Charter 2006 Annual Report Download - page 120

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110
Use of Non-GAAP Financial Measures
The Company uses certain measures that are not defined by GAAP (Generally Accepted Accounting Principles) to evaluate various aspects
of its business. Adjusted EBITDA, pro forma adjusted EBITDA, un-levered free cash flow, and free cash flow are non-GAAP financial measures
and should be considered in addition to, not as a substitute for, net cash flows from operating activities reported in accordance with GAAP.
These terms, as defined by Charter, may not be comparable to similarly titled measures used by other companies.
Adjusted EBITDA is defined as income from operations before special charges, non-cash depreciation and amortization, loss on sale or retirement of
assets, asset impairment charges, and option compensation expense. As such, it eliminates the significant non-cash depreciation and amortization
expense that results from the capital-intensive nature of the Company’s businesses and intangible assets recognized in business combinations
as well as other non-cash or non-recurring items, and is unaffected by the Company’s capital structure or investment activities. Adjusted EBITDA
and pro forma adjusted EBITDA are liquidity measures used by Company management and its Board of Directors to measure the Company’s
ability to fund operations and its financing obligations. For this reason, it is a significant component of Charter’s annual incentive compensation
program. However, this measure is limited in that it does not reflect the periodic costs of certain capitalized tangible and intangible assets
used in generating revenues and the cash cost of financing for the Company. Company management evaluates these costs through other
financial measures.
Un-levered free cash flow is defined as adjusted EBITDA less purchases of property, plant, and equipment. The Company believes this is
an important measure, as it takes into account the period costs associated with capital expenditures used to upgrade, extend, and maintain
Charter’s plant, without regard to the Company’s leverage structure.
Free cash flow is defined as un-levered free cash flow less interest on cash pay obligations. It can also be computed as net cash flows
from operating activities, less capital expenditures and cash special charges, adjusted for the change in operating assets and liabilities,
net of dispositions. As such, it is unaffected by fluctuations in working capital levels from period to period.
The Company believes that adjusted EBITDA, pro forma adjusted EBITDA, un-levered free cash flow, and free cash flow provide information
useful to investors in assessing Charter’s ability to service its debt, fund operations, and make additional investments with internally generated
funds. In addition, adjusted EBITDA generally correlates to the leverage ratio calculation under the Company’s credit facilities or outstanding notes
to determine compliance with the covenants contained in the facilities and notes (all such documents have been previously filed with the United
States Securities and Exchange Commission). Adjusted EBITDA and pro forma adjusted EBITDA, as presented, are reduced for management
fees, which are added back for the purposes of calculating compliance with leverage covenants.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2006 ANNUAL REPORT