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Charter Communications 10-K 2009 Documents found in this filing:UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-KA
(Amendment
No. 1)
For
the Transition Period From
to
Commission File Number:
000-27927
 (Exact name of registrant as
specified in its charter)
(Debtor -
in - Possession as of March 27, 2009)
Securities
registered pursuant to section 12(b) of the Act:
Securities
registered pursuant to section 12(g) of the Act:
Class A
Common Stock, $.001 Par Value
Preferred
Share Purchase Rights
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§
229.405 of this chapter) during the preceeding 12 months
(or for such shorter period that the registrant was required to submit and post
such files). Yes þ No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “accelerated filer,” “large accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated
filer þ Non-accelerated
filer o Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No þ
The
aggregate market value of the registrant of outstanding Class A Common
Stock held by non-affiliates of the registrant at June 30, 2008 was
approximately $393 million, computed based on the closing sale price as quoted
on the NASDAQ Global Select Market on that date. For purposes of this
calculation only, directors, executive officers and the principal controlling
shareholder or entities controlled by such controlling shareholder of the
registrant are deemed to be affiliates of the registrant.
There
were 392,705,927 shares of Class A Common Stock outstanding as of March 31,
2009. There were 50,000 shares of Class B Common Stock
outstanding as of the same date.
Documents
Incorporated By Reference
Information
required by Part III is incorporated by reference from Registrant’s amendment to
this Annual Report on Form 10-K to be filed by April 30, 2009.
Charter
Communications, Inc. ("Charter" or the "Company") and its subsidiaries have
filed petitions under Chapter 11 of the United States Bankruptcy Code on March
27, 2009. See Charter's 2008 Annual Report on Form 10-K filed March
16, 2009, "Part I., Item 1. Recent Developments – Restructuring" and its Form
8-K filed March 27, 2009, for more information on the Company's financial
restructuring.
PART
III
Item
10: Directors and Executive Officers of the Registrant
The
persons listed below are directors of Charter.
The
following sets forth certain biographical information with respect to the
directors listed above.
3
2003.
From 1997 to 2000, Mr. Conn served in various senior business development
roles at America Online. In 2000, Mr. Conn began supervising all of America
Online’s European investments, alliances and business initiatives. In 2002, he
became Senior Vice President of America Online U.S. where he led a
company-wide effort to restructure and optimize America Online’s operations.
From September 1994 until February 1996, Mr. Conn was an attorney with the
Shaw Pittman law firm in Washington, D.C. Mr. Conn is a director at Plains
All American Pipeline, L.P., Plains GP Holdings, L.P. and Vulcan Energy
Corp. Mr. Conn holds a J.D. degree from the University of
Virginia, a M.A. degree in history from the University of Mississippi and an A.B
degree in history from Princeton University.
4
entertainment
practice. In December 2003, he became a director of Outdoor Channel Holdings,
Inc. and serves as Chairman of its audit committee. In February 2006,
Mr. Merritt became a director of Calpine Corporation and serves as Chairman
of its Audit Committee. Mr. Merritt holds a B.S. degree in business and
accounting from California State University —
Northridge.
Larry W. Wangberg>, 66, has
been a director of Charter since January 2002. Since July 2002,
Mr. Wangberg has been an independent business consultant. From August 1997
to May 2004, Mr. Wangberg was a director of TechTV L.L.C., a cable
television network then-controlled by Paul Allen. He also served as its Chairman
and Chief Executive Officer from August 1997 through July 2002. Prior to joining
TechTV L.L.C., Mr. Wangberg was Chairman and Chief Executive Officer of
StarSight Telecast Inc., an interactive navigation and program guide company
which later merged with Gemstar International, from 1994 to 1997.
Mr. Wangberg was Chairman and Chief Executive Officer of Times
5
Mirror
Cable Television and Senior Vice President of its corporate parent, Times Mirror
Co., from 1983 to 1994. Mr. Wangberg holds a B.S. degree in mechanical
engineering and a M.S. degree in industrial engineering, both from the
University of Minnesota.
Board
of Directors and Committees of the Board of Directors
Our board
of directors meets regularly throughout the year on an established schedule. The
board also holds special meetings and acts by written consent from time to time
as necessary.
The board
of directors delegates authority to act with respect to certain matters to board
committees whose members are appointed by the board. The committees of the board
of directors include the following: Audit Committee, Finance Committee,
Compensation and Benefits Committee, Executive Committee, and Corporate
Governance Committee.
Charter’s
Audit Committee, which has a written charter approved by the board, consists of
Messrs. Tory, Johri and Merritt. Mr. Tory joined the Audit Committee in
December 2008; replacing Nathaniel Davis, who resigned from the board of
directors. A copy of the Audit Committee’s charter is available on
the Company’s website, www.charter.com. The
Company’s board of directors has determined that, in its judgment, Mr. Merritt
is an audit committee financial expert within the meaning of the applicable
federal regulations. All members were determined by the board in 2008 to be
independent in accordance with the listing standards of the NASDAQ Global Select
Market.
