Charter Communications DEF 14A 2007
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant þ
Filed by a Party other than the Registrant o
Check the appropriate box:
o Preliminary Proxy Statement
o Confidential, for Use of the Commission Only (as permitted by Rule l4a-6(e)(2))
þ Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Under Rule 14a-l2
Charter Communications, Inc.
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
April 30, 2007
You are cordially invited to attend the annual meeting of stockholders of Charter Communications, Inc. (the Company or Charter), which will be held at the Pan Pacific Hotel, 2125 Terry Avenue, Seattle, Washington 98121 on Tuesday, June 12, 2007 at 10:00 a.m. (Pacific Daylight Time).
All stockholders of record at the close of business on April 16, 2007 are invited to attend the meeting. For security reasons, however, to gain admission to the meeting you may be required to present identification containing a photograph and to comply with other security measures. Parking at the Pan Pacific Hotel for the Annual Meeting will be complimentary. Please inform the attendant you are attending the Charter Annual Meeting.
Details of the business to be conducted at the annual meeting are provided in the attached Notice of Annual Meeting and Proxy Statement.
Whether or not you attend the annual meeting, it is important that your shares be represented and voted at the meeting. Therefore, I urge you to sign, date, and promptly return the enclosed proxy in the postage-paid envelope that is provided. If you decide to attend the annual meeting, you will have the opportunity to vote in person.
On behalf of the Board of Directors, I would like to express our appreciation for your continued interest in the affairs of the Company.
TABLE OF CONTENTS
12405 Powerscourt Drive
St. Louis, Missouri 63131
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
By order of the Board of Directors,
Grier C. Raclin
April 30, 2007
CHARTER COMMUNICATIONS, INC.
Please vote your shares of Class A common stock by completing the enclosed proxy card and returning it to us in the envelope provided. This proxy statement was first mailed to stockholders on or about April 30, 2007.
General Information about Voting and the Meeting
As a holder of Class A common stock, you are being asked to vote, together with the holder of Class B common stock, FOR the following:
There currently are a total of twelve members of the board of directors. Our Certificate of Incorporation provides that all but one of the directors will be elected by vote of the holder of the Class B common stock voting alone (the Class B directors), and that the remaining director (the Class A/Class B director) will be elected by the holders of the Class A and Class B common stock voting together.
The board of directors has nominated the twelve current directors for re-election. As noted above, however, the holders of Class A shares will be voting for only one director. The Class A/Class B director nominee who has been nominated by the board of directors for election by vote of the Class A and Class B shares voting together at the annual meeting is Robert P. May.
The other eleven directors who have been nominated by the board of directors to serve as Class B directors are: Paul G. Allen, W. Lance Conn, Nathaniel A. Davis, Jonathan L. Dolgen, Rajive Johri, David C. Merritt, Marc B. Nathanson, Jo Allen Patton, Neil Smit, John H. Tory and Larry W. Wangberg.
For all matters except the election of the eleven Class B directors, a total of 408,616,474 shares of Class A common stock, representing approximately 10.8% of the total voting power of all of our issued and outstanding common stock, and 50,000 shares of Class B common stock, representing approximately 89.2% of the total voting power of all our issued and outstanding common stock, are entitled to vote. Each holder of Class A common stock is entitled to one vote per share. Each holder of Class B common stock is entitled to ten votes per share plus ten votes per share of Class B common stock for which membership units in Charter Communications Holding Company, LLC held by Mr. Allen and his affiliates are exchangeable. Accordingly, each outstanding share of Class B common stock was entitled to 67,836.4 votes at April 16, 2007.
You can vote your Class A shares if our records show that you owned the shares at the close of business on April 16, 2007 (the Record Date). The enclosed proxy card indicates the number of Class A shares that our records show you are entitled to vote.
You will not have a vote in the election of the Class B directors. Mr. Allen, the sole holder of Class B shares, will be the only stockholder voting in that election.
We will hold the annual meeting if holders of shares having a majority of the combined voting power of the Class A and Class B common stock as of the Record Date either sign and return their proxy cards or attend the meeting. If you sign and return your proxy card, your shares will be counted to determine whether we have a quorum, even if you fail to indicate your vote.
Based on the voting power of the Class A and Class B common stock, the presence or absence of Mr. Allen at the meeting (in person or by proxy) will determine if a quorum is present.
Abstentions and broker non-votes will be counted as present for purposes of determining whether a quorum exists at the annual meeting.
