Charter 2004 Annual Report Download - page 142

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CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2004 FORM 10-K
Notes to Consolidated Financial Statements (continued)
pay, (b) releases Charter Holdco from any claims related to the DBroadband Holdings, LLC, Vulcan Ventures has contributed
failure to achieve distribution benchmarks under the carriage approximately $56 million on Charter Ventures’ behalf.
agreement, (c) requires Oxygen to make payment on outstand- On June 30, 2003, Charter Holdco entered into an
ing receivables for marketing support fees due to the Company agreement with Motorola, Inc. for the purchase of 100,000
under the affiliation agreement; and (d) requires that Oxygen digital video recorder (‘‘DVR’’) units. The software for these
provide its programming content to the Company on economic DVR units is being supplied by Digeo Interactive, LLC under a
terms no less favorable than Oxygen provides to any other cable license agreement entered into in April 2004. Under the license
or satellite operator having fewer subscribers than the Company. agreement Digeo Interactive granted to Charter Holdco the
The renewal of the carriage agreement (a) extends the period right to use Digeo’s proprietary software for the number of
that the Company will carry Oxygen programming to its DVR units that Charter deploys from a maximum of 10
customers through January 31, 2008, and (b) requires license fees headends through year-end 2004. This maximum number of
to be paid based on customers receiving Oxygen programming, headends was increased from 10 to 15 pursuant to a letter
rather than for specific customer benchmarks. agreement executed on June 11, 2004 and the date for entering
In August 2004, Charter Holdco and Oxygen also amended into license agreements for units deployed was extended to
the equity issuance agreement to provide for the issuance of June 30, 2005. The number of headends was increased again
1 million shares of Oxygen Preferred Stock with a liquidation from 15 to 20 pursuant to a letter agreement dated August 4,
preference of $33.10 per share plus accrued dividends to Charter 2004, from 20 to 30 pursuant to a letter agreement dated
Holdco on February 1, 2005 in place of the $34 million of September 28, 2004 and from 30 to 50 headends by a letter
unregistered shares of Oxygen Media common stock. Oxygen agreement in February 2005. The license granted for each unit
Media will deliver these shares in March 2005. The preferred deployed under the agreement is valid for five years. In addition,
stock is convertible into common stock after December 31, 2007 Charter will pay certain other fees including a per-headend
at a conversion ratio, the numerator of which is the liquidation license fee and maintenance fees. Maximum license and mainte-
preference and the denominator which is the fair market value nance fees during the term of the agreement are expected to be
per share of Oxygen Media common stock on the conversion approximately $7 million. The agreement provides that Charter
date. is entitled to receive contract terms, considered on the whole,
and license fees, considered apart from other contract terms, no
Digeo, Inc. In March 2001, Charter Ventures and Vulcan less favorable than those accorded to any other Digeo customer.
Ventures Incorporated formed DBroadband Holdings, LLC for Charter paid $474,400 in license and maintenance fees in 2004.
the sole purpose of purchasing equity interests in Digeo. In In April 2004, the Company launched DVR service (using
connection with the execution of the broadband carriage units containing the Digeo software) in its Rochester, Minnesota
agreement, DBroadband Holdings, LLC purchased an equity market using a broadband media center that is an integrated set-
interest in Digeo funded by contributions from Vulcan Ventures top terminal with a cable converter, DVR hard drive and
Incorporated. The equity interest is subject to a priority return connectivity to other consumer electronics devices (such as
of capital to Vulcan Ventures up to the amount contributed by stereos, MP3 players, and digital cameras).
Vulcan Ventures on Charter Ventures’ behalf. After Vulcan In May 2004, Charter Holdco entered into a binding term
Ventures recovers its amount contributed and any cumulative sheet with Digeo Interactive for the development, testing and
loss allocations, Charter Ventures has a 100% profit interest in purchase of 70,000 Digeo PowerKey DVR units. The term sheet
DBroadband Holdings, LLC. Charter Ventures is not required to provided that the parties would proceed in good faith to
make any capital contributions, including capital calls, and may negotiate, prior to year-end 2004, definitive agreements for the
require Vulcan Ventures, through January 24, 2004, to make development, testing and purchase of the DVR units and that
certain additional contributions through DBroadband Holdings, the parties would enter into a license agreement for Digeo’s
LLC to acquire additional equity in Digeo as necessary to proprietary software on terms substantially similar to the terms
maintain Charter Ventures’ pro rata interest in Digeo in the of the license agreement described above. In November 2004,
event of certain future Digeo equity financings by the founders Charter Holdco and Digeo Interactive executed the license
of Digeo. These additional equity interests are also subject to a agreement and in December 2004, the parties executed the
priority return of capital to Vulcan Ventures up to amounts purchase agreement, each on terms substantially similar to the
contributed by Vulcan Ventures on Charter Ventures’ behalf. binding term sheet. Product development and testing is continu-
DBroadband Holdings, LLC is therefore not included in the ing. Total purchase price and license and maintenance fees
Company’s consolidated financial statements. Pursuant to an during the term of the definitive agreements are expected to be
amended version of this arrangement, in 2003, Vulcan Ventures approximately $41 million. The definitive agreements are termi-
contributed a total of $29 million to Digeo, $7 million of which nable at no penalty to Charter in certain circumstances.
was contributed on Charter Ventures’ behalf, subject to Vulcan A wholly owned subsidiary of Digeo, Digeo Interactive,
Ventures’ aforementioned priority return. Since the formation of provides interactive channel (i-channel) service to Charter on a
month-to-month basis. In the years ended December 31, 2004,
F-34