds thereof. Such pledges
are subject to significant limitations as described in the related pledge
agreement.
The CCH I
notes are senior debt obligations of CCH I and CCH I Capital Corp. To
the extent of the value of the collateral, they rank senior to all of CCH I’s
future unsecured senior indebtedness. The CCH I notes are
structurally subordinated to all obligations of subsidiaries of CCH I, including
the CCH II notes, CCO Holdings notes, the Charter Operating notes and the
Charter Operating credit facilities.
CCH I and
CCH I Capital Corp. may not redeem at their option any of the notes prior to
October 1, 2010. On or after October 1, 2010, CCH I and CCH I Capital
Corp. may redeem, in whole or in part, CCH I notes at anytime, in each case at a
premium. The optional redemption price declines to 100% of the
principal amount, plus accrued and unpaid interest, on or after October 1,
2013.
If a
change of control occurs, each holder of the CCH I notes will have the right to
require the repurchase of all or any part of that holder’s CCH I notes at 101%
of the principal amount plus accrued and unpaid interest.
CCH
II, LLC Notes
The CCH
II Notes are senior debt obligations of CCH II and CCH II Capital
Corp. The CCH II Notes rank equally with all other current and
future unsecured, unsubordinated obligations of CCH II and CCH II Capital
Corp. The CCH II 2013 Notes are guaranteed on a senior unsecured
basis by Charter Holdings. The CCH II notes are structurally
subordinated to all obligations of subsidiaries of CCH II, including the CCO
Holdings notes, the Charter Operating notes and the Charter Operating credit
facilities.
On or
after September 15, 2008, the issuers of the CCH II 2010 Notes may redeem all or
a part of the notes at a redemption price that declines ratably from the initial
redemption price of 105.125% to a redemption price on or after September 15,
2009 of 100.0% of the principal amount of the CCH II 2010 Notes redeemed, plus,
in each case, any accrued and unpaid interest. On or after October 1,
2010, the issuers of the CCH II 2013 Notes may redeem all or a part of the notes
at a redemption price that declines ratably from the initial redemption price of
105.125% to a redemption price on or after October 1, 2012 of 100.0% of the
principal amount of the CCH II 2013 Notes redeemed, plus, in each case, any
accrued and unpaid interest.
F-21
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
In the
event of specified change of control events, CCH II must offer to purchase the
outstanding CCH II notes from the holders at a purchase price equal to 101% of
the total principal amount of the notes, plus any accrued and unpaid
interest.
In July
2008, CCH II completed a tender offer, in which $338 million of CCH II’s 10.25%
senior notes due 2010 were accepted for $364 million of CCH II’s 10.25% senior
notes due 2013, which were issued as part of the same series of notes as CCH
II’s $250 million aggregate principal amount of 10.25% senior notes due 2013,
which were issued in September 2006. The transactions resulted in a
loss on extinguishment of debt of approximately $4 million for the year ended
December 31, 2008, included in gain (loss) on extinguishment of debt on the
Company’s consolidated statements of operations.
CCO
Holdings Notes
The CCO
Holdings notes are senior debt obligations of CCO Holdings and CCO Holdings
Capital Corp. They rank equally with all other current and future unsecured,
unsubordinated obligations of CCO Holdings and CCO Holdings Capital
Corp. The CCO Holdings notes are structurally subordinated to all
obligations of subsidiaries of CCO Holdings, including the Charter Operating
notes and the Charter Operating credit facilities.
On or
after November 15, 2008, the issuers of the CCO Holdings 8 ¾% senior notes may
redeem all or a part of the notes at a redemption price that declines ratably
from the initial redemption price of 104.375% to a redemption price on or after
November 15, 2011 of 100.0% of the principal amount of the CCO Holdings 8 ¾%
senior notes redeemed, plus, in each case, any accrued and unpaid
interest.
In the
event of specified change of control events, CCO Holdings must offer to purchase
the outstanding CCO Holdings senior notes from the holders at a purchase price
equal to 101% of the total principal amount of the notes, plus any accrued and
unpaid interest.
Charter Operating
Notes
The
Charter Operating notes are senior debt obligations of Charter Operating and
Charter Communications Operating Capital Corp. To the extent of the
value of the collateral (but subject to the prior lien of the credit
facilities), they rank effectively senior to all of Charter Operating’s future
unsecured senior indebtedness. The collateral currently consists of
the capital stock of Charter Operating held by CCO Holdings, all of the
intercompany obligations owing to CCO Holdings by Charter Operating or any
subsidiary of Charter Operating, and substantially all of Charter Operating’s
and the guarantors’ assets (other than the assets of CCO
Holdings). CCO Holdings and those subsidiaries of Charter Operating
that are guarantors of, or otherwise obligors with respect to, indebtedness
under the Charter Operating credit facilities and related obligations, guarantee
the Charter Operating notes.
Charter
Operating may, at any time and from time to time, at their option, redeem the
outstanding 8% second lien notes due 2012, in whole or in part, at a redemption
price equal to 100% of the principal amount thereof plus accrued and unpaid
interest, if any, to the redemption date, plus the Make-Whole
Premium. The Make-Whole Premium is an amount equal to the excess of
(a) the present value of the remaining interest and principal payments due on an
8% senior second-lien note due 2012 to its final maturity date, computed using a
discount rate equal to the Treasury Rate on such date plus 0.50%, over (b) the
outstanding principal amount of such Note.
On or
after April 30, 2009, Charter Operating may redeem all or a part of the 8 3/8%
senior second lien notes at a redemption price that declines ratably from the
initial redemption price of 104.188% to a redemption price on or after April 30,
2012 of 100% of the principal amount of the 8 3/8% senior second lien notes
redeemed plus in each case accrued and unpaid interest.
In March
2008, Charter Operating issued $546 million principal amount of 10.875% senior
second-lien notes due 2014, guaranteed by CCO Holdings and certain other
subsidiaries of Charter Operating, in a private transaction. Net
proceeds from the senior second-lien notes were used to reduce borrowings, but
not commitments, under the revolving portion of the Charter Operating credit
facilities.
F-22
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
The
Charter Operating 10.875% senior second-lien notes may be redeemed at the option
of Charter Operating on or after varying dates, in each case at a premium, plus
the Make-Whole Premium. The Make-Whole Premium is an amount equal to
the excess of (a) the present value of the remaining interest and principal
payments due on a 10.875% senior second-lien note due 2014 to its final maturity
date, computed using a discount rate equal to the Treasury Rate on such date
plus 0.50%, over (b) the outstanding principal amount of such
note. The Charter Operating 10.875% senior second-lien notes may be
redeemed at any time on or after March 15, 2012 at specified
prices. In the event of specified change of control events, Charter
Operating must offer to purchase the Charter Operating 10.875% senior
second-lien notes at a purchase price equal to 101% of the total principal
amount of the Charter Operating notes repurchased plus any accrued and unpaid
interest thereon.
High-Yield Restrictive Covenants;
Limitation on Indebtedness.
The
indentures governing the Charter Holdings, CIH, CCH II, CCO Holdings and Charter
Operating notes contain certain covenants that restrict the ability of Charter
Holdings, Charter Capital, CIH, CIH Capital Corp., CCH I, CCH I Capital Corp.,
CCH II, CCH II Capital Corp., CCO Holdings, CCO Holdings Capital Corp., Charter
Operating, Charter Communications Operating Capital Corp., and all of their
restricted subsidiaries to:
|
|
·
|
incur
additional debt;
|
|
|
·
|
pay
dividends on equity or repurchase
equity;
|
|
|
·
|
make
investments;
|
|
|
·
|
sell
all or substantially all of their assets or merge with or into other
companies;
|
|
|
·
|
sell
assets;
|
|
|
·
|
enter
into sale-leasebacks;
|
|
|
·
|
in
the case of restricted subsidiaries, create or permit to exist dividend or
payment restrictions with respect to the bond issuers, guarantee their
parent companies debt, or issue specified equity
interests;
|
|
|
·
|
engage
in certain transactions with affiliates;
and
|
|
|
·
|
grant
liens.
|
CCO
Holdings Credit Facility
The CCO
Holdings credit facility consists of a $350 million term loan. The
term loan matures on September 6, 2014. The CCO Holdings credit
facility also allows the Company to enter into incremental term loans in the
future, maturing on the dates set forth in the notices establishing such term
loans, but no earlier than the maturity date of the existing term
loans. However, no assurance can be given that the Company could
obtain such incremental term loans if CCO Holdings sought to do
so. Borrowings under the CCO Holdings credit facility bear interest
at a variable interest rate based on either LIBOR or a base rate plus, in either
case, an applicable margin. The applicable margin for LIBOR term
loans, other than incremental loans, is 2.50% above LIBOR. The
applicable margin with respect to the incremental loans is to be agreed upon by
CCO Holdings and the lenders when the incremental loans are
established. The CCO Holdings credit facility is secured by the
equity interests of Charter Operating, and all proceeds thereof.
Charter
Operating Credit Facilities
The
Charter Operating credit facilities provide borrowing availability of up to $8.0
billion as follows:
|
·
|
a
term loan with an initial total principal amount of $6.5 billion, which is
repayable in equal quarterly installments, commencing March 31, 2008, and
aggregating in each loan year to 1% of the original amount of the term
loan, with the remaining balance due at final maturity on March 6, 2014;
and
|
|
·
|
a
revolving line of credit of $1.5 billion, with a maturity date on
March 6, 2013.
|
The
Charter Operating credit facilities also allow the Company to enter into
incremental term loans in the future with an aggregate amount of up to $1.0
billion, with amortization as set forth in the notices establishing such term
loans, but with no amortization greater than 1% prior to the final maturity of
the existing term loan. In March 2008, Charter
Operating borrowed $500 million principal amount of incremental term loans (the
“Incremental Term
F-23
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
Loans”)
under the Charter Operating credit facilities. The Incremental Term Loans have a
final maturity of March 6, 2014 and prior to this date will amortize in
quarterly principal installments totaling 1% annually beginning on June 30,
2008. The Incremental Term Loans bear interest at LIBOR plus 5.0%, with a
LIBOR floor of 3.5%, and are otherwise governed by and subject to the existing
terms of the Charter Operating credit facilities. Net proceeds from the
Incremental Term Loans were used for general corporate purposes. Although the
Charter Operating credit facilities allow for the incurrence of up to an
additional $500 million in incremental term loans, no assurance can be given
that additional incremental term loans could be obtained in the future if
Charter Operating sought to do so especially after the announcement of Charter’s
plan to file a Chapter 11 bankruptcy proceeding on or before April 1,
2009. See Note 28.
Amounts
outstanding under the Charter Operating credit facilities bear interest, at
Charter Operating’s election, at a base rate or the Eurodollar rate (1.46% to
3.50% as of December 31, 2008 and 4.87% to 5.24% as of December 31, 2007), as
defined, plus a margin for Eurodollar loans of up to 2.00% for the revolving
credit facility and 2.00% for the term loan, and quarterly commitment fee of
0.5% per annum is payable on the average daily unborrowed balance of the
revolving credit facility.
