UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark One)
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For
the quarterly period ended June 30, 2008
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For
the transition period from ________ to _________
Commission
file number: 000-27927
Charter Communications,
Inc.
(Exact name of registrant as
specified in its charter)
|
Delaware
|
43-1857213
|
|
(State or other jurisdiction
of incorporation or organization)
|
(I.R.S.
Employer Identification Number)
|
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)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “accelerated filer,” “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer þ Accelerated
filer o Non-accelerated
filer o Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes oNo þ
Number of
shares of Class A common stock outstanding as of June 30, 2008:
407,201,927
Number of
shares of Class B common stock outstanding as of June 30, 2008:
50,000
Charter
Communications, Inc.
Quarterly
Report on Form 10-Q for the Period ended June 30, 2008
Table
of Contents
|
PART
I. FINANCIAL INFORMATION
|
Page
|
|
Item
1.Financial Statements - Charter Communications, Inc. and
Subsidiaries
|
|
|
Condensed
Consolidated Balance Sheets as of June 30, 2008
|
|
|
and
December 31, 2007
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4
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Condensed
Consolidated Statements of Operations for the three and
six
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|
|
months
ended June 30, 2008 and 2007
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5
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Condensed
Consolidated Statements of Cash Flows for the
|
|
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six
months ended June 30, 2008 and 2007
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6
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Notes
to Condensed Consolidated Financial Statements
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7
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Item
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
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20
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Item
3. Quantitative and Qualitative Disclosures about Market
Risk
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31
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Item
4. Controls and Procedures
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32
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PART
II. OTHER INFORMATION
|
|
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Item
1. Legal Proceedings
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33
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Item
1A. Risk Factors
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33
|
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Item
4. Submission of Matters to a Vote of Security
Holders
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36
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Item
6. Exhibits
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37
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SIGNATURES
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S-1
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EXHIBIT
INDEX
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E-1
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This
quarterly report on Form 10-Q is for the three and six months ended June
30, 2008. The Securities and Exchange Commission ("SEC") allows
us to "incorporate by reference" information that we file with the SEC, which
means that we can disclose important information to you by referring you
directly to those documents. Information incorporated by reference is
considered to be part of this quarterly report. In addition,
information that we file with the SEC in the future will automatically update
and supersede information contained in this quarterly report. In this
quarterly report, "we," "us" and "our" refer to Charter Communications, Inc.,
Charter Communications Holding Company, LLC and their subsidiaries.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:
This
quarterly report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities
Act"), and Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), regarding, among other things, our plans, strategies and
prospects, both business and financial including, without limitation, the
forward-looking statements set forth in the "Results of Operations" and
"Liquidity and Capital Resources" sections under Part I, Item 2. "Management’s
Discussion and Analysis of Financial Condition and Results of Operations" in
this quarterly report. Although we believe that our plans, intentions
and expectations reflected in or suggested by these forward-looking statements
are reasonable, we cannot assure you that we will achieve or realize these
plans, intentions or expectations. Forward-looking statements are
inherently subject to risks, uncertainties and assumptions including, without
limitation, the factors described under "Risk Factors" under Part II, Item 1A
and the factors described under “Risk Factors” under Part I, Item 1A of our most
recent Form 10-K filed with the SEC. Many of the forward-looking
statements contained in this quarterly report may be identified by the use of
forward-looking words such as "believe," "expect," "anticipate," "should,"
"planned," "will," "may," "intend," "estimated," "aim," "on track," "target,"
"opportunity," and "potential," among others. Important factors that
could cause actual results to differ materially from the forward-looking
statements we make in this quarterly report are set forth in this quarterly
report and in other reports or documents that we file from time to time with the
SEC, and include, but are not limited to:
|
|
·
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the
availability, in general, of funds to meet interest payment obligations
under our debt and to fund our operations and necessary capital
expenditures, either through cash flows from operating activities, further
borrowings or other sources and, in particular, our ability to fund debt
obligations (by dividend, investment or otherwise) to the applicable
obligor of such debt;
|
|
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·
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our
ability to comply with all covenants in our indentures and credit
facilities, any violation of which, if not cured in a timely manner, could
trigger a default of our other obligations under cross-default
provisions;
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|
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·
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our
ability to pay or refinance debt prior to or when it becomes due and/or
refinance that debt through new issuances, exchange offers or otherwise,
including restructuring our balance sheet and leverage
position;
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|
·
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the
impact of competition from other distributors, including incumbent
telephone companies, direct broadcast satellite operators, wireless
broadband providers, and digital subscriber line (“DSL”)
providers;
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·
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difficulties
in growing, further introducing, and operating our telephone services,
while adequately meeting customer expectations for the reliability of
voice services;
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·
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our
ability to adequately meet demand for installations and customer
service;
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·
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our
ability to sustain and grow revenues and cash flows from operating
activities by offering video, high-speed Internet, telephone and other
services, and to maintain and grow our customer base, particularly in the
face of increasingly aggressive
competition;
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|
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·
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our
ability to obtain programming at reasonable prices or to adequately raise
prices to offset the effects of higher programming
costs;
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·
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general
business conditions, economic uncertainty or slowdown, including the
recent significant slowdown in the housing sector and overall economy;
and
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·
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the
effects of governmental regulation on our
business.
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All
forward-looking statements attributable to us or any person acting on our behalf
are expressly qualified in their entirety by this cautionary
statement. We are under no duty or obligation to update any of the
forward-looking statements after the date of this quarterly report.
3
PART
I. FINANCIAL INFORMATION.
|
Item
1.
|
Financial
Statements.
|
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
DATA)
|
June 30,
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December
31,
|
|||||||
|
2008
|
2007
|
|||||||
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(Unaudited)
|
||||||||
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ASSETS
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||||||||
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CURRENT
ASSETS:
|
||||||||
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Cash
and cash equivalents
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$ | 63 | $ | 75 | ||||
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Short-term
investments
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13 | -- | ||||||
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Accounts
receivable, less allowance for doubtful accounts of
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||||||||
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$19
and $18, respectively
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250 | 225 | ||||||
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Prepaid
expenses and other current assets
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35 | 36 | ||||||
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Total
current assets
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361 | 336 | ||||||
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INVESTMENT
IN CABLE PROPERTIES:
|
||||||||
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Property, plant and equipment, net of accumulated
depreciation
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5,106 | 5,103 | ||||||
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Franchises,
net
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8,935 | 8,942 | ||||||
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Total
investment in cable properties, net
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14,041 | 14,045 | ||||||
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OTHER
NONCURRENT ASSETS
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308 | 285 | ||||||
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Total
assets
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$ | 14,710 | $ | 14,666 | ||||
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LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
||||||||
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CURRENT
LIABILITIES:
|
||||||||
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Accounts
payable and accrued expenses
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$ | 1,293 | $ | 1,332 | ||||
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Total
current liabilities
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1,293 | 1,332 | ||||||
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LONG-TERM
DEBT
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20,480 | 19,908 | ||||||
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NOTE
PAYABLE – RELATED PARTY
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69 | 65 | ||||||
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DEFERRED
MANAGEMENT FEES – RELATED PARTY
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14 | 14 | ||||||
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OTHER
LONG-TERM LIABILITIES
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1,150 | 1,035 | ||||||
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MINORITY
INTEREST
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203 | 199 | ||||||
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PREFERRED
STOCK – REDEEMABLE; $.001 par value; 1 million
|
||||||||
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shares
authorized; 36,713 shares issued and outstanding
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5 | 5 | ||||||
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SHAREHOLDERS’
DEFICIT:
|
||||||||
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Class
A Common stock; $.001 par value; 10.5 billion shares
authorized;
|
||||||||
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407,201,927
and 398,226,468 shares issued and outstanding,
respectively
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-- | -- | ||||||
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Class
B Common stock; $.001 par value; 4.5 billion
|
||||||||
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shares
authorized; 50,000 shares issued and outstanding
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-- | -- | ||||||
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Preferred
stock; $.001 par value; 250 million shares
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||||||||
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authorized;
no non-redeemable shares issued and outstanding
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-- | -- | ||||||
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Additional
paid-in capital
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5,331 | 5,327 | ||||||
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Accumulated
deficit
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(13,730 | ) | (13,096 | ) | ||||
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Accumulated
other comprehensive loss
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(105 | ) | (123 | ) | ||||
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Total
shareholders’ deficit
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(8,504 | ) | (7,892 | ) | ||||
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Total
liabilities and shareholders’ deficit
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$ | 14,710 | $ | 14,666 | ||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
4
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(DOLLARS
IN MILLIONS, EXCEPT PER SHARE DATA)
Unaudited
|
Three
Months Ended June 30,
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Six
Months Ended June 30,
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|||||||||||||||
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2008
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2007
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2008
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2007
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|||||||||||||
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REVENUES
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$ | 1,623 | $ | 1,499 | $ | 3,187 | $ | 2,924 | ||||||||
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COSTS
AND EXPENSES:
|
||||||||||||||||
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Operating
(excluding depreciation and amortization)
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698 | 647 | 1,380 | 1,278 | ||||||||||||
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Selling,
general and administrative
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342 | 317 | 687 | 620 | ||||||||||||
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Depreciation
and amortization
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328 | 334 | 649 | 665 | ||||||||||||
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Other
operating expenses, net
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25 | 1 | 36 | 5 | ||||||||||||
| 1,393 | 1,299 | 2,752 | 2,568 | |||||||||||||
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Income
from operations
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230 | 200 | 435 | 356 | ||||||||||||
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OTHER
INCOME AND (EXPENSES):
|
||||||||||||||||
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Interest
expense, net
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(474 | ) | (462 | ) | (939 | ) | (926 | ) | ||||||||
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Change
in value of derivatives
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26 | (3 | ) | (11 | ) | (4 | ) | |||||||||
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Other
income (expense), net
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1 | (36 | ) | (2 | ) | (39 | ) | |||||||||
| (447 | ) | (501 | ) | (952 | ) | (969 | ) | |||||||||
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Loss
before income taxes
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(217 | ) | (301 | ) | (517 | ) | (613 | ) | ||||||||
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INCOME
TAX EXPENSE
|
(59 | ) | (59 | ) | (117 | ) | (128 | ) | ||||||||
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Net
loss
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$ | (276 | ) | $ | (360 | ) | $ | (634 | ) | $ | (741 | ) | ||||
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LOSS
PER COMMON SHARE:
|
$ | (.74 | ) | $ | (.98 | ) | $ | (1.71 | ) | $ | (2.02 | ) | ||||
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Weighted
average common shares outstanding, basic and diluted
|
371,652,070 | 367,582,677 | 370,868,849 | 366,855,427 | ||||||||||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS
IN MILLIONS)
Unaudited
|
Six
Months Ended June 30,
|
||||||||
|
2008
|
2007
|
|||||||
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CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
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Net
loss
|
$ | (634 | ) | $ | (741 | ) | ||
|
Adjustments
to reconcile net loss to net cash flows from operating
activities:
|
||||||||
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Depreciation
and amortization
|
649 | 665 | ||||||
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Noncash
interest expense
|
27 | 21 | ||||||
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Change
in value of derivatives
|
11 | 4 | ||||||
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Deferred
income taxes
|
114 | 123 | ||||||
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Other,
net
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22 | 39 | ||||||
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Changes
in operating assets and liabilities, net of effects from
dispositions:
|
||||||||
|
Accounts
receivable
|
(24 | ) | (29 | ) | ||||
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Prepaid
expenses and other assets
|
-- | 26 | ||||||
|
Accounts
payable, accrued expenses and other
|
3 | 10 | ||||||
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Net
cash flows from operating activities
|
168 | 118 | ||||||
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CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Purchases
of property, plant and equipment
|
(650 | ) | (579 | ) | ||||
|
Change
in accrued expenses related to capital expenditures
|
(41 | ) | (39 | ) | ||||
|
Other,
net
|
(11 | ) | 31 | |||||
|
Net
cash flows from investing activities
|
(702 | ) | (587 | ) | ||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Borrowings
of long-term debt
|
1,765 | 7,247 | ||||||
|
Repayments
of long-term debt
|
(1,195 | ) | (6,727 | ) | ||||
|
Payments
for debt issuance costs
|
(39 | ) | (33 | ) | ||||
|
Other,
net
|
(9 | ) | 3 | |||||
|
Net
cash flows from financing activities
|
522 | 490 | ||||||
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
(12 | ) | 21 | |||||
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
75 | 60 | ||||||
|
CASH
AND CASH EQUIVALENTS, end of period
|
$ | 63 | $ | 81 | ||||
|
CASH
PAID FOR INTEREST
|
$ | 912 | $ | 918 | ||||
|
NONCASH
TRANSACTIONS:
|
||||||||
|
Cumulative
adjustment to accumulated deficit for the adoption of FIN
48
|
$ | -- | $ | 56 | ||||
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
6
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
|
Organization
and Basis of Presentation
|
Charter
Communications, Inc. ("Charter") is a holding company whose principal assets at
June 30, 2008 are the 55% controlling common equity interest (52% for accounting
purposes) in Charter Communications Holding Company, LLC ("Charter Holdco") and
"mirror" notes which are payable by Charter Holdco to Charter and have the same
principal amount and terms as those of Charter’s convertible senior
notes. Charter Holdco is the sole owner of CCHC, LLC ("CCHC"), which
is the sole owner of Charter Communications Holdings, LLC ("Charter
Holdings"). The consolidated financial statements include the
accounts of Charter, Charter Holdco, CCHC, Charter Holdings and all of their
subsidiaries where the underlying operations reside, which are collectively
referred to herein as the "Company." Charter has 100% voting control
over Charter Holdco and consolidates Charter Holdco as a variable interest
entity under Financial Accounting Standards Board ("FASB") Interpretation
("FIN") 46(R) Consolidation of
Variable Interest Entities. Charter Holdco’s limited liability
company agreement provides that so long as Charter’s Class B common stock
retains its special voting rights, Charter will maintain a 100% voting interest
in Charter Holdco. Voting control gives Charter full authority and
control over the operations of Charter Holdco. All significant
intercompany accounts and transactions among consolidated entities have been
eliminated.
The
Company is a broadband communications company operating in the United
States. The Company offers to residential and commercial customers
traditional cable video programming (basic and digital video), high-speed
Internet services, and telephone services, as well as advanced broadband
services such as high definition television, Charter OnDemand™ (“OnDemand”), and
digital video recorder ("DVR") service. 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
accompanying condensed consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Accordingly,
certain information and footnote disclosures typically included in Charter’s
Annual Report on Form 10-K have been condensed or omitted for this quarterly
report. The accompanying condensed consolidated financial statements
are unaudited and are subject to review by regulatory
authorities. However, in the opinion of management, such financial
statements include all adjustments, which consist of only normal recurring
adjustments, necessary for a fair presentation of the results for the periods
presented. Interim results are not necessarily indicative of results
for a full year.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States (“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 incurred net losses of $276 million and $360 million for the three
months ended June 30, 2008 and 2007, respectively, and $634 million and $741
million for the six months ended June 30, 2008 and 2007,
respectively. The Company’s net cash flows from operating activities
were $168 million and $118 million for the six months ended June 30, 2008 and
2007, respectively.
The
Company has a significant amount of debt. The Company's long-term
debt as of June 30, 2008 totaled $20.5 billion, consisting of $7.3 billion of
credit facility debt, $12.8 billion accreted value of high-yield notes, and $365
million accreted value of convertible senior notes. For the remainder
of 2008, $36 million of the Company’s debt
7
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
matures. As
of June 30, 2008, the Company’s 2009 debt maturities totaled $238
million. In 2010 and beyond, significant additional amounts will
become due under the Company’s remaining long-term debt
obligations.
The
Company requires significant cash to fund debt service costs, capital
expenditures and ongoing operations. The Company has historically
funded these requirements through cash flows from operating activities,
borrowings under its credit facilities, 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 six months
ended June 30, 2008, the Company generated $168 million of net cash flows from
operating activities, after paying cash interest of $912 million. In
addition, the Company used $650 million for purchases of property, plant and
equipment. Finally, the Company generated net cash flows from
financing activities of $522 million, as a result of financing transactions
completed during the six months ended June 30, 2008.
The
Company expects that cash on hand, cash flows from operating activities, and the
amounts available under the Charter Communications Operating, LLC (“Charter
Operating”) credit facilities will be adequate to fund its projected cash needs,
including scheduled maturities, through 2009. The Company believes
that cash flows from operating activities, and the amounts available under the
Charter Operating credit facilities will not be sufficient to fund projected
cash needs in 2010 (primarily as a result of the CCH II, LLC (“CCH II”) $1.9
billion of senior notes outstanding at July 2, 2008 that mature in September
2010) and thereafter. The Company’s projected cash needs and
projected sources of liquidity depend upon, among other things, its actual
results, the timing and amount of its capital expenditures, and ongoing
compliance with the Charter Operating credit facilities, including obtaining an
unqualified audit opinion from its independent accountants. 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. A continuation of the
recent turmoil in the credit markets and the general economic downturn could
adversely impact the terms and/or pricing when the Company needs to raise
additional liquidity. No assurances can be given that the Company will not
experience liquidity problems if it does not obtain sufficient additional
financing on a timely basis as the Company’s debt becomes due or because of
adverse market conditions, increased competition, or other unfavorable
events.
If, at
any time, additional capital or borrowing capacity is required beyond amounts
internally generated or available under the Company’s credit facilities, the
Company would consider issuing equity, issuing convertible debt or some other
securities, further reducing the Company’s expenses and capital expenditures,
selling assets, or requesting waivers or amendments with respect to the
Company’s credit facilities.
If the
above strategies were not successful, the Company could be forced to restructure
its obligations or seek protection under the bankruptcy laws. In
addition, if the Company needs to raise additional capital through the issuance
of equity or finds it necessary to engage in a recapitalization or other similar
transaction, the Company’s shareholders could suffer significant dilution,
including potential loss of the entire value of their investment, and in the
case of a recapitalization or other similar transaction, the Company’s
noteholders might not receive principal and interest payments to which they are
contractually entitled.
Credit
Facility Availability
The
Company’s ability to operate depends upon, among other things, its continued
access to capital, including credit under the Charter Operating credit
facilities. The Charter Operating credit facilities, along with the
Company’s indentures and the CCO Holdings, LLC (“CCO Holdings”) credit facility,
contain certain restrictive covenants, some of which require the Company to
maintain specified leverage ratios, meet financial tests, and provide annual
audited financial statements with an unqualified opinion from the Company’s
independent accountants. As of June 30, 2008, the Company was in
compliance with the covenants under its indentures and credit facilities, and
the Company expects to remain in compliance with those covenants for the next
twelve months. As of June 30, 2008, the Company’s potential
availability under Charter Operating’s revolving credit facility totaled
approximately $1.4 billion, none of which was limited by covenant
restrictions. Continued access to the Company’s revolving credit
facility is subject to the Company remaining in compliance with these covenants,
including covenants tied to Charter Operating’s leverage ratio and first lien
leverage ratio. If any event of non-compliance were to occur, funding
under the revolving credit
8
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
facility
may not be available and defaults on some or potentially all of the Company’s
debt obligations could occur. An event of default under any of the
Company’s debt instruments could result in the acceleration of its payment
obligations under that debt and, under certain circumstances, in cross-defaults
under its other debt obligations, which could have a material adverse effect on
the Company’s consolidated financial condition and results of
operations.
Limitations
on Distributions
As long
as Charter’s convertible senior notes remain outstanding and are not otherwise
converted into shares of common stock, Charter must pay interest on the
convertible senior notes and repay the principal amount. 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 June 30,
2008, Charter Holdco was owed $115 million in intercompany loans from Charter
Operating, which amounts were available to pay interest and principal on
Charter's convertible senior notes. In addition, as long as Charter Holdco
continues to hold the $35 million of Charter Holdings’ notes due 2009 and 2010
(as discussed further below), Charter Holdco will receive interest and principal
payments from Charter Holdings. Such amounts may be available to pay
interest and principal on Charter’s convertible senior notes, although Charter
Holdco may use those amounts for other purposes.
Distributions
by Charter’s subsidiaries to a parent company (including Charter, Charter Holdco
and CCHC) for payment of principal on parent company notes, are restricted under
the indentures governing the CCH I Holdings, LLC (“CIH”) notes, CCH I, LLC (“CCH
I”) notes, CCH II notes, CCO Holdings notes, Charter Operating notes, and under
the CCO Holdings credit facility, unless there is no default under the
applicable indenture and credit facilities, and unless each applicable
subsidiary’s leverage ratio test is met at the time of such
distribution. For the quarter ended June 30, 2008, there was no
default under any of these indentures or credit facilities and each subsidiary
met its applicable leverage ratio tests based on June 30, 2008 financial
results. Such distributions would be restricted, however, if any such
subsidiary fails to meet these tests at the time of the contemplated
distribution. In the past, certain subsidiaries have from time to
time failed to meet their leverage ratio test. There can be no
assurance that they will satisfy these tests at the time of the contemplated
distribution. Distributions by Charter Operating for payment of
principal on parent company notes are further restricted by the covenants in the
Charter Operating credit facilities.
Distributions
by CIH, CCH I, CCH II, CCO Holdings, and Charter Operating to a parent company
for payment of parent company interest are permitted if there is no default
under the aforementioned indentures and CCO Holdings credit
facility.
The
indentures governing the Charter Holdings notes permit Charter Holdings to make
distributions to Charter Holdco for payment of interest or principal on
Charter’s convertible senior notes, only if, after giving effect to the
distribution, Charter Holdings can incur additional debt under the leverage
ratio of 8.75 to 1.0, there is no default under Charter Holdings’ indentures,
and other specified tests are met. For the quarter ended June 30,
2008, there was no default under Charter Holdings’ indentures, the other
specified tests were met, and Charter Holdings met its leverage ratio test of
8.75 to 1.0 based on June 30, 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.
Recent
Financing Transactions
In March
2008, Charter Operating issued $546 million principal amount of 10.875% senior
second-lien notes due 2014 and borrowed $500 million principal amount of
incremental term loans under the Charter Operating credit facilities (see Note
5). 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
9
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
2009 and
2010 and approximately $46 million principal amount of Charter’s 5.875%
convertible senior notes due 2009, for approximately $77 million of
cash. Charter Holdco continues to hold the Charter Holdings
notes. The purchased 5.875% convertible senior notes were cancelled
resulting in approximately $3 million principal amount of such notes remaining
outstanding.
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.
3. Franchises
and Goodwill
Franchise
rights represent the value attributed to agreements with local authorities that
allow access to homes in cable service areas acquired through the purchase of
cable systems. Management estimates the fair value of franchise
rights at the date of acquisition and determines if the franchise has a finite
life or an indefinite life as defined by Statement of Financial Accounting
Standards (“SFAS”) No. 142, Goodwill and Other Intangible
Assets. Franchises that qualify for indefinite-life treatment
under SFAS No. 142 are tested for impairment annually each October 1 based
on valuations, or more frequently as warranted by events or changes in
circumstances. Franchises are aggregated into essentially inseparable
asset groups to conduct the valuations. The asset groups generally
represent 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.
