Charter 2005 Annual Report Download - page 104

CHARTER COMMUNICATIONS, INC. 2005 FORM 10-K
settle the dispute, and execute certain permanent and irrevocable Charter’s outstanding preferred stock. In 2005, Charter Holdco
releases pursuant to the Settlement Agreement and Mutual paid to Charter $64 million related to interest on the mirror
Release agreement dated October 31, 2005 (the ‘‘Settlement’’). notes. In connection with our November 2004 sale of the
Pursuant to the Settlement, CII has retained 30% of its CC VIII $862.5 million principal amount of 5.875% convertible senior
interest (the ‘‘Remaining Interests’’). The Remaining Interests are notes due 2009, Charter Holdco issued to us mirror notes in
subject to certain drag along, tag along and transfer restrictions identical principal amount in exchange for the proceeds from
as detailed in the revised CC VIII Limited Liability Company our offering. Charter Holdco then purchased and pledged
Agreement. CII transferred the other 70% of the CC VIII certain U.S. government securities to us as security for the
interest directly and indirectly, through Charter Holdco, to a mirror notes (which were in turn repledged by us to the trustee
newly formed entity, CCHC (a direct subsidiary of Charter for the benefit of holders of our 5.875% convertible senior notes
Holdco and the direct parent of Charter Holdings). Of that and which we expect to use to fund the first six interest
other 70% of the CC VIII preferred interests, 7.4% has been payments on the notes), and agreed to lend common units to
transferred by CII to CCHC for a subordinated exchangeable us, the terms of which will, to the extent practicable, mirror the
note with an initial accreted value of $48 million, accreting at terms of the shares. Charter Holdco also redeemed the
14%, compounded quarterly, with a 15-year maturity (the remaining $588 million principal amount of the mirror notes in
‘‘CCHC note’’). The remaining 62.6% has been transferred by respect of our 5.75% convertible senior notes due 2005
CII to Charter Holdco, in accordance with the terms of the concurrently with our December 23, 2004 redemption of our
settlement for no additional monetary consideration. Charter 5.75% convertible senior notes. In addition, in December 2004,
Holdco contributed the 62.6% interest to CCHC. Charter Holdco entered into a share lending agreement with
As part of the Settlement, CC VIII issued approximately Charter in which it agreed to lend common units to Charter
49 million additional Class B units to CC V in consideration for that would mirror the anticipated loan of Class A common
prior capital contributions to CC VIII by CC V, with respect to shares by Charter to Citigroup Global Markets pursuant to a
transactions that were unrelated to the dispute in connection share lending agreement. The members of Charter Holdco
with CII’s membership units in CC VIII. As a result, Mr. Allen’s (including the entities controlled by Mr. Allen) also at that time
pro rata share of the profits and losses of CC VIII attributable to entered into a letter agreement providing, among other things,
the Remaining Interests is approximately 5.6%. that for purposes of the allocation provisions of the Limited
The CCHC note is exchangeable, at CII’s option, at any Liability Company Agreement of Charter Holdco, the mirror
time, for Charter Holdco Class A Common units at a rate equal units be treated as disregarded and not outstanding until such
to the then accreted value, divided by $2.00 (the ‘‘Exchange time (and except to the extent) that, under Charter’s share
Rate’’). Customary anti-dilution protections have been provided lending agreement, Charter treats the loaned shares in a manner
that could cause future changes to the Exchange Rate. Addition- that assumes they will neither be returned by the borrower nor
ally, the Charter Holdco Class A Common units received will otherwise be acquired by Charter in lieu of such a return. In
be exchangeable by the holder into Charter common stock in 2005, Charter issued 94.9 million shares of Class A common
accordance with existing agreements between CII, Charter and stock and the corresponding issuance of an equal number of
certain other parties signatory thereto. Beginning February 28, mirror membership units by Charter Holdco to Charter pursu-
2009, if the closing price of Charter common stock is at or ant to the share lending agreement. In February 2006, an
above the Exchange Rate for a certain period of time as additional 22.0 million shares and corresponding units were
specified in the Exchange Agreement, Charter Holdco may issued.
require the exchange of the CCHC note for Charter Holdco Allocation of Business Opportunities with Mr. Allen
Class A Common units at the Exchange Rate. As described under ‘‘— Third Party Business Relationships in
CCHC has the right to redeem the CCHC note under which Mr. Allen has or had an Interest’’ in this section,
certain circumstances, for cash in an amount equal to the then Mr. Allen and a number of his affiliates have interests in various
accreted value, such amount, if redeemed prior to February 28, entities that provide services or programming to our subsidiaries.
2009, would also include a make whole up to the accreted value Given the diverse nature of Mr. Allen’s investment activities and
through February 28, 2009. CCHC must redeem the CCHC interests, and to avoid the possibility of future disputes as to
note at its maturity for cash in an amount equal to the initial potential business, Charter and Charter Holdco, under the terms
stated value plus the accreted return through maturity. of their respective organizational documents, may not, and may
The Board of Directors has determined that the transferred not allow their subsidiaries, to engage in any business transac-
CC VIII interests remain at CCHC. tion outside the cable transmission business except for the
Mirror Securities Digeo, Inc. joint venture; a joint venture to develop a digital
Charter is a holding company and its principal assets are its video recorder set-top terminal; an existing investment in Cable
equity interest in Charter Holdco and certain mirror notes Sports Southeast, LLC, a provider of regional sports program-
payable by Charter Holdco to Charter and mirror preferred ming; as an owner of the business of Interactive Broadcaster
units held by Charter, which have the same principal amount Services Corporation or, Chat TV, an investment in @Security
and terms as those of Charter’s convertible senior notes and Broadband Corp., a company developing broadband security
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