The
obligations of Charter Operating under the Charter Operating credit facilities
(the “Obligations”) are guaranteed by Charter Operating’s immediate parent
company, CCO Holdings, and the subsidiaries of Charter Operating, except for
certain subsidiaries, including immaterial subsidiaries and subsidiaries
precluded from guaranteeing by reason of provisions of other indebtedness to
which they are subject (the “non-guarantor subsidiaries”). The Obligations
are also secured by (i) a lien on substantially all of the assets of Charter
Operating and its subsidiaries (other than assets of the non-guarantor
subsidiaries), and (ii) a pledge by CCO Holdings of the equity interests owned
by it in Charter Operating or any of Charter Operating’s subsidiaries, as well
as intercompany obligations owing to it by any of such
entities.
As of
December 31, 2008, outstanding borrowings under the Charter Operating credit
facilities were approximately $8.2 billion and the unused total potential
availability was approximately $27 million.
Credit Facilities
— Restrictive Covenants
Charter
Operating Credit Facilities
The
Charter Operating credit facilities contain representations and warranties, and
affirmative and negative covenants customary for financings of this
type. The financial covenants measure performance against standards
set for leverage to be tested as of the end of each
quarter. Additionally, the Charter Operating credit facilities
contain provisions requiring mandatory loan prepayments under specific
circumstances, including in connection with certain sales of assets, so long as
the proceeds have not been reinvested in the business.
The
Charter Operating credit facilities permit Charter Operating and its
subsidiaries to make distributions to pay interest on the Charter convertible
notes, the Charter Holdings notes, the CIH notes, the CCH I notes, the CCH II
notes, the CCO Holdings notes, the CCO Holdings credit facility, and the Charter
Operating senior second-lien notes, provided that, among other things, no
default has occurred and is continuing under the Charter Operating credit
facilities. Conditions to future borrowings include absence of a
default or an event of default under the Charter Operating credit facilities,
and the continued accuracy in all material respects of the representations and
warranties, including the absence since December 31, 2005 of any event,
development, or circumstance that has had or could reasonably be expected to
have a material adverse effect on the Company’s business.
The
events of default under the Charter Operating credit facilities include, among
other things:
|
|
·
|
the
failure to make payments when due or within the applicable grace
period,
|
|
|
·
|
the
failure to comply with specified covenants, including but not limited to a
covenant to deliver audited financial statements for Charter Operating
with an unqualified opinion from the Company’s independent accountants and
without a “going concern” or like qualification or
exception.
|
F-24
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
|
|
·
|
the
failure to pay or the occurrence of events that cause or permit the
acceleration of other indebtedness owing by CCO Holdings, Charter
Operating, or Charter Operating’s subsidiaries in amounts in excess of
$100 million in aggregate principal
amount,
|
|
|
·
|
the
failure to pay or the occurrence of events that result in the acceleration
of other indebtedness owing by certain of CCO Holdings’ direct and
indirect parent companies in amounts in excess of $200 million in
aggregate principal amount,
|
|
|
·
|
Paul
Allen and/or certain of his family members and/or their exclusively owned
entities (collectively, the “Paul Allen Group”) ceasing to have the power,
directly or indirectly, to vote at least 35% of the ordinary voting power
of Charter Operating,
|
|
|
·
|
the
consummation of any transaction resulting in any person or group (other
than the Paul Allen Group) having power, directly or indirectly, to vote
more than 35% of the ordinary voting power of Charter Operating, unless
the Paul Allen Group holds a greater share of ordinary voting power of
Charter Operating, and
|
|
|
·
|
Charter
Operating ceasing to be a wholly-owned direct subsidiary of CCO Holdings,
except in certain very limited
circumstances.
|
CCO
Holdings Credit Facility
The CCO
Holdings credit facility contains covenants that are substantially similar to
the restrictive covenants for the CCO Holdings notes. The CCO
Holdings credit facility contains provisions requiring mandatory loan
prepayments under specific circumstances, including in connection with certain
sales of assets, so long as the proceeds have not been reinvested in the
business. The CCO Holdings credit facility permits CCO Holdings and
its subsidiaries to make distributions to pay interest on the Charter
convertible senior notes, the Charter Holdings notes, the CIH notes, the CCH I
notes, the CCH II notes, the CCO Holdings notes, and the Charter Operating
second-lien notes, provided that, among other things, no default has occurred
and is continuing under the CCO Holdings credit facility.
Based
upon outstanding indebtedness as of December 31, 2008, the amortization of term
loans, scheduled reductions in available borrowings of the revolving credit
facilities, and the maturity dates for all senior and subordinated notes and
debentures, total future principal payments on the total borrowings under all
debt agreements as of December 31, 2008, are as follows:
|
Year
|
Amount
|
|||
|
2009
|
$ | 155 | ||
|
2010
|
1,932 | |||
|
2011
|
351 | |||
|
2012
|
1,724 | |||
|
2013
|
2,799 | |||
|
Thereafter
|
14,768 | |||
| $ | 21,729 | |||
|
10.
|
Note
Payable – Related Party
|
In
October 2005, CCHC issued a subordinated exchangeable note (the “CCHC Note”) to
CII. The CCHC Note has a 15-year maturity. The CCHC Note
has an initial accreted value of $48 million accreting at 14% compounded
quarterly, except that from and after February 28, 2009, CCHC may pay any
increase in the accreted value of the CCHC Note in cash and the accreted value
of the CCHC Note will not increase to the extent such amount is paid in
cash. The CCHC Note is exchangeable at CII’s option, at any time, for
Charter Holdco Class A Common units at a rate equal to the then accreted value,
divided by $2.00 (the “Exchange Rate”). Customary anti-dilution
protections have been provided that could cause future changes to the Exchange
Rate. Additionally, the Charter Holdco Class A Common units received
will be exchangeable by the holder into Charter Class B common stock in
accordance with existing agreements between CII, Charter and certain other
parties signatory thereto. Beginning March 1, 2009, if the closing
price of Charter common stock is at or above the Exchange Rate for 20 trading
days within any 30
F-25
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
consecutive
trading day period, Charter Holdco may require the exchange of the CCHC Note for
Charter Holdco Class A Common units at the Exchange
Rate. Additionally, CCHC has the right to redeem the CCHC note from
and after February 28, 2009 for cash in an amount equal to the then accreted
value. CCHC has the right to redeem the CCHC Note upon certain change
of control events for cash in an amount equal to the then accreted value, such
amount, if redeemed prior to February 28, 2009, would also include a make whole
up to the accreted value through February 28, 2009. CCHC must redeem
the CCHC Note at its maturity for cash in an amount equal to the initial stated
value plus the accreted return through maturity. The accreted value
of the CCHC Note as of December 31, 2008 and 2007 is $75 million and $65
million, respectively. If not redeemed prior to maturity in 2020,
$380 million would be due under this note. See Note 28.
11. Preferred
Stock – Redeemable
In August
2008, Charter entered into exchange agreements with each of the four holders
(the "Holders") of Charter’s Series A Convertible Redeemable Preferred Stock
("Preferred Stock"). Pursuant to the exchange agreements, the Holders
exchanged 36,713 shares of Preferred Stock having a liquidation preference of
approximately $5 million for approximately 4.7 million shares of Charter’s Class
A common stock based on the closing price of Charter’s Class A common stock on
August 25, 2008. The shares of Preferred Stock were cancelled by
Charter and no shares of Preferred Stock remain outstanding as of December 31,
2008.
12. Common
Stock
The
Company's Class A common stock and Class B common stock are identical except
with respect to certain voting, transfer and conversion
rights. Holders of Class A common stock are entitled to one vote per
share and holder of Class B common stock is entitled to ten votes for each share
of Class B common stock held and for each Charter Holdco membership unit
held. The Class B common stock is subject to significant transfer
restrictions and is convertible on a share for share basis into Class A common
stock at the option of the holder. Charter Holdco membership units
are exchangeable on a one-for-one basis for shares of Class B common
stock.
The
following table summarizes our share activity for the three years ended December
31, 2008:
|
Class
A
|
Class
B
|
|||||||
|
Common
|
Common
|
|||||||
|
Stock
|
Stock
|
|||||||
|
BALANCE,
January 1, 2006
|
416,204,671 | 50,000 | ||||||
|
Option
exercises
|
1,046,540 | -- | ||||||
|
Restricted
stock issuances, net of cancellations
|
809,474 | -- | ||||||
|
Issuances
pursuant to share lending agreement
|
22,038,000 | -- | ||||||
|
Returns
pursuant to share lending agreement
|
(77,104,100 | ) | -- | |||||
|
Issuances
in exchange for convertible notes
|
45,000,000 | -- | ||||||
|
BALANCE,
December 31, 2006
|
407,994,585 | 50,000 | ||||||
|
Option
exercises
|
2,724,271 | -- | ||||||
|
Restricted
stock issuances, net of cancellations
|
2,507,612 | -- | ||||||
|
Returns
pursuant to share lending agreement
|
(15,000,000 | ) | -- | |||||
|
BALANCE,
December 31, 2007
|
398,226,468 | 50,000 | ||||||
|
Option
exercises and performance share vesting
|
1,616,906 | -- | ||||||
|
Restricted
stock issuances, net of cancellations
|
10,194,534 | -- | ||||||
|
Issuances
in exchange for preferred shares
|
4,699,986 | -- | ||||||
|
Returns
pursuant to share lending agreement
|
(3,000,000 | ) | -- | |||||
|
BALANCE,
December 31, 2008
|
411,737,894 | 50,000 | ||||||
F-26
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
Charter
issued 45 million shares of Class A common stock in September 2006 in connection
with the Charter, CCHC and CCH II exchange.
Charter
issued 22.0 million and 94.9 million shares of Class A common stock during 2006
and 2005, respectively, in public offerings. The shares were issued
pursuant to the share lending agreement, pursuant to which Charter had
previously agreed to loan up to 150 million shares to Citigroup Global Markets
Limited ("CGML"). As of December 31, 2008, 95.1 million shares had
been returned under the share lending agreement.
These
offerings of Charter’s Class A common stock were conducted to facilitate
transactions by which investors in Charter’s 5.875% convertible senior notes due
2009, issued on November 22, 2004, hedged their investments in the convertible
senior notes. Charter did not receive any of the proceeds from the
sale of this Class A common stock. However, under the share lending
agreement, Charter received a loan fee of $.001 for each share that it lends to
CGML. In connection with the tender offer completed in October 2007
in which Charter exchanged certain of the 5.875% convertible senior notes due
2009 for 6.5% convertible senior notes due 2027, Charter amended the share
lending agreement to allow for the borrowed shares to remain outstanding through
the maturity of the new convertible notes.
The
issuance of 116.9 million shares pursuant to this share lending agreement is
essentially analogous to a sale of shares coupled with a forward contract for
the reacquisition of the shares at a future date. An instrument that
requires physical settlement by repurchase of a fixed number of shares in
exchange for cash is considered a forward purchase instrument. While
the share lending agreement does not require a cash payment upon return of the
shares, physical settlement is required (i.e., the shares borrowed must be
returned at the end of the arrangement). The fair value of the 21.8
million loaned shares outstanding is approximately $2 million as of December 31,
2008. However, the net effect on shareholders’ deficit of the shares
lent pursuant to the share lending agreement, which includes Charter’s
requirement to lend the shares and the counterparties’ requirement to return the
shares, is de minimis and represents the cash received upon lending of the
shares and is equal to the par value of the common stock issued.