As of
June 30, 2008 and December 31, 2007, indefinite-lived and finite-lived
intangible assets are presented in the following table:
|
June
30, 2008
|
December 31,
2007
|
|||||||||||||||||||||||
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
|||||||||||||||||||
|
Indefinite-lived
intangible assets:
|
||||||||||||||||||||||||
|
Franchises
with indefinite lives
|
$ | 8,928 | $ | -- | $ | 8,928 | $ | 8,929 | $ | -- | $ | 8,929 | ||||||||||||
|
Goodwill
|
68 | -- | 68 | 67 | -- | 67 | ||||||||||||||||||
| $ | 8,996 | $ | -- | $ | 8,996 | $ | 8,996 | $ | -- | $ | 8,996 | |||||||||||||
|
Finite-lived
intangible assets:
|
||||||||||||||||||||||||
|
Franchises
with finite lives
|
$ | 15 | $ | 8 | $ | 7 | $ | 23 | $ | 10 | $ | 13 | ||||||||||||
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 six months ended June
30, 2008, the net carrying amount of indefinite-lived franchises was reduced by
$2 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 six months ended June 30,
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. Franchise amortization expense for the three and six
months ended June 30, 2008 was approximately $0 and $1 million,
respectively. The Company expects that amortization expense on
franchise assets will be approximately $2 million annually for each of the next
five years. Actual amortization expense in future periods could
differ from these estimates as a result of new intangible asset acquisitions or
divestitures, changes in useful lives and other relevant factors.
10
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
4. Accounts Payable and Accrued
Expenses
Accounts
payable and accrued expenses consist of the following as of June 30, 2008 and
December 31, 2007:
|
June
30,
2008
|
December 31,
2007
|
|||||||
|
Accounts
payable – trade
|
$ | 88 | $ | 127 | ||||
|
Accrued
capital expenditures
|
54 | 95 | ||||||
|
Accrued
expenses:
|
||||||||
|
Interest
|
412 | 418 | ||||||
|
Programming
costs
|
288 | 273 | ||||||
|
Compensation
|
107 | 116 | ||||||
|
Franchise-related
fees
|
55 | 66 | ||||||
|
Other
|
289 | 237 | ||||||
| $ | 1,293 | $ | 1,332 | |||||
5. Long-Term
Debt
Long-term
debt consists of the following as of June 30, 2008 and December 31,
2007:
|
June
30, 2008
|
December
31, 2007
|
|||||||||||||||
|
Principal
Amount
|
Accreted
Value
|
Principal
Amount
|
Accreted
Value
|
|||||||||||||
|
Long-Term
Debt
|
||||||||||||||||
|
Charter
Communications, Inc.:
|
||||||||||||||||
|
5.875%
convertible senior notes due November 16, 2009
|
$ | 3 | $ | 3 | $ | 49 | $ | 49 | ||||||||
|
6.50%
convertible senior notes due October 1, 2027
|
|
479 | 362 | 479 | 353 | |||||||||||
|
Charter
Communications Holdings, LLC:
|
||||||||||||||||
|
10.000%
senior notes due April 1, 2009
|
76 | 76 | 88 | 88 | ||||||||||||
|
10.750%
senior notes due October 1, 2009
|
54 | 54 | 63 | 63 | ||||||||||||
|
9.625%
senior notes due November 15, 2009
|
35 | 35 | 37 | 37 | ||||||||||||
|
10.250%
senior notes due January 15, 2010
|
9 | 9 | 18 | 18 | ||||||||||||
|
11.750%
senior discount notes due January 15, 2010
|
13 | 13 | 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 | 4,077 | 3,987 | 4,083 | ||||||||||||
11
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
|
CCH
II, LLC:
|
||||||||||||||||
|
10.250%
senior notes due September 15, 2010
|
2,198 | 2,193 | 2,198 | 2,192 | ||||||||||||
|
10.250% senior notes due October 1, 2013
|
250 | 260 | 250 | 260 | ||||||||||||
|
CCO
Holdings, LLC:
|
||||||||||||||||
|
8
¾% senior notes due November 15, 2013
|
800 | 796 | 800 | 795 | ||||||||||||
|
Credit
facility
|
350 | 350 | 350 | 350 | ||||||||||||
|
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 | 526 | -- | -- | ||||||||||||
|
Credit
facilities
|
6,966 | 6,966 | 6,844 | 6,844 | ||||||||||||
| $ | 20,526 | $ | 20,480 | $ | 19,939 | $ | 19,908 | |||||||||
The
accreted values presented above generally represent the principal amount of the
notes less the original issue discount at the time of sale, plus the accretion
to the balance sheet date. However, the current accreted value for
legal purposes and notes indenture purposes (the amount that is currently
payable if the debt becomes immediately due) is equal to the principal amount of
notes.
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.
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.
In
addition, 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 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.
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 and
approximately $46 million principal amount of Charter’s 5.875% convertible
senior notes due 2009, for approximately $77 million of cash. Charter
Holdco continues to hold the Charter Holdings notes. 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 $4
million for the three months ended June 30, 2008, included in other income
(expense), net on the Company’s condensed consolidated statements of
operations.
12
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
6. Minority
Interest and Equity Interest of Charter Holdco
Charter
is a holding company whose primary assets are a controlling equity interest in
Charter Holdco, the indirect owner of the Company’s cable systems, and $482
million and $528 million at June 30, 2008 and December 31, 2007, respectively,
of mirror notes payable by Charter Holdco to Charter, and which have the same
principal amount and terms as those of Charter’s 5.875% and 6.50% convertible
senior notes. Minority interest on the Company’s condensed
consolidated balance sheets represents Mr. Paul G. Allen’s, Charter’s chairman
and controlling shareholder, 5.6% preferred membership interests in CC VIII, LLC
(“CC VIII”), an indirect subsidiary of Charter Holdco, of $203 million and $199
million as of June 30, 2008 and December 31, 2007,
respectively.
|
7.
|
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 was $154 million and $310 million for the
three months ended June 30, 2008 and 2007, respectively, and $616 million and
$697 million for the six months ended June 30, 2008 and 2007,
respectively.
8. 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.
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 each of the three and six months ended June 30, 2008 and
2007, there was no cash flow hedge ineffectiveness on interest rate swap
agreements.
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 three
months ended June 30, 2008 and 2007, gains of $122 million and $50 million,
respectively, and for the six months ended June 30, 2008 and 2007, gains of $18
million and $48 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 change in value of derivatives 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 three months ended June 30, 2008 and
2007, change in value of derivatives includes gains of $36 million and $6
million, respectively, and for the six months ended June 30, 2008 and 2007,
gains of $6 million and $5 million, respectively, resulting from interest rate
derivative instruments not designated as hedges.
As of
June 30, 2008
and December 31, 2007, the Company had $4.3 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,
13
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
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.
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 statement of
operations. For the three months ended June 30, 2008 and 2007, the
Company recognized $10 million and $9 million in losses related to these
derivatives, respectively, and for the six months ended June 30, 2008 and 2007,
the Company recognized losses of $17 million and $9 million,
respectively. At June 30, 2008 and December 31, 2007, $50 million and
$33 million, respectively, is recorded on the Company’s balance sheets related
to these derivatives.
The Company adopted SFAS
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 157 on its
nonfinancial assets and liabilities including fair value measurements under SFAS
142 and SFAS 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 157
establishes a three-level hierarchy for disclosure of fair value measurements,
based upon the transparency of inputs to the valuation of an asset or liability
as of the measurement date, as follows:
|
·
|
Level
1 – inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active
markets.
|
|
·
|
Level
2 – inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial
instrument.
|
|
·
|
Level
3 – inputs to the valuation methodology are unobservable and significant
to the fair value measurement.
|
Interest
rate derivatives are valued using a present value calculation based on an
implied forward LIBOR curve (adjusted for Charter Operating’s credit risk)
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.
As of
June 30, 2008, Charter had $13 million of available-for-sale investments in
commercial paper with initial maturities of between three and six
months. The investments were valued using quoted prices classified
within level 1 of the valuation hierarchy.
14
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
The
Company’s financial assets and financial liabilities that are accounted for at
fair value on a recurring basis are presented in the table below:
|
Fair
Value As of June 30, 2008
|
||||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Short-term
investments:
|
||||||||||||||||
|
Available-for-sale
investments
|
$ | 13 | $ | -- | $ | -- | $ | 13 | ||||||||
| $ | 13 | $ | -- | $ | -- | $ | 13 | |||||||||
|
Other
long-term liabilities:
|
||||||||||||||||
|
Interest
rate derivatives
|
$ | -- | $ | 145 | $ | -- | $ | 145 | ||||||||
|
Embedded
derivatives
|
-- | -- | 50 | 50 | ||||||||||||
| $ | -- | $ | 145 | $ | 50 | $ | 195 | |||||||||
9. Other
Operating Expenses, Net
Other
operating expenses, net consist of the following for the three and six months
ended June 30, 2008 and 2007:
|
Three
Months
Ended
June 30,
|
Six
Months
Ended
June 30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Loss
on sale of assets, net
|
$ | 2 | $ | -- | $ | 4 | $ | 3 | ||||||||
|
Special
charges, net
|
23 | 1 | 32 | 2 | ||||||||||||
| $ | 25 | $ | 1 | $ | 36 | $ | 5 | |||||||||
Special
charges, net for the three and six months ended June 30, 2008 includes severance
charges and expected settlement costs associated with the Sjoblon litigation
(see Note 13), offset by favorable insurance settlements related to hurricane
Katrina claims. Special charges, net for the three and six months
ended June 30, 2007 primarily represent severance charges.
10. Other
Income (Expense), Net
Other
income (expense), net consists of the following for the three and six months
ended June 30, 2008 and 2007:
|
Three
Months
Ended
June 30,
|
Six
Months
Ended
June 30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Gain
(loss) on extinguishment of debt
|
$ | 4 | $ | (34 | ) | $ | 4 | $ | (35 | ) | ||||||
|
Minority
interest
|
(2 | ) | (1 | ) | (4 | ) | (3 | ) | ||||||||
|
Loss
on investments
|
(1 | ) | (1 | ) | (1 | ) | (1 | ) | ||||||||
|
Other,
net
|
-- | -- | (1 | ) | -- | |||||||||||
| $ | 1 | $ | (36 | ) | $ | (2 | ) | $ | (39 | ) | ||||||
As part
of the refinancing in March 2007, the existing CCO Holdings $350 million
revolving/term credit facility was terminated, resulting in a loss on
extinguishment of debt for the three and six months ended June 30, 2007 of
approximately $12 million and $13 million, respectively. In April
2007, Charter Holdings completed a tender offer
15
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
resulting
in a loss on extinguishment of debt for each of the three and six months ended
June 30, 2007 of approximately $22 million.
11. 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 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.
For each
of the three month periods ended June 30, 2008 and 2007, the Company recorded
$59 million of income tax expense, and for the six months ended June 30, 2008
and 2007, the Company recorded $117 million and $128 million of income tax
expense, respectively. Income tax expense was
recognized through increases in deferred tax liabilities related to Charter’s
investment in Charter Holdco, and certain of Charter’s subsidiaries, in addition
to current federal and state income tax expense.
As of
June 30, 2008 and December 31, 2007, the Company had net deferred income tax
liabilities of approximately $780 million and $665 million,
respectively. Included in these deferred tax liabilities is
approximately $226 million of deferred tax liabilities at June 30, 2008 and
December 31, 2007, relating to certain indirect subsidiaries of Charter Holdco
that file separate income tax returns. The remainder of the Company’s deferred
tax liability arose from Charter’s investment in Charter Holdco, and was largely
attributable to the characterization of franchises for financial reporting
purposes as indefinite-lived.
As of
June 30, 2008, the Company had deferred tax assets of $5.2 billion, which
included $1.9 billion of financial losses in excess of tax losses allocated to
Charter from Charter Holdco. The deferred tax assets also included
$3.3 billion of tax net operating loss carryforwards (generally expiring in
years 2008 through 2028) of Charter and its indirect
subsidiaries. Valuation allowances of $5.0 billion exist with respect
to these deferred tax assets. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will be
realized. Because of the uncertainties in projecting future taxable
income of Charter Holdco, valuation allowances have been established except for
deferred benefits available to offset certain deferred tax liabilities that will
reverse over time.
The
amount of any benefit from the Company’s tax net operating losses is dependent
on: (1) Charter and its subsidiaries’ ability to generate future taxable income
and (2) the unexpired amount of net operating loss carryforwards available to
offset amounts payable on such taxable income. Any future “ownership
changes” of Charter’s common stock, as defined in the applicable federal income
tax rules, would place significant limitations, on an annual basis, on the use
of such net operating losses to offset any future taxable income the Company may
generate. Such limitations, in conjunction with the net operating
loss expiration provisions, could effectively eliminate the Company’s ability to
use a substantial portion of its net operating losses to offset future taxable
income. Although the Company has adopted the Rights Plan as an
attempt to protect against an “ownership change,” certain transactions and the
timing of such transactions could cause such an ownership change including, but
not limited to, the following: the issuance of shares of
common stock upon future conversion of Charter’s convertible senior notes;
reacquisition of the shares borrowed under the share lending agreement by
Charter (of which 21.8 million were outstanding as of June 30, 2008); or
acquisitions or sales of shares by certain holders of Charter’s shares,
including persons who have held, currently hold, or accumulate in the future,
five percent or more of Charter’s outstanding stock (including upon an exchange
by Mr. Allen or his affiliates, directly or indirectly, of membership units of
Charter Holdco into CCI common stock). Many of the foregoing
transactions, including whether Mr. Allen exchanges his Charter Holdco units,
are beyond management’s control.
16
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
The
deferred tax liability for Charter’s investment in Charter Holdco is largely
attributable to the characterization of franchises for financial reporting
purposes as indefinite lived. If Mr. Allen were to exchange his
Charter Holdco units, as described above, Charter would likely record for
financial reporting purposes additional deferred tax liability related to its
increased interest in Charter Holdco and the related underlying indefinite lived
franchise assets.
Charter
and Charter Holdco received notification from the Internal Revenue Service
(“IRS”) examining agent that no changes to the 2004 and 2005 tax returns would
be required as a result of their examination. These findings are
subject to the IRS Area Director’s approval.
In
January 2007, the Company adopted FIN 48, Accounting for Uncertainty in Income
Taxes—an Interpretation of FASB Statement No. 109, which provides
criteria for the recognition, measurement, presentation and disclosure of
uncertain tax positions. A tax benefit from an uncertain position may be
recognized only if it is “more likely than not” that the position is sustainable
based on its technical merits. The adoption of FIN 48 resulted in a
deferred tax benefit of $56 million related to a settlement with Mr. Allen
regarding ownership of the CC VIII preferred membership interests, which was
recognized as a cumulative adjustment to the accumulated deficit in the first
quarter of 2007. The Company does not believe it has taken any
significant positions that would not meet the “more likely than not” criteria
and require disclosure.
12. 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.
Digeo,
Inc.
Mr. Paul
G. Allen, the controlling shareholder of Charter, through his 100% ownership of
Vulcan Ventures Incorporated (“Vulcan Ventures”), owns a majority interest in
Digeo, Inc. on a fully-converted fully-diluted basis. Ms. Jo Allen
Patton is a director of the Company and a director and Vice President of Vulcan
Ventures. Mr. Lance Conn is a director of the Company and is
Executive Vice President of Vulcan Ventures. Currently, Charter
Operating owns 1.8% of Digeo, Inc.’s common stock.
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 six months ended June 30,
2008, Charter has not purchased any units from Digeo Interactive, LLC under
these agreements.
13. Contingencies
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
17
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
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 is in active negotiations with the
plaintiffs to reach a settlement, which would be subject to the approval of the
court. The Company has accrued expected settlement costs associated with
the Sjoblom case (see Note 9). If the Company were subjected, in the
normal course of business, to the assertion of other similar claims in other
jurisdictions, the Company could not predict the ultimate outcome of any such
proceedings or claims.
Charter
is a party to other lawsuits and claims that arise in the ordinary course of
conducting its business. The ultimate outcome of these other legal matters
pending against the Company or its subsidiaries cannot be predicted.
Although such lawsuits and claims, including the employment law claims discussed
above, are not expected individually to be material to the Company’s
consolidated financial condition, results of operations or liquidity, such
lawsuits and claims could be, in the aggregate, material to the Company’s
consolidated financial condition, results of operations or
liquidity.
14. 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. Options granted generally vest over four years from the grant
date, with 25% generally vesting on the first anniversary of the grant date and
ratably thereafter. Generally, options expire 10 years from the
grant date. Restricted stock vests annually over a one to three-year
period beginning from the date of grant. The 2001 Stock Incentive
Plan allows for the issuance of up to a total of 90.0 million shares of Charter
Class A common stock (or units convertible into Charter Class A common
stock). In March 2008, the Company adopted an incentive program to
allow for performance cash. Under the incentive program, performance
units under the 2001 Stock Incentive Plan and performance cash are deposited
into a performance bank of which one-third of the balance is paid out each year,
subject to meeting performance criteria. During the three and six
months ended June 30, 2008, Charter granted 0.7 million and 10.4 million shares
of restricted stock, respectively. During the six months ended June
30, 2008, Charter granted 11.5 million performance units and $8 million of
performance cash under Charter’s 2008 incentive
program.
The
Company recorded $8 million and $5 million of stock compensation expense for the
three months ended June 30, 2008 and 2007, respectively, and $16 million and $10
million for the six months ended June 30, 2008 and 2007, respectively, which is
included in selling, general, and administrative expense.
15. Recently
Issued Accounting Standards
In March
2008, the FASB issued SFAS 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 133. SFAS 161 is effective for interim periods
and fiscal years beginning after November 15, 2008. The Company will
adopt SFAS 161 effective January 1, 2009. The Company is currently
assessing the impact of SFAS 161 on its financial statements.
18
CHARTER
COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars
in millions, except per share amounts and where
indicated)
In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets, which amends the factors to be considered in renewal
or extension assumptions used to determine the useful life of a recognized
intangible asset. FSP FAS 142-3 is effective for interim periods and
fiscal years beginning after December 15, 2008. The Company will adopt FSP
FAS 142-3 effective January 1, 2009. The Company is currently
assessing the impact of FSP FAS 142-3 on its financial
statements.
In May
2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement), which specifies that issuers of convertible debt instruments
that may be settled in cash upon conversion should separately account for the
liability and equity components in a manner reflecting their nonconvertible debt
borrowing rate when interest costs are recognized in subsequent
periods. FSP APB 14-1 is effective for interim periods and fiscal
years beginning after December 15, 2008. The Company will adopt FSP
APB 14-1 effective January 1, 2009. The Company is currently
assessing the impact of FSP APB 14-1 on its financial statements.
The
Company does not believe that any other recently issued, but not yet effective
accounting pronouncements, if adopted, would have a material effect on its
accompanying financial statements.
19
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
General
Charter
Communications, Inc. (“Charter”) is a holding company whose principal assets at
June 30, 2008 are the 55% controlling common equity interest (52% for accounting
purposes) in Charter Communications Holding Company, LLC (“Charter Holdco”) and
“mirror” notes that are payable by Charter Holdco to Charter and have the same
principal amount and terms as Charter’s convertible senior notes.
We are a
broadband communications company operating in the United States with
approximately 5.6 million customers at June 30, 2008. Through our
hybrid fiber and coaxial cable network, we offer our customers traditional cable
video programming (basic and digital, which we refer to as “video” service),
high-speed Internet service, and telephone services, as well as, advanced
broadband services (such as OnDemand high definition television service, and
DVR).
The
following table summarizes our customer statistics for basic video, digital
video, residential high-speed Internet, and telephone as of June 30, 2008 and
2007:
|
Approximate
as of
|
||||||||
|
June
30,
|
June
30,
|
|||||||
|
2008
(a)
|
2007
(a)
|
|||||||
|
Video
Cable Services:
|
||||||||
|
Basic
Video:
|
||||||||
|
Residential
(non-bulk) basic video customers (b)
|
4,897,100 | 5,107,800 | ||||||
|
Multi-dwelling
(bulk) and commercial unit customers (c)
|
264,900 | 269,000 | ||||||
|
Total
basic video customers (b)(c)
|
5,162,000 | 5,376,800 | ||||||
|
Digital
Video:
|
||||||||
|
Digital
video customers (d)
|
3,056,900 | 2,866,000 | ||||||
|
Non-Video
Cable Services:
|
||||||||
|
Residential
high-speed Internet customers (e)
|
2,787,300 | 2,583,200 | ||||||
|
Telephone
customers (f)
|
1,175,500 | 700,300 | ||||||
After
giving effect to sales and acquisitions of cable systems in 2007 and 2008, basic
video customers, digital video customers, high-speed Internet customers and
telephone customers would have been 5,323,800, 2,843,800, 2,577,900, and
701,300, respectively, as of June 30, 2007.
|
(a)
|
"Customers"
include all persons our corporate billing records show as receiving
service (regardless of their payment status), except for complimentary
accounts (such as our employees). At June 30, 2008 and 2007,
"customers" include approximately 34,200 and 31,300 persons whose accounts
were over 60 days past due in payment, approximately 5,300 and 3,800
persons whose accounts were over 90 days past due in payment, and
approximately 2,600 and 1,500 of which were over 120 days past due in
payment, respectively.
|
|
(b)
|
"Basic
video customers" include all residential customers who receive video cable
services.
|
|
(c)
|
Included
within "basic video customers" are those in commercial and multi-dwelling
structures, which are calculated on an equivalent bulk unit ("EBU")
basis. EBU is calculated for a system by dividing the bulk
price charged to accounts in an area by the most prevalent price charged
to non-bulk residential customers in that market for the comparable tier
of service. The EBU method of estimating basic video customers
is consistent with the methodology used in determining costs paid to
programmers and has been used
consistently.
|
|
(d)
|
"Digital
video customers" include all basic video customers that have one or more
digital set-top boxes or cable cards
deployed.
|
20
|
(e)
|
"Residential
high-speed Internet customers" represent those residential customers who
subscribe to our high-speed Internet
service.
|
(f)
“Telephone customers" include all customers receiving telephone
service.
Overview
For the
three months ended June 30, 2008 and 2007, our income from operations was $230
million and $200 million, respectively, and for the six months ended June 30,
2008 and 2007, our income from operations was $435 million and $356 million,
respectively. We had operating margins of 14% and 13% for the three
months ended June 30, 2008 and 2007, respectively, and 14% and 12% for the six
months ended June 30, 2008 and 2007, respectively. The increase in
income from operations and operating margins for the three and six months ended
June 30, 2008 compared to the three and six months ended June 30, 2007 was
principally due to an increase in revenue over cash expenses as a result of
increased customers for high-speed Internet, digital video, and telephone, as
well as overall rate increases.
We have a
history of net losses. Further, we expect to continue to report net
losses for the foreseeable future. Our net losses are principally
attributable to insufficient revenue to cover the combination of operating
expenses and interest expenses we incur because of our high amounts of debt, and
depreciation expenses resulting from the capital investments we have made and
continue to make in our cable properties. We expect that these
expenses will remain significant.
Critical
Accounting Policies and Estimates
For a
discussion of our critical accounting policies and the means by which we develop
estimates therefore, see "Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations" in our 2007 Annual Report on Form
10-K.
