Charter 2004 Annual Report Download - page 143

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2004 FORM 10-K
Notes to Consolidated Financial Statements (continued)
2003 and 2002, Charter paid Digeo Interactive $3 million, CC VIII, Mr. Allen would be entitled to a priority distribution
$4 million and $3 million, respectively, for customized develop- with respect to the 2% priority return (which will continue to
ment of i-channels and an interactive ‘‘toolkit’’ to enable Charter accrete). Any remaining distributions in liquidation would be
to develop interactive local content. distributed to CC V Holdings, LLC and Mr. Allen in proportion
On January 10, 2003, the Company signed an agreement to to CC V Holdings, LLC’s capital account and Mr. Allen’s capital
carry two around-the-clock, high-definition networks, HDNet account (which will equal the initial capital account of the
and HDNet Movies. HDNet Movies delivers a commercial-free Comcast sellers of approximately $630 million, increased or
schedule of full-length feature films converted from 35mm to decreased by Mr. Allen’s pro rata share of CC VIII’s profits or
high-definition, including titles from an extensive library of losses (as computed for capital account purposes) after June 6,
Warner Bros. films. HDNet Movies will feature a mix of 2003). The limited liability company agreement of CC VIII does
theatrical releases, made-for-TV movies, independent films and not provide for a mandatory redemption of the CC VIII interest.
shorts. The HDNet channel features a variety of HDTV An issue has arisen as to whether the documentation for
programming, including live sports, sitcoms, dramas, action the Bresnan transaction was correct and complete with regard
series, documentaries, travel programs, music concerts and to the ultimate ownership of the CC VIII interest following
shows, special events, and news features including HDNet consummation of the Comcast put right. Specifically, under the
World Report. HDNet also offers a selection of classic and terms of the Bresnan transaction documents that were entered
recent television series. The Company paid HDNet and HDNet into in June 1999, the Comcast sellers originally would have
Movies approximately $0.6 million in 2004. The Company received, after adjustments, 24,273,943 Charter Holdco member-
believes that entities controlled by Mr. Cuban owned approxi- ship units, but due to an FCC regulatory issue raised by the
mately 81% of HDNet as of December 31, 2004. As of Comcast sellers shortly before closing, the Bresnan transaction
December 31, 2004, the Company believes that Mark Cuban, was modified to provide that the Comcast sellers instead would
co-founder and president of HDNet, owned approximately 6.2% receive the preferred equity interests in CC VIII represented by
of the total common equity in Charter based on a Schedule 13G the CC VIII interest. As part of the last-minute changes to the
filed with the SEC on May 21, 2003. Bresnan transaction documents, a draft amended version of the
Certain related parties, including members of the board of Charter Holdco limited liability company agreement was pre-
directors and officers, hold interests in the Company’s senior pared, and contract provisions were drafted for that agreement
convertible debt and senior notes and discount notes of the that would have required an automatic exchange of the CC VIII
Company’s subsidiary of approximately $59.6 million of face interest for 24,273,943 Charter Holdco membership units if the
value at December 31, 2004. Comcast sellers exercised the Comcast put right and sold the
As part of the acquisition of the cable systems owned by CC VIII interest to Mr. Allen or his affiliates. However, the
Bresnan Communications Company Limited Partnership in provisions that would have required this automatic exchange did
February 2000, CC VIII, LLC, Charter’s indirect limited liability not appear in the final version of the Charter Holdco limited
company subsidiary, issued, after adjustments, 24,273,943 liability company agreement that was delivered and executed at
Class A preferred membership units (collectively, the ‘‘CC VIII the closing of the Bresnan transaction. The law firm that
interest’’) with a value and an initial capital account of prepared the documents for the Bresnan transaction brought
approximately $630 million to certain sellers affiliated with this matter to the attention of Charter and representatives of
AT&T Broadband, subsequently owned by Comcast Corpora- Mr. Allen in 2002.
tion (the ‘‘Comcast sellers’’). While held by the Comcast sellers, Thereafter, the board of directors of Charter formed a
the CC VIII interest was entitled to a 2% priority return on its Special Committee (currently comprised of Messrs. Merritt,
initial capital account and such priority return was entitled to Tory and Wangberg) to investigate the matter and take any
preferential distributions from available cash and upon liquida- other appropriate action on behalf of Charter with respect to
tion of CC VIII. While held by the Comcast sellers, the CC VIII this matter. After conducting an investigation of the relevant
interest generally did not share in the profits and losses of CC facts and circumstances, the Special Committee determined that
VIII. Mr. Allen granted the Comcast sellers the right to sell to a ‘‘scrivener’s error’’ had occurred in February 2000 in connec-
him the CC VIII interest for approximately $630 million plus tion with the preparation of the last-minute revisions to the
4.5% interest annually from February 2000 (the ‘‘Comcast put Bresnan transaction documents and that, as a result, Charter
right’’). In April 2002, the Comcast sellers exercised the Comcast should seek the reformation of the Charter Holdco limited
put right in full, and this transaction was consummated on liability company agreement, or alternative relief, in order to
June 6, 2003. Accordingly, Mr. Allen has become the holder of restore and ensure the obligation that the CC VIII interest be
the CC VIII interest, indirectly through an affiliate. Conse- automatically exchanged for Charter Holdco units. The Special
quently, subject to the matters referenced in the next paragraph, Committee further determined that, as part of such contract
Mr. Allen generally thereafter will be allocated his pro rata share reformation or alternative relief, Mr. Allen should be required to
(based on number of membership interests outstanding) of contribute the CC VIII interest to Charter Holdco in exchange
profits or losses of CC VIII. In the event of a liquidation of for 24,273,943 Charter Holdco membership units. The Special
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