13. Rights
Agreement
In August
2007, Charter’s board of directors adopted a rights plan and declared a dividend
of one preferred share purchase right for each issued and outstanding share of
Charter’s Class A common stock and Class B common stock (a “Right”). The
dividend was payable to stockholders of record as of August 31, 2007 and
403,219,728 Rights were issued. In connection with the adoption of the rights
plan, the Company increased the authorized Class A common stock and Class B
common stock to 10.5 billion and 4.5 billion shares, respectively. The
terms of the Rights and rights plan were set forth in a Rights Agreement, by and
between Charter and Mellon Investor Services LLC, dated as of August 14, 2007
(the “Rights Plan” or “Rights Agreement”).
The
Rights Plan was adopted in an attempt to protect against a possible limitation
on Charter’s ability to use its net operating loss carryforwards, which could
significantly impair the value of that asset. See Note 21. The
Rights Plan is intended to act as a deterrent to any person or group from
acquiring 5.0% or more of Charter’s Class A common stock or any person or group
holding 5.0% or more of Charter’s Class A common stock (“Acquiring Person”) from
acquiring more shares without the approval of Charter’s board of
directors. The Rights will not be exercisable until 10 days after a
public announcement by Charter that a person or group has become an Acquiring
Person. Upon such a triggering event, except as may be determined by
Charter’s board of directors, with the consent of the holders of the majority of
the Class B common stock, all outstanding, valid, and exercisable Rights, except
for those Rights held by any Acquiring Person, will be exchanged for 2.5 shares
of Class A common stock and/or Class B common stock, as applicable, or an
equivalent security. If Charter’s board of directors and holders of the
Class B common stock determine that such an exchange does not occur upon such a
triggering event, all holders of Rights, except any Acquiring Person, may
exercise their Rights upon payment of the purchase price to purchase five shares
of Charter’s Class A common stock and/or Class B common stock, as applicable (or
other securities or assets as determined by Charter’s board of directors) at a
50% discount to the then current market price. The Rights and Rights
Agreement will expire on December 31, 2009, if not terminated
earlier.
F-27
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
14. Comprehensive
Loss
The
Company reports changes in the fair value of interest rate agreements designated
as hedging the variability of cash flows associated with floating-rate debt
obligations, that meet the effectiveness criteria of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, in accumulated other comprehensive
loss. Comprehensive loss for the years ended December 31, 2008,
2007, and 2006 was $2.6 billion, $1.7 billion, and $1.5 billion,
respectively.
15. Accounting
for Derivative Instruments and Hedging Activities
The
Company uses interest rate swap agreements to manage its interest costs and
reduce the Company’s exposure to increases in floating interest
rates. The Company’s policy is to manage its exposure to fluctuations
in interest rates by maintaining a mix of fixed and variable rate debt within a
targeted range. Using interest rate swap agreements, the Company
agrees to exchange, at specified intervals through 2013, the difference between
fixed and variable interest amounts calculated by reference to agreed-upon
notional principal amounts. At the banks’ option, certain interest
rate swap agreements may be extended through 2014.
The
Company’s hedging policy does not permit it to hold or issue derivative
instruments for speculative trading purposes. The Company does,
however, have certain interest rate derivative instruments that have been
designated as cash flow hedging instruments. Such instruments
effectively convert variable interest payments on certain debt instruments into
fixed payments. For qualifying hedges, SFAS No. 133 allows
derivative gains and losses to offset related results on hedged items in the
consolidated statement of operations. The Company has formally
documented, designated and assessed the effectiveness of transactions that
receive hedge accounting. For the years ended December 31, 2008,
2007, and 2006, change in value of derivatives includes gains of $0, $0, and $2
million, respectively, which represent cash flow hedge ineffectiveness on
interest rate hedge agreements. This ineffectiveness arises from
differences between critical terms of the agreements and the related hedged
obligations.
Changes
in the fair value of interest rate agreements that are designated as hedging
instruments of the variability of cash flows associated with floating-rate debt
obligations, and that meet the effectiveness criteria specified by SFAS No. 133
are reported in accumulated other comprehensive loss. For the years
ended December 31, 2008, 2007, and 2006, losses of $180 million, $123 million
and $1 million, respectively, related to derivative instruments designated as
cash flow hedges, were recorded in accumulated other comprehensive
loss. The amounts are subsequently reclassified as an increase or
decrease to interest expense in the same periods in which the related interest
on the floating-rate debt obligations affects earnings (losses).
Certain
interest rate derivative instruments are not designated as hedges as they do not
meet the effectiveness criteria specified by SFAS
No. 133. However, management believes such instruments are
closely correlated with the respective debt, thus managing associated
risk. Interest rate derivative instruments not designated as hedges
are marked to fair value, with the impact recorded as a change in value of
derivatives in the Company’s consolidated statements of
operations. For the years ended December 31, 2008, 2007, and
2006, change in value of derivatives includes losses of $62 million and $46
million and gains of $4 million, respectively, resulting from interest rate
derivative instruments not designated as hedges.
As of
December 31, 2008, 2007, and 2006, the Company had outstanding $4.3
billion, $4.3 billion, and $1.7 billion, in notional amounts of interest rate
swaps outstanding. The notional amounts of interest rate instruments
do not represent amounts exchanged by the parties and, thus, are not a measure
of exposure to credit loss. The amounts exchanged are determined by
reference to the notional amount and the other terms of the
contracts.
16. Fair
Value of Financial Instruments
The
Company has estimated the fair value of its financial instruments as of
December 31, 2008 and 2007 using available market information or other
appropriate valuation methodologies. Considerable judgment, however,
is required in interpreting market data to develop the estimates of fair
value. Accordingly, the estimates presented in the accompanying
consolidated financial statements are not necessarily indicative of the amounts
the Company would realize in a current market exchange.
F-28
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
The
carrying amounts of cash, receivables, payables and other current assets and
liabilities approximate fair value because of the short maturity of those
instruments.
The fair
value of interest rate agreements represents the estimated amount the Company
would receive or pay upon termination of the agreements adjusted for Charter
Operating’s credit risk. Management believes that the sellers of the
interest rate agreements will be able to meet their obligations under the
agreements. In addition, some of the interest rate agreements are
with certain of the participating banks under the Company’s credit facilities,
thereby reducing the exposure to credit loss. The Company has
policies regarding the financial stability and credit standing of major
counterparties. Nonperformance by the counterparties is not
anticipated nor would it have a material adverse effect on the Company’s
consolidated financial condition or results of operations.
The
estimated fair value of the Company’s notes at December 31, 2008 and 2007
are based on quoted market prices and the fair value of the credit facilities is
based on dealer quotations.
A summary
of the carrying value and fair value of the Company’s debt at December 31,
2008 and 2007 is as follows:
|
2008
|
2007
|
|||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||
|
Value
|
Value
|
Value
|
Value
|
|||||||||||
|
Debt
|
|
|||||||||||||
|
Charter
convertible notes
|
$
|
376
|
$
|
12
|
$
|
397
|
$
|
332
|
||||||
|
Charter
Holdings debt
|
440
|
159
|
578
|
471
|
||||||||||
|
CIH
debt
|
2,534
|
127
|
2,534
|
1,627
|
||||||||||
|
CCH
I debt
|
4,072
|
658
|
4,083
|
3,225
|
||||||||||
|
CCH
II debt
|
2,455
|
1,051
|
2,452
|
2,390
|
||||||||||
|
CCO
Holdings debt
|
796
|
505
|
795
|
761
|
||||||||||
|
Charter
Operating debt
|
2,397
|
1,923
|
1,870
|
1,807
|
||||||||||
|
Credit
facilities
|
8,596
|
6,187
|
7,194
|
6,723
|
||||||||||
The
Company adopted SFAS No. 157, Fair Value Measurements, on
its financial assets and liabilities effective January 1, 2008, and has an
established process for determining fair value. The Company has
deferred adoption of SFAS No. 157 on its nonfinancial assets and liabilities
including fair value measurements under SFAS No. 142 and SFAS No. 144 of
franchises, goodwill, property, plant, and equipment, and other long-term assets
until January 1, 2009 as permitted by FASB Staff Position (“FSP”)
157-2. Fair value is based upon quoted market prices, where
available. If such valuation methods are not available, fair value is
based on internally or externally developed models using market-based or
independently-sourced market parameters, where available. Fair value
may be subsequently adjusted to ensure that those assets and liabilities are
recorded at fair value. The Company’s methodology may produce a fair
value that may not be indicative of net realizable value or reflective of future
fair values, but the Company believes its methods are appropriate and consistent
with other market peers. The use of different methodologies or
assumptions to determine the fair value of certain financial instruments could
result in a different fair value estimate as of the Company’s reporting
date.
SFAS No.
157 establishes a three-level hierarchy for disclosure of fair value
measurements, based upon the transparency of inputs to the valuation of an asset
or liability as of the measurement date, as follows:
|
·
|
Level
1 – inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
|
·
|
Level
2 – inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
|
·
|
Level
3 – inputs to the valuation methodology are unobservable and significant
to the fair value measurement.
|
F-29
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
Interest
rate derivatives are valued using a present value calculation based on an
implied forward LIBOR curve (adjusted for Charter Operating’s credit risk) and
are classified within level 2 of the valuation hierarchy. The fair
values of the embedded derivatives within Charter’s 5.875% and 6.50% convertible
senior notes issued in November 2004 and October 2007, respectively, are derived
from valuations using a simulation technique with market based inputs, including
Charter’s Class A common stock price, implied volatility of Charter’s Class A
common stock, Charter’s credit risk and costs to borrow Charter’s Class A common
stock. These valuations are classified within level 3 of the
valuation hierarchy.
The
Company’s financial liabilities that are accounted for at fair value on a
recurring basis are presented in the table below:
|
Fair
Value As of December 31, 2008
|
Fair
Value As of December 31, 2007
|
|||||||||||||||||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||||||||||||||
|
Other
long-term liabilities:
|
||||||||||||||||||||||||||||||||
|
Interest
rate derivatives
|
$ | -- | $ | 411 | $ | -- | $ | 411 | $ | -- | $ | 169 | $ | -- | $ | 169 | ||||||||||||||||
|
Embedded
derivatives
|
-- | -- | -- | -- | -- | -- | 33 | 33 | ||||||||||||||||||||||||
| $ | -- | $ | 411 | $ | -- | $ | 411 | $ | -- | $ | 169 | $ | 33 | $ | 202 | |||||||||||||||||
The
weighted average interest pay rate for the Company’s interest rate swap
agreements was 4.93% and 4.93% at December 31, 2008 and 2007,
respectively.
17. Other
Operating (Income) Expenses, Net
Other
operating (income) expenses, net consist of the following for the years
presented:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
(Gain)
loss on sale of assets, net
|
$ | 13 | $ | (3 | ) | $ | 8 | |||||
|
Special
charges, net
|
56 | (14 | ) | 13 | ||||||||
| $ | 69 | $ | (17 | ) | $ | 21 | ||||||
(Gain)
loss on sale of assets, net
(Gain)
loss on sale of assets represents the (gain) loss recognized on the sale of
fixed assets and cable systems.
Special
charges, net
Special
charges, net for the year ended December 31, 2008 includes severance charges and
litigation related items, including settlement costs associated with the Sjoblom litigation (see Note
23), offset by favorable insurance settlements related to hurricane Katrina
claims. Special charges, net for the year ended December 31, 2007,
primarily represents favorable legal settlements of approximately $20 million
offset by severance associated with the closing of call centers and divisional
restructuring. Special charges, net for the year ended December 31,
2006 primarily represent severance associated with the closing of call centers
and divisional restructuring.