21
RESULTS
OF OPERATIONS
The
following table sets forth the percentages of revenues that items in the
accompanying condensed consolidated statements of operations constituted for the
periods presented (dollars in millions, except per share data):
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||||||||||||||||||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||||||||||||||||||
|
REVENUES
|
$ | 1,623 | 100 | % | $ | 1,499 | 100 | % | $ | 3,187 | 100 | % | $ | 2,924 | 100 | % | ||||||||||||||||
|
COSTS
AND EXPENSES:
|
||||||||||||||||||||||||||||||||
|
Operating
(excluding depreciation and
amortization)
|
698 | 43 | % | 647 | 43 | % | 1,380 | 43 | % | 1,278 | 44 | % | ||||||||||||||||||||
|
Selling,
general and administrative
|
342 | 21 | % | 317 | 21 | % | 687 | 22 | % | 620 | 21 | % | ||||||||||||||||||||
|
Depreciation
and amortization
|
328 | 20 | % | 334 | 23 | % | 649 | 20 | % | 665 | 23 | % | ||||||||||||||||||||
|
Other
operating expenses, net
|
25 | 2 | % | 1 | -- | 36 | 1 | % | 5 | -- | ||||||||||||||||||||||
| 1,393 | 86 | % | 1,299 | 87 | % | 2,752 | 86 | % | 2,568 | 88 | % | |||||||||||||||||||||
|
Income
from operations
|
230 | 14 | % | 200 | 13 | % | 435 | 14 | % | 356 | 12 | % | ||||||||||||||||||||
|
OTHER
INCOME (EXPENSES):
|
||||||||||||||||||||||||||||||||
|
Interest
expense, net
|
(474 | ) | (462 | ) | (939 | ) | (926 | ) | ||||||||||||||||||||||||
|
Change
in value of derivatives
|
26 | (3 | ) | (11 | ) | (4 | ) | |||||||||||||||||||||||||
|
Other
income (expense), net
|
1 | (36 | ) | (2 | ) | (39 | ) | |||||||||||||||||||||||||
| (447 | ) | (501 | ) | (952 | ) | (969 | ) | |||||||||||||||||||||||||
|
Loss
before income taxes
|
(217 | ) | (301 | ) | (517 | ) | (613 | ) | ||||||||||||||||||||||||
|
INCOME
TAX EXPENSE
|
(59 | ) | (59 | ) | (117 | ) | (128 | ) | ||||||||||||||||||||||||
|
Net
loss
|
$ | (276 | ) | $ | (360 | ) | $ | (634 | ) | $ | (741 | ) | ||||||||||||||||||||
|
LOSS
PER COMMON SHARE
|
$ | (.74 | ) | $ | (0.98 | ) | $ | (1.71 | ) | $ | (2.02 | ) | ||||||||||||||||||||
|
Weighted
average common shares
outstanding,
basic and diluted
|
371,652,070 | 367,582,677 | 370,868,849 | 366,855,427 | ||||||||||||||||||||||||||||
Revenues. Average
monthly revenue per basic video customer increased to $104 for the three months
ended June 30, 2008 from $93 for the three months ended June 30, 2007 and
increased to $102 for the six months ended June 30, 2008 from $88 for the six
months ended June 30, 2007. Average monthly revenue per basic video
customer represents total revenue, divided by the number of respective months,
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 2007 reduced
the increase in revenues for the three and six months ended June 30, 2008 as
compared to the three and six months ended June 30, 2007 by approximately $9
million and $18 million, respectively.
22
Revenues
by service offering were as follows (dollars in millions):
|
Three
Months Ended June 30,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2008
over 2007
|
||||||||||||||||||||||
|
Revenues
|
%
of
Revenues
|
Revenues
|
%
of
Revenues
|
Change
|
%
Change
|
|||||||||||||||||||
|
Video
|
$ | 874 | 54 | % | $ | 859 | 57 | % | $ | 15 | 2 | % | ||||||||||||
|
High-speed
Internet
|
339 | 21 | % | 308 | 21 | % | 31 | 10 | % | |||||||||||||||
|
Telephone
|
134 | 8 | % | 80 | 5 | % | 54 | 68 | % | |||||||||||||||
|
Commercial
|
96 | 6 | % | 83 | 6 | % | 13 | 16 | % | |||||||||||||||
|
Advertising
sales
|
75 | 5 | % | 76 | 5 | % | (1 | ) | (1 | %) | ||||||||||||||
|
Other
|
105 | 6 | % | 93 | 6 | % | 12 | 13 | % | |||||||||||||||
| $ | 1,623 | 100 | % | $ | 1,499 | 100 | % | $ | 124 | 8 | % | |||||||||||||
|
Six
Months Ended June 30,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2008
over 2007
|
||||||||||||||||||||||
|
Revenues
|
%
of
Revenues
|
Revenues
|
%
of
Revenues
|
Change
|
%
Change
|
|||||||||||||||||||
|
Video
|
$ | 1,732 | 54 | % | $ | 1,697 | 58 | % | $ | 35 | 2 | % | ||||||||||||
|
High-speed
Internet
|
667 | 21 | % | 602 | 21 | % | 65 | 11 | % | |||||||||||||||
|
Telephone
|
255 | 8 | % | 143 | 5 | % | 112 | 78 | % | |||||||||||||||
|
Commercial
|
189 | 6 | % | 164 | 6 | % | 25 | 15 | % | |||||||||||||||
|
Advertising
sales
|
143 | 5 | % | 139 | 4 | % | 4 | 3 | % | |||||||||||||||
|
Other
|
201 | 6 | % | 179 | 6 | % | 22 | 12 | % | |||||||||||||||
| $ | 3,187 | 100 | % | $ | 2,924 | 100 | % | $ | 263 | 9 | % | |||||||||||||
Video
revenues consist primarily of revenues from basic and digital video services
provided to our non-commercial customers. Basic video customers
decreased by 214,800 customers from June 30, 2007, 53,000 of which was related
to asset sales, net of acquisitions, compared to June 30,
2008. Digital video customers increased by 190,900, reduced by the
sale, net of acquisitions, of 22,200 customers. The increases in
video revenues are attributable to the following (dollars in
millions):
|
Three
months ended
June
30, 2008
compared
to
three
months ended
June
30, 2007
Increase
/ (Decrease)
|
Six
months ended
June
30, 2008
compared
to
six
months ended
June
30, 2007
Increase
/ (Decrease)
|
|||||||
|
Incremental
video services and rate adjustments
|
$ | 22 | $ | 51 | ||||
|
Increase
in digital video customers
|
18 | 33 | ||||||
|
Decrease
in basic video customers
|
(19 | ) | (36 | ) | ||||
|
System
sales, net of acquisitions
|
(6 | ) | (13 | ) | ||||
| $ | 15 | $ | 35 | |||||
High-speed
Internet customers grew by 204,100 customers, reduced by system sales, net of
acquisitions, of 5,300 customers, from June 30, 2007 to June 30,
2008. The increase in high-speed Internet revenues from our
residential customers is attributable to the following (dollars in
millions):
23
|
Three
months ended
June
30, 2008
compared
to
three
months ended
June
30, 2007
Increase
/ (Decrease)
|
Six
months ended
June
30, 2008
compared
to
six
months ended
June
30, 2007
Increase
/ (Decrease)
|
|||||||
|
Increase
in high-speed Internet customers
|
$ | 28 | $ | 61 | ||||
|
Rate
adjustments and service upgrades
|
4 | 6 | ||||||
|
System
sales, net of acquisitions
|
(1 | ) | (2 | ) | ||||
| $ | 31 | $ | 65 | |||||
Revenues
from telephone services increased primarily as a result of an increase of
475,200 telephone customers (1,000 of which was related to system acquisitions,
net of sales) from June 30, 2007 to June 30, 2008.
Commercial
revenues consist primarily of revenues from services provided to our commercial
customers. Commercial revenues increased primarily as a result of
increases in commercial high-speed Internet and telephone customers, offset by
decreases of $1 million related to asset sales, net of acquisitions, for the
three and six months ended June 30, 2008.
Advertising
sales revenues consist primarily of revenues from commercial advertising
customers, programmers, and other vendors. Advertising sales revenues
for the six months ended June 30, 2008 increased primarily as a result of an
increase in political advertising sales offset by decreased revenues from the
automotive and furniture sectors and decreases of $1 million and $2 million
related to asset sales, net of acquisitions, for the three and six months ended
June 30, 2008, respectively. For the three months ended June 30, 2008
and 2007, we received $3 million and $2 million, respectively, and for the six
months ended June 30, 2008 and 2007, we received $7 million and $6 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 three months ended June 30, 2008 and 2007,
franchise fees represented approximately 48% and 49%, respectively, of total
other revenues. For the six months ended June 30, 2008 and 2007,
franchise fees represented approximately 47% and 50%, respectively, of total
other revenues. The increase in other revenues was primarily the
result of increases in franchise and other regulatory fees, wire maintenance
fees, and late payment fees.
Operating
expenses. The increase in
operating expenses is attributable to the following (dollars in
millions):
|
Three
months ended
June
30, 2008
compared
to
three
months ended
June
30, 2007
Increase
/ (Decrease)
|
Six
months ended
June
30, 2008
compared
to
six
months ended
June
30, 2007
Increase
/ (Decrease)
|
|||||||
|
Programming
costs
|
$ | 24 | $ | 44 | ||||
|
Labor
costs
|
10 | 30 | ||||||
|
Regulatory
taxes
|
9 | 14 | ||||||
|
Franchise
costs
|
3 | 5 | ||||||
|
Maintenance
costs
|
5 | 9 | ||||||
|
Other,
net
|
5 | 10 | ||||||
|
System
sales, net of acquisitions
|
(5 | ) | (10 | ) | ||||
| $ | 51 | $ | 102 | |||||
Programming
costs were approximately $410 million and $388 million, representing 59% and 60%
of total operating expenses for the three months ended June 30, 2008 and 2007,
respectively, and were approximately $819 million and $781 million, representing
59% and 61% of total operating expenses for the six months ended June 30,
24
2008 and
2007, respectively. Programming costs consist primarily of costs paid
to programmers for basic, premium, digital, OnDemand, and pay-per-view
programming. The increase in programming costs is primarily a result
of annual contractual rate adjustments, offset in part by system sales.
Programming
costs were impacted by approximately $6 million and $2 million of favorable
programming contract settlements in the three and six months ended June 30,
2007, respectively, that did not recur in 2008. Programming costs
were also offset by the amortization of payments received from programmers in
support of launches of new channels of $7 million and $5 million for the three
months ended June 30, 2008 and 2007, respectively, and $12 million and $10
million for the six months ended June 30, 2008 and 2007,
respectively. We expect programming expenses to continue to increase
due to a variety of factors, including annual increases imposed by programmers,
amounts paid for retransmission consent, and additional programming, including
high-definition, OnDemand, and pay-per-view programming, being provided to our
customers.
Labor
costs increased primarily due to an increased headcount to support improved
service levels and telephone deployment.
Selling, general
and administrative expenses. The increase in
selling, general and administrative expenses is attributable to the following
(dollars in millions):
|
Three
months ended
June
30, 2008
compared
to
three
months ended
June
30, 2007
Increase
/ (Decrease)
|
Six
months ended
June
30, 2008
compared
to
six
months ended
June
30, 2007
Increase
/ (Decrease)
|
|||||||
|
Employee
costs
|
$ | 5 | $ | 21 | ||||
|
Marketing
costs
|
8 | 15 | ||||||
|
Bad
debt and collection costs
|
3 | 11 | ||||||
|
Billing
costs
|
5 | 8 | ||||||
|
Stock
compensation costs
|
3 | 6 | ||||||
|
Other,
net
|
3 | 9 | ||||||
|
System
sales, net of acquisitions
|
(2 | ) | (3 | ) | ||||
| $ | 25 | $ | 67 | |||||
Depreciation and
amortization. Depreciation and
amortization expense decreased by $6 million and $16 million for the three and
six months ended June 30, 2008 compared to June 30, 2007, respectively, and was
primarily the result of certain assets becoming fully depreciated and the impact
of changes in the useful lives of certain assets during 2007, offset by
depreciation on capital expenditures.
Other operating
expenses, net. For the three and six months ended June 30,
2008 compared to June 30, 2007, the increase in other operating expenses, net
was primarily attributable to a $22 million and $30 million increase in special
charges, respectively. For more information, see Note 9 to the
accompanying condensed consolidated financial statements contained in “Item 1.
Financial Statements.”
Interest expense,
net. For
the three months ended June 30, 2008 compared to June 30, 2007, net interest
expense increased by $12 million, which was a result of average debt outstanding
increasing from $19.4 billion for the second quarter of 2007 to $20.5 billion
for the second quarter of 2008, offset by a decrease in our average borrowing
rate from 9.2% in the second quarter of 2007 to 8.9% in the second quarter of
2008. For the six months ended June 30, 2008 compared to June 30,
2007, net interest expense increased by $13 million, which was a result of
average debt outstanding increasing from $19.4 billion for the six months ended
June 30, 2007 to $20.4 billion for the six months ended June 30, 2008, offset by
a decrease in our average borrowing rate from 9.3% for the six months ended June
30, 2007 to 8.8% for the six months ended June 30, 2008.
25
Other
income (expense), net (dollars in millions).
|
Three
months ended
June
30, 2008
compared
to
three
months ended
June
30, 2007
|
Six
months ended
June
30, 2008
compared
to
six
months ended
June
30, 2007
|
|||||||
|
Decrease in
loss on extinguishment of debt
|
$ | 38 | $ | 39 | ||||
|
Increase
in minority interest
|
(1 | ) | (1 | ) | ||||
|
Other,
net
|
-- | (1 | ) | |||||
| $ | 37 | $ | 37 | |||||
For more
information, see Note 10 to the accompanying condensed consolidated financial
statements contained in “Item 1. Financial Statements.”
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. 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 three and six months ended June 30, 2008 and 2007 (dollars in
millions):
|
Three
months ended June 30,
|
Six
months ended June 30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Interest
rate swaps
|
$ | 36 | $ | 6 | $ | 6 | $ | 5 | ||||||||
|
Embedded
derivatives from convertible senior notes
|
(10 | ) | (9 | ) | (17 | ) | (9 | ) | ||||||||
| $ | 26 | $ | (3 | ) | $ | (11 | ) | $ | (4 | ) | ||||||
Income tax
expense. Income tax expense was
recognized for the three and six months ended June 30, 2008 and 2007, 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 expense included $1 million of
deferred tax benefit and $19 million of deferred tax expense related to asset
acquisitions and sales occurring in the six months ended June 30, 2008 and 2007,
respectively.
Net
loss. Net
loss decreased by $84 million, or 23%, for the three months ended June 30, 2008
compared to the three months ended June 30, 2007 and by $107 million, or 14%,
for the six months ended June 30, 2008 compared to the six months ended June 30,
2007 as a result of the factors described above.
Loss per common
share. During the three months
ended June 30, 2008 compared to the three months ended June 30, 2007, net loss
per common share decreased by $0.24, or 24%, and during the six months ended
June 30, 2008 compared to the six months ended June 30, 2007, net loss per
common share decreased by $0.31, or 15%, as a result of the factors described
above.
Liquidity and Capital
Resources
Introduction
This
section contains a discussion of our liquidity and capital resources, including
a discussion of our cash position, sources and uses of cash, access to credit
facilities and other financing sources, historical financing activities, cash
needs, capital expenditures and outstanding debt.
26
We have
significant amounts of debt. Our long-term debt as of June 30, 2008
totaled $20.5 billion, consisting of $7.3 billion of credit facility debt, $12.8
billion accreted value of high-yield notes, and $365 million accreted value of
convertible senior notes. For the remainder of 2008, $36 million of
our debt matures. As of June 30, 2008, our 2009 debt maturities
totaled $238 million. In 2010 and beyond, significant additional
amounts will become due under our remaining long-term debt
obligations.
Our
business requires significant cash to fund debt service costs, capital
expenditures and ongoing operations. We have historically funded
these requirements through cash flows from operating activities, borrowings
under our credit facilities, 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 six months ended June
30, 2008, we generated $168 million of net cash flows from operating activities
after paying cash interest of $912 million. In addition, we used $650
million for purchases of property, plant and equipment. Finally, we
generated net cash flows from financing activities of $522 million, as a result
of financing transactions completed during the six months ended June 30,
2008. We expect that our mix of sources of funds will continue to
change in the future based on overall needs relative to our cash flow and on the
availability of funds under the credit facilities of our subsidiaries, our
access to the debt and equity markets, the timing of possible asset sales, and
based on our ability to generate cash flows from operating
activities.
We expect
that cash on hand, cash flows from operating activities, and the amounts
available under Charter Operating’s credit facilities will be adequate to fund
our projected cash needs, including scheduled maturities, through
2009. We believe that cash flows from operating activities and the
amounts available under Charter Operating’s credit facilities will not be
sufficient to fund projected cash needs in 2010 (primarily as a result of the
CCH II, LLC (“CCH II”) $1.9 billion of senior notes outstanding at July 2, 2008
that mature in September 2010) and thereafter. Our projected cash
needs and projected sources of liquidity depend upon, among other things, our
actual results, the timing and amount of our capital expenditures, and ongoing
compliance with the Charter Operating credit facilities, including obtaining an
unqualified audit opinion from our independent accountants. Although
we have been able to refinance or otherwise fund the repayment of debt in the
past, we 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. A continuation of the recent turmoil
in the credit markets and the general economic downturn could adversely impact
the terms and/or pricing when we need to raise additional
liquidity.
Access
to Capital
Our
significant amount of debt could negatively affect our ability to access
additional capital in the future. Additionally, our ability to incur
additional debt may be limited by the restrictive covenants in our indentures
and credit facilities. No assurances can be given that we will not
experience liquidity problems if we do not obtain sufficient additional
financing on a timely basis as our debt becomes due or because of adverse market
conditions, increased competition or other unfavorable events. If, at
any time, additional capital or borrowing capacity is required beyond amounts
internally generated or available under our credit facilities, we would
consider:
|
•
|
issuing
equity that would significantly dilute existing
shareholders;
|
|
|
•
|
issuing
convertible debt or some other securities that may have structural or
other priority over our existing notes and may also, in the case of
convertible debt, significantly dilute Charter’s existing
shareholders;
|
|
|
•
|
further
reducing our expenses and capital expenditures, which may impair our
ability to increase revenue and grow operating cash
flows;
|
|
|
•
|
selling
assets; or
|
|
|
•
|
requesting
waivers or amendments with respect to our credit facilities, which may not
be available on acceptable terms, and cannot be
assured.
|
If the
above strategies were not successful, we could be forced to restructure our
obligations or seek protection under the bankruptcy laws. In
addition, if we need to raise additional capital through the issuance of equity
or find it necessary to engage in a recapitalization or other similar
transaction, our shareholders could suffer significant dilution, including
potential loss of the entire value of their investment, and in the case of a
recapitalization or other similar transaction, our noteholders might not receive
the full principal and interest payments to which they are contractually
entitled.
27
Credit
Facility Availability
Our
ability to operate depends upon, among other things, our continued access to
capital, including credit under the Charter Operating credit
facilities. The Charter Operating credit facilities, along with our
indentures and the CCO Holdings, LLC (“CCO Holdings”) credit facility, contain
certain restrictive covenants, some of which require us to maintain specified
leverage ratios and meet financial tests, and provide annual audited financial
statements with an unqualified opinion from our independent
accountants. As of June 30, 2008, we were in compliance with the
covenants under our indentures and credit facilities, and we expect to remain in
compliance with those covenants for the next twelve months. As of
June 30, 2008, our potential availability under Charter Operating’s revolving
credit facility totaled approximately $1.4 billion, none of which was limited by
covenant restrictions. Continued access to our revolving credit
facility is subject to our remaining in compliance with these covenants,
including covenants tied to Charter Operating’s leverage ratio and first lien
leverage ratio. If any event of non-compliance were to occur, funding
under the revolving credit facility may not be available and defaults on some or
potentially all of our debt obligations could occur. An event of
default under any of our debt instruments could result in the acceleration of
our payment obligations under that debt and, under certain circumstances, in
cross-defaults under our other debt obligations, which could have a material
adverse effect on our consolidated financial condition and results of
operations.
Limitations
on Distributions
As long
as Charter’s convertible senior notes remain outstanding and are not otherwise
converted into shares of common stock, Charter must pay interest on the
convertible senior notes and repay the principal amount. 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 June 30,
2008, Charter Holdco was owed $115 million in intercompany loans from Charter
Operating, which amounts were available to pay interest and principal on
Charter's convertible senior notes. In addition, as long as Charter Holdco
continues to hold the $35 million of Charter Holdings’ notes due 2009 and 2010
(as discussed further below), Charter Holdco will receive interest and principal
payments from Charter Holdings. 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, LLC (“CCHC”)) for payment of principal on parent company notes, are
restricted under the indentures governing the CCH I Holdings, LLC (“CIH”) notes,
CCH I, LLC (“CCH I”) notes, CCH II notes, CCO Holdings notes, Charter Operating
notes, and under the CCO Holdings credit facility, unless there is no default
under the applicable indenture and credit facilities, and unless each applicable
subsidiary’s leverage ratio test is met at the time of such
distribution. For the quarter ended June 30, 2008, there was no
default under any of these indentures or credit facilities and each subsidiary
met its applicable leverage ratio tests based on June 30, 2008 financial
results. Such distributions would be restricted, however, if any such
subsidiary fails to meet these tests at the time of the contemplated
distribution. In the past, certain subsidiaries have from time to
time failed to meet their leverage ratio test. There can be no
assurance that they will satisfy these tests at the time of the contemplated
distribution. Distributions by Charter Operating for payment of
principal on parent company notes are further restricted by the covenants in the
Charter Operating credit facilities.
Distributions
by CIH, CCH I, CCH II, CCO Holdings and Charter Operating to a parent company
for payment of parent company interest are permitted if there is no default
under the aforementioned indentures and CCO Holdings credit
facility.
The
indentures governing the Charter Holdings notes permit Charter Holdings to make
distributions to Charter Holdco for payment of interest or principal on
Charter’s convertible senior notes, only if, after giving effect to the
distribution, Charter Holdings can incur additional debt under the leverage
ratio of 8.75 to 1.0, there is no default under Charter Holdings’ indentures,
and other specified tests are met. For the quarter ended June 30,
2008, there was no default under Charter Holdings’ indentures, the other
specified tests were met, and Charter Holdings met its leverage ratio test of
8.75 to 1.0 based on June 30, 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
28
subsidiaries
to make specified investments (that are not restricted payments) in Charter
Holdco or Charter, up to an amount determined by a formula, as long as there is
no default under the indentures.
In
addition to the limitation on distributions under the various indentures
discussed above, distributions by our subsidiaries may be limited by applicable
law. See “Risk Factors — Because of our holding company structure,
our outstanding notes are structurally subordinated in right of payment to all
liabilities of our subsidiaries. Restrictions in our subsidiaries’
debt instruments and under applicable law limit their ability to provide funds
to us or our various debt issuers.”
Recent Financing
Transactions
On March
19, 2008, Charter Operating issued $546 million principal amount of 10.875%
senior second-lien notes due 2014 (the “Notes"), guaranteed by CCO Holdings and
certain other subsidiaries of Charter Operating, in a private transaction.
The net proceeds of this issuance were used to repay, but not permanently
reduce, the outstanding debt balances under the existing revolving credit
facility of Charter Operating. The Notes were sold to qualified
institutional buyers in reliance on Rule 144A and outside the United States to
non-U.S. persons in reliance on Regulation S.
On March
20, 2008, Charter Operating borrowed $500 million principal amount of
incremental term loans (the "Incremental Term Loans") under the Charter
Operating credit facilities. The net proceeds were used for general
corporate purposes. 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.
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 and
approximately $46 million principal amount of Charter’s 5.875% convertible
senior notes due 2009, for approximately $77 million of cash. Charter
Holdco continues to hold the Charter Holdings notes. The purchased
5.875% convertible senior notes were cancelled resulting in approximately $3
million principal amount of such notes remaining outstanding.
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.