A broker non-vote occurs when a nominee holding shares for a beneficial owner votes on one proposal but does not vote on another proposal because the nominee does not have discretionary voting power for that particular proposal and has not received voting instructions from the beneficial owner.
A plurality of Class A and Class B votes cast, voting together as a single class, is required for the election of the Class A/Class B director. The affirmative vote of the holders of a majority of Class A and Class B shares present in person or represented by proxy at the meeting and entitled to vote, voting together as a single class, is required for ratification of the appointment of KPMG as our independent registered public accounting firm.
Under our Certificate of Incorporation and Bylaws, for purposes of determining whether votes have been cast, abstentions and broker non-votes will not be counted except with respect to the election of directors where abstentions and broker non-votes will result in the respective nominee receiving fewer votes, but will have no effect on the outcome of the vote since only a plurality is needed to elect the directors.
A stockholder may vote to abstain on the ratification of the appointment of KPMG as our independent registered public accounting firm and the other proposals which may properly come before the annual meeting. If you vote to abstain, your shares will be counted as present at the meeting for purposes of determining a quorum on all matters, but will not be considered to be votes cast with respect to such matters. Abstentions will not be voted and will have the effect of a vote against the proposals. If an executed proxy is returned by a broker holding shares in street name that indicates that the broker does not have discretionary authority as to certain shares to vote on one or more matters (a broker non-vote), such shares will be considered present at the meeting for purposes of determining a quorum on all matters, but will not be considered to be votes cast with respect to such matters. Therefore, broker non-votes will have no effect on the outcome of the election of directors, but will have the effect of a vote against the ratification of the appointment of KPMG as our independent registered public accounting firm. In addition, in the election of directors, a stockholder may withhold such stockholders vote.
We have been advised by Mr. Allen, the sole holder of Class B shares, that he intends to vote FOR all of the twelve nominees identified above, including the Class A/Class B director nominee, which would result in the election of the Class A/Class B nominee. We have also been advised by Mr. Allen, that he intends to vote FOR the ratification of the appointment of KPMG as our independent registered public accounting firm, which would result in the approval of the proposals.
You can vote your shares FOR, or you can withhold your vote for, the Class A/Class B director nominee, Robert P. May. On the proposal not involving the election of directors, you can (1) vote for the proposal, (2) vote against the proposal, or (3) abstain from voting.
Follow the instructions on the enclosed proxy card. Sign and date the proxy card and mail it back to us in the enclosed envelope. If you receive more than one proxy card it may mean that you hold shares in more than one account. Sign and return all proxy cards to ensure that all of your shares are voted. The proxy holder named on the proxy card will vote your shares as you instruct. If you sign and return the proxy card but do not indicate your vote, the proxy holder will vote on your behalf FOR the named Class A/Class B director nominee or his substitute and FOR ratification of KPMG as our independent registered public accounting firm.
Stockholders with shares registered in their names with Mellon Investor Services LLC, our transfer agent, may authorize a proxy via the Internet at the following address: http://www.proxyvote.com. A number of brokerage firms and banks participate in a program that permits Internet voting. If your shares are held in an account at a brokerage firm or bank that participates in such a program, you may direct the vote of those shares by following the instructions on the voting form enclosed with the proxy from the brokerage firm or bank.
Proxies submitted via the Internet must be received by 11:59 p.m. (EDT) on June 11, 2007. Please refer to your voting instruction form and/or your proxy card for specific voting instructions. If you vote this years proxy via the Internet, you may also elect to receive future proxy and other materials electronically by following the instructions when you vote. Making this election will save the Company the cost of producing and mailing these documents.
The items listed on the Notice of Annual Meeting of Stockholders are the only matters that we know will be voted on at the annual meeting. On such other business as may properly come before the meeting, your shares will be voted in the discretion of the proxy holder.
Yes. At any time before the vote at the annual meeting, you can change your vote either by giving our Corporate Secretary a written notice revoking your proxy card, or by signing, dating and submitting a new proxy card. We will honor the latest dated proxy card which has been received prior to the closing of the voting. You may also attend the meeting and vote in person.
Although we encourage you to complete and return the proxy card to ensure that your vote is counted, you can attend the annual meeting and vote your shares in person.
If your shares are held in the name of your broker, a bank or other nominee, you should return your proxy in the envelope provided by such broker, bank or nominee or instruct the person responsible for holding your shares to execute a proxy on your behalf. In either case, your shares will be voted according to your instructions.