F-30
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
18. Gain
(Loss) on Extinguishment of Debt
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Charter
Holdings debt notes repurchases / exchanges
|
$ | 3 | $ | (3 | ) | $ | 108 | |||||
|
CCO
Holdings notes redemption
|
-- | (19 | ) | -- | ||||||||
|
Charter
Operating credit facilities refinancing
|
-- | (13 | ) | (27 | ) | |||||||
|
Charter
convertible note repurchases / exchanges
|
5 | (21 | ) | (40 | ) | |||||||
|
CCH
II tender offer
|
(4 | ) | -- | -- | ||||||||
| $ | 4 | $ | (56 | ) | $ | 41 | ||||||
See Note
9 for discussion of 2008 debt transactions.
In
October 2007, Charter Holdco completed a tender offer in which $364 million of
Charter’s 5.875% convertible senior notes due 2009 were accepted for $479
million of Charter’s 6.50% convertible senior notes due 2027. The
tender offer resulted in a loss on extinguishment of debt of approximately $21
million for the year ended December 31, 2007, included in gain (loss) on
extinguishment of debt on the Company’s consolidated statements of
operations.
In April
2007, Charter Holdings completed a tender offer in which $97 million of Charter
Holdings’ notes were accepted in exchange for $100 million of total
consideration, including premiums and accrued interest. In addition,
Charter Holdings redeemed $187 million of its 8.625% senior notes due April 1,
2009 and CCO Holdings redeemed $550 million of its senior floating rate notes
due December 15, 2010. These redemptions closed in April
2007. The redemptions and tender resulted in a loss on extinguishment
of debt for the CCH transactions and the CCOH transaction of approximately $3
million and $19 million, respectively, for the year ended December 31, 2007,
included in gain (loss) on extinguishment of debt on the Company’s consolidated
statements of operations.
In March
2007, Charter Operating refinanced its facilities resulting in a loss on
extinguishment of debt for the year ended December 31, 2007 of approximately $13
million included in gain (loss) on extinguishment of debt on the Company’s
consolidated statements of operations.
In
September 2006, Charter Holdings, CCH I and CCH II, completed the exchange of
approximately $797 million in total principal amount of outstanding debt
securities of Charter Holdings for $250 million principal amount of new 10.25%
CCH II notes due 2013 and $462 million principal amount of 11% CCH I notes due
2015. The Charter Holdings notes received in the exchange were
thereafter distributed to Charter Holdings and cancelled. The
exchange resulted in a gain on extinguishment of debt of approximately $108
million for the year ended December 31, 2006.
In
September 2006, CCHC and CCH II completed the exchange of $450 million principal
amount of Charter’s outstanding 5.875% senior convertible notes due 2009 for
$188 million in cash, 45 million shares of Charter’s Class A common stock valued
at $68 million and $146 million principal amount of 10.25% CCH II notes due
2010. The convertible notes received in the exchange held by CCHC,
were transferred to Charter Holdco in August 2007, and subsequently cancelled in
November 2007. The exchange resulted in a loss on extinguishment of
debt of approximately $40 million for the year ended December 31,
2006.
In April
2006, Charter Operating completed a $6.85 billion refinancing of its credit
facilities including a new $350 million revolving/term facility (which converts
to a term loan no later than April 2007), a $5.0 billion term loan due in 2013
and certain amendments to the existing $1.5 billion revolving credit
facility. In addition, the refinancing reduced margins on Eurodollar
rate term loans to 2.625% from a weighted average of 3.15% previously and
margins on base rate term loans to 1.625% from a weighted average of 2.15%
previously. Concurrent with this refinancing, the CCO Holdings bridge
loan was terminated. The refinancing resulted in a loss on
extinguishment of debt for the year ended December 31, 2006 of approximately $27
million.
F-31
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
|
19.
|
|
Other
Income (Expense), Net
|
Other
income (expense), net consists of the following for years
presented:
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
CC
VIII preferred interest (Note 3)
|
$ | (4 | ) | $ | (7 | ) | $ | (4 | ) | |||
|
Gain
(loss) on investment
|
(1 | ) | -- | 16 | ||||||||
|
Other,
net
|
(5 | ) | (1 | ) | 2 | |||||||
| $ | (10 | ) | $ | (8 | ) | $ | 14 | |||||
20. Stock
Compensation Plans
The
Company has stock compensation plans (the “Plans”) which provide for the grant
of non-qualified stock options, stock appreciation rights, dividend equivalent
rights, performance units and performance shares, share awards, phantom stock
and/or shares of restricted stock (shares of restricted stock not to exceed 20.0
million shares of Charter Class A common stock), as each term is defined in the
Plans. Employees, officers, consultants and directors of the Company
and its subsidiaries and affiliates are eligible to receive grants under the
Plans. The 2001 Stock Incentive Plan allows for the issuance of up to
a total of 90.0 million shares of Charter Class A common stock (or units
convertible into Charter Class A common stock).
Under
Charter's Long-Term Incentive Program (“LTIP”), a program administered under the
2001 Stock Incentive Plan, employees of Charter and its subsidiaries whose pay
classifications exceeded a
certain level were eligible in 2006 and 2007 to receive stock options, and more
senior level employees were eligible to receive stock options and performance
units. The stock options vest 25% on each of the first four
anniversaries of the date of grant. Generally, options expire
10 years from the grant date. The performance units became
performance shares on or about the first anniversary of the grant date,
conditional upon Charter's performance against financial performance measures
established by Charter’s management and approved by its board of directors as of
the time of the award. The performance shares become shares of Class
A common stock on the third anniversary of the grant date of the performance
units. In March 2008, the Company adopted the 2008 incentive program
to allow for the issuance of performance units and restricted stock under the
2001 Stock Incentive Plan and for the issuance of performance
cash. Under the 2008 incentive program, subject to meeting
performance criteria, performance units and performance cash are deposited into
a performance bank of which one-third of the balance is paid out each
year. Restricted stock granted under this program vests annually over
a three-year period beginning from the date of grant. During the year
ended December 31, 2008, Charter granted $8 million of performance cash under
Charter’s 2008 incentive program and recognized $2 million of expense for the
year ended December 31, 2008.
F-32
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
A summary
of the activity for the Company’s stock options for the years ended
December 31, 2008, 2007, and 2006, is as follows (amounts in thousands,
except per share data):
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||||||
|
Exercise
|
Exercise
|
Exercise
|
||||||||||||||||||||||
|
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
|||||||||||||||||||
|
Outstanding,
beginning of period
|
25,682 | $ | 4.02 | 26,403 | $ | 3.88 | 29,127 | $ | 4.47 | |||||||||||||||
|
Granted
|
45 | 1.19 | 4,549 | 2.77 | 6,065 | 1.28 | ||||||||||||||||||
|
Exercised
|
(53 | ) | 1.18 | (2,759 | ) | 1.57 | (1,049 | ) | 1.41 | |||||||||||||||
|
Cancelled
|
(3,630 | ) | 5.27 | (2,511 | ) | 2.98 | (7,740 | ) | 4.39 | |||||||||||||||
|
Outstanding,
end of period
|
22,044 | $ | 3.82 | 25,682 | $ | 4.02 | 26,403 | $ | 3.88 | |||||||||||||||
|
Weighted
average remaining contractual life
|
6
years
|
7
years
|
8
years
|
|||||||||||||||||||||
|
Options
exercisable, end of period
|
15,787 | $ | 4.53 | 13,119 | $ | 5.88 | 10,984 | $ | 6.62 | |||||||||||||||
|
Weighted
average fair value of options granted
|
$ | 0.90 | $ | 1.86 | $ | 0.96 | ||||||||||||||||||
The
following table summarizes information about stock options outstanding and
exercisable as of December 31, 2008 (amounts in thousands, except per share
data):
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Weighted | Weighted | |||||||||||||||||||
| Average | Weighted- | Average | Weighted- | |||||||||||||||||
| Remaining | Average | Remaining | Average | |||||||||||||||||
| Range of | Number | Contractual | Exercise | Number | Contractual | Exercise | ||||||||||||||
| Exercise Prices | Outstanding | Life | Price | Exercisable | Life | Price | ||||||||||||||
| $ |
1.00
|
—
|
$
|
1.36
|
8,278
|
7
years
|
1.17
|
5,528
|
7
years
|
1.17
|
||||||||||
| $ |
1.53
|
—
|
$
|
1.96
|
2,821
|
6
years
|
1.55
|
2,178
|
6
years
|
1.55
|
||||||||||
| $ |
2.66
|
—
|
$
|
3.35
|
4,981
|
7
years
|
2.89
|
2,229
|
6
years
|
2.92
|
||||||||||
| $ |
4.30
|
—
|
$
|
5.17
|
3,566
|
5
years
|
5.00
|
3,454
|
5
years
|
5.02
|
||||||||||
| $ |
9.13
|
—
|
$
|
12.27
|
1,008
|
3
years
|
11.19
|
1,008
|
3
years
|
11.19
|
||||||||||
| $ |
13.96
|
—
|
$
|
20.73
|
1,168
|
1
year
|
18.41
|
1,168
|
1
year
|
18.41
|
||||||||||
| $ |
21.20
|
—
|
$
|
23.09
|
222
|
2
years
|
22.86
|
222
|
2
years
|
22.86
|
||||||||||
F-33
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
A summary
of the activity for the Company’s restricted Class A common stock for the years
ended December 31, 2008, 2007, and 2006, is as follows (amounts in
thousands, except per share data):
|
2008
|
2007
|
2006
|
||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||
|
Grant
|
Grant
|
Grant
|
||||||||||||||||
|
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
|||||||||||||
|
Outstanding,
beginning of period
|
4,112
|
$
|
2.87
|
3,033
|
$
|
1.96
|
4,713
|
$
|
2.08
|
|||||||||
|
Granted
|
10,761
|
0.85
|
2,753
|
3.64
|
906
|
1.28
|
||||||||||||
|
Vested
|
(2,298)
|
2.36
|
(1,208)
|
1.83
|
(2,278)
|
1.62
|
||||||||||||
|
Cancelled
|
(566)
|
1.57
|
(466)
|
4.37
|
(308)
|
4.37
|
||||||||||||
|
Outstanding,
end of period
|
12,009
|
$
|
1.21
|
4,112
|
$
|
2.87
|
3,033
|
$
|
1.96
|
|||||||||
A summary
of the activity for the Company’s performance units and shares for the years
ended December 31, 2008, 2007, and 2006, is as follows (amounts in
thousands, except per share data):
|
2008
|
2007
|
2006
|
||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||
|
Grant
|
Grant
|
Grant
|
||||||||||||||||
|
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
|||||||||||||
|
Outstanding,
beginning of period
|
28,013
|
$
|
2.16
|
15,206
|
$
|
1.27
|
5,670
|
$
|
3.09
|
|||||||||
|
Granted
|
10,137
|
0.84
|
14,797
|
2.95
|
13,745
|
1.22
|
||||||||||||
|
Vested
|
(1,562)
|
1.49
|
(41)
|
1.23
|
--
|
--
|
||||||||||||
|
Cancelled
|
(3,551)
|
2.08
|
(1,949)
|
1.51
|
(4,209)
|
3.58
|
||||||||||||
|
Outstanding,
end of period
|
33,037
|
$
|
1.80
|
28,013
|
$
|
2.16
|
15,206
|
$
|
1.27
|
|||||||||
As of
December 31, 2008, deferred compensation remaining to be recognized in future
periods totaled $41 million.