Historical
Operating, Investing and Financing Activities
Cash and Cash
Equivalents. We held $63 million in cash and cash equivalents
as of June 30, 2008 compared to $75 million as of December 31,
2007.
Operating
Activities. Net cash provided by
operating activities increased $50 million, or 42%, from $118 million for the
six months ended June 30, 2007 to $168 million for the six months ended June 30,
2008, primarily as a result of revenues increasing at a faster rate than cash
expenses offset by changes in operating assets and liabilities that used $28
million more cash during the six months ended June 30, 2008 than the
corresponding period in 2007.
Investing
Activities. Net cash used in
investing activities was $702 million and $587 million for the six months ended
June 30, 2008 and 2007, respectively. The increase is primarily due
to an increase of $73 million in cash used for the purchase of property, plant,
and equipment.
Financing
Activities. Net cash provided by
financing activities was $522 million and $490 million for the six months ended
June 30, 2008 and 2007, respectively. The increase in cash provided
during the six months ended June 30, 2008 as compared to the corresponding
period in 2007, was primarily the result of an increase in the amount by which
borrowings exceeded repayments of long-term debt.
29
Capital
Expenditures
We have
significant ongoing capital expenditure requirements. Capital
expenditures were $650 million and $579 million for the six months ended June
30, 2008 and 2007, respectively. Capital expenditures increased as a
result of spending on customer premise equipment and support capital to meet
increased digital, high-speed Internet, and telephone customer
growth. See the table below for more
details.
Our
capital expenditures are funded primarily from cash flows from operating
activities, the issuance of debt, and borrowings under our credit
facilities. In addition, during the six months ended June 30, 2008
and 2007, our liabilities related to capital expenditures decreased $41 million
and $39 million, respectively.
During
2008, 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. We have funded and expect to continue to fund capital
expenditures for 2008 primarily from cash flows from operating activities and
borrowings under our credit facilities. 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 three and six months ended June 30, 2008
and 2007 (dollars in millions):
|
Three
Months Ended
June
30,
|
Six
Months Ended
June
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Customer
premise equipment (a)
|
$ | 158 | $ | 128 | $ | 323 | $ | 289 | ||||||||
|
Scalable
infrastructure (b)
|
52 | 51 | 133 | 100 | ||||||||||||
|
Line
extensions (c)
|
23 | 25 | 44 | 49 | ||||||||||||
|
Upgrade/Rebuild
(d)
|
12 | 12 | 29 | 24 | ||||||||||||
|
Support
capital (e)
|
71 | 65 | 121 | 117 | ||||||||||||
|
Total
capital expenditures
|
$ | 316 | $ | 281 | $ | 650 | $ | 579 | ||||||||
|
(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).
|
30
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
Interest Rate
Risk
We are
exposed to various market risks, including fluctuations in interest
rates. We use interest rate swap agreements to manage our interest
costs and reduce our exposure to increases in floating interest
rates. Our policy is to manage our exposure to fluctuations in
interest rates by maintaining a mix of fixed and variable rate debt within a
targeted range. Using interest rate swap agreements, we agree to
exchange, at specified intervals through 2013, the difference between fixed and
variable interest amounts calculated by reference to agreed-upon notional
principal amounts.
As of
June 30, 2008 and December 31, 2007, our long-term debt totaled approximately
$20.5 billion and $19.9 billion, respectively. As of June 30, 2008
and December 31, 2007, the weighted average interest rate on the credit facility
debt was approximately 6.3% and 6.8%, respectively; the weighted average
interest rate on the high-yield notes was approximately 10.4% and 10.3%,
respectively; and the weighted average interest rate on the convertible senior
notes was approximately 6.2% and 6.4%, respectively, resulting in a blended
weighted average interest rate of 8.9% and 9.0%, respectively. The
interest rate on approximately 85% of the total principal amount of our debt was
effectively fixed, including the effects of our interest rate swap agreements,
as of June 30, 2008 and December 31, 2007. The fair value of our
high-yield notes was $10.5 billion and $10.3 billion at June 30, 2008 and
December 31, 2007, respectively. The fair value of our convertible
senior notes was $225 million and $332 million at June 30, 2008 and December 31,
2007, respectively. The fair value of our credit facilities was $6.5
billion and $6.7 billion at June 30, 2008 and December 31, 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.
We do not
hold or issue derivative instruments for trading purposes. We do,
however, have certain interest rate derivative instruments that have been
designated as cash flow hedging instruments. Such instruments
effectively convert variable interest payments on certain debt instruments into
fixed payments. For qualifying hedges, SFAS No. 133 allows derivative
gains and losses to offset related results on hedged items in the consolidated
statement of operations. We have formally documented, designated and
assessed the effectiveness of transactions that receive hedge
accounting. For each of the three and six months ended June 30, 2008
and 2007, there was no cash flow hedge ineffectiveness on interest rate swap
agreements.
Changes
in the fair value of interest rate agreements that are designated as hedging
instruments of the variability of cash flows associated with floating-rate debt
obligations, and that meet the effectiveness criteria of SFAS No. 133 are
reported in accumulated other comprehensive loss. For the three months ended
June 30, 2008
and 2007, gains of $122 million and $50 million, respectively, and for the six
months ended June 30, 2008 and 2007, gains of $18 million and $48 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 change in value of
derivatives in the same periods in which the related interest on the
floating-rate debt obligations affects earnings (losses).
Certain
interest rate derivative instruments are not designated as hedges as they do not
meet the effectiveness criteria specified by SFAS No. 133. However,
management believes such instruments are closely correlated with the respective
debt, thus managing associated risk. Interest rate derivative
instruments not designated as hedges are marked to fair value, with the impact
recorded as a change in value of derivatives in our statements of
operations. For the three months ended June 30, 2008 and
2007, change in value of derivatives included gains of $36 million and $6
million, respectively, and for the six months ended June 30, 2008 and 2007,
gains of $6 million and $5 million, respectively, resulting from interest rate
derivative instruments not designated as hedges.
The table
set forth below summarizes the fair values and contract terms of financial
instruments subject to interest rate risk maintained by us as of June 30, 2008
(dollars in millions):
31
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
Fair
Value at June 30, 2008
|
||||||||||||||||||||||||||||||||||||||||||||||
|
Debt:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Fixed
Rate
|
$ |
--
|
$ |
168
|
$ |
2,220
|
$ |
281
|
$ |
1,654
|
$ |
1,050
|
$ |
7,837
|
$ |
13,210
|
$ |
10,671
|
||||||||||||||||||||||||||||||||||||
|
Average
Interest Rate
|
--
|
10.09% |
10.26%
|
11.25%
|
7.75%
|
9.11%
|
10.93%
|
10.27%
|
||||||||||||||||||||||||||||||||||||||||||||||
|
Variable
Rate
|
$
|
36
|
$
|
70
|
$
|
70
|
$
|
70
|
$
|
70
|
$
|
70
|
$
|
6,930
|
$
|
7,316
|
$
|
6,461
|
||||||||||||||||||||||||||||||||||||
|
Average Interest
Rate
|
5.71%
|
5.80%
|
6.42%
|
6.92%
|
7.05%
|
7.17%
|
6.89%
|
6.87%
|
||||||||||||||||||||||||||||||||||||||||||||||
|
Interest
Rate Instruments:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Variable
to Fixed Swaps
|
$
|
--
|
$
|
--
|
$
|
500
|
$
|
300
|
$
|
2,500
|
$
|
1,000
|
$
|
--
|
$
|
4,300
|
$
|
(145)
|
||||||||||||||||||||||||||||||||||||
|
Average Pay
Rate
|
--
|
--
|
7.02%
|
7.20%
|
7.16%
|
7.15%
|
--
|
7.15%
|
||||||||||||||||||||||||||||||||||||||||||||||
|
Average Receive
Rate
|
--
|
--
|
6.60%
|
6.77%
|
7.14%
|
7.13%
|
--
|
7.05%
|
||||||||||||||||||||||||||||||||||||||||||||||
The
notional amounts of interest rate instruments do not represent amounts exchanged
by the parties and, thus, are not a measure of our exposure to credit
loss. The amounts exchanged are determined by reference to the
notional amount and the other terms of the contracts. The estimated
fair value approximates the costs (proceeds) to settle the outstanding
contracts. Interest rates on variable debt are estimated using the
average implied forward LIBOR for the year of maturity based on the yield
curve in effect at June 30, 2008 including applicable bank spread.
At June
30, 2008 and December 31, 2007, we had $4.3 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.
Item
4. Controls and Procedures.
As of the
end of the period covered by this report, management, including our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of our disclosure controls and procedures with respect
to the information generated for use in this quarterly report. The
evaluation was based in part upon reports and certifications provided by a
number of executives. Based upon, and as of the date of that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures were effective to provide reasonable
assurances that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Commission’s
rules and forms.
In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures. Based upon the above evaluation, we believe that our
controls provide such reasonable assurances.
There was
no change in our internal control over financial reporting during the quarter
ended June 30, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
32
PART
II. OTHER INFORMATION.
|
Legal
Proceedings.
|
See Note
13 to our consolidated financial statements of this Quarterly Report on Form
10-Q for a discussion concerning our legal proceedings.
|
Item
1A.
|
Risk
Factors.
|
Our
Annual Report on Form 10-K for the year ended December 31, 2007 includes “Risk
Factors” under Item 1A of Part I. Except for the updated risk factors
described below, there have been no material changes from the risk factors
described in our Form 10-K. The information below updates, and should
be read in conjunction with, the risk factors and information disclosed in our
Form 10-K.
Risks Related to Significant
Indebtedness of Us and Our Subsidiaries
We
and our subsidiaries have a significant amount of debt and may incur significant
additional debt, including secured debt, in the future, which could adversely
affect our financial health and our ability to react to changes in our
business.
We and
our subsidiaries have a significant amount of debt and may (subject to
applicable restrictions in our debt instruments) incur additional debt in the
future. As of June 30, 2008, our total long-term debt was
approximately $20.5 billion, our shareholders’ deficit was approximately $8.5
billion and the deficiency of earnings to cover fixed charges for the three and
six months ended June 30, 2008 was $215 million and $513 million,
respectively.
Because
of our significant indebtedness and adverse changes in the capital markets, our
ability to raise additional capital at reasonable rates or at all is uncertain,
and the ability of our subsidiaries to make distributions or payments to their
parent companies is subject to availability of funds and restrictions under our
subsidiaries’ applicable debt instruments and under applicable
law. If we need to raise additional capital through the issuance of
equity or find it necessary to engage in a recapitalization or other similar
transaction, our shareholders could suffer significant dilution, including
potential loss of the entire value of their investment, and in the case of a
recapitalization or other similar transaction, our noteholders might not receive
principal and interest payments to which they are contractually
entitled.
Our
significant amount of debt could have other important
consequences. For example, the debt will or could:
|
|
·
|
require
us to dedicate a significant portion of our cash flow from operating
activities to make payments on our debt, reducing our funds available for
working capital, capital expenditures, and other general corporate
expenses;
|
|
|
·
|
limit
our flexibility in planning for, or reacting to, changes in our business,
the cable and telecommunications industries, and the economy at
large;
|
|
|
·
|
place
us at a disadvantage compared to our competitors that have proportionately
less debt;
|
|
|
·
|
make
us vulnerable to interest rate increases, because net of hedging
transactions approximately 15% of our borrowings are, and will continue to
be, subject to variable rates of
interest;
|
|
|
·
|
expose
us to increased interest expense to the extent we refinance existing debt
with higher cost debt;
|
|
|
·
|
adversely
affect our relationship with customers and
suppliers;
|
|
|
·
|
limit
our ability to borrow additional funds in the future, due to applicable
financial and restrictive covenants in our
debt;
|
|
|
·
|
make
it more difficult for us to satisfy our obligations to the holders of our
notes and for our subsidiaries to satisfy their obligations to the lenders
under their credit facilities and to their noteholders;
and
|
|
|
·
|
limit
future increases in the value, or cause a decline in the value of our
equity, which could limit our ability to raise additional capital by
issuing equity.
|
A default
by one of our subsidiaries under its debt obligations could result in the
acceleration of those obligations, which in turn could trigger cross-defaults
under other agreements governing our long-term indebtedness. In
addition, the secured lenders under the Charter Operating credit facilities, the
holders of the Charter Operating senior second-lien notes, the secured lenders
under the CCO Holdings credit facility, and the holders of the CCH I
33
notes
could foreclose on the collateral, which includes equity interests in certain of
our subsidiaries, and exercise other rights of secured creditors. Any
default under our debt could adversely affect our growth, our financial
condition, our results of operations, the value of our equity and our ability to
make payments on our debt, and could force us to seek the protection of the
bankruptcy laws. We and our subsidiaries may incur significant
additional debt in the future. If current debt amounts increase, the
related risks that we now face will intensify.
We
depend on generating (and having available to the applicable obligor) sufficient
cash flow and having access to additional liquidity sources to fund our debt
obligations, capital expenditures, and ongoing operations.
Our
ability to service our debt and to fund our planned capital expenditures and
ongoing operations will depend on both our ability to generate and grow cash
flow and our access (by dividend or otherwise) to additional liquidity sources.
Our ability to generate and grow cash flow is dependent on many factors,
including:
|
·
|
the
impact of competition from other distributors, including incumbent
telephone companies, direct broadcast satellite operators, wireless
broadband providers and DSL
providers;
|
|
·
|
difficulties
in growing, further introducing, and operating our telephone services,
while adequately meeting customer expectations for the reliability of
voice services;
|
|
·
|
our
ability to adequately meet demand for installations and customer
service;
|
|
·
|
our
ability to sustain and grow revenues and cash flows from operating
activities by offering video, high-speed Internet, telephone and other
services, and to maintain and grow our customer base, particularly in the
face of increasingly aggressive
competition;
|
|
·
|
our
ability to obtain programming at reasonable prices or to adequately raise
prices to offset the effects of higher programming
costs;
|
|
·
|
general
business conditions, economic uncertainty or slowdown, including the
recent significant slowdown in the housing sector and overall economy;
and
|
|
·
|
the
effects of governmental regulation on our
business.
|
Some of
these factors are beyond our control. It is also difficult to assess
the impact that the general economic downturn and recent turmoil in the credit
markets will have on future operations and financial
results. However, we believe there is risk that the economic slowdown
could result in reduced spending by customers and advertisers, which could
reduce our revenues and our cash flows from operating activities from those that
otherwise would have been generated. If we are unable to generate
sufficient cash flow or we are unable to access additional liquidity sources,
we may not be able to service and repay our debt, operate our business,
respond to competitive challenges, or fund our other liquidity and capital
needs. We expect that cash on hand, cash flows from operating
activities, and the amounts available under Charter Operating’s credit
facilities will be adequate to fund our projected cash needs, including
scheduled maturities, through 2009. We believe that cash flows from
operating activities, and the amounts available under the Charter Operating
credit facilities will not be sufficient to fund projected cash needs in 2010
(primarily as a result of the CCH II $1.9 billion of senior notes outstanding at
July 2, 2008 that mature in September 2010) and thereafter. Our
projected cash needs and projected sources of liquidity depend upon, among other
things, our actual results, the timing and amount of our capital expenditures,
and ongoing compliance with the Charter Operating credit facilities, including
obtaining an unqualified audit opinion from our independent
accountants. Although we have been able to refinance or otherwise
fund the repayment of debt in the past, we 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. An
inability to access additional sources of liquidity to fund our cash needs in
2010 or thereafter or to refinance or otherwise fund the repayment of the CCH II
senior notes could adversely affect our growth, our financial condition, our
results of operations, and our ability to make payments on our debt, and could
force us to seek the protection of the bankruptcy laws, which could materially
adversely impact our ability to operate our business and to make payments under
our debt instruments. See “Part I. Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations — Liquidity and Capital Resources.”
We
may not be able to access funds under the Charter Operating revolving credit
facility if we fail to satisfy the covenant restrictions, which could adversely
affect our financial condition and our ability to conduct our
business.
Our
subsidiaries have historically relied on access to credit facilities to fund
operations, capital expenditures, and to service parent company debt, and we
expect such reliance to continue in the future. Our total potential
borrowing availability under our revolving credit facility was approximately
$1.4 billion as of June 30, 2008, none of which
34
was
limited by covenant restrictions. There can be no assurance that
actual availability under our credit facility will not be limited by covenant
restrictions in the future.
One of
the conditions to the availability of funding under the Charter Operating
revolving credit facility is the absence of a default under such facility,
including as a result of any failure to comply with the covenants under the
facilities. Among other covenants, the Charter Operating credit
facility requires us to maintain specified leverage ratios. The
Charter Operating revolving credit facility also provides that Charter Operating
obtain an unqualified audit opinion from its independent accountants for each
fiscal year, which, among other things, requires Charter to demonstrate its
ability to fund its projected liquidity needs for a reasonable period of time
following the balance sheet date of the financial statements being
audited. There can be no assurance that Charter Operating will be
able to continue to comply with these or any other of the covenants under the
credit facilities. See “—We and our subsidiaries have a significant
amount of debt and may incur significant additional debt, including secured
debt, in the future, which could adversely affect our financial health and our
ability to react to changes in our business” for a discussion of the
consequences of a default under our debt obligations.
Because
of our holding company structure, our outstanding notes are structurally
subordinated in right of payment to all liabilities of our
subsidiaries. Restrictions in our subsidiaries’ debt instruments and
under applicable law limit their ability to provide funds to us or our various
debt issuers.
Charter’s
primary assets are our equity interests in our subsidiaries. Our
operating subsidiaries are separate and distinct legal entities and are not
obligated to make funds available to us for payments on our notes or other
obligations in the form of loans, distributions or otherwise. Our
subsidiaries’ ability to make distributions to us or the applicable debt issuers
to service debt obligations is subject to their compliance with the terms of
their credit facilities and indentures and restrictions under applicable
law. See “Part I. Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Liquidity and Capital
Resources — Limitations on Distributions.” Under the Delaware Limited
Liability Company Act, our subsidiaries may only make distributions if they have
“surplus” as defined in the act. Under fraudulent transfer laws, our
subsidiaries may not pay dividends if they are insolvent or are rendered
insolvent thereby. The measures of insolvency for purposes of these
fraudulent transfer laws vary depending upon the law applied in any proceeding
to determine whether a fraudulent transfer has occurred. Generally, however, an
entity would be considered insolvent if:
|
·
|
the
sum of its debts, including contingent liabilities, was greater than the
fair saleable value of all its
assets;
|
|
·
|
the
present fair saleable value of its assets was less than the amount that
would be required to pay its probable liability on its existing debts,
including contingent liabilities, as they become absolute and mature;
or
|
|
·
|
it
could not pay its debts as they became
due.
|
While we
believe that our relevant subsidiaries currently have surplus and are not
insolvent, there can be no assurance that these subsidiaries will not become
insolvent or will be permitted to make distributions in the future in compliance
with these restrictions in amounts needed to service our
indebtedness. Our direct or indirect subsidiaries include the
borrowers and guarantors under the Charter Operating and CCO Holdings credit
facilities. Several of our subsidiaries are also obligors and
guarantors under senior high yield notes. Our convertible senior
notes are structurally subordinated in right of payment to all of the debt and
other liabilities of our subsidiaries. As of June 30, 2008, our total
long-term debt was approximately $20.5 billion, of which approximately $20.1
billion was structurally senior to our convertible senior notes.
In the
event of bankruptcy, liquidation or dissolution of one or more of our
subsidiaries, that subsidiary’s assets would first be applied to satisfy its own
obligations, and following such payments, such subsidiary may not have
sufficient assets remaining to make payments to its parent company as an equity
holder or otherwise. In that event:
|
|
·
|
the
lenders under Charter Operating’s credit facilities whose interests are
secured by substantially all of our operating assets, and all holders of
other debt of our subsidiaries, will have the right to be paid in full
before us from any of our subsidiaries’ assets;
and
|
|
|
·
|
the
holders of preferred membership interests in our subsidiary, CC VIII,
would have a claim on a portion of its assets that may reduce the amounts
available for repayment to holders of our outstanding
notes.
|
35
Risks Related to Our
Business
The
failure to maintain a minimum share price of $1.00 per share of
Class A common stock could result in delisting of our shares on the NASDAQ
Global Select Market, which would harm the market price of Charter’s
Class A common stock.
In order
to retain our listing on the NASDAQ Global Select Market we are required to
maintain a minimum bid price of $1.00 per share. Although, as of August 4, 2008,
the trading price of Charter’s Class A common stock was $1.14 per share,
our stock has traded near or below this $1.00 minimum in the recent past. If the
bid price falls below the $1.00 minimum for more than 30 consecutive trading
days, we will have 180 days to satisfy the $1.00 minimum bid price for a
period of at least 10 trading days. If we are unable to take action to increase
the bid price per share (either by reverse stock split or otherwise), we could
be subject to delisting from the NASDAQ Global Select Market. During
March and April 2008, the bid price was below $1.00 for 30 consecutive trading
days; however, by May 14, 2008, the minimum bid price requirement was satisfied
for a period of at least 10 trading days and we regained compliance with the
NASDAQ rules.
The
failure to maintain our listing on the NASDAQ Global Select Market would harm
the liquidity of Charter’s Class A common stock and would have adverse
effect on the market price of our common stock. If the stock were to trade it
would likely trade on the OTC “pink sheets,” which provide significantly less
liquidity than does NASDAQ. As a result, the liquidity of our common stock would
be impaired, not only in the number of shares which could be bought and sold,
but also through delays in the timing of transactions, reduction in security
analysts’ and news media’s coverage, and lower prices for our common stock than
might otherwise be attained. In addition, our common stock would become subject
to the low-priced security or so-called “penny stock” rules that impose
additional sales practice requirements on broker-dealers who sell such
securities.
|
Submission
of Matters to a Vote of Security
Holders
|
The
annual meeting of shareholders of Charter Communications, Inc. was held on April
29, 2008. Of the total 398,227,512 shares of Class A common
stock issued, outstanding and eligible to be voted at the meeting, 330,965,121
shares, representing the same number of votes, were represented in person or by
proxy at the meeting. Of the total 50,000 shares of Class B common stock
issued, outstanding and eligible to be voted at the meeting, 50,000 shares,
representing 3,391,820,310 votes, were represented in person or by proxy at the
meeting. Three matters were submitted to a vote of the shareholders at the
meeting.
ELECTION
OF ONE CLASS A/CLASS B DIRECTOR. The holders of the Class A common stock
and the Class B common stock voting together elected Robert P. May as the
Class A/Class B director, to hold office for a term of one year. The
voting results are set forth below:
|
NOMINEE
|
FOR
|
WITHHELD
|
BROKER
NON-VOTE
|
|||||||||
|
Robert
P. May
|
3,563,833,693
|
158,951,738
|
N/A
|
|||||||||
ELECTION
OF ELEVEN CLASS B DIRECTORS. The holder of the Class B common stock elected
eleven Class B directors to the Board of Directors, each to hold office for
a term of one year. The voting results are set forth below:
|
NOMINEE
|
FOR
|
WITHHELD
|
||
|
Paul
G. Allen
|
3,391,820,310
|
0
|
||
|
W.