As
previously reported, the Company has filed a petition under Chapter 11 of the
Bankruptcy Code and, as part of those proceedings, a plan of
reorganization. As a result of the Company's filing of the bankruptcy
petition, the Company's common stock was delisted by NASDAQ as of April 7, 2009,
and the Company is no longer required to follow the independence rules required
by the NASDAQ Global Select Market listing standards.
Executive
Officers
Our
executive officers, listed below, are elected by the board of directors
annually, and each serves until his or her successor is elected and qualified or
until his or her earlier resignation or removal.
6
7
engineering
and a M.S. in electrical/communication-engineering from California State
University — Long Beach.
8
Section 16 of the Exchange Act requires our directors and certain of our
officers, and persons who own more than 10% of our common stock, to file initial
reports of ownership and reports of changes in ownership with the SEC. Such
persons are required by SEC regulation to furnish us with copies of all Section
16(a) forms they file. Based solely on our review of
the copies of such forms furnished to us and written representations from these
officers and directors, we believe that all Section 16(a) filing
requirements were met in 2008 with the exception of the Form 3s filed by Messrs.
Howard and Apodaca. In both cases, equity awards previously granted
to these officers were inadvertently excluded from their Form 3s. In
both cases, amended Form 3s were filed.
Charter has adopted a Code of Conduct that constitutes a Code of Ethics
within the meaning of federal securities regulations for our employees,
including all executive officers, and established a hotline and website for
reporting alleged violations of the code of conduct, established procedures for
processing complaints and implemented educational programs to inform our
employees regarding the Code of Conduct. The Code of Conduct is posted on
Charter's website at www.charter.com.
Controlled
Company and Election of Directors
By virtue of Mr. Allen’s control of more than
50% of the voting power of the Company as of December 31, 2008, the Company is a
“controlled company” under NASDAQ rule 4350(c)(5). As such, the Company is
currently not subject to requirements that a majority of our directors be
“independent” (as defined in NASDAQ’s rules) or that there be a nominating
committee of the board, responsible for nominating director candidates. The
Company does not have a nominating committee. Candidates for director are
nominated by the board of directors, based on the recommendation of one or more
of our directors. Given the significance of Mr. Allen’s investment in the
Company and the high caliber of the individuals who have been recruited to serve
on our board of directors, we believe that the Company’s nomination process is
appropriate. Criteria and qualifications for new board members considered by the
Company’s directors include a high level of integrity and ability, industry
experience or knowledge, and operating company experience as a member of senior
management (operational or financial). In addition, director candidates must be
individuals with the time and commitment necessary to perform the duties of a
board member and other special skills that complement or supplement the skill
sets of current directors. Stockholders may nominate persons to be
directors by following the procedures set forth in our Bylaws. These procedures
require the stockholder to deliver timely notice to the Corporate Secretary at
our principal executive offices. That notice must contain the information
required by the Bylaws about the stockholder proposing the nominee and about the
nominee.
Pursuant
to the Company's proposed plan of reorganization, upon the Company's emergence
from bankruptcy, the reorganized Company's initial board of directors will be
comprised of up to 11 members. Each holder expected to hold 10%
or more of the voting power of the reorganized Company on the effective date of
the plan of reorganization will have the right to appoint one member of the
initial board of directors for each 10% of the Class A stock voting power held
as of a date to be determined. Mr. Allen will have the right to
9
appoint
four board members of the initial board of directors, and Mr. Smit will also
serve on the initial board of directors. Members of the initial board of
directors will serve until the next annual meeting of stockholders which will
not be held until at least 12 months following the effective date of the plan of
reorganization. Thereafter, for as long as shares of the
post-emergence Class B Stock are outstanding, holders of same will have the
right to elect 35% of the members of the board of directors (rounded up to the
nearest whole number), and all other members of the board of directors will be
elected by majority vote of the holders of the post-emergence Class A Stock and
post-emergence Preferred Stock, voting together as a single
class.
Item 11. Executive Compensation.
Report
of the Compensation and Benefits Committee
The
following report does not constitute soliciting materials and is not considered
filed or incorporated by reference into any other Company filing under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, unless the Company specifically states otherwise.
The
Compensation and Benefits Committee has reviewed and discussed with management
the Compensation and Analysis ("CD&A") set forth below including the
accompanying tables. The Compensation and Benefits Committee
recommended to the board of directors that the CD&A be included in the
Company's 2008 Annual Report on Form 10-K.
PAUL G.
ALLEN
ROBERT P.
MAY
DAVID C.
MERRITT
Compensation
Discussion and Analysis
Overview
The
following discussion and analysis of compensation arrangements of our Named
Executive Officers (including our Chief Executive Officer, Chief Financial
Officers1, and other executive officers appearing in the
Summary Compensation Table) in 2006, 2007 and 2008 should be read together with
the compensation tables and related disclosures set forth elsewhere in this
proxy statement.
Role
of the Compensation and Benefits Committee
The
Compensation and Benefits Committee of our board of directors is responsible for
overseeing the overall compensation structure, policies and programs of our
Company and assessing whether our compensation structure results in appropriate
compensation levels and incentives for executive management and employees of the
Company and its subsidiaries.
