Charter 2008 Annual Report Download - page 52

Table of Contents
the Bresnan transaction was correct and complete with regard to the ultimate ownership of the interest in CC
VIII, LLC (the “CC VIII Settlement”), an indirect limited liability company subsidiary of Charter (“CC
VIII”), CII retained 30% of the CC VIII preferred membership interest (the “Remaining Interests”). The
Remaining Interests are subject to certain drag along, tag along and transfer restrictions as detailed in the
revised CC VIII Limited Liability Company Agreement. The CC VIII preferred interests are entitled to a 2%
accreting priority return on the priority capital of CC VIII. The initial priority capital for the Remaining
Interests is $189 million. CCHC, LLC (“CCHC”) (a direct subsidiary of Charter Holdco and the direct parent
of Charter Holdings) also issued to CII to a subordinated exchangeable note with an initial accreted value of
$48 million, accreting at 14% per annum, compounded quarterly, with a 15-year maturity (the “CCHC note”).
The accreted value of the CCHC note as of December 31, 2007 was $65 million.
The CCHC note is exchangeable, at CII’s option, at any time, for Charter Holdco Class A Common units
at a rate equal to the then accreted value, divided by $2.00 (the “Exchange Rate”). Customary anti-dilution
protections have been provided that could cause future changes to the Exchange Rate. Additionally, the
Charter Holdco Class A Common units received will be exchangeable by the holder into Charter common
stock in accordance with existing agreements between CII, Charter and certain other parties signatory thereto.
Beginning February 28, 2009, if the closing price of Charter common stock is at or above the Exchange Rate
for a certain period of time as specified in the Exchange Agreement, Charter Holdco may require the
exchange of the CCHC note for Charter Holdco Class A Common units at the Exchange Rate.
CCHC has the right to redeem the CCHC note under certain circumstances, for cash in an amount equal
to the then accreted value. Such amount, if redeemed prior to February 28, 2009, would also include a make
whole up to the accreted value through February 28, 2009. CCHC must redeem the CCHC note at its maturity
for cash in an amount equal to the initial stated value plus the accreted return through maturity.
Charter is currently in litigation with its former law firm to recover damages arising from the Bresnan
transaction and the CC VIII Settlement. In addition, Charter and its subsidiaries have agreed to reimburse CII
and affiliates for all reasonable expenses incurred as a result of its cooperation with Charter in the pursuit,
preservation or settlement of certain claims under the CC VIII Settlement. To date, no request for
reimbursement has been made.
Mirror Securities
Charter is a holding company and its principal assets are its equity interest in Charter Holdco and certain
mirror notes payable by Charter Holdco to Charter and mirror preferred units held by Charter, which have the
same principal amount and terms as those of Charter’s convertible senior notes and Charter’s outstanding
preferred stock. In December 2004, Charter Holdco entered into a share lending agreement with Charter in
which it agreed to lend common units to Charter that would mirror the anticipated loan of Class A common
shares by Charter to Citigroup Global Markets pursuant to a share lending agreement. The members of
Charter Holdco (including the entities controlled by Mr. Allen) also at that time entered into a letter
agreement providing, among other things, that for purposes of the allocation provisions of the Limited
Liability Company Agreement of Charter Holdco, the mirror units be treated as disregarded and not
outstanding until such time (and except to the extent) that, under Charter’s share lending agreement, Charter
treats the loaned shares in a manner that assumes they will neither be returned by the borrower nor otherwise
be acquired by Charter in lieu of such a return. In 2005, Charter issued 94.9 million shares of Class A
common stock and the corresponding issuance of an equal number of mirror membership units by Charter
Holdco to Charter pursuant to the share lending agreement. In February 2006, an additional 22.0 million
shares and corresponding units were issued. During 2006 and 2007, 92.1 million shares of Class A common
stock were returned pursuant to the share lending agreement.
In October 2007, Charter Holdco completed an exchange offer, in which $364 million of Charter’s
5.875% convertible senior notes due 2009 were exchanged for $479 million of Charter’s 6.50% convertible
senior notes. Approximately $49 million of Charter’s 5.875% convertible senior notes remain outstanding.
Charter Holdco issued to Charter mirror notes in identical principal amount as a result of the exchange. In
connection with our October 2007 issuance of the 6.50% convertible senior notes, Charter entered into an
amended and restated share lending agreement and an amended and restated mirror notes agreement with
Charter Holdco to provide for the
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Source: CHARTER COMMUNICATIO, DEF 14A, March 17, 2008