If you wish to attend the annual meeting and vote your shares in person, you should obtain the documents required to vote your shares in person at the annual meeting from your broker, bank or other nominee.
Who is soliciting my vote?
The board of directors is soliciting your vote.
The Company pays for the proxy solicitation. We will ask banks, brokers and other nominees and fiduciaries to forward the proxy material to the beneficial owners of the Class A common stock and to obtain the authority of executed proxies. We will reimburse them for their reasonable expenses.
Proposal No. 1: Election of Class A/Class B Director
(Item 1 on Proxy Card)
The Company currently has twelve directors, each of whom is elected on an annual basis. The Companys Certificate of Incorporation and Bylaws provide that the holders of the Class B common stock elect all but one of the directors. The holders of the Class A common stock and Class B common stock, voting together, elect one director (the Class A/Class B director). This election of one Class A/Class B director by the holders of Class A and Class B common stock voting together is scheduled to take place at the annual meeting of stockholders. The board of directors is soliciting your vote for the Class A/Class B director to be elected at the annual meeting of stockholders. Once elected, the Class A/Class B director will hold office until his or her successor is elected, which we expect to occur at next years annual meeting of stockholders. You do not have a vote, and your vote is not being solicited, with respect to the election of the eleven Class B directors who will be elected at the meeting.
Nominations. Robert P. May has been nominated for election as the Class A/Class B director. Although we do not know of any reason why Mr. May might not be able to serve, the board of directors will propose a substitute nominee to serve if Mr. May is not available for election for any reason.
By virtue of Mr. Allens control of approximately 90.0% of the voting power of the Company as of the Record Date, the Company is a controlled company under NASDAQ rule 4350(c)(5). As such, the Company is not subject to requirements that a majority of our directors be independent (as defined in NASDAQs 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. Allens 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 Companys nomination process is appropriate. Criteria and qualifications for new board members considered by the Companys 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. No stockholder nominees have been proposed for this years meeting.
Stockholders also are free to suggest persons for the board of directors to consider as nominees. The board of directors will consider those individuals if adequate information is submitted in a timely manner (but at least 120 days before the date of the proxy statement for the prior years annual meeting of stockholders) in writing to the board of directors at the Companys principal executive offices, in care of the General Counsel. The board of directors may, however, give less serious consideration to individuals with whom none of the current board members personally know.
Robert P. May is the director nominee proposed for election by the holders of the Companys Class A and Class B common stock. Mr. May has agreed to be named in this proxy statement and to serve as a director if elected.
Robert P. May, 57, was elected to Charters board of directors in October 2004 and was Charters Interim President and Chief Executive Officer from January until August 2005. Mr. May was named Chief Executive Officer and a director of Calpine Corporation, a power company, in December 2005. Calpine filed for Chapter 11 bankruptcy reorganization in December 2005. He served on the board of directors of HealthSouth Corporation, a national provider of healthcare services, from October 2002 until October 2005, and was its Chairman from July
2004 until October 2005. Mr. May also served as HealthSouth Corporations Interim Chief Executive Officer from March 2003 until May 2004, and as Interim President of its Outpatient and Diagnostic Division from August 2003 to January 2004. Since March 2001, Mr. May has been a private investor and principal of RPM Systems, which provides strategic business consulting services. From March 1999 to March 2001, Mr. May served on the board of directors and was Chief Executive of PNV Inc., a national telecommunications company. Prior to his employment at PNV Inc., Mr. May was Chief Operating Officer and a member of the board of directors of Cablevision Systems Corporation from October 1996 to February 1998, and from 1973 to 1993 he held several senior executive positions with Federal Express Corporation, including President, Business Logistics Services. Mr. May was educated at Curry College and Boston College and attended Harvard Business Schools Program for Management Development. He is a member of Deutsche Bank of Americas Advisory Board.
THE BOARD OF DIRECTORS RECOMMENDS VOTING FOR THE CLASS A/CLASS B DIRECTOR NOMINEE.
Election of Class B Directors
The following information concerns the eleven individuals who have been nominated by the board of directors for election by the Class B holder, voting as a separate class. Each of the following individuals currently serves as a Class B director.