Our
Chief Executive Officer (“CEO”) annually reviews the performance of each of the
other Named Executive Officers. He recommends to the Compensation and Benefits
Committee salary adjustments,
1 Jeffrey
T. Fisher was the Company's Chief Financial Officer at the beginning of
2008. Mr. Fisher separated from the Company effective April 4,
2008. Eloise E. Schmitz was appointed to replace Mr.
Fisher. As a result, the compensation tables were prepared for both
individuals. 10
annual cash bonuses and equity incentive compensation applying specific performance metrics that have been approved by the Compensation and Benefits Committee at the beginning of each year for the other Named Executive Officers. The Compensation and Benefits Committee has, on occasion, requested certain executives to be present at Compensation and Benefits Committee meetings where executive compensation and Company and individual performance are discussed and evaluated. These executives are invited for the purpose of providing insight or suggestions regarding executive performance objectives and/or achievements, and the overall competitiveness and effectiveness of our executive compensation program. Although the Compensation and Benefits Committee considers the CEO’s recommendations along with analysis provided by the Compensation and Benefits Committee’s compensation consultants, it retains full discretion to set all compensation for the Company’s Named Executive Officers, except that the Compensation and Benefits Committee’s recommendations for the CEO’s compensation goes before our full board of directors, with non-employee directors voting on the approval of any recommendations, subject to any employment agreements. The
Compensation and Benefits Committee has the discretion to directly engage the
services of a compensation consultant or other advisors and has done so in the
past. Beginning in 2006, it retained the services of Pearl Meyer &
Partners to conduct a comprehensive assessment of our annual executive
compensation program relative to competitive markets, as well as conduct an
analysis on certain retention strategies for our senior management team. Pearl
Meyer & Partners was retained directly by the Compensation and Benefits
Committee, although in carrying out assignments, it also interacted with
management when necessary and appropriate. Pearl Meyer & Partners may,
in its discretion, seek input and feedback from management regarding its
consulting work product prior to presentation to the Compensation and Benefits
Committee in order to confirm alignment with the Company’s business strategy,
identify data questions or other similar issues, if any, prior to presentation
to the Compensation and Benefits Committee.
Compensation
Philosophy and Objectives
The
Compensation and Benefits Committee believes that attracting and retaining
well-qualified executives is a top priority. The Compensation and Benefits
Committee’s approach is to compensate executives commensurate with their
experience, expertise and performance and to ensure that the Company's
compensation programs are competitive to executive pay levels within the cable,
telecommunications, and other related industries that define our competitive
labor markets. We seek to uphold this philosophy through attainment of the
following objectives:
Pay-for-Performance. We
seek to ensure that the amount of compensation for each Named Executive Officer
is reflective of the executive’s performance and service to the Company for the
time period under consideration. Our primary measures of performance used to
gauge appropriate levels of performance-based compensation have included
revenue, adjusted EBITDA, unlevered free cash flow, operating cash flow, new
product growth, operational improvements, customer satisfaction, and/or such
other metrics as the Compensation and Benefits Committee shall determine is then
critical to the long-term success of the Company at that time. While we believe
that our executives are best motivated when they believe that their performance
objectives are attainable, we also believe that these metrics should be
challenging and represent important incremental improvements over performance in
prior years. Compensation payable
11
pursuant
to our annual Executive Bonus Plan and our Long-Term Incentive Program is
dependent on Company performance.
Alignment. We seek
to align the interests of the Named Executive Officers with those of our
investors by evaluating executive performance on the basis of the financial
measurements noted above, which we believe closely correlate to long-term
stakeholder value creation. The annual cash bonus and long-term incentives are
intended to align executive compensation with our business strategies, values
and management initiatives, both short- and long-term. Through this incentive
compensation, we place a substantial portion of executive compensation at risk,
specifically dependent upon the financial performance of the Company over the
relevant periods. This rewards executives for performance that enhances the
Company’s financial strength and stakeholder value.
Retention. We
recognize that a key element to our success is our ability to retain a team of
highly qualified executives who can provide the leadership necessary to
successfully execute our short- and long-term business strategies. We also
recognize that, because of their qualifications, our senior executives are often
presented with other professional opportunities, potentially ones at higher
compensation levels. It is often difficult to retain talented management. Our
retention strategy faces additional challenges in that the skills of our current
management team are attractive to many companies outside of the cable industry
and several members of our management team do not have long-standing ties to the
St. Louis area where the Company's headquarters is located. Two programs
underscore our focus on retention. First, the Executive Cash Award Plan provided
for a cash award to be paid at the end of a pre-determined period, but was
modified and cancelled in the first quarter of 2009, as discussed in detail
below. Second, an Incentive Program was approved in March 2008 and modified in
February 2009, and is also discussed below. In addition, the Value
Creation Plan was approved by the board of directors in 2009.
Pay
Levels and Benchmarking
Pay
levels for executives are determined based on a number of factors, including the
individual’s roles and responsibilities within the Company, the individual’s
experience and expertise, pay levels for peers within the Company, pay levels in
the marketplace for similar positions, and performance of the individual and the
Company as a whole. In determining these pay levels, the Compensation and
Benefits Committee considers all forms of compensation and benefits. When
establishing the amounts of such compensation, the Compensation and Benefits
Committee considers publicly available information, such as proxy statements, as
well as third-party administered benchmark surveys concerning executive
compensation levels paid by other competitors and in the industry
generally.