Lance Conn
|
3,391,820,310
|
0
|
||
|
Nathaniel
A. Davis
|
3,391,820,310
|
0
|
||
|
Jonathan
L. Dolgen
|
3,391,820,310
|
0
|
||
|
Rajive
Johri
|
3,391,820,310
|
0
|
||
|
David
C. Merritt
|
3,391,820,310
|
0
|
||
|
Marc
B. Nathanson
|
3,391,820,310
|
0
|
||
|
Jo
Allen Patton
|
3,391,820,310
|
0
|
||
|
Neil
Smit
|
3,391,820,310
|
0
|
||
|
John
H. Tory
|
3,391,820,310
|
0
|
||
|
Larry
W. Wangberg
|
3,391,820,310
|
0
|
36
RATIFICATION
OF KPMG LLP AS THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. The holders of
the Class A common stock and the Class B common stock voting together
ratified KPMG LLP as Charter Communications, Inc.’s independent registered
public accounting firm for the year ended December 31, 2008. The voting
results are set forth below:
|
FOR
|
AGAINST
|
ABSTAIN
|
BROKER
NON-VOTE
|
|||||||||
|
33,718,812,144
|
3,286,236
|
687,061
|
N/A
|
|||||||||
Under the
Certificate of Incorporation and Bylaws of Charter Communications, Inc. for
purposes of determining whether votes have been cast, abstentions and broker
“non-votes” are not counted and therefore do not have an effect on the
proposals
|
Item
6.
|
Exhibits.
|
The index
to the exhibits begins on page E-1 of this quarterly report.
37
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, Charter
Communications, Inc. has duly caused this quarterly report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CHARTER
COMMUNICATIONS, INC.,
Registrant
|
Dated:
August 5, 2008
|
By:
/s/ Kevin D.
Howard
|
|
|
Name:
|
Kevin
D. Howard
|
|
|
Title:
|
Vice
President, Controller and
|
|
|
Chief
Accounting Officer
|
||
S-1
|
Exhibit
Number
|
Description
of Document
|
||||
|
10.1
|
First
Supplemental Indenture dated as of July 2, 2008, among CCH II,
LLC, CCH II Capital Corp., Charter Communications Holdings, LLC, and
The Bank of New York Mellon Trust Company, N.A., for CCH II 10.25% Senior
Notes due 2013 (incorporated by reference to Exhibit 10.1 to the
current report on Form 8-K of Charter Communications, Inc. filed on
July 3, 2008 (File No. 000-27927)).
|
||||
|
10.2
|
Exchange
and Registration Rights Agreement dated as of July 2, 2008 for the
issuance of CCH II 10.25% Senior Notes due 2013(incorporated by reference
to Exhibit 10.2 to the current report on Form 8-K of Charter
Communications, Inc. filed on July 3, 2008 (File
No. 000-27927)).
|
||||
|
10.3+
|
Charter
Communications, Inc. 2008 Incentive Program dated as of June 30,
2008.
|
||||
|
10.4+
|
Amended
and Restated Employment Agreement between Eloise E. Schmitz and Charter
Communications, Inc., dated as of July 1, 2008.
|
||||
|
10.5+
|
Amendment
to Amended and Restated Employment Agreement between Robert A. Quigley and
Charter Communications, Inc., dated as of July 1, 2008.
|
||||
|
12.1
|
Computation
of Ratio of Earnings to Fixed Charges.
|
||||
|
31.1
|
Certificate
of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under
the Securities Exchange Act of 1934.
|
||||
|
31.2
|
Certificate
of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under
the Securities Exchange Act of 1934.
|
||||
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).
|
||||
|
32.2
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).
|
||||
+
Management compensatory plan or arrangement
E-1
Exhibit
10.3
CONFIDENTIAL
CHARTER
COMMUNICATIONS, INC.
2008
Incentive Program
Program
Name
|
·
|
The
Charter Communications, Inc. 2008 Incentive Program
(“Program”).
|
Purpose
|
·
|
The
Program is designed to provide both annual and long-term incentive
compensation to selected management employees who contribute and
significantly impact the long term growth and success of Charter
Communications, Inc. (“Company”). It is focused on both
retention and performance, and uses a combination of equity and cash
incentives.
|
Effective
Date
|
·
|
The
effective date of the Program is January 1,
2008.
|
Program
Year
|
·
|
The
Program operates on a calendar year basis, but portions of the awards
under the Program are earned and paid in subsequent years and will
increase or decrease in value based on the degree of attainment of
performance goals and on the market value of the Company’s Class A common
stock.
|
Eligibility
|
·
|
Incentive
opportunities are defined generally by position and may vary based on
responsibility and employment level. Individual participation
in the Program is at the discretion of the Compensation and Benefits
Committee (the "Committee") of the Board of Directors which administers
the Program.
|
|
·
|
Employees
shall be notified in writing of their eligibility to participate in the
Program for each Program Year. Participation in the Program for
one year does not entitle an employee to participate in any subsequent
year.
|
|
·
|
A
written award agreement will document each respective component of a
participant’s
award.
|
Awards
|
·
|
The
total annual award for each participant will consist of three
components. One-third of the annual award will be in the form
of time-vested restricted stock; one-third of the award will consist of
Performance Units, and the remaining one-third of the award will consist
of Performance Cash. The Performance Units and Performance Cash
awards will be earned and deposited in book-entry format into a
Performance Bank, as described below, based on the degree of attainment by
the Company of its performance goals. Annually, one-third of
the Performance Units and Performance Cash in the Performance
Bank will be paid based on attainment of financial and operational
performance goals for the year of grant. Two-thirds of the
Performance Bank balance will remain to be augmented by any future
performance awards and adjusted by Performance Interest (increases or
decreases based on future performance of the Company). . Each
subsequent
|
|
|
year,
participants will receive a payout equal to one-third of their Performance
Bank balance, as adjusted based on attainment of the performance goals for
the year immediately preceding the year of
payment.
|
|
·
|
Each
participant will have a target, minimum and maximum incentive award
opportunity for Performance Cash and Performance Unit awards. Attainment
of the performance maximum will result in an actual award of 200% of
target opportunity. Attainment of the performance target will
result in an actual award of 100% of target. Attainment of the
performance minimum or threshold level will result in an actual award of
50% of target. Except as otherwise provided in the Program, the
participant must be actively employed on March 15 of the year following
the applicable Program Year in order to receive any
award.
|
|
·
|
The
target award will be earned if stated performance objectives are
achieved. The threshold (minimum) and maximum awards will
coincide with stated threshold and maximum performance
objectives.
|
|
·
|
If
the threshold level of performance is not achieved for the applicable
measurements, no award payment will be
made.
|
|
·
|
If
actual performance results are between the threshold and target, or the
target and maximum levels, the award opportunity will be determined based
on the scale provided.
|
|
·
|
If
actual performance is above the maximum level, the award will be the
maximum award allowable under the
Program.
|
Performance
Measures
|
·
|
The
performance metrics will be selected by the Committee may include such
performance and operational criteria as revenue, adjusted EBITDA, free
cash flow, unlevered free cash flow, average revenue per unit, operating
cash flow, customer satisfaction or such other metrics as the Committee
may approve and may change in any given Program Year. The
initial measures established for Performance Cash and Performance Units
are revenue growth and unlevered free cash flow growth, as set forth in
each award agreement. Performance criteria and goals will be
established in writing within 90 days after commencement of each Program
Year and will be provided to the participants
thereafter.
|
|
·
|
As
soon as practicable after the close of the Program Year, the Committee
will determine the actual level of performance. This actual
level of performance will be compared to the target and the deviation from
target will be computed. This deviation from target, expressed
as a percentage, will determine the Performance Cash and Performance Unit
awards earned, if any, for each
participant.
|
|
·
|
The
Committee will approve final awards and, in its sole discretion, may make
discretionary adjustments as required to reflect the relative performance
of the participant(s).
|
- 2
- -
Vesting
and Payment of Awards
|
·
|
Performance
Cash –Earned Performance Cash will be credited to a Performance
Cash Bank. Each year, the Performance Cash balance in the
participant’s Performance Cash Bank will be subject to adjustment based on
attainment of the performance goals for the immediately preceding Program
Year, as shown in the award agreement. After adjustment,
one-third of the Performance Cash balance in the participant’s Performance
Cash Bank will be paid in a cash lump sum payment to the participant, net
of all required tax withholding. Two-thirds of the Performance
Cash balance in the participant’s Performance Cash Bank will remain to be
augmented by any future Performance Cash awards and adjusted by
Performance Interest.
|
|
·
|
Performance
Units –Earned Performance Units will be credited to a Performance
Units Bank. Each year, the Performance Units balance in the
participant’s Performance Units Bank will be subject to adjustment based
on attainment of the performance goals for the immediately preceding
Program Year, as shown in the award agreement. After
adjustment, one-third of the Performance Units balance in the
participant’s Performance Units Bank will then be distributed in whole
shares of the Company's Class A common stock; no fractional shares will be
paid. Two-thirds of the Performance Unit balance in the
participant’s Performance Units Bank will remain to be augmented by any
future Performance Unit awards and adjusted by Performance
Interest.
|
|
·
|
Restricted
Stock – One-third of the restricted Stock award will vest on each
of the first three anniversary dates of the date of
award.
|
|
·
|
One-third
of the amounts credited to the Performance Bank (as adjusted based on
achievement of the performance goals for the Program Year) are payable on
March 15 of the year following the Program Year. Except as
otherwise provided in the Program, a participant must be actively employed
on the payment date to receive
payment.
|
Termination
of Employment
|
·
|
Except
as otherwise provided in a written employment agreement, in the event of a
participant’s termination of employment, awards and Performance Bank
balances will be paid or forfeited as
follows:
|
|
·
|
Voluntary
Termination, Termination for Cause, Death, Termination on Account of
Disability. All
unvested restricted stock, all Performance Bank Balance amounts and all
unearned Performance Units awards and Performance Cash awards will be
forfeited upon the occurrence of any of these events prior to the day of
payment or vesting (in the case of restricted
stock).
|
|
·
|
Involuntary
Termination – Without Cause or for Good
Reason.
In the event of an involuntary termination by the Company without
Cause or by a participant for Good Reason, the current Program Year
Performance Cash and Performance Unit awards will be
forfeited. If termination occurs on or after September 15 and
before the following March 15, any amounts credited to the Performance
Cash Bank and Performance Units Bank that are otherwise payable on March
15 following termination of employment will be paid on that date, and the
remainder will be forfeited. If termination of employment occurs on or
after March 15 and before the following September 15, any amounts then
|
- 3
- -
|
|
credited
to the Performance Cash Bank and Performance Units Bank shall be
forfeited. Any unvested restricted stock that was scheduled to
vest within the one year period following termination of employment will
be vested on termination of employment and any remaining restricted stock
will be forfeited.
|
|
·
|
Termination
of Employment without Cause or for Good Reason within 12 months following
a Change in Control. The current Program Year
Performance Cash and Performance Unit awards will be paid at target level
on termination of employment. Any amounts credited to the
Performance Bank will be paid on termination of employment. All
unvested restricted stock awards shall immediately vest. (The awards of
the Chief Executive Officer, Executive Vice Presidents and Senior Vice
Presidents are limited in the event that a Change of Control occurs within
90 days of the grant of the
award.)
|
|
·
|
Retirement. The current Program Year
Performance Cash and Performance Unit awards will be
forfeited. Any amounts credited or to be credited to the
Performance Cash Bank and Performance Units Bank will be paid (without
future adjustment) to the participant in three annual installments,
commencing on March 15 following the date of Retirement. All
unvested restricted stock awards will immediately
vest.
|
For purposes of the Program, “Cause,” “Good Reason,” “Change in Control,” and “Retirement” have the meaning set forth in the 2001 Stock Incentive Plan.
Section
409A Compliance
|
·
|
Notwithstanding
any other provision of the Program to the contrary, if the participant is
a “Specified Employee” on the date of termination of the participant’s
employment, the participant may not receive a payment of “nonqualified
deferred compensation” for which the payment event is “separation from
service,” as defined in Internal Revenue Code Section 409A and the
regulations thereunder, until at least six months after the date of
termination. Any payment of nonqualified deferred compensation
otherwise due in such six month period shall be suspended and become
payable at the end of such six month
period.
|
|
·
|
A
“Specified Employee” means a specified employee as defined in Treas. Reg.
§1.409A-1(i) (generally, officers earning more than $145,000 per year, as
indexed for inflation, who are among the fifty highest paid
employees).
|
Miscellaneous
|
·
|
The
Program is not a contract of employment, nor is any portion of the Program
to be construed as a contract for continued employment, whether for the
duration of the Program, or
thereafter.
|
|
·
|
No
participant shall have the right to anticipate, sell, transfer, assign,
pledge or encumber his or her right to receive any award made under the
Program until such an award becomes payable to him or
her.
|
|
·
|
No
participant shall have any lien on any assets of the Company by reason of
any award made under the Program.
|
- 4
- -
|
·
|
Performance
Cash awards under the Program will be paid out of the general assets of
the Company, dependent upon the achievement of certain performance goals
and continued employment through the applicable date. Equity
awards will be granted under the Company’s 2001 Stock Incentive Plan or
any successor equity plan for employees of the Company and are subject to
approval of such successor plan by the Company's stockholders. Any payment
in shares of Company's Class A common stock will be issued under those
plans, if approved.
|
Administration
|
·
|
The
Committee may review this Program annually and make changes in Program
participation, target incentives, determination of performance factor
benchmarks or any other aspect of this Program. Such review may
include, but not be limited to, the
following:
|
|
·
|
To
interpret the Program and to prescribe, amend and/or eliminate
administrative guidelines.
|
|
·
|
To
adjust individual awards, upwards or downwards, in its sole
discretion.
|
|
·
|
To
establish award opportunities for each
position.
|
|
·
|
To
recommend to the Board of Directors the termination of the Program at any
time without decreasing the value of awards previously earned and still
outstanding.
|
|
·
|
The
receipt of an award shall not give an employee any right to continued
employment. The receipt of an award with respect to any Program
Year shall not entitle an employee to an award with respect to any
subsequent Program Year.
|
- 5
- -
60; Exhibit
10.4
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT
AGREEMENT (the “Agreement”), dated
and effective the 1st day of July, 2008 (the “Effective Date”) is
made by and between CHARTER COMMUNICATIONS, INC., a Delaware corporation (the
“Company”), and
Eloise E.
Schmitz, an adult resident of the state of Missouri (the “Executive”).
RECITALS:
WHEREAS, the Executive and the
Company have previously entered into that certain Amended and Restated
Employment Agreement dated August 1, 2007, amended as of April 7,
2008 (the "Old Employment
Agreement"), and the parties desire to amend and restate in its entirety
the Old Employment Agreement;
WHEREAS, it is the desire of
the Company to assure itself of the services of Executive by engaging Executive
as its Executive Vice President and Chief Financial Officer and the Executive
desires to serve the Company on the terms herein provided;
WHEREAS, in connection with
the entry into the Agreement, the Executive will be granted performance units
and restricted shares of Class A Common Stock pursuant to the
Company's 2001 Stock Incentive Plan, as amended as of the date
hereof;
WHEREAS, Executive’s agreement
to the terms and conditions of Sections 17 and 19 are a material and essential
condition of Executive’s employment with the Company hereafter under the terms
of this Agreement;
NOW, THEREFORE, in
consideration of the foregoing and of the respective covenants and agreements
set forth below, the parties hereto agree as follows:
1. Certain
Definitions.
(a) “Allen”
shall mean Paul G. Allen (and his heirs or beneficiaries under his will(s),
trusts or other instruments of testamentary disposition), and any entity or
group over which Paul G. Allen has Control and that constitutes a Person as
defined herein. For the purposes of this definition, “Control” means the
power to direct the management and policies of an entity or to appoint or elect
a majority of its governing board.
(b) “Annual
Base Salary” shall have the meaning set forth in Section 5.
(c) “Board”
shall mean the Board of Directors of the Company.
(d) “Bonus”
shall have the meaning set forth in Section 6.
(e) The
Company shall have “Cause” to terminate Executive’s employment hereunder upon
Executive’s:
1
(i) Executive’s
breach of a material obligation (which, if curable, is not cured within ten
business (10) days after Executive receives written notice of such breach) or
representation under this Agreement or breach of any fiduciary duty to the
Company which, if curable, is not cured within ten business (10) days after
Executive receives written notice of such breach; or any act of fraud or knowing
material misrepresentation or concealment upon, to or from the Company or the
Board;
(ii) Executive’s
failure to adhere in any material respect to (i) the Company’s Code of Conduct
in effect from time to time and applicable to officers and/or employees
generally, or (ii) any written Company policy, if such policy is material to the
effective performance by Executive of the Executive’s duties under this
Agreement, and if Executive has been given a reasonable opportunity to cure this
failure to comply within a period of time which is reasonable under the
circumstances but not more than the thirty (30) day period after written notice
of such failure is provided to Executive; provided that if Executive
cures this failure to comply with such a policy and then fails again to comply
with the same policy, no further opportunity to cure that failure shall be
required;
(iii) Executive’s
misappropriation (or attempted misappropriation) of a material amount of the
Company’s funds or property;
(iv) Executive’s
conviction of, the entering of a guilty plea or plea of nolo contendere or no contest
(or the equivalent), or entering into any pretrial diversion program or
agreement or suspended imposition of sentence, with respect to either a felony
or a crime that adversely affects or could reasonably be expected to adversely
affect the Company or its business reputation; or the institution of criminal
charges against Executive, which are not dismissed within sixty (60) days after
institution, for fraud, embezzlement, any felony offense involving dishonesty or
constituting a breach of trust or moral turpitude;
(v) Executive’s
admission of liability of, or finding of liability, for a knowing and deliberate
violation of any “Securities Laws.” As used herein, the term
“Securities Laws” means any federal or state law, rule or regulation governing
generally the issuance or exchange of securities, including without limitation
the Securities Act of 1933, the Securities Exchange Act of 1934 and the rules
and regulations promulgated thereunder;
(vi) conduct
by Executive in connection with Executive’s employment that constitutes gross
neglect of any material duty or responsibility, willful
misconduct, or recklessness which, if curable, is not cured within
ten business (10) days after Executive receives written notice of such
breach;
(vii) Executive’s
illegal possession or use of any controlled substance, or excessive use of
alcohol at a work function, in connection with Executive’s duties, or on Company
premises; “excessive” meaning either repeated unprofessional use or any single
event of consumption giving rise to significant intoxication or unprofessional
behavior;
(viii) willful
or grossly negligent commission of any other act or failure to act in connection
with the Executive’s duties as an executive of the Company which causes
2
or
reasonably may be expected (as of the time of such occurrence) to cause
substantial economic injury to or substantial injury to the business reputation
of the Company or any subsidiary or affiliate of the Company, including, without
limitation, any material violation of the Foreign Corrupt Practices Act, as
described herein below.
If
Executive commits or is charged with committing any offense of the character or
type specified in subparagraphs 1(e)(iv), (v) or (viii) above, then the Company
at its option may suspend the Executive with or without pay. If the
Executive subsequently is convicted of, pleads guilty or nolo contendere (or
equivalent plea) to, or enters into any type of suspended imposition of sentence
or pretrial diversion program with respect to, any such offense (or any matter
that gave rise to the suspension), the Executive shall immediately repay any
compensation paid in cash hereunder from the date of the
suspension. Notwithstanding anything to the contrary in any stock
option or equity incentive plan or award agreement, all vesting and all lapsing
of restrictions on restricted shares shall be tolled during the period of
suspension and all unvested options and restricted shares for which the
restrictions have not lapsed shall terminate and not be exercisable by or issued
to Executive if during or after such suspension the Executive is convicted of,
pleads guilty or nolo
contendere (or equivalent plea) to, or enters into any type of suspended
imposition of sentence or pretrial diversion program with respect to, any
offense specified in subparagraphs 1(e)(iv), (v) or (viii) above or any matter
that gave rise to the suspension.
(f) “Change
of Control” shall be deemed to have occurred if:
(i) any
Person is or becomes a “beneficial owner” (as determined for purposes of
Regulation 13D-G, as currently in effect, of the Exchange Act), directly or
indirectly, of securities representing the Applicable Percentage (as defined
below) or more of the total voting power of all of the Company’s then
outstanding voting securities. For purposes of this Section 1(f), the
term “Person” shall not include: (A) the Company or any of
its subsidiaries, (B) a trustee or other fiduciary holding securities under
an employee benefit plan of the Company or any of its subsidiaries, or
(C) an underwriter temporarily holding securities pursuant to an offering
of said securities, or (D) Allen. For purposes of this Agreement, in
the case of a recapitalization or other exchange involving the exchange of
Company voting stock for the Company's debt, the group of debtholders that
acquires such Company voting stock as the result of such recapitalization or
exchange shall not be treated as a single Person solely by reason of such
recapitalization or exchange; or
(ii) the
occurrence of a
merger, consolidation or sale or other disposition of all or substantially all
of the assets of the Company (a “Business Combination”), in each case, unless
following such Business Combination: (A) all or substantially
all of the individuals and entities who were the “beneficial owners” (as
determined for purposes of Regulation 13D-G, as currently in effect, of the
Exchange Act) of the outstanding voting securities of the Company immediately
prior to such Business Combination beneficially own, directly or indirectly,
securities representing more than fifty percent (50%) of the total voting power
of the then outstanding voting securities of the entity resulting from such
Business Combination (or such assets as the case may be) or the parent of such
entity in substantially the same proportionate ownership as in effect
immediately prior to the Business Combination (the “Resulting Entity”); and
(B) a majority of the members of the board of
3
directors or other governing body
of the Resulting Entity were members of the Board at the time of the execution
of the initial agreement, or at the time of the action
of the Board, providing for
such Business Combination; or
(iii) the
consummation of a plan of complete liquidation or dissolution of the Company;
or
(iv) if
and when Allen shall no longer have the power to appoint a majority of the
Board, during any period of two (2) consecutive calendar years, individuals who
either (A) at the beginning of such period are members of the Board ("Incumbent
Directors"), or (B) whose election to the Board during such period is approved
by a vote of the majority of those members of the Board who are Incumbent
Directors at the time of such approval, whereupon such individual so approved
shall be treated as an Incumbent Director with respect to future approvals,
cease for any reason to constitute a majority of the Board.
Notwithstanding
the foregoing subsections 1(f)(i) through (iii), a Change of Control shall
not include any transaction or series of transactions, including any
transactions described above if, following such transaction or transactions, (x)
Allen has the largest percentage ownership of the voting securities in the
Company or any successor or surviving corporation held by any Person (other
than any Person that includes Allen), provided such percentage ownership is more
than twenty-five percent or (y) Allen has the power to appoint a majority of the
members of the Board of Directors.
For
purposes of this definition, (A) at all times that Allen is or are the
“beneficial owner(s)” (as determined for purposes of Regulation 13D-G, as
currently in effect, of the Exchange Act) of securities representing in the
aggregate at least fifty percent (50%) of the total voting power of all of the
Company’s then outstanding voting securities, “Applicable Percentage” means
fifty percent (50%); and (B) at all times that Allen is or are the beneficial
owner(s) of securities representing in the aggregate less than fifty percent
(50%) of the total voting power of all of the Company’s then outstanding voting
securities, “Applicable Percentage” means any percentage that is more than the
greater of (1) the percentage of the total voting power of all of the Company’s
then outstanding voting securities represented by securities beneficially owned
by Allen or (2) twenty-five percent (25%).
(g) “Code”
shall mean the Internal Revenue Code of 1986, as amended from time to
time.
(h) “Committee”
shall mean either the Compensation and Benefits Committee of the Board, or a
Subcommittee of such Committee duly appointed by the Board or the
Committee.
(i) “Company”
shall have the meaning set forth in the preamble hereto.
(j) “Company
Stock” shall mean the $.10 par value common stock of the Company.