Paul G. Allen, 54, has been Chairman of Charters board of directors since July 1999, and Chairman of the board of directors of Charter Investment, Inc. (a predecessor to, and currently an affiliate of, Charter) since December 1998. Mr. Allen, co-founded Microsoft Corporation with Bill Gates in 1975 and remained the companys chief technologist until he left Microsoft Corporation in 1983. Mr. Allen is the founder and chairman of Vulcan Inc., Mr. Allens project and investment management company that oversees large stakes in DreamWorks Animation SKG, Digeo, Oxygen Media, real estate and more than 40 other technology, media and content companies. In 2004, Mr. Allen funded SpaceShipOne, the first privately-funded effort to successfully put a civilian in suborbital space and winner of the Ansari X-Prize competition. Mr. Allen also owns the Seattle Seahawks NFL and Portland Trail Blazers NBA franchises. In addition, Mr. Allen is a director of Vulcan Ventures, Inc., Vulcan Inc., and numerous privately held companies.
W. Lance Conn, 38, was elected to the board of directors of Charter in September 2004. Since July 2004, Mr. Conn has served as Executive Vice President, Investment Management for Vulcan Inc., the investment and project management company that oversees a diverse multi-billion dollar portfolio across diverse industry sectors and investment asset classes. Prior to joining Vulcan Inc., Mr. Conn was employed by America Online, Inc., an interactive online services company, from March 1996 to May 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 Onlines 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 Onlines operations. From September 1994 until February 1996, Mr. Conn was an attorney with the Shaw Pittman law firm in Washington, D.C. 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.
Nathaniel A. Davis, 53, was elected to the board of directors of Charter on August 23, 2005. In July 2006, Mr. Davis became President and Chief Operating Officer of XM Satellite Radio Holdings, Inc. where he is also a director. Prior to that, from June 2003 until July 2006, Mr. Davis had been Managing Director and owner of RANND Advisory Group, a technology consulting group, which advises venture capital, telecom and other technology related firms. From January 2000 through May 2003, he was President and Chief Operating Officer of XO Communication, Inc. XO Communications filed a petition to reorganize under Chapter 11 of the Bankruptcy Code in June 2002 and completed its restructuring and emerged from Chapter 11 in January 2003. From October 1998 to December 1999 he was Executive Vice President, Network and Technical Services of Nextel Communications, Inc. Prior to that, he worked for MCI Communications from 1982 until 1998 in a number of positions, including Chief Financial Officer of MCIT from November 1996 until October 1998. Previously, Mr. Davis served in a variety of roles that include Senior Vice President of Network Operations, Chief Operating Officer of MCImetro, Sr. Vice President of Finance, Vice President of Systems Development. Mr. Davis holds a B.S. degree from Stevens Institute of Technology, an M.S. degree from Moore School of Engineering and an M.B.A. degree from the Wharton School at the University of Pennsylvania. He is a member of the board of Mutual of America Capital Management Corporation.
Jonathan L. Dolgen, 62, was elected to the board of directors of Charter in October 2004. Since October 2006, Mr. Dolgen has served as senior consultant for ArtistDirect, Inc. Since July 2004, Mr. Dolgen has also been a Senior Advisor to Viacom, Inc. (Old Viacom), a worldwide entertainment and media company, where he provided advisory services to the Chief Executive Officer of Old Viacom, or others designated by him, on an as requested basis. Effective December 31, 2005, Old Viacom was separated into two publicly traded companies, Viacom Inc. (New Viacom) and CBS Corporation. Since the separation of Old Viacom, Mr. Dolgen provides advisory services to the Chief Executive Officer of New Viacom, or others designated by him, on an as requested basis. Since July 2004, Mr. Dolgen has been a private investor and since September 2004, Mr. Dolgen has been a principal of Wood
River Ventures, LLC, (Wood River) a private start-up entity that seeks investment and other opportunities primarily in the media sector. Since April 2005, Mr. Dolgen, through Wood River, has had an arrangement with Madison Dearborn Partners, LLC to seek investment opportunities primarily in the media sector. Mr. Dolgen is also a member of the board of directors of Expedia, Inc. From April 1994 to July 2004, Mr. Dolgen served as Chairman and Chief Executive Officer of the Viacom Entertainment Group, a unit of Old Viacom, where he oversaw various operations of Old Viacoms businesses, which during 2003 and 2004 primarily included the operations engaged in motion picture production and distribution, television production and distribution, regional theme parks, theatrical exhibition and publishing. As a result of the separation of Old Viacom, Old Viacoms motion picture production and distribution and theatrical exhibition business became part of New Viacoms businesses, and substantially all of the remaining businesses of Old Viacom overseen by Mr. Dolgen remained with CBS Corporation. Mr. Dolgen began his career in the entertainment industry in 1976, and until joining the Viacom Entertainment Group, served in executive positions at Columbia Pictures Industries, Inc., Twentieth Century Fox and Fox, Inc., and Sony Pictures Entertainment. Mr. Dolgen holds a B.S. degree from Cornell University and a J.D. degree from New York University.