In the
first quarter of 2009, the majority of restricted stock and performance units
and shares were forfeited, and the remaining will be cancelled in connection
with the Proposed Restructuring. See Note 28.
21. Income
Taxes
All
operations are held through Charter Holdco and its direct and indirect
subsidiaries. Charter Holdco and the majority of its subsidiaries are
generally limited liability companies that are not subject to income
tax. However, certain of these limited liability companies are
subject to state income tax. In addition, the subsidiaries that are
corporations are subject to federal and state income tax. All of the
remaining taxable income, gains, losses, deductions and credits of Charter
Holdco are passed through to its members: Charter, CII, and Vulcan
Cable. Charter is responsible for its share of taxable income or loss
of Charter Holdco allocated to Charter in accordance with the Charter Holdco
limited liability company agreement (the “LLC Agreement”) and partnership tax
rules and regulations. Charter also records financial statement
deferred tax assets and liabilities related to its investment in Charter
Holdco.
The LLC
Agreement provides for certain special allocations of net tax profits and net
tax losses (such net tax profits and net tax losses being determined under the
applicable federal income tax rules for determining capital
accounts). Under the LLC Agreement, through the end of 2003, net tax
losses of Charter Holdco that would otherwise have been allocated to Charter
based generally on its percentage ownership of outstanding common units were
allocated instead to membership units held by Vulcan Cable and CII (the “Special
Loss Allocations”) to the extent of their
F-34
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
respective
capital account balances. After 2003, under the LLC Agreement, net
tax losses of Charter Holdco are allocated to Charter, Vulcan Cable, and CII
based generally on their respective percentage ownership of outstanding common
units to the extent of their respective capital account
balances. Allocations of net tax losses in excess of the members’
aggregate capital account balances are allocated under the rules governing
Regulatory Allocations, as described below. Subject to the Curative
Allocation Provisions described below, the LLC Agreement further provides that,
beginning at the time Charter Holdco generates net tax profits, the net tax
profits that would otherwise have been allocated to Charter based generally on
its percentage ownership of outstanding common membership units will instead
generally be allocated to Vulcan Cable and CII (the “Special Profit
Allocations”). The Special Profit Allocations to Vulcan Cable and CII
will generally continue until the cumulative amount of the Special Profit
Allocations offsets the cumulative amount of the Special Loss
Allocations. The amount and timing of the Special Profit Allocations
are subject to the potential application of, and interaction with, the Curative
Allocation Provisions described in the following paragraph. The LLC
Agreement generally provides that any additional net tax profits are to be
allocated among the members of Charter Holdco based generally on their
respective percentage ownership of Charter Holdco common membership
units.
Because
the respective capital account balance of each of Vulcan Cable and CII was
reduced to zero by December 31, 2002, certain net tax losses of Charter Holdco
that were to be allocated for 2002, 2003, 2004 and 2005, to Vulcan Cable and CII
instead have been allocated to Charter (the “Regulatory
Allocations”). As a result of the allocation of net tax losses to
Charter in 2005, Charter’s capital account balance was reduced to zero during
2005. The LLC Agreement provides that once the capital account
balances of all members have been reduced to zero, net tax losses are to be
allocated to Charter, Vulcan Cable, and CII based generally on their respective
percentage ownership of outstanding common units. Such allocations
are also considered to be Regulatory Allocations. The LLC Agreement
further provides that, to the extent possible, the effect of the Regulatory
Allocations is to be offset over time pursuant to certain curative allocation
provisions (the “Curative Allocation Provisions”) so that, after certain
offsetting adjustments are made, each member's capital account balance is equal
to the capital account balance such member would have had if the Regulatory
Allocations had not been part of the LLC Agreement. The cumulative
amount of the actual tax losses allocated to Charter as a result of the
Regulatory Allocations in excess of the amount of tax losses that would have
been allocated to Charter had the Regulatory Allocations not been part of the
LLC Agreement through the year ended December 31, 2008 is approximately $4.1
billion.
As a
result of the Special Loss Allocations and the Regulatory Allocations referred
to above (and their interaction with the allocations related to assets
contributed to Charter Holdco with differences between book and tax basis), the
cumulative amount of losses of Charter Holdco allocated to Vulcan Cable and CII
is in excess of the amount that would have been allocated to such entities if
the losses of Charter Holdco had been allocated among its members in proportion
to their respective percentage ownership of Charter Holdco common membership
units. The cumulative amount of such excess losses was approximately
$1.0 billion through December 31, 2008.
In
certain situations, the Special Loss Allocations, Special Profit Allocations,
Regulatory Allocations and Curative Allocation Provisions described above could
result in Charter paying taxes in an amount that is more or less than if Charter
Holdco had allocated net tax profits and net tax losses among its members based
generally on the number of common membership units owned by such
members. This could occur due to differences in (i) the
character of the allocated income (e.g., ordinary versus capital), (ii) the
allocated amount and timing of tax depreciation and tax amortization expense due
to the application of section 704(c) under the Internal Revenue Code,
(iii) the potential interaction between the Special Profit Allocations and
the Curative Allocation Provisions, (iv) the amount and timing of alternative
minimum taxes paid by Charter, if any, (v) the apportionment of the
allocated income or loss among the states in which Charter Holdco does business,
and (vi) future federal and state tax laws. Further, in the
event of new capital contributions to Charter Holdco, it is possible that the
tax effects of the Special Profit Allocations, Special Loss Allocations,
Regulatory Allocations and Curative Allocation Provisions will change
significantly pursuant to the provisions of the income tax regulations or the
terms of a contribution agreement with respect to such
contribution. Such change could defer the actual tax benefits to be
derived by Charter with respect to the net tax losses allocated to it or
accelerate the actual taxable income to Charter with respect to the net tax
profits allocated to it. As a result, it is possible under certain
circumstances, that Charter could receive future allocations of taxable income
in excess of its currently allocated tax deductions and available tax loss
carryforwards. The ability to utilize net operating loss
carryforwards is potentially subject to certain limitations as discussed
below.
F-35
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
In
addition, under their exchange agreement with Charter, Vulcan Cable and CII have
the right at any time to exchange some or all of their membership units in
Charter Holdco for Charter’s Class B common stock, be merged with Charter
in exchange for Charter’s Class B common stock, or be acquired by Charter in a
non-taxable reorganization in exchange for Charter’s Class B common
stock. If such an exchange were to take place prior to the date that
the Special Profit Allocation provisions had fully offset the Special Loss
Allocations, Vulcan Cable and CII could elect to cause Charter Holdco to make
the remaining Special Profit Allocations to Vulcan Cable and CII immediately
prior to the consummation of the exchange. In the event Vulcan Cable
and CII choose not to make such election or to the extent such allocations are
not possible, Charter would then be allocated tax profits attributable to the
membership units received in such exchange pursuant to the Special Profit
Allocation provisions. Mr. Allen has generally agreed to
reimburse Charter for any incremental income taxes that Charter would owe as a
result of such an exchange and any resulting future Special Profit Allocations
to Charter. The ability of Charter to utilize net operating loss
carryforwards is potentially subject to certain limitations as discussed
below. If Charter were to become subject to certain limitations
(whether as a result of an exchange described above or otherwise), and as a
result were to owe taxes resulting from the Special Profit Allocations, then Mr.
Allen may not be obligated to reimburse Charter for such income
taxes.
For the
years ended December 31, 2008, 2007, and 2006, the Company recorded
deferred income tax expense and benefits as shown below. The income
tax expense is recognized through increases in deferred tax liabilities related
to our investment in Charter Holdco, as well as through current federal and
state income tax expense and increases in the deferred tax liabilities of
certain of our indirect corporate subsidiaries. The income tax
benefits were realized through reductions in the deferred tax liabilities
related to Charter’s investment in Charter Holdco, as well as the deferred tax
liabilities of certain of Charter’s indirect corporate
subsidiaries. The tax provision in future periods will vary based on
current and future temporary differences, as well as future operating
results.
Current
and deferred income tax benefit (expense) is as follows:
|
December
31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Current
expense:
|
||||||||||||
|
Federal
income taxes
|
$ | (2 | ) | $ | (3 | ) | $ | (2 | ) | |||
|
State
income taxes
|
(2 | ) | (8 | ) | (5 | ) | ||||||
|
Current
income tax expense
|
(4 | ) | (11 | ) | (7 | ) | ||||||
|
Deferred
benefit (expense):
|
||||||||||||
|
Federal
income taxes
|
95 | (188 | ) | (177 | ) | |||||||
|
State
income taxes
|
12 | (10 | ) | (25 | ) | |||||||
|
Deferred
income tax benefit (expense)
|
107 | (198 | ) | (202 | ) | |||||||
|
Total
income benefit (expense)
|
$ | 103 | $ | (209 | ) | $ | (209 | ) | ||||
Income
tax benefit for the year ended December 31, 2008 included $325 million of
deferred tax benefit related to the impairment of franchises. A
portion of income tax expense was recorded as a reduction of income (loss) from
discontinued operations in the year ended December 31, 2006. See Note
4.
F-36
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
The
Company’s effective tax rate differs from that derived by applying the
applicable federal income tax rate of 35%, and average state income tax rate of
5.9%, 5.3%, and 5% for the years ended December 31, 2008, 2007, and 2006,
respectively, as follows:
|
December
31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Statutory
federal income taxes
|
$ | 894 | $ | 493 | $ | 407 | ||||||
|
Statutory
state income taxes, net
|
151 | 74 | 58 | |||||||||
|
Franchises
|
107 | (198 | ) | (202 | ) | |||||||
|
Valuation
allowance provided and other
|
(1,049 | ) | (578 | ) | (472 | ) | ||||||
| 103 | (209 | ) | (209 | ) | ||||||||
|
Less:
discontinued operations
|
-- | -- | 22 | |||||||||
|
Income
tax benefit (expense)
|
$ | 103 | $ | (209 | ) | $ | (187 | ) | ||||
The tax
effects of these temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 2008 and
2007 which are included in long-term liabilities are presented
below.
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss carryforward
|
$ | 3,379 | $ | 3,155 | ||||
|
Investment
in Charter Holdco
|
2,594 | 1,888 | ||||||
|
Other
|
43 | 19 | ||||||
|
Total
gross deferred tax assets
|
6,016 | 5,062 | ||||||
|
Less:
valuation allowance
|
(5,803 | ) | (4,786 | ) | ||||
|
Deferred
tax assets
|
$ | 213 | $ | 276 | ||||
|
Deferred
tax liabilities:
|
||||||||
|
Investment
in Charter Holdco
|
$ | (579 | ) | $ | (707 | ) | ||
|
Indirect
Corporate Subsidiaries:
|
||||||||
|
Property,
plant & equipment
|
(23 | ) | (29 | ) | ||||
|
Franchises
|
(169 | ) | (205 | ) | ||||
|
Deferred
tax liabilities
|
(771 | ) | (941 | ) | ||||
|
Net
deferred tax liabilities
|
$ | (558 | ) | $ | (665 | ) | ||
As of
December 31, 2008, the Company had deferred tax assets of $6.0 billion,
which included $2.6 billion of financial losses in excess of tax losses
allocated to Charter from Charter Holdco. The deferred tax assets
also included $3.4 billion of tax net operating loss carryforwards (generally
expiring in years 2009 through 2028) of Charter and its indirect
subsidiaries. Valuation allowances of $5.8 billion exist with respect
to these deferred tax assets. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will be
realized. Because of the uncertainties in projecting future taxable
income of Charter Holdco, valuation allowances have been established except for
deferred benefits available to offset certain deferred tax liabilities that will
reverse over time.