4
(k) “Date
of Termination” shall mean (i) if Executive’s employment is terminated by
Executive’s death, the date of Executive’s death and (ii) if Executive’s
employment is terminated pursuant to Section 14(a)(ii) – (vi), the date of
termination of employment, as defined in 409(A) regulations under the
Code.
(l) For
purposes of this Agreement, Executive will be deemed to have a “Disability” if,
due to illness, injury or a physical or medically recognized mental condition,
(a) Executive is unable to perform Executive’s duties under this Agreement with
reasonable accommodation for 120 consecutive days, or 180 days during any
twelve month period, as determined in accordance with this Section, or (b)
Executive is considered disabled for purposes of receiving / qualifying for long
term disability benefits under any group long term disability insurance
plan or policy offered by Company in which Executive
participates. The Disability of Executive will be determined by a
medical doctor selected by written agreement of Company and Executive upon the
request of either party by notice to the other, or (in the case of and with
respect to any applicable long term disability insurance policy or plan) will be
determined according to the terms of the applicable long term disability
insurance policy / plan. If Company and Executive cannot agree on the
selection of a medical doctor, each of them will select a medical doctor and the
two medical doctors will select a third medical doctor who will determine
whether Executive has a Disability. The determination of the medical
doctor selected under this Section will be binding on both
parties. Executive must submit to a reasonable number of examinations
by the medical doctor making the determination of Disability under this Section,
and to other specialists designated by such medical doctor, and Executive hereby
authorizes the disclosure and release to Company of such determination and all
supporting medical records. If Executive is not legally competent,
Executive’s legal guardian or duly authorized attorney-in-fact will act in
Executive’s stead under this Section for the purposes of submitting Executive to
the examinations, and providing the authorization of disclosure, required under
this Section.
(m) “Executive”
shall have the meaning set forth in the preamble hereto.
(n) “Good
Reason” shall mean any of the events described herein that occur without
Executive's prior written consent: (i) any reduction in Executive’s Annual Base
Salary, Target Bonus Percentage, or title except as permitted hereunder, (ii)
any failure to pay Executive's compensation hereunder when due; (iii) any
material breach by the Company of a term hereof; (iv) relocation
of Executive’s primary workplace to a location that is more
than fifty (50) miles from the office where Executive is then
assigned to work as Executive’s principal office; (v) a transfer or reassignment
to another executive of material responsibilities that have been assigned to
Executive (and were not identified by the Company to be assigned only on an
interim basis at the time of assignment or thereafter) and generally are part of
the responsibilities and functions assigned to a Chief Financial Officer of
a public corporation or (vi) any change in reporting structure such that
Executive no longer reports directly to the Chief Executive Officer (or
equivalent position, if there is no Chief Executive Officer) (in each case “(i)”
through “(vi)” only if Executive objects in writing within 30 days after being
informed of such events and unless Company retracts and/or rectifies the claimed
Good Reason within 30 days following Company’s receipt of timely written
objection from Executive); (vii) if within six months after a Change of Control,
Executive has not received an offer from the surviving company to continue in
his or her position immediately prior to such Change of Control under at least
the same terms and conditions
5
(except
that the value of equity-based compensation after such Change of Control need
only be commensurate with the value of equity-based compensation given to
executives with equivalent positions in the surviving company, if any) as set
herein; (viii) the Company's decision not to renew this Agreement at the end of
its term, or (ix) the failure of a successor to the business of the Company to
assume the Company's obligations under this Agreement in the event of a Change
of Control during its term.
(o) “Notice
of Termination” shall have the meaning set forth in Section 14(b).
(p) “Options”
shall have the meaning set forth in Section 7
(q) “Performance
Unit” and “Performance Shares” shall have the meaning set forth in Section 9
hereof.
(r) “Person”
shall have the meaning set forth in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934.
(s) “Plan”
shall mean the 2001 Stock Incentive Plan as amended by the Company from time to
time.
(s) “Restricted
Shares” shall have the meaning set forth in Section 8.
(t) “Term”
shall have the meaning set forth in Section 2.
(u) "Voluntary"
and "Voluntarily" in connection with Executive's termination of employment shall
mean a termination of employment resulting from the initiative of the Executive,
excluding a termination of employment attributable to Executive's death or
Disability. A resignation by Executive that is in response to a communicated
intent by the Company to discharge Executive other than for Cause is not
considered to be "Voluntary" and shall be considered to be a termination by
the Company for the purposes of this Agreement.
2. Employment
Term. The Company hereby employs the
Executive, and the Executive hereby accepts his employment, under the terms and
conditions hereof, for the period (the “Term”) beginning on
the Effective Date hereof and terminating upon the earlier of (i) July 31,
2010 (the “Initial Term”) and
(ii) the Date of Termination as defined in Section 1(k), and, if not terminated
earlier, will be automatically renewed at the end of its Initial Term and on
each anniversary thereafter for a period of one (1) year unless either party
shall give written notice of cancellation to the other party not later than
ninety (90) days prior to the end of the Initial Term or anniversaries
thereof.
3. Position
and Duties. Executive shall serve as Executive
Vice President and Chief Financial Officer reporting to the Chief Executive
Officer, with such responsibilities, duties and authority as are customary for
such role, including, but not limited to, overall management responsibility for
the financial planning, reporting and strategic planning for the Company and
management of all personnel reporting to the Chief Financial
Officer. Executive shall devote all necessary business time and
attention, and employ Executive’s reasonable best efforts, toward the
6
fulfillment
and execution of all assigned duties, and the satisfaction of defined annual
and/or longer-term performance criteria.
4. Place of
Performance. In connection with Executive’s employment during
the Term, Executive's initial primary workplace shall be the Company’s offices
in or near St. Louis, MO except for necessary travel on the Company’s
business.
5. Annual
Base Salary.
During the Term, Executive shall receive a base salary at a rate not less
than $525,000.00 per annum (the “Annual Base Salary”),
less standard deductions, paid in accordance with the Company’s general payroll
practices for executives, but no less frequently than monthly. The
Annual Base Salary shall compensate Executive for any official position or
directorship of a subsidiary or affiliate that Executive is asked to hold in the
Company or its subsidiaries or affiliates as a part of Executive’s employment
responsibilities. No less frequently than annually during the Term,
the Committee, on advice of the Company’s Chief Executive Officer, shall review
the rate of Annual Base Salary payable to Executive, and may, in its discretion,
increase the rate of Annual Base Salary payable hereunder; provided, however, that any
increased rate shall thereafter be the rate of “Annual Base Salary”
hereunder.
6. Bonus. Except
as otherwise provided for herein, for each fiscal year or other period
consistent with the Company’s then-applicable normal employment practices during
which Executive is employed hereunder on the last day (the “Bonus Year”),
Executive shall be eligible to receive a bonus (i) for 2008, in an amount
up to 50% of Executive’s Annual Base Salary for the period prior to that in
which she served as Interim Chief Financial Officer, and up to 75% of
Executive’s Annual Base Salary for the period that Executive served as Interim
Chief Financial Officer through December 31, 2008, and (ii) in an amount up to
75% of Executive's Annual Base Salary for fiscal years thereafter, (the “Bonus” and bonuses at
such percentage of Annual Base Salary being the “Target Bonus”)
pursuant to, and as set forth in, the terms of the Executive Bonus Plan as such
Plan may be amended from time to time, plus such other bonus payments, if any,
as shall be determined by the Committee in its sole discretion, with such Bonus
being paid on or before February 28 of the year next following the Bonus Year,
or as soon as is administratively practicable thereafter (e.g., after the public
disclosure of the Company’s financial results for the prior year on SEC Form
10-K or on such replacement form as the SEC shall determine, for those years as
the Company’s securities are traded publicly, and the Company’s annual financial
results are reported to the shareholders, for those (if any) years as the
Company’s securities are not traded publicly).
7. Stock
Options. The Company has previously granted to Executive
options to purchase shares of Company Stock as set forth in Exhibit A hereto,
and may, in the Committee’s discretion, grant to Executive additional options to
purchase shares of Company Stock (all of such options, collectively, the “Options”) pursuant to
the terms of the Plan, any successor plan and an associated Stock Option
Agreement.
8. Restricted
Shares. The Company has previously granted to Executive
Restricted Shares of Company Stock as set forth in Exhibit A hereto, and may, in
the Committee’s discretion, grant to Executive Restricted Shares (collectively,
the “Restricted
Shares”), which shall be subject to restrictions on their sale as set
forth in the Plan and an associated Restricted Shares Grant Letter.
7
9. Performance
Share Units. The Company has previously granted to Executive
Performance Share Units of which some have been converted into Performance
Shares (which are not aggregated in the forgoing description of Restricted
Shares) as set forth in Exhibit A hereto, and may, in the Committee’s
discretion, grant to Executive further Performance Share Units (collectively,
the “Performance
Units”), which shall be subject to restrictions on their sale as set
forth in the Plan and an associated Performance Unit Grant Letter.
9A. Performance
Cash. The Company has previously granted to Executive a
Performance Cash award as set forth in Exhibit A hereto pursuant to the 2008
Incentive Program, as defined therein, which shall be subject to the
restrictions and conditions as set forth in the 2008 Incentive Program and an
associated Performance Cash Grant Letter.
10. Executive
Cash Award
Plan. Executive
currently is a participant in the Company’s 2005 Executive Cash Award Plan with
a Plan Award (as defined in such Plan) as set forth in Exhibit B and shall
remain a participant in such Plan under the terms therefore for the term of this
Agreement.
11. Benefits. Executive
shall be entitled to receive such benefits and to participate in such employee
group benefit plans, including life, health and disability insurance policies,
and financial planning services, and other perquisites and plans as are
generally provided by the Company to its senior executives of comparable level
and responsibility in accordance with the plans, practices and programs of the
Company, as amended from time to time.
12. Expenses. The
Company shall reimburse Executive for all reasonable and necessary expenses
incurred by Executive in connection with the performance of Executive’s duties
as an employee of the Company in accordance with the Company’s generally
applicable policies and procedures. Such reimbursement is subject to
the submission to the Company by Executive of appropriate documentation and/or
vouchers in accordance with the customary procedures of the Company for expense
reimbursement, as such procedures may be revised by the Company from time to
time hereafter.
13. Vacations. Executive
shall be entitled to paid vacation in accordance with the Company’s vacation
policy as in effect from time to time provided that, in no event
shall Executive be entitled to less than three (3) weeks vacation per calendar
year. Executive shall also be entitled to paid holidays and personal
days in accordance with the Company’s practice with respect to same as in effect
from time to time.
14. Termination.
(a) Executive’s
employment hereunder may be terminated by the Company, on the one hand, or
Executive, on the other hand, as applicable, without any breach of this
Agreement, under the following circumstances:
(i) Death. Executive’s
employment hereunder shall automatically terminate upon Executive’s
death.
8
(ii) Disability. If
Executive has incurred a Disability, the Company may give Executive written
notice of its intention to terminate Executive’s employment. In such
event, Executive’s employment with the Company shall terminate effective on the
14th day after delivery of such notice to Executive, provided that within the 14
days after such delivery, Executive shall not have returned to full-time
performance of Executive’s duties. Executive may provide notice to
the Company of Executive's resignation on account of a bona fide Disability at
any time.
(iii) Cause. The
Company may terminate Executive’s employment hereunder for Cause effectively
immediately upon delivery of notice to Executive, taking into account any
procedural requirements set forth under Section 1(e) above.
(iv) Good
Reason. Executive may terminate Executive’s employment herein
for Good Reason upon (i) satisfaction of any advance notice and other procedural
requirements set forth under Section 1(n) above for any termination pursuant to
Section 1(n)(i) through (vi) or (ii) at least 30 days’ advance written notice by
the Executive for any termination pursuant to Section 1(n)(vii) through
(ix).
(v) Without
Cause. The Company may terminate Executive’s employment
hereunder without Cause upon at least 30 days’ advance written notice to the
Executive.
(vi) Resignation Without Good
Reason. Executive may resign Executive’s employment without
Good Reason upon at least fourteen (14) days’ written notice to the
Company.
(b) Notice of
Termination. Any termination of Executive’s employment by the
Company or by Executive under this Section 14 (other than pursuant to Sections
14(a)(i)) shall be communicated by a written notice (the “Notice of
Termination”) to the other party hereto, indicating the specific
termination provision in this Agreement relied upon, setting forth in reasonable
detail any facts and circumstances claimed to provide a basis for termination of
Executive’s employment under the provision so indicated, and specifying a Date
of Termination which notice shall be delivered within the applicable time
periods set forth in subsections 14(a)(ii)-(vi) above ( the “Notice Period”);
provided that the Company may pay to
Executive all Annual Base Salary, benefits and other rights due to Executive
during such Notice Period instead of employing Executive during such Notice
Period.
(c) Resignation from
Representational Capacities. Executive hereby acknowledges and
agrees that upon Executive's termination of employment with the Company for
whatever reason, she shall be deemed to have, and shall have in fact,
effectively resigned from all executive, director or other positions with the
Company or its affiliates at the time of such termination of employment, and
shall return all property owned by the Company and in Executive’s possession,
including all hardware, files and documents, at that time.
(d) Termination in Connection
with Change in Control. If Executive’s employment is
terminated by the Company without Cause either upon or within thirty days before
or thirteen (13) months after a Change of Control, or prior to a Change in
Control at the request of a prospective purchaser whose proposed purchase would
constitute a Change in Control upon its completion,
9
such
termination shall be deemed to have occurred immediately before such Change in
Control for purposes of this Agreement and the Plan.
15. Termination
Pay
(a) Effective
upon the termination of Executive’s employment, Company will be obligated to pay
Executive (or, in the event of Executive’s death, the Executive’s designated
beneficiary as defined below) only such compensation as is provided in this
Section 15, except to the extent otherwise provided for in any Company
stock incentive, stock option or cash award plan (including, among others,
the Plan), approved by the Board. For purposes of this Section 15,
Executive’s designated beneficiary will be such individual beneficiary or trust,
located at such address, as Executive may designate by notice to Company from
time to time or, if Executive fails to give notice to Company of such a
beneficiary, Executive’s estate. Notwithstanding the preceding
sentence, Company will have no duty, in any circumstances, to attempt to open an
estate on behalf of Executive, to determine whether any beneficiary designated
by Executive is alive or to ascertain the address of any such beneficiary, to
determine the existence of any trust, to determine whether any person purporting
to act as Executive’s personal representative (or the trustee of a trust
established by Executive) is duly authorized to act in that capacity, or to
locate or attempt to locate any beneficiary, personal representative, or
trustee.
(b) Termination by Executive for
Good Reason or by Company without Cause. If prior to
expiration of the Term, Executive terminates his or her employment for Good
Reason, or if the Company terminates Executive’s employment other
than for Cause or Executive’s death or Disability, Executive will be entitled to
receive, subject to the conditions of this Agreement, the
following:
(i) (A)
all Annual Base Salary and Bonus duly payable under the applicable plan for
performance periods ending prior to the Date of Termination, but unpaid as of
the Date of Termination, plus (B) in consideration for Executive’s obligations
set forth in Section 19 hereof, an amount equal to two (2) times the Executive’s
then-current rate of Annual Base Salary and Target Bonus, which total sum
shall be payable following the Date of Termination in fifty-two (52) equal
bi-weekly installments in accordance with the Company’s normal payroll practices
provided that, if a
Change of Control occurs (or is deemed pursuant to Sec. 14(d) hereof to
have occurred after such termination) during such twenty-four (24) month period
(and such Change of Control qualifies either as a “change in the ownership or
effective control” of the Company or a “change in the ownership of a substantial
portion of the assets” of the Company as such terms are defined under Section
409A of the Code), any amounts remaining payable to Executive hereunder
shall be paid in a single lump sum immediately upon such Change of
Control.
(ii) if
Executive’s employment is terminated by the Company without Cause either
upon or within thirty days before or thirteen (13) months after a Change of
Control, or prior to a Change in Control at the request of a prospective
purchaser whose proposed purchase would constitute a Change in Control upon its
completion, the Company shall treat as earned all unvested Performance Units for
which the performance term has not expired as of such Change of Control at the
rate calculated pursuant to the Plan and the
10
applicable Grant Letter, and
shall immediately convert those Units into Restricted Shares and accelerate as
of the Date of Termination the removal of restrictions on
such shares.
(iii) all
reasonable expenses Executive has incurred in the pursuit of Executive’s duties
under this Agreement through the Date of Termination which are payable under and
in accordance with this Agreement, which amount will be paid within thirty (30)
days after the submission by Executive of properly completed reimbursement
requests on the Company’s standard forms;
(iv) a
lump sum payment (net after deduction of taxes and other required withholdings)
equal to twenty-four (24) times the monthly cost, at the time Executive’s
employment terminated, for Executive to receive under COBRA the paid coverage
for health, dental and vision benefits then being provided for Executive at the
Company’s cost at the time Executive’s employment
terminated. This amount will be paid at the same time the payment is
made under Section 15(b)(i) and will not take into account future increases in
costs during the applicable time period; and
(v) notwithstanding
anything to the contrary in any award agreement, Executive shall be deemed to be
actively employed during the twenty-four (24) month period following termination
of employment for purposes of vesting of all stock options, performance units
and restricted stock; provided
that if a Change of Control occurs (or is deemed pursuant to
Sec. 14(d) hereof to have occurred after such termination) within such
period, all remaining stock options that would have vested in the
twenty-four (24) month period shall vest, and all remaining restricted stock and
performance units whose restrictions would have lapsed in the twenty-four (24)
month period shall have their restrictions lapse immediately upon such
Change of Control; provided, however, that with respect to any equity-based
compensation awards subject to Section 409A of the Code (as determined by
independent tax counsel retained by the Company), vesting and/or the lapse of
restrictions will only be accelerated if such Change of Control qualifies either
as a “change in the ownership or effective control” of the Company or a “change
in the ownership of a substantial portion of the assets” of the Company as such
terms are defined under Section 409A of the Code, or the first subsequent time
at which such distribution may be made in compliance with Section 409A of the
Code; and
(vi) pay
the cost of up to twelve (12) months, as required, of executive-level
out-placement services (which provides as part of the outplacement the use of an
office and secretarial support as near as reasonably practicable to Executive’s
residence).
provided, however, any of the
benefits described in Section 15(b)(i) through (vi) that are due to be paid or
awarded during the first six (6) months after the Date of Termination shall, to
the extent required to avoid the tax consequences of Section 409A of the Code as
determined by independent tax counsel, be suspended and paid after the six (6)
month anniversary of Executive’s Date of Termination.
(c) The
Executive shall not be required to mitigate the amount of any payments provided
in Section 15, by seeking other employment or otherwise, nor shall the amount of
any
11
payment
provided for in this Section 15 be reduced by any compensation earned by
Executive as a result of employment by another company or business, or by
profits earned by Employee from any other source at any time before or after the
date of Termination, so long as Executive is not in breach of the
Agreement.
(d) Termination by Executive
without Good Reason or by Company for Cause. If prior to the
expiration of the Term or thereafter, Executive Voluntarily terminates
Executive’s employment prior to expiration of the Term without Good Reason or if
Company terminates this Agreement for Cause, Executive will be entitled to
receive Executive’s then-existing Annual Base Salary only through the date such
termination is effective and will be reimbursed for all reasonable expenses
Executive has incurred in the pursuit of Executive’s duties under this Agreement
through the date of termination which are payable under and in accordance with
this Agreement; any unvested options and shares of restricted stock shall
terminate as of the date of termination unless otherwise provided for in any
applicable plan or award agreement; and Executive shall be entitled to no other
compensation, bonus, payments or benefits except as expressly provided in this
paragraph.
(e) Termination upon Disability
or Death. If Executive’s employment shall terminate by reason
of Executive’s Disability (pursuant to Section 14(a)(ii)) or death (pursuant to
Section 14(a)(i)), the Company shall pay to Executive, in a lump sum cash
payment as soon as practicable following the Date of Termination, all unpaid
Annual Base Salary and Bonus previously earned for a performance period ending
prior to the Date of Termination, but unpaid as of the Date of Termination, and
the pro rata portion of
their Bonus for such year (when and as paid to other senior executives of the
Company) for the Performance Period in which the termination
occurred. In the case of Disability, if there is a period of time
during which Executive is not being paid Annual Base Salary and not receiving
long-term disability insurance payments, the Company shall make interim payments
equal to such unpaid disability insurance payments to Executive until
commencement of disability insurance payments; provided that, to the extent
required to avoid the tax consequences of Section 409A of the Code, as
determined by independent tax counsel, the first payment shall cover all
payments scheduled to be made to Executive during the first six (6) months after
the date Executive’s employment terminates, and the first such payment shall be
delayed until the day that is six (6) months after the date Executive’s
employment terminates.
(f) Benefits. Except as
otherwise required by law, Executive’s accrual of, and participation in plans
providing for, the Benefits will cease at the effective Date of the Termination
of employment.
(g) Conditions To
Payments. To be eligible
to receive (and continue to receive) and retain the payments and benefits
described in Sections 15(b)(i) and 15(e), Executive must comply with the
provisions of Sections 17, 18 and 19. In addition, to be eligible to
receive (and continue to receive) and retain the payments and benefits described
in Sections 15(b) and 15(e) Executive (or Executive’s executor and personal
representatives in case of death) must first execute and deliver to Company, and
comply with, an agreement, in form and substance reasonably satisfactory to
Company, effectively releasing and giving up all claims Executive may have
against Company or any of its subsidiaries or affiliates (and each of their
respective controlling
12
shareholders,
employees, directors, officers, plans, fiduciaries, insurers and agents) arising
out of or based upon any facts or conduct occurring prior to that date. The
agreement will be prepared by Company, will be based upon the standard form (if
any) then being utilized by Company for executive separations when severance is
being paid, and will be provided to Executive at the time Executive’s employment
is terminated or as soon as administratively practicable thereafter (not to
exceed five (5) business days). The agreement will require Executive
to consult with Company representatives, and voluntarily appear as a witness for
trial or deposition (and to prepare for any such testimony) in connection with,
any claim which may be asserted by or against Company, any investigation or
administrative proceeding, any matter relating to a franchise, or any business
matter concerning Company or any of its transactions or operations. A
copy of the standard form release being used by Company as of the date of this
agreement for executive separations when severance is being paid is attached to
this Agreement as Exhibit C. It is understood that the final document may
not contain provisions specific to the release of a federal age discrimination
claim if Executive is not at least forty (40) years of age, and may be changed
as Company’s chief legal counsel considers necessary and appropriate to enforce
the same, including provisions to comply with changes in applicable laws and
recent court decisions. Payments under and/or benefits provided by
Section 15 will not be made unless and until Executive executes and delivers
that agreement to Company within twenty-one (21) days after delivery of the
document (or such lesser time as Company’s chief legal counsel may specify in
the document) and all conditions to the effectiveness of that agreement and the
releases contemplated thereby have been satisfied (including without limitation
the expiration of any applicable revocation period without revoking
acceptance).
(h) Survival. The
expiration or termination of the Term shall not impair the rights or obligations
of any party hereto which shall have accrued hereunder prior to such expiration,
subject to the terms of any agreement containing a general release provided by
Executive.
16. Excess
Parachute Payment.