Rajive Johri, 57, was elected to the board of directors of Charter in April 2006. Since June 2006, Mr. Johri has served as President and Director of First National Bank of Omaha. From September 2005 to June 2006, he served as President of the First National Credit Cards Center for First National Bank of Omaha. From August 2004 to September 2005, he served as Executive Consultant for Park Li Group in New York, NY. Prior to that, Mr. Johri served as Executive Vice President, Marketing for J.P. Morgan Chase Bank from September 1999 until August 2004. From 1985 to 1999, Mr. Johri was employed by Citibank N.A. in a number of management positions. Mr. Johri is a director and Executive Vice President of First National Bank of Nebraska, Inc., a director of First National Credit Card, Inc, and director and chairman of InfiCorp Holdings, Inc, InfiBank, N.A. and InfiStar Corporation. Mr. Johri received a bachelors of technology degree in Mechanical Engineering from Indian Institute of Technology in New Delhi, India and a M.B.A. degree in Marketing and Finance from Indian Institute of Management in Calcutta, India.
David C. Merritt, 52, was elected to the board of directors of Charter in July 2003, and was also appointed as Chairman of Charters Audit Committee at that time. Since October 2003, Mr. Merritt has been a Managing Director of Salem Partners, LLC, an investment banking firm. He was a Managing Director in the Entertainment Media Advisory Group at Gerard Klauer Mattison & Co., Inc., a company that provided financial advisory services to the entertainment and media industries from January 2001 through April 2003. He served as a director of Laser-Pacific Media Corporation from January 2001 until October 2003 and served as Chairman of its audit committee. In December 2003, he became a director of Outdoor Channel Holdings, Inc and serves as Chairman of its audit committee. Mr. Merritt joined KPMG in 1975 and served in a variety of capacities during his years with the firm, including national partner in charge of the media and entertainment practice and before joining CKE Associates, Mr. Merritt was an audit and consulting partner of KPMG for 14 years. In February 2006, Mr. Merritt became a director of Calpine Corporation. Mr. Merritt holds a B.S. degree in business and accounting from California State University Northridge.
Marc B. Nathanson, 61, has been a director of Charter since January 2000 and serves as Vice Chairman of Charters board of directors, a non-executive position. Mr. Nathanson is the Chairman of Mapleton Investments LLC, an investment vehicle formed in 1999. He also founded and served as Chairman and Chief Executive Officer of Falcon Holding Group, Inc., a cable operator, and its predecessors, from 1975 until 1999. He served as Chairman and Chief Executive Officer of Enstar Communications Corporation, a cable operator, from 1988 until November 1999. Prior to 1975, Mr. Nathanson held executive positions with Teleprompter Corporation, Warner Cable and Cypress Communications Corporation. In 1995, he was appointed by the President of the United States to the Broadcasting Board of Governors, and from 1998 through September 2002, served as its Chairman. Mr. Nathanson holds a B.A. in Mass Communications from the University of Denver and a M.A. in political science from University of California/Santa Barbara.
Jo Allen Patton, 49, has been a director of Charter since April 2004. Ms. Patton co-founded Vulcan Inc., Mr. Allens project and investment management firm, in 1986. Since that time she has served as an officer and director of many affiliates of Mr. Allen, including her current position as President and Chief Executive Officer of Vulcan Inc. since July 2001. Also in 2001, Ms. Patton co-founded the Allen Institute for Brain Science, a non-profit
institute established to identify and address key issues in neuroscience, particularly those that can advance the understanding of human behavior. Ms. Patton is also President of Vulcan Productions, an independent feature film and documentary production company, Vice Chair of First & Goal, Inc., which developed and operated the Seattle Seahawks NFL stadium, and serves as Executive Director of The Paul G. Allen Family Foundation. Ms. Patton is a co-founder of the Experience Music Project museum, as well as the Science Fiction Museum and Hall of Fame. Ms. Patton is the sister of Mr. Allen.