With the
assistance of Pearl Meyer & Partners, the Compensation and Benefits
Committee approved two distinct peer groups of publicly-traded companies for
benchmarking executive compensation effective for 2008. The first is
an “industry peer group” of 11 companies: Cablevision Systems Corp., Clear
Channel Communications, Inc., Comcast Corporation, The DIRECTV Group, Inc., E.W.
Scripps Company, EchoStar Communications Corp., Embarq Corporation, Global
Crossing Ltd., Level 3 Communications, Inc., Mediacom Communications Corp.
and Time Warner Cable Inc. These companies include companies in cable,
telecommunications or other related industries of similar size and business
strategy.
12
Because
we have a much higher level of debt than these industry peers, we also felt it
important to analyze pay practices of a secondary peer group. Specifically, in
order to understand pay practices and the mix of incentive vehicles in companies
with similar leverage (i.e., those with total debt of $1 billion or more,
with a debt to capital ratio of 100% or more), the Compensation and Benefits
Committee worked with Pearl Meyer & Partners to analyze a reference
group of 10 additional peer companies. While these companies were not used to
gauge levels of pay, the Compensation and Benefits Committee felt it was
appropriate to examine the types, design and mix of compensation vehicles used
within these organizations for pay mix and design purposes.
In
addition to these specific peer companies, the Compensation and Benefits
Committee also reviews data from a number of published compensation surveys that
provide broader market data for specific functional responsibilities for
companies of similar revenue size to the Company.
After
consideration of the data collected on external competitive levels of
compensation and internal relationships within the executive group, the
Compensation and Benefits Committee makes decisions regarding individual
executives’ target total compensation opportunities based on the need to
attract, motivate and retain an experienced and effective management
team.
In light
of our practice of making a relatively high portion of each executive officer’s
compensation based on performance (i.e.,
at risk), the Compensation and Benefits Committee generally examines peer
company data at the average, the 25th
percentile, the 50th
percentile (i.e.,
the median) and the 75th percentile, for performance at target and in
excess of target, respectively, or for specialization of a skill set. The
Compensation and Benefits Committee generally sets compensation for our Named
Executive Officers at the median of the industry peer group with the opportunity
to reach the 75th percentile based on the criteria above.
As noted
above, notwithstanding the Company’s overall pay positioning objectives, pay
opportunities for specific individuals vary based on a number of factors such as
scope of duties, tenure, institutional knowledge and/or difficulty in recruiting
a new executive. Actual total compensation in a given year will vary above or
below the target compensation levels based primarily on the attainment of
operating goals and the preservation of stakeholder value. Based on data provided
by our outside advisor, total direct compensation (i.e. salary, bonus and
long-term incentive) is, on average, at competitive median levels for each Named
Executive Officer (NEO).
Pay
Mix
We
utilize the particular elements of compensation described above because we
believe that it provides a well-proportioned mix of compensation, retention
value and at-risk compensation which produces short-term and long-term
performance incentives and rewards. By following this portfolio approach, we
provide the executive a measure of stability in the minimum level of
compensation the executive is eligible to receive, while motivating the
executive to focus on the business metrics and actions that will produce a high
level of performance for the Company, as well as reducing the risk of
recruitment of top executive talent by competitors.
For key executives, the
mix of compensation is weighted toward at-risk pay (annual incentives and
long-term incentives). We believe that maintaining this pay mix
results in a fundamental pay-for-performance
13
orientation
for our executives. We also believe that long-term incentives, and particularly
equity compensation, provide a very important motivational and retentive aspect
to the compensation package of our key executives. In 2008 and prior
years, a portion of an executive's at-risk compensation was security-oriented
compensation. While the Company anticipates again instituting a stock
incentive plan after emergence from bankruptcy, there has been no stock-based
compensation granted to date in 2009.
Implementing
Our Objectives
The Compensation and
Benefits Committee makes compensation decisions after reviewing the performance
of the Company and carefully evaluating an executive’s performance during the
year against pre-established goals, leadership qualities, operational
performance, business responsibilities, career with the Company, current
compensation arrangements and long-term potential to enhance stakeholder value.