F-37
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
The
amount of any benefit from the Company’s tax net operating losses is dependent
on: (1) Charter and its subsidiaries’ ability to generate future
taxable income and (2) the unexpired amount of net operating loss carryforwards
available to offset amounts payable on such taxable income. Any
future “ownership changes” of Charter's common stock, such as that which will
occur upon emergence from Chapter 11 bankruptcy, would place limitations, on an
annual basis, on the use of such net operating losses to offset any future
taxable income the Company may generate and will be reduced by the amount of any
cancellation of debt income resulting from the Proposed Restructuring that is
allocable to Charter. See Note 28. Such limitations, in
conjunction with the net operating loss expiration provisions, could reduce the
Company’s ability to use a substantial portion of its net operating losses to
offset future taxable income.
The
deferred tax liability for Charter’s investment in Charter Holdco is largely
attributable to the characterization of franchises for financial reporting
purposes as indefinite lived.
No tax
years for Charter or Charter Holdco are currently under examination by the
Internal Revenue Service. Tax years ending 2006 and 2007 remain subject to
examination.
In
January 2007, the Company adopted FIN 48, Accounting for Uncertainty in Income
Taxes—an Interpretation of FASB Statement No. 109, which provides
criteria for the recognition, measurement, presentation and disclosure of
uncertain tax positions. A tax benefit from an uncertain position may be
recognized only if it is “more likely than not” that the position is sustainable
based on its technical merits. The Company does not believe it has
taken any significant positions that would not meet the “more likely than not”
criteria and require disclosure.
22. Related
Party Transactions
The
following sets forth certain transactions in which the Company and the
directors, executive officers, and affiliates of the Company are
involved. Unless otherwise disclosed, management believes each of the
transactions described below was on terms no less favorable to the Company than
could have been obtained from independent third parties.
Charter
is a holding company and its principal assets are its equity interest in Charter
Holdco and certain mirror notes payable by Charter Holdco to Charter and mirror
preferred units held by Charter, which have the same principal amount and terms
as those of Charter’s convertible senior notes and Charter’s outstanding
preferred stock. In 2008, 2007, and 2006, Charter Holdco paid to
Charter $32 million, $51 million, and $51 million, respectively, related to
interest on the mirror notes.
Charter
is a party to management arrangements with Charter Holdco and certain of its
subsidiaries. Under these agreements, Charter and Charter Holdco
provide management services for the cable systems owned or operated by their
subsidiaries. The management services include such services as
centralized customer billing services, data processing and related support,
benefits administration and coordination of insurance coverage and
self-insurance programs for medical, dental and workers’ compensation
claims. Costs associated with providing these services are charged
directly to the Company’s operating subsidiaries and are included within
operating costs in the accompanying consolidated statements of
operations. Such costs totaled $213 million, $213 million, and $231
million for the years ended December 31, 2008, 2007, and 2006,
respectively. All other costs incurred on behalf of Charter’s
operating subsidiaries are considered a part of the management fee and are
recorded as a component of selling, general and administrative expense, in the
accompanying consolidated financial statements. For the years ended
December 31, 2008, 2007, and 2006, the management fee charged to the
Company’s operating subsidiaries approximated the expenses incurred by Charter
Holdco and Charter on behalf of the Company’s operating
subsidiaries. The Company’s previous credit facilities prohibited
payments of management fees in excess of 3.5% of revenues until repayment of the
outstanding indebtedness. In the event any portion of the management
fee due and payable was not paid, it would be deferred by Charter and accrued as
a liability of such subsidiaries. Any deferred amount of the
management fee would bear interest at the rate of 10% per year, compounded
annually, from the date it was due and payable until the date paid.
Mr. Allen,
the controlling shareholder of Charter, and a number of his affiliates have
interests in various entities that provide services or programming to Charter’s
subsidiaries. Given the diverse nature of Mr. Allen’s investment
F-38
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
activities
and interests, and to avoid the possibility of future disputes as to potential
business, Charter and Charter Holdco, under the terms of their respective
organizational documents, may not, and may not allow their subsidiaries to
engage in any business transaction outside the cable transmission business
except for certain existing approved investments. Charter or Charter
Holdco or any of their subsidiaries may not pursue, or allow their subsidiaries
to pursue, a business transaction outside of this scope, unless Mr. Allen
consents to Charter or its subsidiaries engaging in the business
transaction. The cable transmission business means the business of
transmitting video, audio, including telephone, and data over cable systems
owned, operated or managed by Charter, Charter Holdco or any of their
subsidiaries from time to time.
Mr. Allen
or his affiliates own or have owned equity interests or warrants to purchase
equity interests in various entities with which the Company does business or
which provides it with products, services or programming. Among these
entities are Oxygen Media Corporation (“Oxygen Media”), Digeo, Inc. (“Digeo”),
and Microsoft Corporation. Mr. Allen owns 100% of the equity of
Vulcan Ventures Incorporated (“Vulcan Ventures”) and Vulcan Inc. and is the
president of Vulcan Ventures. Ms. Jo Allen Patton is a director of
the Company and the President and Chief Executive Officer of Vulcan Inc. and is
a director and Vice President of Vulcan Ventures. Mr. Lance Conn is a
director of the Company and is Executive Vice President of Vulcan Inc. and
Vulcan Ventures. The various cable, media, Internet and telephone
companies in which Mr. Allen has invested may mutually benefit one
another. The Company can give no assurance, nor should you expect,
that any of these business relationships will be successful, that the Company
will realize any benefits from these relationships or that the Company will
enter into any business relationships in the future with Mr. Allen’s
affiliated companies.
Mr. Allen
and his affiliates have made, and in the future likely will make, numerous
investments outside of the Company and its business. The Company
cannot provide any assurance that, in the event that the Company or any of its
subsidiaries enter into transactions in the future with any affiliate of
Mr. Allen, such transactions will be on terms as favorable to the Company
as terms it might have obtained from an unrelated third party. Also,
conflicts could arise with respect to the allocation of corporate opportunities
between the Company and Mr. Allen and his affiliates. The
Company has not instituted any formal plan or arrangement to address potential
conflicts of interest.
In 2009,
pursuant to indemnification provisions in the October 2005 settlement with Mr.
Allen regarding the CC VIII interest, the Company reimbursed Vulcan Inc.
approximately $3 million in legal expenses.
Oxygen. Oxygen Media LLC
("Oxygen") provides programming content to the Company pursuant to a carriage
agreement. Under the carriage agreement, the Company paid Oxygen
approximately $6 million, $8 million, and $8 million for the years ended
December 31, 2008, 2007, and 2006, respectively.
In 2005,
pursuant to an amended equity issuance agreement, Oxygen Media delivered 1
million shares of Oxygen Preferred Stock with a liquidation preference of $33.10
per share plus accrued dividends to Charter Holdco. In November 2007,
Oxygen was sold to an unrelated third party and the Company received
approximately $35 million representing its liquidation preference on its
preferred stock. Mr. Allen and his affiliates also no longer have an
interest in Oxygen.
Digeo, Inc. In March 2001,
Charter Ventures and Vulcan Ventures Incorporated formed DBroadband Holdings,
LLC for the sole purpose of purchasing equity interests in Digeo. In
connection with the execution of the broadband carriage agreement, DBroadband
Holdings, LLC purchased an equity interest in Digeo funded by contributions from
Vulcan Ventures Incorporated. At that time, the equity interest was
subject to a priority return of capital to Vulcan Ventures up to the amount
contributed by Vulcan Ventures on Charter Ventures’ behalf. After
Vulcan Ventures recovered its amount contributed (the “Priority Return”),
Charter Ventures should have had a 100% profit interest in DBroadband Holdings,
LLC. Charter Ventures was not required to make any capital
contributions, including capital calls to DBroadband Holdings,
LLC. DBroadband Holdings, LLC therefore was not included in the
Company’s consolidated financial statements. Pursuant to an amended
version of this arrangement, in 2003, Vulcan Ventures contributed a total of
$29 million to Digeo, $7 million of which was contributed on Charter
Ventures’ behalf, subject to Vulcan Ventures’ aforementioned priority
return. Since the formation of DBroadband Holdings, LLC, Vulcan
Ventures has contributed approximately $56 million on Charter Ventures’
behalf. On October 3, 2006, Vulcan Ventures and Digeo recapitalized
Digeo. In connection with such recapitalization, DBroadband Holdings,
LLC consented to the conversion of its preferred stock holdings in Digeo to
common stock, and Vulcan Ventures
F-39
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
surrendered
its Priority Return to Charter Ventures. As a result, DBroadband
Holdings, LLC is now included in the Company’s consolidated financial
statements. Such amounts are immaterial. After the
recapitalization, DBroadband Holdings, LLC owns 1.8% of Digeo, Inc’s common
stock. Digeo, Inc. is therefore not included in the Company’s
consolidated financial statements. In December 2007, the Digeo, Inc.
common stock was transferred to Charter Operating, and DBroadband Holdings, LLC
was dissolved.
The
Company paid Digeo Interactive approximately $0, $0, and $2 million for the
years ended December 31, 2008, 2007, and 2006, respectively, for customized
development of the i-channels and the local content tool kit.
On June
30, 2003, Charter Holdco entered into an agreement with Motorola, Inc. for the
purchase of 100,000 DVR units. The software for these DVR units is
being supplied by Digeo Interactive, LLC under a license agreement entered into
in April 2004. Pursuant to a software license agreement with Digeo
Interactive for the right to use Digeo's proprietary software for DVR units,
Charter paid approximately $1 million, $2 million, and $3 million in license and
maintenance fees in 2008, 2007, and 2006, respectively.
Charter
paid approximately $1 million, $10 million, and $11 million for the years ended
December 31, 2008, 2007, and 2006, respectively, in capital purchases under an
agreement with Digeo Interactive for the development, testing and purchase of
70,000 Digeo PowerKey DVR units. Total purchase price and license and
maintenance fees during the term of the definitive agreements are expected to be
approximately $41 million. The definitive agreements are terminable
at no penalty to Charter in certain circumstances.
In May
2008, Charter Operating entered into an agreement with Digeo Interactive, LLC, a
subsidiary of Digeo, Inc., for the minimum purchase of high-definition DVR units
for approximately $21 million. This minimum purchase commitment is
subject to reduction as a result of certain specified events such as the failure
to deliver units timely and catastrophic failure. The software
for these units is being supplied under a software license agreement with Digeo
Interactive, LLC; the cost of which is expected to be approximately $2 million
for the initial licenses and on-going maintenance fees of approximately $0.3
million annually, subject to reduction to coincide with any reduction in the
minimum purchase commitment. For the year ended December 31, 2008,
Charter has purchased approximately $1 million of DVR units from Digeo
Interactive, LLC under these agreements.
Certain
related parties, including members of the board of directors, hold interests in
the Company’s senior notes and discount notes of the Company’s subsidiaries of
approximately $199 million of face value at December 31, 2008.