Neil Smit, 48, was elected a director and President and Chief Executive Officer of Charter in August 2005. He had previously worked at Time Warner, Inc. since 2000, most recently serving as the President of Time Warners America Online Access Business. He also served at America Online (AOL) as Executive Vice President, Member Development, Chief Operating Officer of AOL Local and Chief Operating Officer of MapQuest. Prior to that he was a Regional President with Nabisco and was with Pillsbury in a number of management positions. Mr. Smit has a B.S. degree from Duke University and a M.S. degree with a focus in international business from Tufts Universitys Fletcher School of Law and Diplomacy.
John H. Tory, 52, has been a director of Charter since December 2001. Mr. Tory served as the Chief Executive Officer of Rogers Cable Inc., Canadas largest broadband cable operator, from 1999 until 2003. From 1995 to 1999, Mr. Tory was President and Chief Executive Officer of Rogers Media Inc., a broadcasting and publishing company. Prior to joining Rogers, Mr. Tory was a Managing Partner and member of the executive committee at Tory Tory DesLauriers & Binnington, one of Canadas largest law firms. Mr. Tory serves on the board of directors of Rogers Telecommunications Limited and Cara Operations Limited and is Chairman of Cara Operations Audit Committee. Mr. Tory was educated at University of Toronto Schools, Trinity College (University of Toronto) and Osgoode Hall Law School. In September 2004, Mr. Tory was elected Leader of the Ontario Progressive Conservative Party. In March 2005, he was elected a Member of the Provincial Parliament and became the Leader of Her Majestys Loyal Opposition.
Larry W. Wangberg, 64, 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 controlled by Paul Allen. He also served as its Chairman and Chief Executive Officer from August 1997 through July 2002. In May 2004, TechTV L.L.C. was sold to an unrelated party. 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 Mirror Cable Television and Senior Vice President of its corporate parent, Times Mirror Co., from 1983 to 1994. He currently serves on the boards of Autodesk Inc. and ADC Telecommunications, Inc. Mr. Wangberg holds a B.S. degree in mechanical engineering and a M.S. degree in industrial engineering, both from the University of Minnesota.
Our board of directors meets regularly throughout the year on a set schedule. The board also holds special meetings and acts by written consent from time to time as necessary. Meetings of the independent members of the board are scheduled from time to time. Management is not present at these meetings. Eleven of the twelve directors then serving attended last years annual meeting of stockholders, and members of the board of directors are encouraged to attend the annual meeting each year. In 2006, the full board of directors held nine meetings and acted five times by written consent. No incumbent director attended fewer than 75% of the total number of meetings of the board and of committees on which he or she served.
The board of directors has determined that all of the members of the Audit Committee are independent directors, as required by the NASDAQ Global Market listing standards. As previously noted, by virtue of Mr. Allens control of more than 50% of the voting power of the Company, the remaining director independence requirements of NASDAQ do not apply to the Company, as it is a Controlled Company under the NASDAQ listing standards, except for the provision that the Companys independent directors must have regularly scheduled meetings at which only independent directors are present. The Companys Corporate Governance Committee of the Board of Directors has determined that except for Messrs. Allen, Conn and Smit and Ms. Patton, all directors are independent under NASDAQ rules.
Individuals may communicate directly with members of the board of directors or members of the boards standing committees by writing to the following address:
Charter Communications, Inc.
12405 Powerscourt Drive
St. Louis, Missouri 63131
Attn: Corporate Secretary
The Corporate Secretary will summarize all correspondence received, subject to the standards below, and periodically forward summaries to the board. Members of the board may at any time request copies of any such correspondence. Communications may be addressed to the attention of the board, a standing committee of the board, or any individual member of the board or a committee. Communication that is primarily commercial in nature, relates to an improper or irrelevant topic, or requires investigation to verify its content may not be forwarded.
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.
Charters Audit Committee, which has a written charter approved by the board, consists of Messrs. Davis, Johri and Merritt, all of whom were determined by the board of directors to be independent in accordance with the applicable corporate governance listing standards of the NASDAQ Global Market. A copy of the Audit Committees charter is available on the Companys website, www.charter.com. The Companys board of directors has determined that, in its judgment, David Merritt is an audit committee financial expert within the meaning of the applicable federal regulations. The Audit Committee held ten meetings in 2006.