Specific factors affecting compensation decisions for the Named Executive
Officers include:
Elements
Used to Achieve Compensation Objectives
The main components of
the Company’s compensation program have included:
14
Details
of Each Compensation Element
(1) Base
salary
Base salaries are set
with regard to the level of the position within the Company and the individual’s
current and sustained performance results. The base salary levels for
executives, and any changes in those salary levels, are reviewed each year by
the Compensation and Benefits Committee, and such adjustments may be based on
factors such as new roles and/or responsibilities assumed by the executive and
the executive’s significant impact on then current Company
goals. Salary adjustments may also be based on changes in market pay
levels for comparable positions in our competitive markets. Base Salaries are
reviewed and adjusted with regard to (a) market competitive Base Salary levels
and increases, (b) the employee’s impact on and contributions to the business
performance, and (c) Company-wide total salary increase budgets. With
regard to 2008, the Compensation and Benefits Committee approved the following
Base Salary increases: effective July 1, 2008, Mr. Smit received a
$300,000 increase per the terms of his Employment Agreement; Mr. Lovett received
a $26,029 increase; Mr. Raclin received a $16,733 increase; and Mr. Fawaz
received a $16,733 increase. Pursuant to the terms of her Employment
Agreement, Ms. Schmitz received a $134,425 increase when she was appointed to
the position of the Company's Interim Chief Financial Officer in April 2008 and
received an additional $25,000 increase when she was appointed to the position
of Executive Vice President and Chief Financial Officer in July
2008. There is no specific weighting applied to any one factor in
setting the level of salary, and the process ultimately relies on the subjective
exercise of the Compensation and Benefits Committee’s judgment. Although
salaries are generally targeted at market median compared to an industry peer
group and to a peer group of comparably leveraged companies and other
compensation survey data for experienced professionals, the Compensation and
Benefits Committee may also take into account historical compensation, potential
as a key contributor as well as special recruiting/retention situations in
setting salaries for individual executives above or below the market
median. Based upon data provided by our outside advisor, Base
Salaries for our NEOs are, on average, at median competitive
levels.
(2) Executive
Bonus Plan
2008
Executive Bonus Plan
For 2008, bonuses for
eligible employees were determined based on Charter’s (or, if applicable, an
employees’ particular division’s or KMA’s) performance during 2008 measured
against four performance goals or measures. These measures, and the
percentage of an employee’s bonus allocated to each measure, are revenue (30%),
adjusted EBITDA for corporate employees or operating cash flow for divisional
and KMA employees (30%), unlevered free cash flow (20%) and customer
satisfaction (20%). Target bonuses for executive officers ranged from 40% to
200% of base salary in 2008, subject to applicable employment agreements (see
"Employment Agreements"). The range of potential payouts relative to
target range from 50% to 150% of target bonus amounts.
15
In January 2009, the
Compensation and Benefits Committee determined that achievement toward
performance goals for 2008 resulted in bonuses under the 2008 Executive Bonus
Plan at the corporate level in the amount of 104.6% of targeted bonuses, as
detailed in the following chart and as set forth in the Non-Equity Incentive
Plan column of the Summary Compensation Table.
The Compensation and Benefits
Committee has the discretion to increase or decrease payouts under this annual
plan based on organizational factors such as acquisitions or significant
transactions, performance driven by changes in products or markets and other
unusual, unforeseen or exogenous situations. In addition to the bonuses paid
under the 2008 Executive Bonus Plan, the Compensation and Benefits Committee
approved discretionary bonuses of $60,000 to Ms. Schmitz, $75,000 to Mr. Lovett
and $25,000 to Mr. Fawaz for their performances in 2008.
(3) Long-Term
Incentives
The Company’s long-term
incentive award compensation program is designed to recognize scope of
responsibilities, reward demonstrated performance and leadership, motivate
future superior performance, align the interests of the executive with that of
our stakeholders, and incent and retain the executives through the term of the
awards. In 2006, we began to shift a greater portion of our long-term incentive
grants away from stock options and towards restricted shares and performance
units. In 2008, we included performance cash incentives in our
program. We believe that performance-based incentives help to drive
Company performance through their direct linkage to controllable business
results while, at the same
16
time,
rewarding executives for the value created through share price appreciation.
Making grants of restricted shares also allowed us to reduce the number of
shares we had previously granted through the use of stock options, thereby
providing for greater efficiency with regard to dilution and the number of new
shares coming into the market at any particular time. While the size of the
award is ultimately left to the Compensation and Benefits Committee discretion,
grant levels are generally targeted at the median of our industry peer group in
accordance with our compensation philosophy.
Stock
Incentive Plan
The 2001 Stock Incentive
Plan provides for the potential grant of non-qualified stock options, stock
appreciation rights, dividend equivalent rights, performance units and
performance shares, share awards, phantom stock and shares of restricted stock
(currently not to exceed 20,000,000 shares) as each term is defined in the
2001 Stock Incentive Plan and in the discretion of the Compensation and Benefits
Committee. Generally, options expire 10 years from the grant date. Unless
terminated sooner, the 2001 Stock Incentive Plan will terminate on
February 12, 2011, and no option or award can be granted thereafter under
that plan. It is expected that prior to the Company's emergence from
the Chapter 11 proceedings, the 2001 Stock Incentive Plan will be terminated and
awards under it will be cancelled. It is anticipated that a new Stock
Incentive Plan will be put in place after the Company emerges from the Chapter
11 proceedings.
As of December 31,
2008, 9,546,607 shares remained available for future grants under the plan
(assuming actual attainment of performance units). As of
December 31, 2008, there were 3,089 participants in the plan.
The plan
authorizes the repricing of options, which could include reducing the exercise
price per share of any outstanding option, permitting the cancellation,
forfeiture or tender of outstanding options in exchange for other awards or for
new options with a lower exercise price per share, or repricing or replacing any
outstanding options by any other method.
