Charter 2004 Annual Report Download - page 94

CHARTER COMMUNICATIONS, INC. 2004 FORM 10-K
(based on number of membership interests outstanding) of
Vulcan Ventures Channel Access Agreement profits or losses of CC VIII. In the event of a liquidation of
Vulcan Ventures, an entity controlled by Mr. Allen, Charter, CC VIII, Mr. Allen would be entitled to a priority distribution
Charter Investment and Charter Holdco are parties to an with respect to the 2% priority return (which will continue to
agreement dated September 21, 1999 granting to Vulcan accrete). Any remaining distributions in liquidation would be
Ventures the right to use up to eight of our digital cable distributed to CC V Holdings, LLC and Mr. Allen in proportion
channels as partial consideration for a prior capital contribution to CC V Holdings, LLC’s capital account and Mr. Allen’s capital
of $1.325 billion. Specifically, at Vulcan Ventures’ request, we account (which will equal the initial capital account of the
will provide Vulcan Ventures with exclusive rights for carriage Comcast sellers of approximately $630 million, increased or
of up to eight digital cable television programming services or decreased by Mr. Allen’s pro rata share of CC VIII’s profits or
channels on each of the digital cable systems with local and to losses (as computed for capital account purposes) after June 6,
the extent available, national control of the digital product 2003). The limited liability company agreement of CC VIII does
owned, operated, controlled or managed by Charter or its not provide for a mandatory redemption of the CC VIII interest.
subsidiaries now or in the future of 550 megahertz or more. If An issue has arisen as to whether the documentation for
the system offers digital services but has less than 550 the Bresnan transaction was correct and complete with regard
megahertz of capacity, then the programming services will be to the ultimate ownership of the CC VIII interest following
equitably reduced. Upon request of Vulcan Ventures, we will consummation of the Comcast put right. Specifically, under the
attempt to reach a comprehensive programming agreement terms of the Bresnan transaction documents that were entered
pursuant to which it will pay the programmer, if possible, a fee into in June 1999, the Comcast sellers originally would have
per digital video customer. If such fee arrangement is not received, after adjustments, 24,273,943 Charter Holdco member-
achieved, then we and the programmer shall enter into a ship units, but due to an FCC regulatory issue raised by the
standard programming agreement. The initial term of the Comcast sellers shortly before closing, the Bresnan transaction
channel access agreement was 10 years, and the term extends was modified to provide that the Comcast sellers instead would
by one additional year (such that the remaining term continues receive the preferred equity interests in CC VIII represented by
to be 10 years) on each anniversary date of the agreement the CC VIII interest. As part of the last-minute changes to the
unless either party provides the other with notice to the Bresnan transaction documents, a draft amended version of the
contrary at least 60 days prior to such anniversary date. To date, Charter Holdco limited liability company agreement was pre-
Vulcan Ventures has not requested to use any of these channels. pared, and contract provisions were drafted for that agreement
However, in the future it is possible that Vulcan Ventures could that would have required an automatic exchange of the CC VIII
require us to carry programming that is less profitable to us than interest for 24,273,943 Charter Holdco membership units if the
the programming that we would otherwise carry and our results Comcast sellers exercised the Comcast put right and sold the
would suffer accordingly. CC VIII interest to Mr. Allen or his affiliates. However, the
Equity Put Rights provisions that would have required this automatic exchange did
CC VIII. As part of the acquisition of the cable systems owned not appear in the final version of the Charter Holdco limited
by Bresnan Communications Company Limited Partnership in liability company agreement that was delivered and executed at
February 2000, CC VIII, Charter’s indirect limited liability the closing of the Bresnan transaction. The law firm that
company subsidiary, issued, after adjustments, 24,273,943 prepared the documents for the Bresnan transaction brought
Class A preferred membership units (collectively, the ‘‘CC VIII this matter to the attention of Charter and representatives of
interest’’) with a value and an initial capital account of Mr. Allen in 2002.
approximately $630 million to certain sellers affiliated with Thereafter, the board of directors of Charter formed a
AT&T Broadband, subsequently owned by Comcast Corpora- Special Committee (currently comprised of Messrs. Merritt,
tion (the ‘‘Comcast sellers’’). While held by the Comcast sellers, Tory and Wangberg) to investigate the matter and take any
the CC VIII interest was entitled to a 2% priority return on its other appropriate action on behalf of Charter with respect to
initial capital account and such priority return was entitled to this matter. After conducting an investigation of the relevant
preferential distributions from available cash and upon liquida- facts and circumstances, the Special Committee determined that
tion of CC VIII. While held by the Comcast sellers, the CC VIII a ‘‘scrivener’s error’’ had occurred in February 2000 in connec-
interest generally did not share in the profits and losses of CC tion with the preparation of the last-minute revisions to the
VIII. Mr. Allen granted the Comcast sellers the right to sell to Bresnan transaction documents and that, as a result, Charter
him the CC VIII interest for approximately $630 million plus should seek the reformation of the Charter Holdco limited
4.5% interest annually from February 2000 (the ‘‘Comcast put liability company agreement, or alternative relief, in order to
right’’). In April 2002, the Comcast sellers exercised the Comcast restore and ensure the obligation that the CC VIII interest be
put right in full, and this transaction was consummated on automatically exchanged for Charter Holdco units. The Special
June 6, 2003. Accordingly, Mr. Allen has become the holder of Committee further determined that, as part of such contract
the CC VIII interest, indirectly through an affiliate. Conse- reformation or alternative relief, Mr. Allen should be required to
quently, subject to the matters referenced in the next paragraph, contribute the CC VIII interest to Charter Holdco in exchange
Mr. Allen generally thereafter will be allocated his pro rata share for 24,273,943 Charter Holdco membership units. The Special
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