(a) Anything
in this Agreement or the Plan to the contrary notwithstanding, to the extent
that any payment, distribution or acceleration of vesting to or for the benefit
of Executive by the Company (within the meaning of Section 280G of the Code and
the regulations thereunder), whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise (the "Total
Payments") is or will be subject to the excise tax imposed under Section 4999 of
the Code (the "Excise Tax"), then the Total Payments shall be reduced (but not
below zero) to the Safe Harbor Amount (as defined below) if and to the extent
that a reduction in the Total Payments would result in Executive retaining a
larger amount, on an after-tax basis (taking into account federal, state and
local income and employment taxes and the Excise Tax), than if Executive
received the entire amount of such Total Payments in accordance with their
existing terms (taking into account federal, state, and local income and
employment taxes and the Excise
Tax). For purposes of this Agreement, the term “Safe Harbor
Amount” means the largest portion of the Total Payments that would result in no
portion of the Total Payments being subject to the Excise Tax. Unless
Executive shall have given prior written notice specifying a different order to
the Company to effectuate the foregoing, the Company shall reduce or eliminate
the Total Payments, by first reducing or eliminating the portion of the Total
Payments which are payable in cash and then by reducing or eliminating non-cash
payments in such order as Executive shall
13
determine;
provided that Executive may not so elect to the extent that, in the
determination of the Determining Party (as defined herein), such election would
cause Executive to be subject to the Excise Tax. Any notice given by
Executive pursuant to the preceding sentence shall take precedence over the
provisions of any other plan, arrangement or agreement governing Executive's
rights and entitlements to any benefits or compensation.
(b) The determination of
whether the Total Payments shall be reduced as provided in Section 16(a) and the
amount of such reduction shall be made at the Company's expense by an accounting
firm selected by Company from among the ten largest accounting firms in the
United States or by qualified independent tax counsel (the “Determining Party”);
provided that Executive
shall be given advance notice of the Determining Party selected by the Company,
and shall have the opportunity to reject to the selection, within two
business days of being notified of the selection, on the basis of that
Determining Party’s having a conflict of interest or other reasonable basis, in
which case the Company shall select an alternative auditing firm among the
ten largest accounting firms in the United States or alternative
independent qualified tax counsel, which shall become the Determining
Party. Such Determining Party shall provide its determination (the
"Determination"), together with detailed supporting calculations and
documentation to the Company and Executive within ten (10) days of the
termination of Executive’s employment or at such other time mutually agreed by
the Company and Executive. If the Determining Party determines that
no Excise Tax is payable by Executive with respect to the Total Payments, it
shall furnish Executive with an opinion reasonably acceptable to Executive that
no Excise Tax will be imposed with respect to any such payments and, absent
manifest error, such Determination shall be binding, final and conclusive upon
the Company and Executive. If the Determining Party determines that
an Excise Tax would be payable, the Company shall have the right to accept the
Determination as to the extent of the reduction, if any, pursuant to Section
16(a), or to have such Determination reviewed by another accounting firm
selected by the Company, at the Company’s expense. If the two
accounting firms do not agree, a third accounting firm shall be jointly chosen
by the Executive Party and the Company, in which case the determination of such
third accounting firm shall be binding, final and conclusive upon the Company
and Executive.
(c) If,
notwithstanding any reduction described in this Section 16, the IRS determines
that Executive is liable for the Excise Tax as a result of the receipt of any of
the Total Payments or otherwise, then Executive shall be obligated to pay back
to the Company, within thirty (30) days after a final IRS determination or in
the event that Executive challenges the final IRS determination, a final
judicial determination, a portion of the Total Payments equal to the “Repayment
Amount.” The Repayment Amount with respect to the payment of benefits
shall be the smallest such amount, if any, as shall be required to be paid to
the Company so that Executive’s net after-tax proceeds with respect to the Total
Payments (after taking into account the payment of the Excise Tax and all other
applicable taxes imposed on the Payment) shall be maximized. The
Repayment Amount shall be zero if a Repayment Amount of more than zero would not
result in Executive’s net after-tax proceeds with respect to the Total Payments
being maximized. If the Excise Tax is not eliminated pursuant to this
paragraph, the Executive shall pay the Excise Tax.
(d) Notwithstanding
any other provision of this Section 16, if (i) there is a reduction in the Total
Payments as described in this Section 16, (ii) the IRS later determines that
Executive is liable for the Excise Tax, the payment of which would result in the
maximization of Executive’s
14
net
after-tax proceeds (calculated as if Executive’s benefits had not previously
been reduced), and (iii) Executive pays the Excise Tax, then the Company
shall pay to Executive those payments or benefits which were reduced pursuant to
this Section 16 as soon as administratively possible after Executive pays the
Excise Tax so that Executive’s net after-tax proceeds with respect to the Total
Payments are maximized.
17. Competition/Confidentiality.
(a) Acknowledgments by
Executive. Executive acknowledges that (a) during the Term and
as a part of Executive’s employment, Executive has been and will be afforded
access to Confidential Information (as defined below); (b) public disclosure of
such Confidential Information could have an adverse effect on the Company and
its business; (c) because Executive possesses substantial technical expertise
and skill with respect to the Company’s business, Company desires to obtain
exclusive ownership of each invention by Executive while Executive is employed
by the Company, and Company will be at a substantial competitive disadvantage if
it fails to acquire exclusive ownership of each such invention by Executive; and
(d) the provisions of this Section 17 are reasonable and necessary to prevent
the improper use or disclosure of Confidential Information and to provide
Company with exclusive ownership of all inventions and works made or created by
Executive.
(b) Confidential
Information. (i) The Executive acknowledges that during the
Term Executive will have access to and may obtain, develop, or learn of
Confidential Information (as defined below) under and pursuant to a relationship
of trust and confidence. The Executive shall hold such Confidential
Information in strictest confidence and never at any time, during or
after Executive’s employment terminates, directly or indirectly use for
Executive’s own benefit or otherwise (except in connection with the performance
of any duties as an employee hereunder) any Confidential Information, or
divulge, reveal, disclose or communicate any Confidential Information to any
unauthorized person or entity in any manner whatsoever.
(ii) As
used in this Agreement, the term “Confidential
Information” shall include, but not be limited to, any of the following
information relating to Company learned by the Executive during the Term or as a
result of Executive’s employment with Company:
(A) information
regarding the Company’s business proposals, manner of the Company’s operations,
and methods of selling or pricing any products or services;
(B) the
identity of persons or entities actually conducting or considering conducting
business with the Company, and any information in any form relating to such
persons or entities and their relationship or dealings with the Company or its
affiliates;
(C) any
trade secret or confidential information of or concerning any business operation
or business relationship;
(D) computer
databases, software programs and information relating to the nature of the
hardware or software and how said hardware or software is used in combination or
alone;
15
(E) information
concerning Company personnel, confidential financial information, customer or
customer prospect information, information concerning subscribers, subscriber
and customer lists and data, methods and formulas for estimating costs and
setting prices, engineering design standards, testing procedures, research
results (such as marketing surveys, programming trials or product trials), cost
data (such as billing, equipment and programming cost projection models),
compensation information and models, business or marketing plans or strategies,
deal or business terms, budgets, vendor names, programming operations, product
names, information on proposed acquisitions or dispositions, actual performance
compared to budgeted performance, long-range plans, internal financial
information (including but not limited to financial and operating results for
certain offices, divisions, departments, and key market areas that are not
disclosed to the public in such form), results of internal analyses, computer
programs and programming information, techniques and designs, and trade
secrets;
(F) information
concerning the Company’s employees, officers, directors and shareholders;
and
(G) any
other trade secret or information of a confidential or proprietary
nature.
(iii) Executive
shall not make or use any notes or memoranda relating to any Confidential
Information except for uses reasonably expected by Executive to be for the
benefit of the Company, and will, at Company’s request, return each original and
every copy of any and all notes, memoranda, correspondence, diagrams or other
records, in written or other form, that Executive may at any time have within
his possession or control that contain any Confidential
Information.
(iv) Notwithstanding
the foregoing, Confidential Information shall not include information which has
come within the public domain through no fault of or action by Executive or
which has become rightfully available to Executive on a non-confidential basis
from any third party, the disclosure of which to Executive does not violate any
contractual or legal obligation such third party has to the Company or its
affiliates with respect to such Confidential Information. None of the
foregoing obligations and restrictions applies to any part of the Confidential
Information that Executive demonstrates was or became generally available to the
public other than as a result of a disclosure by Executive or by any other
person bound by a confidentiality obligation to the Company in respect of such
Confidential Information.
(v) Executive
will not remove from the Company’s premises (except to the extent such removal
is for purposes of the performance of Executive’s duties at home or while
traveling, or except as otherwise specifically authorized by Company) any
Company document, record, notebook, plan, model, component, device, or computer
software or code, whether embodied in a disk or in any other form (collectively,
the “Proprietary
Items”). Executive recognizes that, as between Company and
Executive, all of the Proprietary Items, whether or not developed by Executive,
are the exclusive property of the Company. Upon termination of
Executive’s employment by either party, or upon the request of Company during
the Term, Executive will return to Company all of the Proprietary Items in
Executive’s possession or subject to Executive’s control, including all
equipment (e.g., laptop
computers, cell phone, portable e-mail devices, etc.),
16
documents,
files and data, and Executive shall not retain any copies, abstracts, sketches,
or other physical embodiment of any such Proprietary Items.
18. Proprietary
Developments.
(a) Any
and all inventions, products, discoveries, improvements, processes, methods,
computer software programs, models, techniques, or formulae (collectively,
hereinafter referred to as “Developments”), made,
conceived, developed, or created by Executive (alone or in conjunction with
others, during regular work hours or otherwise) during Executive’s
employment, which may be directly or indirectly useful in, or relate to, the
business conducted or to be conducted by the Company will be promptly disclosed
by Executive to Company and shall be Company’s exclusive
property. The term “Developments” shall not be deemed to include
inventions, products, discoveries, improvements, processes, methods, computer
software programs, models, techniques, or formulae which were in the possession
of Executive prior to the Term. Executive hereby transfers and
assigns to Company all proprietary rights which Executive may have or acquire in
any Developments and Executive waives any other special right which the
Executive may have or accrue therein. Executive will execute any
documents and to take any actions that may be required, in the reasonable
determination of Company’s counsel, to effect and confirm such assignment,
transfer and waiver, to direct the issuance of patents, trademarks, or
copyrights to Company with respect to such Developments as are to be Company’s
exclusive property or to vest in Company title to such Developments; provided,
however, that the expense of securing any patent, trademark or copyright shall
be borne by Company. The parties agree that Developments shall constitute
Confidential Information.
(b) “Work Made for
Hire.” Any work performed by Executive during Executive’s
employment with Company shall be considered a “Work Made for Hire”
as defined in the U.S. Copyright laws, and shall be owned by and for the express
benefit of Company. In the event it should be established that such
work does not qualify as a Work Made for Hire, Executive agrees to and does
hereby assign to Company all of Executive’s right, title, and interest in such
work product including, but not limited to, all copyrights and other proprietary
rights.
19. Non-Competition
and Non-Interference.
(a) Acknowledgments by
Executive. Executive acknowledges and agrees that: (a) the
services to be performed by Executive under this Agreement are of a special,
unique, unusual, extraordinary, and intellectual character; (b) the Company
competes with other businesses that are or could be located in any part of the
United States; and (c) the provisions of this Section 19 are reasonable and
necessary to protect the Company’s business and lawful protectable interests,
and do not impair Executive’s ability to earn a living.
(b) Covenants of
Executive. For purposes of this Section 19, the term “Restricted Period”
shall mean the period commencing as of the date of this Agreement and
terminating on the second anniversary (or, in the case of Section 19(b)(i), the
first anniversary), of the date Executive’s employment terminated provided that the “Restricted
Period” also shall encompass any period of time from whichever anniversary date
is applicable until and ending on the last date Executive is to be paid any
payment under Section 15 hereof. In consideration of the
17
acknowledgments
by Executive, and in consideration of the compensation and benefits to be paid
or provided to Executive by Company, Executive covenants and agrees that during
the Restricted Period, the Executive will not, directly or indirectly, for
Executive’s own benefit or for the benefit of any other person or entity other
than the Company:
(i) in
the United States or any other country or territory where the Company then
conducts its business: engage in, operate, finance, control or be employed by a
“Competitive Business” (defined below); serve as an officer or director of a
Competitive Business (regardless of where Executive then lives or conducts such
activities); perform any work as an employee, consultant (other than as a member
of a professional consultancy, law firm, accounting firm or similar professional
enterprise that has been retained by the Competitive Business and where
Executive has no direct role in such professional consultancy and maintains the
confidentiality of all information acquired by Executive during his or her
employment with the Company), contractor, or in any other capacity with, a
Competitive Business; directly or indirectly invest or own any interest in a
Competitive Business (regardless of where Executive then lives or conducts such
activities); or directly or indirectly provide any services or advice to a any
business, person or entity who or which is engaged in a Competitive Business
(other than as a member of a professional consultancy, law firm, accounting firm
or similar professional enterprise that has been retained by the Competitive
Business and where Executive has no direct role in such professional consultancy
and maintains the confidentiality of all information acquired by Executive
during his or her employment with the Company). A “Competitive Business”
is any business, person or entity who or which, anywhere within that part of the
United States, or that part of any other country or territory, where the Company
conducts business; owns or operates a cable television system; provides direct
television or any satellite-based, telephone system-based, internet based or
wireless system for delivering television, music or other entertainment
programming (other than as an ancillary service, such as cellular telephone
providers); provides telephony services using any wired connection or fixed (as
opposed to mobile) wireless application; provides data or internet access
services; or offers, provides, markets or sells any service or product of a type
that is offered or marketed by or directly competitive with a service or product
offered or marketed by the Company at the time Executive’s employment
terminates; or who or which in any case is preparing or planning to do so. The
provisions of this Section 19 shall not be construed or applied (i) so as to
prohibit Executive from owning not more than five percent (5%) of any class of
securities that is publicly traded on any national or regional securities
exchange, as long as Executive’s investment is passive and Executive does not
lend or provide any services or advice to such business or otherwise violate the
terms of this Agreement in connection with such investment; or (ii) so
as to prohibit Executive from working as an employee in the cable
television business for a company/business that owns or operates cable
television franchises (by way of current example only, Time Warner, Cablevision,
Cox or Comcast), provided
that the company/business is not providing cable services in any
political subdivision/ geographic area where the Company has a franchise or
provides cable services (other than nominal overlaps of service areas) and the
company/business is otherwise not engaged in a Competitive Business, and
provided Executive does not otherwise violate the terms of this Agreement in
connection with that work;
(ii) contact,
solicit or provide any service to any person or entity that was a customer
franchisee, or prospective customer of the Company at any time during
Executive’s
18
employment
(a prospective customer being one to whom the Company had made a business
proposal within twelve (12) months prior to the time Executive’s employment
terminated); or directly solicit or encourage any customer, franchisee or
subscriber of the Company to purchase any service or product of a type offered
by or competitive with any product or service provided by the Company, or to
reduce the amount or level of business purchased by such customer, franchisee or
subscriber from the Company; or take away or procure for the benefit of any
competitor of the Company, any business of a type provided by or competitive
with a product or service offered by the Company; or
(iii) solicit
or recruit for employment, any person or persons who are employed by Company or
any of its subsidiaries or affiliates, or who were so employed at any time
within a period of six (6) months immediately prior to the date Executive’s
employment terminated, or otherwise interfere with the relationship between
any such person and the Company; nor will the Executive assist anyone else in
recruiting any such employee to work for another company or business or discuss
with any such person his or her leaving the employ of the Company or engaging in
a business activity in competition with the Company. This provision shall not
apply to secretarial, clerical, custodial or maintenance employees.
If
Executive violates any covenant contained in this Section 19, then the term of
the covenants in this Section shall be extended by the period of time Executive
was in violation of the same.
(c) Provisions Pertaining to the
Covenants. Executive recognizes that the existing business of
the Company extends to various locations and areas throughout the United States
and may extend hereafter to other countries and territories and agrees that the
scope of Section 19 shall extend to any part of the United States, and any other
country or territory, where the Company operates or conducts business, or has
concrete plans to do so at the time Executive’s employment
terminates. It is agreed that the Executive’s services hereunder are
special, unique, unusual and extraordinary giving them peculiar value, the loss
of which cannot be reasonably or adequately compensated for by damages, and in
the event of the Executive’s breach of this Section, Company shall be entitled
to equitable relief by way of injunction or otherwise in addition to the
cessation of payments and benefits hereunder. If any provision of
Sections 17, 18 or 19 of this Agreement is deemed to be unenforceable by a court
(whether because of the subject matter of the provision, the duration of a
restriction, the geographic or other scope of a restriction or otherwise), that
provision shall not be rendered void but the parties instead agree that the
court shall amend and alter such provision to such lesser degree, time, scope,
extent and/or territory as will grant Company the maximum restriction on
Executive’s activities permitted by applicable law in such circumstances.
Company’s failure to exercise its rights to enforce the provisions of this
Agreement shall not be affected by the existence or non existence of any other
similar agreement for anyone else employed by Company or by Company’s failure to
exercise any of its rights under any such agreement.
(d) Notices. In
order to preserve Company’s rights under this Agreement, Company is authorized
to advise any potential or future employer, any third party with whom Executive
may become employed or enter into any business or contractual relationship with,
and any third party whom Executive may contact for any such purpose, of the
existence of this Agreement and its terms, and Company shall not be
liable for doing so.
19
(e) Injunctive Relief and
Additional Remedy. Executive
acknowledges that the injury that would be suffered by Company as a result of a
breach of the provisions of this Agreement (including any provision of Sections
17, 18 and 19) would be irreparable and that an award of monetary damages to
Company for such a breach would be an inadequate remedy. Consequently,
Company will have the right, in addition to any other rights it may have, to
obtain injunctive relief to restrain any breach or threatened breach or
otherwise to specifically enforce any provision of this Agreement, and Company
will not be obligated to post bond or other security in seeking such
relief. Without limiting Company’s rights under this Section or any
other remedies of Company, if Executive breaches any of the provisions of
Sections 17, 18 or 19, Company will have the right to cease making any payments
otherwise due to Executive under this Agreement.
(f) Covenants of Sections
17, 18 and
19 are
Essential and Independent Covenants. The covenants by
Executive in Sections 17, 18 and 19 are essential elements of this Agreement,
and without Executive’s agreement to comply with such covenants, Company would
not have entered into this Agreement or employed Executive. Company
and Executive have independently consulted their respective counsel and have
been advised in all respects concerning the reasonableness and propriety of such
covenants, with specific regard to the nature of the business conducted by
Company. Executive’s covenants in Sections 17, 18 and 19 are
independent covenants and the existence of any claim by Executive against
Company, under this Agreement or otherwise, will not excuse Executive’s breach
of any covenant in Section 17, 18 or 19. If Executive’s employment hereunder is
terminated, this Agreement will continue in full force and effect as is
necessary or appropriate to enforce the covenants and agreements of Executive in
Sections 17, 18 and 19. The Company’s right to enforce the covenants
in Sections 17, 18 and 19 shall not be adversely affected or limited by the
Company’s failure to have an agreement with another employee with provisions at
least as restrictive as those contained in Sections 17, 18 or 19 , or by the
Company’s failure or inability to enforce (or agreement not to enforce) in full
the provisions of any other or similar agreement containing one or more
restrictions of the type specified in Sections 17, 18 and 19 of this
Agreement.
20 Executive’s
Representations And Further Agreements.
(a) Executive
represents, warrants and covenants to Company that:
(i) Neither the
execution and delivery of this Agreement by Executive nor the performance of any
of Executive’s duties hereunder in accordance with the Agreement will violate,
conflict with or result in the breach of any order, judgment, employment
contract, agreement not to compete or other agreement or arrangement to which
Executive is a party or is subject;
(ii) On or
prior to the date hereof, Executive has furnished to Company true and
complete copies of all judgments, orders, written employment contracts,
agreements not to compete, and other agreements or arrangements restricting
Executive’s employment or business pursuits, that have current application to
Executive;
(iii) Executive
is knowledgeable and sophisticated as to business matters, including the subject
matter of this Agreement, and that prior to assenting to the terms of this
20
Agreement,
or giving the representations and warranties herein, Executive has been given a
reasonable time to review it and has consulted with counsel of Executive’s
choice; and
(iv) Executive
has not provided, nor been requested by Company to provide, to Company, any
confidential or non public document or information of a former employer that
constitutes or contains any protected trade secret, and will not use any
protected trade secrets in connection with the Executive’s
employment.
(b) During
and subsequent to expiration of the Term, the Executive will cooperate with
Company, and furnish any and all complete and truthful information, testimony or
affidavits in connection with any matter that arose during the Executive’s
employment, that in any way relates to the business or operations of the Company
or any of its parent or subsidiary corporations or affiliates, or of which the
Executive may have any knowledge or involvement; and will consult with and
provide information to Company and its representatives concerning such
matters. Executive shall fully cooperate with Company in the
protection and enforcement of any intellectual property rights that relate to
services performed by Executive for Company, whether under the terms of this
Agreement or prior to the execution of this Agreement. This shall
include without limitation executing, acknowledging, and delivering to Company
all documents or papers that may be necessary to enable Company to publish or
protect such intellectual property rights. Subsequent to the Term,
the parties will make their best efforts to have such cooperation performed at
reasonable times and places and in a manner as not to unreasonably interfere
with any other employment in which Executive may then be
engaged. Nothing in this Agreement shall be construed or interpreted
as requiring the Executive to provide any testimony, sworn statement or
declaration that is not complete and truthful. If Company requires
the Executive to travel outside the metropolitan area in the United States where
the Executive then resides to provide any testimony or otherwise provide any
such assistance, then Company will reimburse the Executive for any reasonable,
ordinary and necessary travel and lodging expenses incurred by Executive to do
so provided the Executive submits all documentation required under Company’s
standard travel expense reimbursement policies and as otherwise may be required
to satisfy any requirements under applicable tax laws for Company to deduct
those expenses. Nothing in this Agreement shall be construed or interpreted as
requiring the Executive to provide any testimony or affidavit that is not
complete and truthful.
21. Mutual
Non-Disparagement. Neither
the Company nor Executive shall make any oral or written statement about the
other party which is intended or reasonably likely to disparage the other party,
or otherwise degrade the other party’s reputation in the business or legal
community or in the telecommunications industry.
22. Foreign
Corrupt Practices Act. Executive
agrees to comply in all material respects with the applicable provisions of the
U.S. Foreign Corrupt Practices Act of 1977 (“FCPA”), as amended,
which provides generally that: under no circumstances will foreign officials,
representatives, political parties or holders of public offices be offered,
promised or paid any money, remuneration, things of value, or provided any other
benefit, direct or indirect, in connection with obtaining or maintaining
contracts or orders hereunder. When any representative, employee,
agent, or other individual or organization associated with Executive is required
to perform any obligation related to or in connection with this Agreement, the
substance of this
21
section
shall be imposed upon such person and included in any agreement between
Executive and any such person. Failure by Executive to comply with
the provisions of the FCPA shall constitute a material breach of this Agreement
and shall entitle the Company to terminate Executive’s employment for
Cause.
23. Purchases
and Sales of the Company’s
Securities. Executive
has read and agrees to comply in all respects with the Company’s Policy
Regarding the Purchase and Sale of the Company’s Securities by Employees, as
such Policy may be amended from time to time. Specifically, and
without limitation, Executive agrees that Executive shall not purchase or sell
stock in the Company at any time (a) that Executive possesses material
non-public information about the Company or any of its businesses; and (b)
during any “Trading Blackout Period” as may be determined by the Company as set
forth in the Policy from time to time.