Long-Term
Incentive Program
Grants of
equity compensation in the form of stock options, restricted shares and
performance units were previously made to our Named Executive Officers through
our Long-Term Incentive Program (“LTIP”), which was administered under the 2001
Stock Incentive Plan as discussed above. Following the end of each year, the
Compensation and Benefits Committee reviewed the Company’s performance and
determined the number of performance units that would be converted into
performance shares.
The
amount of equity incentive compensation granted in 2008 was based upon the
strategic, operational and financial performance of the Company overall and
reflects the executives’ expected contributions to the Company’s future success.
In 2008, as in the recent past, the Company capped the amount of equity awards
which was available to all employees of the Company at 2.09% of the outstanding
equity and the Compensation and Benefits Committee includes consideration of
this limitation in awarding such compensation and determining what awards are
available at all levels of the Company. In 2008, the Company changed
the mix of awards made to individuals under the LTIP, granting restricted
shares, performance units and performance cash, but not stock options, to
participants. In 2009, Charter’s Compensation and Benefits Committee
approved conversion of the 2008 performance
17
units to
performance shares, and adjusted the performance cash awards, at the level of
83.4% of granted units and cash awards as a result of the achievement of the
financial performance measures. The level of award attainment was based on
revenue growth of 8.5% versus a target of 10.4% and unlevered free cash flow
growth of 33.9% versus a target of 33.5%. One-third of these shares
was scheduled to vest in each of 2009, 2010 and 2011, respectively, subject to
adjustment for each year's performance attainment percentage. However, in March
2009, most participants including all Named Executive Officers forfeited their
equity awards due to the Company's pending financial
restructuring. See, "Recent Events relating to Equity Awards"
below.
Timing
of Equity Grants
Grants of
equity-based awards are determined by the Compensation and Benefits Committee
and are typically made each calendar year following review by the Compensation
and Benefits Committee of the prior year’s Company performance. Grants may also
be made at other times of the year upon execution of a new employment agreement,
or in a new hire or promotion situation. Grants of options are made with an
exercise price equal to the average of the high and low stock price on the date
of grant.
(4) Retention
Programs
Executive
Cash Award Plan
In 2005,
Charter adopted the Executive Cash Award Plan ("ECAP") to provide additional
incentive to, and retain the services of, certain officers of Charter and its
subsidiaries, to achieve the highest level of individual performance and
contribute to the success of Charter. Eligible participants are employees of
Charter or any of its subsidiaries who have been recommended by the CEO and
designated and approved as ECAP participants by the Compensation and Benefits
Committee of Charter’s board of directors. At the time the ECAP was adopted, the
interim CEO recommended and the Compensation and Benefits Committee designated
and approved as plan participants the permanent President and Chief Executive
Officer position, Executive Vice President positions and selected Senior Vice
President positions.
The ECAP
provides that each participant be granted an award which represents an
opportunity to receive cash payments in accordance with the ECAP. An award was
credited in book entry format to a participant’s notional account in an amount
equal to 100% of a participant’s base salary on the date of plan approval in
2005 and 20% of participant’s base salary in each year 2006 through 2009, based
on that participant’s base salary as of May 1 of the applicable year. The
ECAP awards vested at the rate of 50% of the ECAP award balance at the end of
2007 and 100% of the ECAP award balance was to vest at the end of 2009.
Participants are entitled to receive payment of the vested portion of the award
if the participant remains employed by Charter continuously from the date of the
participant’s initial participation through the end of the calendar year in
which his or her award becomes vested, subject to payment of pro-rated award
balances to a participant who terminates due to death or disability or in the
event Charter elects to terminate the ECAP.
A
participant’s eligibility for, and right to receive, any payment under the ECAP
(except in the case of intervening death) would be conditioned upon the
participant first executing and delivering to Charter an agreement releasing and
giving up all claims that participant may have against Charter and related
parties arising out of or based upon any facts or conduct occurring prior to the
payment date, and containing
18
additional
restrictions on post-employment use of confidential information, non-competition
and nonsolicitation and recruitment of customers and
employees.
The ECAP
was revised to allow the participation of new senior executives who became
eligible for the plan beginning in 2006. For each new participant, an award was
credited in book entry format to the new participant’s notional account in an
amount equal to 100% of a new participant’s base salary on the date of
eligibility approval or hire in 2006 and 20% of the new participant’s base
salary in each year 2007 through 2010, based on the new participant’s base
salary as of May 1 of the applicable year. The plan awards would vest at
the rate of 50% of the plan award balance at the end of 2008 and 100% of the
plan award balance at the end of 2010. All other terms and conditions remain the
same.
In 2007,
the plan was amended and restated to make it consistent with the 2001 Stock
Incentive Plan to include the acceleration and payment of awards in the event of
a change in control of the Company.
All Named
Executive Officers participated in this plan.
