Charter 2005 Annual Report Download - page 157

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2005 FORM 10-K
Notes to Consolidated Financial Statements (continued)
the service, and for Charter and Digeo to split certain revenues Charter paid approximately $10 million and $1 million for the
earned from the service. The Company paid Digeo Interactive years ended December 31, 2005 and 2004, respectively, in
approximately $3 million, $3 million and $4 million for the years capital purchases under this agreement.
ended December 31, 2005, 2004 and 2003, respectively, for CC VIII. As part of the acquisition of the cable systems owned by
customized development of the i-channels and the local content Bresnan Communications Company Limited Partnership in
tool kit. This amendment expired pursuant to its terms on February 2000, CC VIII, LLC, Charter’s indirect limited liability
December 31, 2003. Digeo Interactive is continuing to provide company subsidiary, issued, after adjustments, 24,273,943
the Basic i-TV service on a month-to-month basis. Class A preferred membership units (collectively, the ‘‘CC VIII
On June 30, 2003, Charter Holdco entered into an interest’’) with a value and an initial capital account of
agreement with Motorola, Inc. for the purchase of 100,000 approximately $630 million to certain sellers affiliated with
digital video recorder (‘‘DVR’’’) units. The software for these AT&T Broadband, subsequently owned by Comcast Corpora-
DVR units is being supplied by Digeo Interactive, LLC under a tion (the ‘‘Comcast sellers’’). Mr. Allen granted the Comcast
license agreement entered into in April 2004. Under the license sellers the right to sell to him the CC VIII interest for
agreement Digeo Interactive granted to Charter Holdco the approximately $630 million plus 4.5% interest annually from
right to use Digeo’s proprietary software for the number of February 2000 (the ‘‘Comcast put right’’). In April 2002, the
DVR units that Charter deployed from a maximum of 10 Comcast sellers exercised the Comcast put right in full, and this
headends through year-end 2004. This maximum number of transaction was consummated on June 6, 2003. Accordingly,
headends restriction was expanded and eventually eliminated Mr. Allen has become the holder of the CC VIII interest,
through successive agreement amendments and the date for indirectly through an affiliate. In the event of a liquidation of
entering into license agreements for units deployed was CC VIII, Mr. Allen would be entitled to a priority distribution
extended. The license granted for each unit deployed under the with respect to a 2% priority return (which will continue to
agreement is valid for five years. In addition, Charter will pay accrete). Any remaining distributions in liquidation would be
certain other fees including a per-headend license fee and distributed to CC V Holdings, LLC and Mr. Allen in proportion
maintenance fees. Maximum license and maintenance fees to CC V Holdings, LLC’s capital account and Mr. Allen’s capital
during the term of the agreement are expected to be approxi- account (which will equal the initial capital account of the
mately $7 million. The agreement provides that Charter is Comcast sellers of approximately $630 million, increased or
entitled to receive contract terms, considered on the whole, and decreased by Mr. Allen’s pro rata share of CC VIII’s profits or
license fees, considered apart from other contract terms, no less losses (as computed for capital account purposes) after June 6,
favorable than those accorded to any other Digeo customer. 2003).
Charter paid approximately $1 million in license and mainte- An issue arose as to whether the documentation for the
nance fees in 2005. Bresnan transaction was correct and complete with regard to
In April 2004, the Company launched DVR service using the ultimate ownership of the CC VIII interest following
units containing the Digeo software in its Rochester, Minnesota consummation of the Comcast put right. Thereafter, the board
market using a broadband media center that is an integrated set- of directors of Charter formed a Special Committee of indepen-
top terminal with a cable converter, DVR hard drive and dent directors to investigate the matter and take any other
connectivity to other consumer electronics devices (such as appropriate action on behalf of Charter with respect to this
stereos, MP3 players, and digital cameras). matter. After conducting an investigation of the relevant facts
In May 2004, Charter Holdco entered into a binding term and circumstances, the Special Committee determined that a
sheet with Digeo Interactive for the development, testing and ‘‘scrivener’s error’’ had occurred in February 2000 in connection
purchase of 70,000 Digeo PowerKey DVR units. The term sheet with the preparation of the last-minute revisions to the Bresnan
provided that the parties would proceed in good faith to transaction documents and that, as a result, Charter should seek
negotiate, prior to year-end 2004, definitive agreements for the the reformation of the Charter Holdco limited liability company
development, testing and purchase of the DVR units and that agreement, or alternative relief, in order to restore and ensure
the parties would enter into a license agreement for Digeo’s the obligation that the CC VIII interest be automatically
proprietary software on terms substantially similar to the terms exchanged for Charter Holdco units. The Special Committee
of the license agreement described above. In November 2004, further determined that, as part of such contract reformation or
Charter Holdco and Digeo Interactive executed the license alternative relief, Mr. Allen should be required to contribute the
agreement and in December 2004, the parties executed the CC VIII interest to Charter Holdco in exchange for 24,273,943
purchase agreement, each on terms substantially similar to the Charter Holdco membership units. The Special Committee also
binding term sheet. Product development and testing has been recommended to the board of directors of Charter that, to the
completed. Total purchase price and license and maintenance extent the contract reformation is achieved, the board of
fees during the term of the definitive agreements are expected to directors should consider whether the CC VIII interest should
be approximately $41 million. The definitive agreements are
terminable at no penalty to Charter in certain circumstances.
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