24. Indemnification. (a) If
Executive is made a party or is threatened to be made a party or is otherwise
involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter, a "proceeding"), by reason of the
fact that he or she is or was a director or an officer of the Corporation or is
or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to an employee benefit
plan (hereinafter, a "Covered Person"), whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee or agent
or in any other capacity while serving as a director, officer, employee or
agent, shall be indemnified and held harmless by the Corporation to the fullest
extent authorized by the Delaware General Corporation Law, as the same exists or
may hereafter be amended, against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such Covered Person in
connection therewith; provided, however, that,
except as provided in Section 24(c) hereof with respect to proceedings to
enforce rights to indemnification, the Corporation shall indemnify any such
Covered Person in connection with a proceeding (or part thereof) initiated by
such Covered Person only if such proceeding (or part thereof) was authorized by
the Board.
(b)
The Corporation shall pay the expenses (including attorneys' fees) incurred by
Executive in defending any such proceeding in advance of its final disposition
(hereinafter, an "advancement of expenses"), provided, however, that, if
the Delaware General Corporation Law so requires, an advancement of expenses
incurred by Executive in his or her capacity as such shall be made only upon
delivery to the Corporation of an undertaking (hereinafter, an "Undertaking"),
by or on behalf of such Executive, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter, a "Final Adjudication") that Executive was
not entitled to be indemnified for such expenses under this Section 24 or
otherwise. The rights to indemnification and to the advancement of
expenses conferred in Subsections 24(a) and (b) hereof shall be contract
rights and such rights shall continue even after Executive ceases to be employed
by the Company and shall inure to the benefit of Executive’s heirs, executors
and administrators.
(c)
If a claim under Section 24(a) or (b) hereof is not paid in full by the
Company within sixty (60) days after a written claim therefore has been
received by the Company,
22
except in
the case of a claim for an advancement of expenses, in which case the applicable
period shall be twenty (20) days, Executive may at any time thereafter
bring suit against the Company to recover the unpaid amount of the
claim. If Executive is successful in whole or in part in any such
suit, or in a suit brought by the Company to recover an advancement of expenses
pursuant to the terms of an Undertaking, Executive shall be entitled to be paid
also the expense of prosecuting or defending such suit. In
(i) any suit brought by Executive to enforce a right to indemnification
hereunder (but not in a suit brought by Executive to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) any suit
brought by the Company to recover an advancement of expenses pursuant to the
terms of an Undertaking, the Company shall be entitled to recover such expenses
upon a final adjudication that, Executive has not met the applicable standard
for indemnification set forth in the Delaware General Corporation
Law. To the fullest extent permitted by law, neither the failure of
the Company (including its disinterested directors, committee thereof,
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such suit that indemnification of Executive is
proper in the circumstances because the Executive has met the applicable
standard of conduct set forth in the Delaware General Corporation Law, nor an
actual determination by the Company (including its disinterested directors,
committee thereof, independent legal counsel or its stockholders) that Executive
has not met such applicable standard of conduct, shall create a presumption that
Executive has not met the applicable standard of conduct or, in the case of such
a suit brought by Executive, be a defense to such suit. In any suit
brought by Executive to enforce a right to indemnification or to an advancement
of expenses hereunder, or brought by the Company to recover an advancement of
expenses pursuant to the terms of an undertaking, the burden of proving that
Executive is not entitled to be indemnified, or to such advancement of expenses,
under this Section 24 or otherwise shall, to the extent permitted by law, be on
the Company.
(d)
The rights to indemnification and to the advancement of expenses conferred in
this Section 24 shall not be exclusive of any other right of indemnification
which Executive or any other person may have or hereafter acquire by any
statute, the Corporation's Certificate of Incorporation or Bylaws, agreement,
vote of stockholders or disinterested directors or otherwise.
(e)
The Company may maintain insurance, at its expense, to protect itself and any
director, officer, employee or agent of the Corporation or another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss, whether or not the Company would have the power to indemnify
such person against such expense, liability or loss under the Delaware General
Corporation Law.
25. Withholding.
Anything to the contrary notwithstanding, all payments required to be made by
Company hereunder to Executive or his estate or beneficiary shall be
subject to the withholding of such amounts, if any, relating to tax and other
payroll deductions as the Company may reasonably determine it should withhold
pursuant to applicable law or regulation.
26. Notices. Any
written notice required by this Agreement will be deemed provided and delivered
to the intended recipient when (a) delivered in person by hand; or (b) three
days after being sent via U.S. certified mail, return receipt requested; or (c)
the day after being sent via by
23
overnight
courier, in each case when such notice is properly addressed to the following
address and with all postage and similar fees having been paid in
advance:
|
|
If
to the Company:
|
Charter
Communications, Inc.
|
|
|
Attn.:
Human Resources
|
|
|
12405
Powerscourt Drive
|
|
| St. Louis, MO 63131 | ||
| If to Executive: | 12405 Powerscourt Drive | |
| St. Louis, MO 63131 | ||
Either
party may change the address to which notices, requests, demands and other
communications to such party shall be delivered personally or mailed by giving
written notice to the other party in the manner described above.
27. Binding
Effect. This
Agreement shall be for the benefit of and binding upon the parties hereto and
their respective heirs, personal representatives, legal representatives,
successors and, where applicable, assigns.
28. Entire
Agreement. As
of the Effective Date, the Employee and the Company hereby irrevocably agree
that the Old Employment Agreement is hereby terminated in its entirety, and
neither party thereto shall have any rights or obligations under the Old
Employment Agreement, including but not limited to, in the case of the Employee,
any right to any severance payment or benefit. This Agreement
constitutes the entire agreement between the listed parties with respect to the
subject matter described in this Agreement and supersedes all prior agreements,
understandings and arrangements, both oral and written, between the parties with
respect to such subject matter, except to the extent said agreements,
understandings and arrangements are referenced or referred to in this
Agreement. This Agreement may not be modified, amended, altered or
rescinded in any manner, except by written instrument signed by both of the
parties hereto; provided, however, that the waiver by either party of a breach
or compliance with any provision of this Agreement shall not operate nor be
construed as a waiver of any subsequent breach or compliance. Except to the
extent the terms hereof are explicitly and directly inconsistent with the
terms of the Plan, nothing herein shall be deemed to override or replace the
terms of the Plan, including but not limited to sections 6.4, 9.4 and 10.4
thereof.
29. Severability. In
case any one or more of the provisions of this Agreement shall be held by any
court of competent jurisdiction or any arbitrator selected in accordance with
the terms hereof to be illegal, invalid or unenforceable in any respect, such
provision shall have no force and effect, but such holding shall not affect the
legality, validity or enforceability of any other provision of this Agreement
provided that the provisions held illegal, invalid or unenforceable does not
reflect or manifest a fundamental benefit bargained for by a party
hereto.
30. Assignment. Subject
to the Executive’s right to terminate in the event of a Change of Control
hereunder, this Agreement can be assigned by the Company only to a company that
controls, is controlled by, or is under common control with the Company and
which assumes all of the Company’s obligations hereunder. The duties
and covenants of Executive under this
24
Agreement,
being personal, may not be assigned or delegated except that Executive may
assign payments due hereunder to a trust established for the benefit of
Executive’s family or to Executive’s estate or to any partnership or trust
entered into by Executive and/or Executive’s immediate family members (meaning,
Executive’s spouse and lineal descendants). This agreement shall be
binding in all respects on permissible assignees.
31. Notification. In
order to preserve the Company’s rights under this Agreement, the Company is
authorized to advise any third party with whom Executive may become employed or
enter into any business or contractual relationship with, or whom Executive may
contact for any such purpose, of the existence of this Agreement and its terms,
and the Company shall not be liable for doing so.
32. Choice of
Law/Jurisdiction.
This Agreement is deemed to be accepted and entered into in St. Louis County,
Missouri. Executive and the Company intend and hereby acknowledge that
jurisdiction over disputes with regard to this Agreement, and over all aspects
of the relationship between the parties hereto, shall be governed by the laws of
the State of Missouri without giving effect to its rules governing conflicts of
laws. Executive agrees that in any suit to enforce this Agreement, or
a to any dispute that arises between the Company and the Executive regarding or
relating to this Agreement and/or any aspect of Executive’s employment
relationship with Company, venue and jurisdiction are proper in the County of
St. Louis, and (if federal jurisdiction exists) the United States District Court
for the Eastern Division of Missouri in St. Louis, and Executive waives all
objections to jurisdiction and venue in any such forum and any defense that such
forum is not the most convenient forum.
33. Section
Headings. The
section headings contained in this Agreement are for reference purposes only and
shall not affect in any manner the meaning or interpretation of this
Agreement.
34. Counterparts. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed an original, but all of which taken together shall constitute one and the
same instrument.
25
IN WITNESS WHEREOF, the
parties have executed this Agreement as of the date and year first above
written.
Charter
Communications, Inc.
By: /s/ Lynne F.
Ramsey
Name: Lynne F.
Ramsey
Title:Senior Vice
President, Human Resources
EXECUTIVE
/s/ Eloise E.
Schmitz
Name: Eloise
E. Schmitz
Address: St.
Louis, MO
26
Exhibit
A
Grant
Summary
Eloise
Schmitz
|
Grant
Date
|
Grant
Type
|
Grant
Price
|
LTIP
Granted
|
LTIP
Canceled
|
LTIP
Exercised
|
LTIP
Outstanding
|
Outstanding
Exercisable
|
Expiration
Date
|
||||||||||||||||||
|
2/9/1999
|
NQ
|
20.00 | 40,000 | 40,000 | 0 | 0 | 0 |
2/25/2004
|
||||||||||||||||||
|
2/12/2001
|
NQ
|
23.09 | 20,000 | 20,000 | 0 | 0 | 0 |
2/25/2004
|
||||||||||||||||||
|
9/28/2001
|
NQ
|
11.99 | 20,000 | 20,000 | 0 | 0 | 0 |
2/25/2004
|
||||||||||||||||||
|
7/23/2002
|
NQ
|
2.85 | 40,000 | 0 | 0 | 40,000 | 40,000 |
7/23/2012
|
||||||||||||||||||
|
4/29/2003
|
NQ
|
1.60 | 35,000 | 0 | 26,250 | 8,750 | 8,750 |
4/29/2013
|
||||||||||||||||||
|
1/27/2004
|
PU
|
0.00 | 15,000 | 15,000 | 0 | 0 | 0 |
12/31/2006
|
||||||||||||||||||
|
1/27/2004
|
NQ
|
5.17 | 28,000 | 0 | 0 | 28,000 | 28,000 |
1/27/2014
|
||||||||||||||||||
|
2/25/2004
|
RES
|
0.00 | 10,000 | 0 | 10,000 | 0 | 0 |
2/25/2014
|
||||||||||||||||||
|
3/25/2005
|
PU
|
0.00 | 40,500 | 5,569 | 34,931 | 0 | 0 |
3/26/2008
|
||||||||||||||||||
|
3/25/2005
|
NQ
|
1.53 | 83,700 | 0 | 0 | 83,700 | 62,775 |
3/25/2015
|
||||||||||||||||||
|
3/10/2006
|
PU
|
0.00 | 72,585 | 0 | 0 | 72,585 | 0 |
3/10/2016
|
||||||||||||||||||
|
3/10/2006
|
PU
|
0.00 | 43,551 | 0 | 0 | 43,551 | 0 |
3/10/2016
|
||||||||||||||||||
|
3/10/2006
|
NQ
|
1.00 | 31,100 | 0 | 0 | 31,100 | 15,550 |
3/10/2016
|
||||||||||||||||||
|
8/29/2006
|
PU
|
0.00 | 100,000 | 0 | 0 | 100,000 | 0 |
8/29/2016
|
||||||||||||||||||
|
8/29/2006
|
PU
|
0.00 | 60,000 | 0 | 0 | 60,000 | 0 |
8/29/2016
|
||||||||||||||||||
|
8/29/2006
|
NQ
|
1.32 | 100,000 | 0 | 0 | 100,000 | 25,000 |
8/29/2016
|
||||||||||||||||||
|
3/9/2007
|
PU
|
0.00 | 72,585 | 0 | 0 | 72,585 | 0 |
3/9/2017
|
||||||||||||||||||
|
3/9/2007
|
PU
|
0.00 | 30,486 | 0 | 0 | 30,486 | 0 |
3/9/2017
|
||||||||||||||||||
|
3/9/2007
|
NQ
|
2.84 | 31,100 | 0 | 0 | 31,100 | 7,775 |
3/9/2017
|
||||||||||||||||||
|
8/1/2007
|
RES
|
0.00 | 92,500 | 0 | 0 | 92,500 | 0 |
8/1/2017
|
||||||||||||||||||
|
8/1/2007
|
PU
|
0.00 | 92,500 | 0 | 0 | 92,500 | 0 |
8/1/2017
|
||||||||||||||||||
|
8/1/2007
|
PU
|
0.00 | 38,850 | 0 | 0 | 38,850 | 0 |
8/1/2017
|
||||||||||||||||||
|
3/18/2008
|
RES
|
0.00 | 123,450 | 0 | 0 | 123,450 | 0 |
3/18/2018
|
||||||||||||||||||
27
|
3/18/2008
|
PU
|
0.00
|
145,230
|
0
|
0
|
145,230
|
0
|
3/18/2018
|
|
3/18/2008
|
PC
|
0.00
|
99,990
|
0
|
0
|
99,990
|
0
|
3/18/2018
|
|
7/1/2008
|
RES
|
0.00
|
92,593
|
0
|
0
|
92,593
|
0
|
7/1/2018
|
|
7/1/2008
|
PU
|
0.00
|
108,932
|
0
|
0
|
108,932
|
0
|
7/1/2018
|
|
7/1/2008
|
PC
|
0.00
|
100,000
|
0
|
0
|
100,000
|
0
|
7/1/2018
|
PU =
Performance
Units NQ
= Non-Qualified Stock Options
RES =
Restricted
Shares PC
= Performance Cash
28
Exhibit
B
Executive
Cash Award Plan
|
Eloise
Schmitz
|
||||||||||||||||||||
|
Assumptions
|
||||||||||||||||||||
|
Annual
contribution rate
|
20 | % | ||||||||||||||||||
|
Salary
multiple
|
100 | % | ||||||||||||||||||
|
Annual
salary increase
|
3.5 | % | ||||||||||||||||||
|
Actual 2005
|
Actual 2006
|
Actual 2007
|
Actual 2008
|
Estimate 2009*
|
||||||||||||||||
|
Base
Salary effective May 1st
|
$ | 260,000 | $ | 350,000 | $ | 365,575 | $ | 500,000 | $ | 543,000 | ||||||||||
|
Account
Activity
|
12/31/2005
|
12/31/2006
|
12/31/2007
|
12/31/2008
|
12/31/2009
|
|||||||||||||||
|
Initial
award/accumulating value
|
$ | 260,000 | $ | 260,000 | $ | 330,000 | $ | 201,558 | $ | 301,558 | ||||||||||
|
Annual
contribution
|
$ | 70,000 | $ | 73,115 | $ | 100,000 | $ | 108,600 | ||||||||||||
|
Subtotal
|
$ | 260,000 | $ | 330,000 | $ | 403,115 | $ | 301,558 | $ | 410,158 | ||||||||||
|
Payout
|
$ | (201,558 | ) | $ | (410,158 | ) | ||||||||||||||
|
Ending
value
|
$ | 260,000 | $ | 330,000 | $ | 201,558 | $ | 301,558 | $ | 0 | ||||||||||
|
Total
cash paid Year 3 + Year 5
|
$ | 611,715 | ||||||||||||||||||
|
* Applies
3.5% salary increase assumption to $525,000 base salary effective
7/1/08
|
||||||||||||||||||||
|
See
agreement in file for the 2006 contribution - salary changed to
$350,000
|
||||||||||||||||||||
29
Exhibit
10.5
AMENDMENT
TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This
Amendment to the Amended and Restated Employment Agreement is entered into as of
July 1, 2008 (the “Effective Date”) by and between CHARTER COMMUNICATIONS, INC.,
a Delaware corporation (the “Company”), and Robert A. Quigley, an
adult resident of Illinois (the “Executive”).
WHEREAS,
the Company and the Executive entered into a Amended and Restated Employment
Agreement effective August 1, 2007 (the “Agreement”);
WHEREAS,
the Company and the Executive desire to amend the Agreement as set forth
herein;
NOW, THEREFORE, intending to be legally
bound and in consideration of the covenants and promises set forth herein, the
receipt and sufficiency of which is hereby acknowledged, the Company and the
Executive agree that the Agreement shall be amended as follows:
1. Section
2 of the Agreement is hereby amended in its entirety to read as follows: "The
Company hereby employs the Executive, and the Executive hereby accepts his
employment, under the terms and conditions hereof, for the period (the 'Term')
beginning on the Effective Date hereof and terminating on December 31,
2008."
2. Section
3 of the Agreement is hereby amended in its entirety to read as follows:
"Executive shall serve as an advisor reporting to the Chief Executive Officer,
with such responsibilities, duties and authority as are assigned to him by the
Chief Executive Officer or his designee."
3. Section
5 of the Agreement, is hereby amended in its entirety to read as
follows: "Executive shall receive a total base salary of $60,000 for
the Term of the Agreement all payable during the Term, less standard deductions,
paid in accordance with the Company's general payroll practices for executives,
but no less frequently than monthly."
4. Section
6 of the Agreement is hereby amended in its entirety to read as follows: "For
2008, the Executive shall be eligible to receive a bonus in an amount equal to
75% of Executive's previous Target Bonus of up to 60% of his Annual Base Salary
prior to July 1, 2008 of $470,000, such total potential bonus amount being
$211,500 (the "2008 Bonus"); provided that, $100,000 of the 2008 Bonus shall be
payable to the Executive on the Effective Date hereof, and is not refundable to
the Company. The remainder of the 2008 Bonus, if any, shall be paid
pursuant to, and as set forth in, the terms of the Executive Bonus Plan as such
Plan may be amended from time to time, and as shall be determined by the
Committee in its sole discretion, with such remainder of the 2008 Bonus being
paid on or before February 28, 2009, or
as soon as is
administratively practicable thereafter (e.g., after the public disclosure of
the Company’s financial results for the prior year on SEC Form 10-K or on such
replacement form as the SEC shall determine)."
5. Sections 7, 8 and 9 and
14, and any other sections as applicable, are amended so that all awards granted
under the 2001 Stock Incentive Plan will vest through December 31,
2008.
6. Notwithstanding any other
provision in the Agreement, Executive shall receive a lump sum payment, payable
on the Effective Date hereof, equal to the amount for Executive to receive under
COBRA the paid coverage for health, dental and vision benefits then being
provided for Executive at the Company’s cost; provided that, after December 31,
2008, the Executive remains eligible for COBRA, the Company will pay no further
amounts for such cost of COBRA coverage.
The Company and the Executive agree
that all other provisions of the Agreement shall remain in full force
and effect until expiration or earlier termination upon the terms
therein.
IN
WITNESS WHEREOF, the Company and the Executive have each caused this Amendment
to Restated and Amended Employment Agreement to be duly executed on its behalf
as of the date first above written.
CHARTER
COMMUNICATIONS, INC.
By: /s/ Lynne F.
Ramsey
Name:
Lynne F. Ramsey
Title:
SVP, Human Resources
EXECUTIVE
/s/ Robert A.
Quigley
Name: Robert
A. Quigley
Exhibit 12.1
|
CHARTER
COMMUNICATIONS, INC AND SUBSIDIARIES
|
||||||||||||||||
|
RATIO
OF EARNINGS TO FIXED CHARGES CALCULATION
|
||||||||||||||||
|
(In
millions)
|
||||||||||||||||
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
Earnings
|
||||||||||||||||
|
Loss
from Operations before Income Taxes and Minority Interest
|
$ | (215 | ) | $ | (300 | ) | $ | (513 | ) | $ | (610 | ) | ||||
|
Fixed
Charges
|
476 | 464 | 943 | 930 | ||||||||||||
|
Total
Earnings
|
$ | 261 | $ | 164 | $ | 430 | $ | 320 | ||||||||
|
Fixed
Charges
|
||||||||||||||||
|
Interest
Expense
|
$ | 465 | $ | 454 | $ | 923 | $ | 910 | ||||||||
|
Amortization
of Debt Costs
|
9 | 8 | 16 | 16 | ||||||||||||
|
Interest
Element of Rentals
|
2 | 2 | 4 | 4 | ||||||||||||
|
Total
Fixed Charges
|
$ | 476 | $ | 464 | $ | 943 | $ | 930 | ||||||||
|
Ratio
of Earnings to Fixed Charges (1)
|
- | - | - | - | ||||||||||||
|
(1) Earnings
for the three months ended June 30, 2008 and 2007 were insufficient to
cover fixed charges by $215 million and $300 million,
respectively.
|
||||||||||||||||
|
Earnings
for the six months ended June 30, 2008 and 2007 were insufficient to cover
fixed charges by $513 million and $610 million,
respectively.
|
||||||||||||||||
|
As
a result of such deficiencies, the ratios are not presented
above.
|
||||||||||||||||
Exhibit
31.1
I, Neil
Smit, certify that:
|
1.
|
I
have reviewed this Quarterly Report on Form 10-Q of Charter
Communications, Inc.;
|
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
|
4.
|
The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and
have:
|
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
||
|
(b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
||
|
(c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
|
||
|
(d)
|
Disclosed
in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting.
|
|
5.
|
The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
||
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
Date:
August 5, 2008
/s/ Neil
Smit
Neil
Smit
President
and Chief Executive Officer
Exhibit
31.2
I, Eloise
E. Schmitz, certify that:
|
1.
|
I
have reviewed this Quarterly Report on Form 10-Q of Charter
Communications, Inc.;
|
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
|
4.
|
The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and
have:
|
|
(a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
||
|
(b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
||
|
(c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
|
||
|
(d)
|
Disclosed
in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting.
|
|
5.
|
The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
|
(a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
||
|
(b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
Date:
August 5, 2008
/s/ Eloise E.
Schmitz
Eloise E.
Schmitz
Chief
Financial Officer
(Principal
Financial Officer)
Exhibit
32.1
CERTIFICATION
OF CHIEF EXECUTIVE
OFFICER
REGARDING PERIODIC REPORT CONTAINING
FINANCIAL
STATEMENTS
I, Neil
Smit, the President and Chief Executive Officer of Charter Communications, Inc.
(the "Company") in compliance with 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, the
Company's Quarterly Report on Form 10-Q for the period ended June 30, 2008 (the
"Report") filed with the Securities and Exchange Commission:
|
·
|
fully
complies with the requirements of Section 13(a) of the Securities Exchange
Act of 1934; and
|
|
·
|
the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
/s/ Neil
Smit
Neil
Smit
President
and Chief Executive Officer
August 5,
2008
Exhibit
32.2
CERTIFICATION
OF CHIEF FINANCIAL
OFFICER
REGARDING PERIODIC REPORT CONTAINING
FINANCIAL
STATEMENTS
I, Eloise
E. Schmitz, the Chief Financial Officer of Charter Communications, Inc. (the
"Company") in compliance with 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify that, the
Company's Quarterly Report on Form 10-Q for the period ended June 30, 2008 (the
"Report") filed with the Securities and Exchange Commission:
|
·
|
fully
complies with the requirements of Section 13(a) of the Securities Exchange
Act of 1934; and
|
|
·
|
the
information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
|
/s/ Eloise E.
Schmitz
Eloise E.
Schmitz
Chief
Financial Officer
(Principal
Financial Officer)
August 5,
2008