In
December 2008, the Company announced that it was in discussions with certain of
its bondholders about a potential financial restructuring of the Company's
balance sheet and as part of that process, the Compensation and Benefits
Committee hired Towers Perrin as consultants to consider changes to
compensation. Based on recommendations of Towers Perrin, the Company
determined that prepayment of amounts under the ECAP, subject to repayment
obligation if the participants' employment were terminated voluntarily or "for
cause" prior to December 31, 2009 would provide a valuable retention incentive
to ECAP participants. Therefore, the prepayment of all awards under
the ECAP to all participants including the Named Executive Officers was made in
January 2009, provided, however, that if any participant leaves the Company
prior to December 31, 2009 as a result of a "for cause" termination by the
Company or a termination by the participant other than for "good reason" (as
such terms are defined in the ECAP Plan), such participant will be required to
refund to the Company the full amount of the prepayment, net of any taxes paid
by the employee on receipt of the award. See the Summary Compensation
Table below.
Value
Creation Plan
On March 12, 2009, the
Company, after discussion with certain of its bondholders and upon the
recommendation of Towers Perrin, adopted the Value Creation Plan (the "VCP")
comprised of two components, the Restructuring Value Program (the “RVP”), and
the Cash Incentive Program (the “CIP”).
The RVP provides incentives
to encourage and reward participants for a successful financial restructuring of
the Company. Participants who continue to be employed by the Company
or its subsidiaries until payment of RVP awards earn payments under the RVP upon
the Company’s emergence from its Chapter 11 restructuring proceeding (the
“Proceeding”); provided that, if the Company’s restructuring plan is the Joint
Plan (as defined in the VCP) presently being advocated by the Company, the
payment of RVP awards shall occur after emergence and the Company has $600
million of cash. Participants also earn their RVP payments upon an
earlier of (i) their termination of employment due to death or disability, or
their termination on or after the Company’s emergence from the Proceeding by the
Company for a reason other than “cause,” or voluntarily due to a “good reason”
(as each such term is defined in the Plan) or (ii) a “change in control” of the
Company if they are then employed by the
19
Company
or its subsidiaries. The target RVP awards for the Company’s named executive
officers (which are subject to change in accordance with the terms of the Plan)
are: Mr. Smit - $6 million; Mr. Lovett - $2.38 million; Ms. Schmitz - $765,000;
Mr. Fawaz - $765,000; and Mr. Raclin - $765,000.
The CIP provides annual
incentives for participants to achieve specified individual performance goals
during each of the three years following the Company’s emergence from the
Proceeding. Reasonably attainable individual performance goals for
each of the first three years following the Company’s emergence from the
Proceeding will be established by the CEO, subject to approval by the board of
directors (or by the board for the CEO), within thirty days following the
Company’s emergence from the Proceeding. Participants will earn all
or a portion of their target bonus based on the degree to which these goals are
achieved in a particular year; provided that any amount not paid in a year other
than the third year will be added to the amounts potentially payable upon the
participant’s achievement of the performance goals in future
years. The CEO may decrease (including to zero) any Participant’s RVP
and CIP awards at any time prior to their Vesting Date (as defined in the Value
Creation Plan). Any such reduction shall be used to increase the
amounts otherwise payable under the RVP or CIP component, as applicable, to one
or more other Participants, as selected by the CEO, it being understood that the
CEO may not increase his own RVP award without the consent of the
Board. Amounts that are not earned by a participant in a particular
year may be earned by that participant in a subsequent year if the participant’s
performance goals applicable to that subsequent year are
achieved. Participants also earn the CIP payments upon an earlier of,
or due to (i) a termination of their employment on or after the Company’s
emergence from the Proceeding due to death, disability, by the Company for a
reason other than “cause,” or voluntarily due to a “good reason” (as each such
term is defined in the Plan) and (ii) a “change in control” of the Company if
they are then employed by the Company. The annual target awards for
the Company’s named executive officers (which are subject to change in
accordance with the terms of the Plan) are: Mr. Smit - $2.5 million; Mr. Lovett
- $910,000; Ms. Schmitz - $664,000; Mr. Fawaz - $597,000; and Mr. Raclin -
$597,000.
Other
Compensation Elements
The
Named Executive Officers participate in all other benefit programs offered to
all employees generally.
Impact
of Tax and Accounting
Section 162(m)
of the Internal Revenue Code generally provides that certain kinds of
compensation in excess of $1 million in any single year paid to the chief
executive officer and the three other most highly compensated executive officers
other than the chief financial officer of a public company are not deductible
for federal income tax purposes. However, pursuant to regulations issued by the
U.S. Treasury Department, certain limited exemptions to Section 162(m)
apply with respect to qualified “performance-based compensation.” While the tax
effect of any compensation arrangement is one factor to be considered, such
effect is evaluated in light of our overall compensation philosophy. To maintain
flexibility in compensating executive officers in a manner designed to promote
varying corporate goals, the Compensation and Benefits Committee has not adopted
a policy that all compensation must be deductible. Stock options and performance
shares granted under our 2001 Stock Incentive Plan are subject to the approval
of the Compensation and Benefits Committee. The grants qualify as
“performance-based compensation” and, as such, are exempt from the limitation on
deductions. Outright
20
grants of
restricted stock and certain cash payments (such as base salary and cash
bonuses) are not structured to qualify as “performance-based compensation” and
are, therefore, subject to the Section 162(m) limitation on deductions and
will count against the $1 million cap.