23. Commitments
and Contingencies
Commitments
The
following table summarizes the Company’s payment obligations as of December 31,
2008 for its contractual obligations.
|
Total
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
||||||||||||||||||||||
|
Contractual
Obligations
|
||||||||||||||||||||||||||||
|
Capital
and Operating Lease Obligations (1)
|
$ | 103 | $ | 24 | $ | 25 | $ | 15 | $ | 12 | $ | 9 | $ | 18 | ||||||||||||||
|
Programming
Minimum Commitments (2)
|
687 | 315 | 101 | 105 | 110 | 56 | -- | |||||||||||||||||||||
|
Other
(3)
|
475 | 368 | 66 | 22 | 19 | -- | -- | |||||||||||||||||||||
|
Total
|
$ | 1,265 | $ | 707 | $ | 192 | $ | 142 | $ | 141 | $ | 65 | $ | 18 | ||||||||||||||
|
|
(1) The
Company leases certain facilities and equipment under noncancelable
operating leases. Leases and rental costs charged to expense
for the years ended December 31, 2008, 2007, and 2006, were $24
million, $23 million, and $23 million,
respectively.
|
F-40
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
|
|
(2) The
Company pays programming fees under multi-year contracts ranging from
three to ten years, typically based on a flat fee per customer, which may
be fixed for the term, or may in some cases escalate over the
term. Programming costs included in the accompanying statement
of operations were $1.6 billion, $1.6 billion, and $1.5 billion, for the
years ended December 31, 2008, 2007, and 2006,
respectively. Certain of the Company’s programming agreements
are based on a flat fee per month or have guaranteed minimum
payments. The table sets forth the aggregate guaranteed minimum
commitments under the Company’s programming
contracts.
|
|
|
(3) “Other”
represents other guaranteed minimum commitments, which consist primarily
of commitments to the Company’s billing services
vendors.
|
The
following items are not included in the contractual obligation table due to
various factors discussed below. However, the Company incurs these
costs as part of its operations:
|
|
·
|
The
Company also rents utility poles used in its
operations. Generally, pole rentals are cancelable on short
notice, but the Company anticipates that such rentals will
recur. Rent expense incurred for pole rental attachments for
the years ended December 31, 2008, 2007, and 2006, was $47 million,
$47 million, and $44 million,
respectively.
|
|
|
·
|
The
Company pays franchise fees under multi-year franchise agreements based on
a percentage of revenues generated from video service per
year. The Company also pays other franchise related costs, such
as public education grants, under multi-year
agreements. Franchise fees and other franchise-related costs
included in the accompanying statement of operations were $179 million,
$172 million, and $175 million for the years ended December 31, 2008,
2007, and 2006, respectively.
|
|
|
·
|
The
Company also has $158 million in letters of credit, primarily to its
various worker’s compensation, property and casualty, and general
liability carriers, as collateral for reimbursement of
claims. These letters of credit reduce the amount the Company
may borrow under its credit
facilities.
|
Litigation
The
Company is a defendant or co-defendant in several unrelated lawsuits claiming
infringement of various patents relating to various aspects of its
businesses. Other industry participants are also defendants in
certain of these cases, and, in many cases, the Company expects that any
potential liability would be the responsibility of its equipment vendors
pursuant to applicable contractual indemnification provisions. In the event that
a court ultimately determines that the Company infringes on any intellectual
property rights, it may be subject to substantial damages and/or an injunction
that could require the Company or its vendors to modify certain products and
services the Company offers to its subscribers. While the Company
believes the lawsuits are without merit and intends to defend the actions
vigorously, the lawsuits could be material to the Company’s consolidated results
of operations of any one period, and no assurance can be given that any adverse
outcome would not be material to the Company’s consolidated financial condition,
results of operations or liquidity.
In the
ordinary course of business, the Company may face employment law claims,
including claims under the Fair Labor Standards Act and wage and hour laws of
the states in which we operate. On August 15, 2007, a complaint was
filed, on behalf of both nationwide and state of Wisconsin classes of certain
categories of current and former Charter technicians, against Charter in the
United States District Court for the Western District of Wisconsin (Sjoblom v. Charter Communications,
LLC and Charter Communications, Inc.), alleging that Charter violated the
Fair Labor Standards Act and Wisconsin wage and hour laws by failing to pay
technicians for certain hours claimed to have been worked. While the
Company believes it has substantial factual and legal defenses to the claims at
issue, in order to avoid the cost and distraction of continuing to litigate the
case, the Company reached a settlement with the plaintiffs, which received final
approval from the court on January 26, 2009. The Company has accrued
settlement
costs associated with the Sjoblom case. The
Company has been subjected, in the normal course of business, to the assertion
of other similar claims and could be subjected to additional such
claims. The Company can not predict the ultimate outcome of any such
claims.
F-41
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
Charter
is a party to lawsuits and claims that arise in the ordinary course of
conducting its business. The ultimate outcome of these other legal
matters pending against the Company or its subsidiaries cannot be predicted, and
although such lawsuits and claims are not expected individually to have a
material adverse effect on the Company’s consolidated financial condition,
results of operations or liquidity, such lawsuits could have, in the aggregate,
a material adverse effect on the Company’s consolidated financial condition,
results of operations or liquidity.
Regulation in the Cable
Industry
The
operation of a cable system is extensively regulated by the Federal
Communications Commission (“FCC”), some state governments and most local
governments. The FCC has the authority to enforce its regulations
through the imposition of substantial fines, the issuance of cease and desist
orders and/or the imposition of other administrative sanctions, such as the
revocation of FCC licenses needed to operate certain transmission facilities
used in connection with cable operations. The 1996 Telecom Act
altered the regulatory structure governing the nation’s communications
providers. It removed barriers to competition in both the cable
television market and the telephone market. Among other things, it
reduced the scope of cable rate regulation and encouraged additional competition
in the video programming industry by allowing telephone companies to provide
video programming in their own telephone service areas.
Future
legislative and regulatory changes could adversely affect the Company’s
operations, including, without limitation, additional regulatory requirements
the Company may be required to comply with as it offers new services such as
telephone.
24. Employee
Benefit Plan
The
Company’s employees may participate in the Charter Communications, Inc. 401(k)
Plan. Employees that qualify for participation can contribute up to
50% of their salary, on a pre-tax basis, subject to a maximum contribution limit
as determined by the Internal Revenue Service. For each payroll
period, the Company will contribute to the 401(k) Plan (a) the total amount of
the salary reduction the employee elects to defer between 1% and 50% and (b) a
matching contribution equal to 50% of the amount of the salary reduction the
participant elects to defer (up to 5% of the participant’s payroll
compensation), excluding any catch-up contributions. The Company made
contributions to the 401(k) plan totaling $8 million, $7 million, and $8 million
for the years ended December 31, 2008, 2007, and 2006,
respectively.
25. Recently
Issued Accounting Standards
In
December 2007, the FASB issued SFAS No. 141R, Business Combinations: Applying the
Acquisition Method, which provides guidance on the accounting and
reporting for business combinations. SFAS No. 141R is effective for
fiscal years beginning after December 15, 2008. The Company adopted
SFAS No. 141R effective January 1, 2009. The adoption of SFAS No.
141R has not had a material impact on the Company’s financial
statements.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51, which
provides guidance on the accounting and
reporting for minority interests in consolidated financial
statements. SFAS No. 160 requires losses to be allocated to
non-controlling (minority) interests even when such amounts are
deficits. As such, future losses will be allocated between Charter
and the Charter Holdco non-controlling interest. SFAS No. 160 is
effective for fiscal years beginning after December 15, 2008. The
Company adopted SFAS No. 160 effective January 1, 2009 and applied the
effects respectively to all periods presented to the extent prescribed by
the standard. Had SFAS No. 160 been effective for the
Company’s financial statements for the year ended December 31, 2008, our net
loss to Charter shareholders would have been reduced by $1.2
billion. The adoption resulted in the presentation of Mr. Allen’s
5.6% preferred membership interest in CC VIII as temporary equity in the
Company’s consolidated balance sheets as of December 31, 2008 and 2007 as
presented, which was previously classified as minority interest. See
Note 3.
In
February 2008, the FASB issued FASB Staff Position (FSP) 157-2, Effective Date of FASB Statement No.
157, which deferred the effective date of SFAS No. 157 to fiscal years
beginning after November 15, 2008 for
F-42
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
nonfinancial
assets and nonfinancial liabilities. The Company applied SFAS No. 157
to nonfinancial assets and nonfinancial liabilities beginning January 1,
2009. The adoption of SFAS No. 157 has not had a material impact on
the Company’s financial statements.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133, which requires companies to disclose their objectives and strategies
for using derivative instruments, whether or not designated as hedging
instruments under SFAS No. 133. SFAS No. 161 is effective for interim
periods and fiscal years beginning after November 15, 2008. The
Company adopted SFAS No. 161 effective January 1, 2009. The adoption
of SFAS No. 161 has not had a material impact on the Company’s financial
statements.
In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets, which amends the factors to be considered in renewal
or extension assumptions used to determine the useful life of a recognized
intangible asset. FSP FAS 142-3 is effective for interim periods and
fiscal years beginning after December 15, 2008. The Company adopted
FSP FAS 142-3 effective January 1, 2009. The adoption of FSP FAS
142-3 has not had a material impact on the Company’s financial
statements.
In May
2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), which specifies that issuers of convertible debt instruments
that may be settled in cash upon conversion should separately account for the
liability and equity components in a manner reflecting their nonconvertible debt
borrowing rate when interest costs are recognized in subsequent
periods. FSP APB 14-1 is effective for interim periods and fiscal
years beginning after December 15, 2008. The Company adopted FSP APB
14-1 effective January 1, 2009 and applied the effects retrospectively to all
prior periods presented. The adoption of FSP APB 14-1 resulted in the
Company recording a cumulative adjustment as of December 31, 2005 of an increase
in additional paid-in capital of $302 million and an increase in accumulated
deficit of $48 million. The
adoption of FSP APB 14-1 did not have an impact on net loss or net loss per
common share for the year ended December 31, 2008. The
adoption of FSP APB 14-1 resulted in a decrease in net loss and net loss per
common share of $82 million and $0.22 for the year ended December 31, 2007 and
an increase in net loss and net loss per common share of $84 million and
$0.25 for the year ended December 31, 2006. The Company’s
consolidated financial statements and relevant financial information in the
footnotes herein have been updated to reflect the changes required by FSP APB
14-1.
The
Company does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on its
accompanying financial statements.
26. Parent
Company Only Financial Statements
As the
result of limitations on, and prohibitions of, distributions, substantially all
of the net assets of the consolidated subsidiaries are restricted from
distribution to Charter, the parent company. The following condensed
parent-only financial statements of Charter account for the investment in
Charter Holdco under the equity method of accounting. The financial
statements should be read in conjunction with the consolidated financial
statements of the Company and notes thereto.
F-43
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
Charter
Communications, Inc. (Parent Company Only)
Condensed
Balance Sheet
|
December
31,
|
||||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
Receivable
from related party
|
$ | 18 | $ | 27 | ||||
|
Notes
receivable from Charter Holdco
|
376 | 397 | ||||||
|
Other
assets
|
-- | 33 | ||||||
|
Total
assets
|
$ | 394 | $ | 457 | ||||
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
||||||||
|
Current
liabilities
|
$ | 16 | $ | 22 | ||||
|
Convertible
notes
|
376 | 397 | ||||||
|
Deferred
income taxes
|
364 | 425 | ||||||
|
Other
long term liabilities
|
-- | 27 | ||||||
|
Preferred
stock — redeemable
|
-- | 5 | ||||||
|
Losses
in excess of investment
|
10,144 | 7,468 | ||||||
|
Shareholders’
deficit
|
(10,506 | ) | (7,887 | ) | ||||
|
Total
liabilities and shareholders’ deficit
|
$ | 394 | $ | 457 | ||||
F-44
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
Condensed
Statement of Operations
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
INCOME
|
||||||||||||
|
Interest
income
|
$ | 54 | $ | 74 | $ | 83 | ||||||
|
Management
fees
|
21 | 15 | 30 | |||||||||
|
Gain
on extinguishment of notes
receivable
from Charter Holdco
|
6 | 155 | -- | |||||||||
|
Change
in value of derivative
|
33 | 98 | -- | |||||||||
|
Total
income
|
114 | 342 | 113 | |||||||||
|
EXPENSES
|
||||||||||||
|
Equity
in losses of Charter Holdco
|
(2,514 | ) | (1,361 | ) | (1,252 | ) | ||||||
|
General
and administrative expenses
|
(21 | ) | (15 | ) | (30 | ) | ||||||
|
Interest
expense
|
(54 | ) | (74 | ) | (83 | ) | ||||||
|
Loss
on extinguishment of convertible notes
|
(6 | ) | (155 | ) | -- | |||||||
|
Change
in value of derivative
|
(33 | ) | (98 | ) | -- | |||||||
|
Total
expenses
|
(2,628 | ) | (1,703 | ) | (1,365 | ) | ||||||
|
Net
loss before income taxes
|
(2,514 | ) | (1,361 | ) | (1,252 | ) | ||||||
|
Income
tax benefit (expense)
|
63 | (173 | ) | (202 | ) | |||||||
|
Net
loss
|
$ | (2,451 | ) | $ | (1,534 | ) | $ | (1,454 | ) | |||
F-45
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
Condensed
Statements of Cash Flows
|
Year
Ended December 31,
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net
loss
|
$ | (2,451 | ) | $ | (1,534 | ) | $ | (1,454 | ) | |||
|
Equity
in losses of Charter Holdco
|
2,514 | 1,361 | 1,252 | |||||||||
|
Changes
in operating assets and liabilities
|
-- | -- | 1 | |||||||||
|
Deferred
income taxes
|
(63 | ) | 172 | 202 | ||||||||
|
Net
cash flows from operating activities
|
-- | (1 | ) | 1 | ||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Payments
from Charter Holdco
|
-- | -- | 20 | |||||||||
|
Investment
in Charter Holdco
|
-- | (4 | ) | (1 | ) | |||||||
|
Net
cash flows from investing activities
|
-- | (4 | ) | 19 | ||||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Paydown
of convertible notes
|
-- | -- | (20 | ) | ||||||||
|
Net
proceeds from issuance of common stock
|
-- | 4 | 1 | |||||||||
|
Net
cash flows from financing activities
|
-- | 4 | (19 | ) | ||||||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
-- | (1 | ) | 1 | ||||||||
|
CASH
AND CASH EQUIVALENTS, beginning of year
|
-- | 1 | -- | |||||||||
|
CASH
AND CASH EQUIVALENTS, end of year
|
$ | -- | $ | -- | $ | 1 | ||||||
27. Unaudited
Quarterly Financial Data
The
following table presents quarterly data for the periods presented on the
consolidated statement of operations:
|
Year
Ended December 31, 2008
|
||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
|
Revenues
|
$ | 1,564 | $ | 1,623 | $ | 1,636 | $ | 1,656 | ||||||||
|
Operating
income (loss) from continuing operations
|
$ | 205 | $ | 230 | $ | 208 | $ | (1,257 | ) | |||||||
|
Net
loss
|
$ | (360 | ) | $ | (274 | ) | $ | (322 | ) | $ | (1,495 | ) | ||||
|
Basic
and diluted net loss per common share
|
$ | (0.97 | ) | $ | (0.74 | ) | $ | (0.86 | ) | $ | (3.96 | ) | ||||
|
Weighted-average
shares outstanding, basic and diluted
|
370,085,187 | 371,652,070 | 374,145,243 | 377,920,301 | ||||||||||||
|
Year
Ended December 31, 2007
|
||||||||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
|
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
|
Revenues
|
$ | 1,425 | $ | 1,499 | $ | 1,525 | $ | 1,553 | ||||||||
|
Operating
income from continuing operations
|
$ | 156 | $ | 200 | $ | 107 | $ | 85 | ||||||||
|
Net
loss
|
$ | (384 | ) | $ | (363 | ) | $ | (409 | ) | $ | (378 | ) | ||||
|
Basic
and diluted net loss per common share
|
$ | (1.05 | ) | $ | (0.99 | ) | $ | (1.11 | ) | $ | (1.02 | ) | ||||
|
Weighted-average
shares outstanding, basic and diluted
|
366,120,096 | 367,582,677 | 369,239,742 | 369,916,556 | ||||||||||||
F-46
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
The
Company restated certain current year and prior year amounts as a result of the
adoption of FSP ABP 14-1. See Note 25.
28. Subsequent
Events
Impairment
of Franchises
During
the quarter ended September 30, 2009, the Company performed an interim franchise
impairment analysis and recorded a preliminary non-cash franchise impairment
charge of $2.9 billion (unaudited) which represented the Company’s best estimate
of the impairment of its franchise assets as of the date of filing the 3rd
quarter Form 10-Q. The Company currently expects to finalize
its franchise impairment analysis during the quarter ended December 31, 2009,
which could potentially result in an impairment charge that materially differs
from the estimate. In addition, upon the effectiveness of the Company’s
Plan, the Company will apply fresh start accounting in accordance with Statement
of Position 90-7, Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code (“SOP
90-7”) and as such will adjust its franchise assets to reflect fair
value.
Emergence
from Reorganization Proceedings and Related Events
On March
27, 2009, the Company and certain affiliates (collectively, the “Debtors”) filed
voluntary petitions in the United States Bankruptcy Court for the Southern
District of New York (the “Bankruptcy Court”) seeking relief under the
provisions of Chapter 11 of Title 11 of the United States Code (the “Bankruptcy
Code”). The Chapter 11 cases were jointly administered under the
caption In re Charter
Communications, Inc., et al., Case No. 09-11435 (the “Chapter 11
Cases”). The Debtors continued to operate their businesses and
managed their properties as debtors in possession under the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code from March 27, 2009 until emergence from Chapter 11 on
November 30, 2009 (the “Effective Date”).
On
November 17, 2009, the Bankruptcy Court entered an order (the “Confirmation
Order”) confirming the Plan and, on the Effective Date, the Plan was consummated
and the Company emerged from bankruptcy. As provided in the Plan and the
Confirmation Order, (i) the notes and bank debt of Charter Operating and CCO
Holdings remained outstanding; (ii) holders of approximately $1.5 billion of
notes issued by CCH II received new CCH II notes (the “Notes Exchange”); (iii)
holders of notes issued by CCH I received shares of Charter new Class A common
stock; (iv) holders of notes issued by CIH received warrants to
purchase shares of Charter new Class A common stock; (v) holders of notes issued
by Charter Holdings received warrants to purchase shares of Charter new Class A
common stock; (vi) holders of convertible notes issued by Charter received cash
and preferred stock issued by Charter; and (vii) all previously outstanding
shares of Charter Class A common stock were cancelled. In addition,
as part of the Plan, the holders of CCH I notes received and transferred to Mr.
Allen $85 million of new CCH II notes.
The
consummation of the Plan was funded with cash on hand, the Notes Exchange, and
proceeds of approximately $1.6 billion of an equity rights offering (the “Rights
Offering”) in which holders of CCH I notes purchased approximately $1.6
billion of Charter’s new Class A common stock.
Pursuant
to a separate restructuring agreement among Charter, Mr. Allen, and an entity
controlled by Mr. Allen (as amended, the “Allen Agreement”), in settlement and
compromise of their legal, contractual and equitable rights, claims and remedies
against Charter and its subsidiaries, and in addition to any amounts received by
virtue of their holding any claims of the type set forth above, upon the
Effective Date of the Plan, Mr. Allen or his affiliates were issued shares of
the new Class B common stock of Charter equal to 2% of the equity value of
Charter, after giving effect to the Rights Offering, but prior to issuance of
warrants and equity-based awards provided for by the Plan and 35% (determined on
a fully diluted basis) of the total voting power of all new capital stock of
Charter. Each share of new Class B common stock is convertible, at the
option of the holder subject to various restrictions, into one share of new
Class A common stock, and is subject to significant restrictions on
transfer. Certain holders of new Class A common stock and new Class B
common stock will receive certain customary registration rights with respect to
their shares. At the Effective Date of the Plan, Mr. Allen or his
affiliates also received (i) warrants to purchase shares of new Class A common
stock of Charter in an aggregate amount equal to 4% of the equity value of
reorganized
F-47
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2008, 2007, AND 2006
(dollars
in millions, except where indicated)
Charter,
after giving effect to the Rights Offering, but prior to the issuance of
warrants and equity-based awards provided for by the Plan, (ii) $85 million
principal amount of new CCH II notes, (iii) $25 million in cash for amounts
owing to CII under a management agreement, (iv) up to $20 million in cash for
reimbursement of fees and expenses in connection with the Plan, and (v) an
additional $150 million in cash. In addition, on the Effective Date
of the Plan, CII retained a 1% equity interest in reorganized Charter Holdco and
a right to exchange such interest into new Class A common stock of Charter.
Further, Mr. Allen transferred his preferred equity interest in CC VIII to
Charter.
Charter
Operating Revolving Credit Facility
The
Company has utilized $1.4 billion of the $1.5 billion revolving credit facility
under its Amended and Restated Credit Agreement, dated as of March 18, 1999, as
amended and restated as of March 6, 2007 (the “Credit
Agreement”). Upon filing bankruptcy, Charter Operating no longer had
access to the revolving feature of its revolving credit
facility. Reinstatement of the Credit Agreement resulted in the
revolving credit facility remaining in place with its original terms except its
revolving feature.
Plan
Effects and Fresh Start Accounting
In the
disclosure statement related to the Plan, the reorganization value of the
Company was set forth as approximately $14.1 billion to $16.6 billion, with a
midpoint estimate of $15.4 billion. The reorganization value was determined
using numerous projections and
assumptions that are inherently subject to significant uncertainties and the
resolution of contingencies beyond the control of the Company. Accordingly,
there can be no assurance that the estimates, assumptions and amounts reflected
in the valuation will be realized. On a pro
forma basis, as of December 31, 2008, the consummation of the Plan
resulted in a net reduction of the Company’s debt by approximately $8 billion
and a net reduction to cash of approximately $273 million.
Effective
December 1, 2009, the Company will apply fresh start accounting in accordance
with SOP 90-7 which requires assets and liabilities to be reflected at fair
value. Upon
application of fresh start accounting, the Company will adjust its property,
plant and equipment, franchise, goodwill, and other intangible assets to reflect
fair value and will also establish any previously unrecorded intangible assets
at their fair values. The Company expects these fresh start
adjustments will result in material increases to total tangible and intangible
assets, primarily as a result of adjustments to property, plant and equipment,
goodwill and customer relationships.
F-48