When
determining amounts and forms of compensation grants to executives and
employees, the Compensation and Benefits Committee considers the accounting cost
associated with the grants. On January 1, 2006, the Company adopted
Statement of Financial Accounting Standard 123 (revised 2004), Share — Based Payment
(“SFAS No. 123R”), which addresses the accounting for share-based
payment transactions in which a company receives employee services in exchange
for (a) equity instruments of that company or (b) liabilities that are
based on the fair value of the company’s equity instruments or that may be
settled by the issuance of such equity instruments. Under
SFAS No. 123R, grants of stock options, restricted stock, performance
shares and other share-based payments result in an accounting charge for our
company. The accounting charge is equal to the fair value of the instruments
being issued and is amortized over the requisite service period, or vesting
period of the instruments. For restricted stock and performance shares, the cost
is equal to the fair value of the stock on the date of grant times the number of
shares or units granted. For stock options, the cost is equal to the fair value
of the option, estimated using the Black-Scholes option-pricing model, times the
number of options granted. The following weighted average assumptions were used
for grants during the years ended December 31, 2008, 2007 and 2006,
respectively: risk-free interest rates of 3.5%, 4.6% and 4.6%; expected
volatility of 88.1%, 70.3%, and 87.3% based on historical volatility; and
expected lives of 6.3 years, 6.3 years and 4.5 years,
respectively. The valuations assume no dividends are paid. Dollar values
included in the “Non-Employee Director Compensation Table” and the “Summary
Compensation Table” represent the expense recognized in 2008 relating to all
awards granted in 2008 and prior.
Recent
Events Relating to Equity Awards
As
set forth in Part I, Item 1, "Recent Events – Restructuring" of the Company's
annual report on Form 10-K filed on March 16, 2009, the Company announced on
February 12, 2009 that it had reached agreements in principle on a financial
restructuring with certain of the Company's bondholders and that it would file
Chapter 11 petition to implement those agreements on or before April 1,
2009. Due in part to the implications of this on the Company's equity, the
Company's plan to adopt a new employee equity incentive plan upon emergence from
bankruptcy, and also due in part to low trading prices of the Company's common
stock, the Company's management decided to offer employees the option of
forfeiting certain grants of restricted stock and performance shares scheduled
to vest in 2009. The forfeiture offer was accepted by the Named Executive
Officers detailed in the following compensation tables. The compensation
tables were prepared regarding compensation earned during the fiscal year ending
December 31, 2008. As a result of the forfeiture of his or her vesting,
the amount of the NEO's equity as reflected in the following tables prepared as
of December 31, 2008, will decrease and the amounts in the following tables may
not, therefore, accurately reflect future equitable vesting in the Company by
any NEO.
21
Summary
Compensation Table
The
following table sets forth information as of December 31, 2008, 2007 and
2006 regarding the compensation to those executive officers listed below for
services rendered for the fiscal years ended December 31, 2008, 2007 and
2006. These officers consist of the Chief Executive Officer, Chief Financial
Officers and each of the other three most highly compensated executive officers
as of December 31, 2008.
22
(1) 2008 amounts reflect payouts of the
balance of each Named Executive Officer's ECAP Account discounted at 6% per
annum for present value. In January 2009, the Compensation and
Benefits Committee approved the prepayment of all awards under the
plan.
(2)
These awards were forfeited in the first quarter of 2009 and the underlying
equity cancelled with the exception of equity grants to Michael J. Lovett for
the years 2010 and thereafter. Amounts were calculated in accordance
with SFAS No. 123R and represent expense recognized in the period indicated
related to all grants in such period and prior. For more information
on SFAS No. 123R, see "Impact of Tax and Accounting" under Compensation
Discussion and Analysis.
(3)
Amounts reflect the 2006, 2007 and 2008 Executive Bonus Plan bonuses
earned during the 2006 fiscal year, paid in March 2007; during the 2007 fiscal
year, paid in March 2008; and during the 2008 fiscal year, paid in January
2009.
(4) Pursuant to his
2008 Employment Agreement, Mr. Smit received a $2,000,000 signing
bonus. In addition to his ECAP payout, Mr. Smit received a $150,000
discretionary bonus for 2007, paid in March 2008. In addition to her
ECAP payout, Ms. Schmitz received a $60,000 discretionary bonus for 2008, paid
in January 2009. In addition to her ECAP payout, Ms. Schmitz received a $50,000
discretionary bonus for 2007, paid in March 2008. Pursuant to his
Employment Agreement, Mr. Fisher received a $100,000 signing
bonus. In addition to his ECAP payout, Mr. Lovett received a $75,000
discretionary bonus for 2008, paid in January 2009. In addition to
his ECAP payout, Mr. Lovett received a $100,000 discretionary bonus for 2007
paid in March 2008. In addition to his ECAP payout, Mr. Raclin received a
$50,000 discretionary bonus for 2007 paid in March 2008. In addition to his ECAP
earned, Mr. Fawaz received a $25,000 discretionary bonus for 2008 paid in
January 2009. Pursuant to his Employment Agreement, Mr. Fawaz received a
$100,000 signing bonus.
(5) The
following table identifies the perquisites and personal benefits received by the
Named Executive Officers:
23
24
2008
Grants of Plan Based Awards
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