The Compensation and Benefits Committee, which has a written charter approved by the board, reviews and approves the Companys compensation of the senior management of the Company and its subsidiaries. The charter is available on the Companys website, www.charter.com. The Committee is comprised of Messrs. Allen, May, Merritt, and Nathanson. The Compensation and Benefits Committee met seven times in 2006 and executed one unanimous consent in lieu of a meeting.
The Finance Committee reviews the Companys financing activities and approves the terms and conditions of any financing transactions referred to it by the Board, in consultation with the Companys legal and financial advisors. The Finance Committee in 2005 consisted of Messrs. Allen and Merritt. The Finance Committee met two times in 2006 and executed two unanimous written consents in lieu of meetings.
The Executive Committee has the authority to act in place of the full board of directors and exercise such powers of the full board as the board may delegate to the Executive Committee from time to time. The Executive Committee consisted of directors Messrs. Allen, Nathanson and Smit. The Executive Committee did not meet in 2006.
The Corporate Governance Committee was formed in August 2006 to develop and recommend to the board corporate governance guidelines and to perform a leadership role in shaping the Companys corporate governance. The Committee consists of Messrs. Conn, May and Wangberg. The Corporate Governance Committee met two times in 2006.
The following table sets forth information as of December 31, 2006 regarding the compensation to those non-employee directors listed below for services rendered for the fiscal year ended December 31, 2006. Non-employee directors are not eligible for option awards within the 2001 Stock Incentive Plan, non-equity incentive compensation within the 2006 Executive Bonus Plan or deferred compensation within the Supplemental Deferred Compensation Plan.
All grant date fair value amounts were calculated in accordance with SFAS No. 123R. For more information on SFAS No. 123R, see Impact of Tax and Accounting under Compensation Discussion and Analysis. The aggregate number of shares of restricted stock outstanding at fiscal year-end for all directors, except Mr. Johri and Ms. Patton, was 49,242. In addition, Mr. Johri and Ms. Patton received mid-year restricted stock grants, vesting one year after the date of grant. Mr. Johris mid-year grant was prorated based upon his partial years service as a director prior to the annual grant. His aggregate number of restricted stock outstanding at fiscal year-end was 67,379. Ms. Pattons mid-year grant was prorated based upon the prior grant schedule. Her aggregate number of restricted stock outstanding at fiscal year-end was 63,986.
(3) Amount attributed to payment of fees in 2006 resulting from his service as interim President and CEO in 2005.
Cash and Equity Compensation. Each non-employee member of the board receives an annual retainer of $40,000 in cash plus restricted stock, vesting one year after the date of grant, with a value on the date of grant of $65,000. In addition, the Audit Committee chair receives $25,000 per year, and the chair of each other committee receives $10,000 per year. Each committee member also received $1,000 for attendance at each committee meeting. Each director receives $1,000 for telephonic attendance at each meeting of the full board and $2,000 for in-person attendance. Each director of Charter is entitled to reimbursement for costs incurred in connection with attendance at board and committee meetings. Vulcan has informed us that, in accordance with its internal policy, Mr. Conn turns over to Vulcan all cash compensation he receives for his participation on Charters board of directors or committees thereof.
Directors who are employees do not receive additional compensation for Board participation. Mr. Smit, who was our President and Chief Executive Officer in 2006, is the only director who was also an employee during 2006.
Our Bylaws provide that all directors are entitled to indemnification to the maximum extent permitted by law from and against any claims, damages, liabilities, losses, costs or expenses incurred in connection with or arising out of the performance by them of their duties for us or our subsidiaries.
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.
Information regarding our executive officers who do not serve as directors is set forth below.
Michael J. Lovett, 45, Executive Vice President and Chief Operating Officer. Mr. Lovett was promoted to his current position in April 2005. Prior to that he served as Executive Vice President, Operations and Customer Care from September 2004 through March 2005, and as Senior Vice President, Midwest Division Operations and as Senior Vice President of Operations Support, since joining Charter in August 2003 until September 2004. Mr. Lovett was Chief Operating Officer of Voyant Technologies, Inc., a voice conferencing hardware/software solutions provider, from December 2001 to August 2003. From November 2000 to December 2001, he was Executive Vice President of Operations for OneSecure, Inc., a startup company delivering management/monitoring of firewalls and virtual private networks. Prior to that, Mr. Lovett was Regional Vice President at AT&T from June 1999 to November 2000 where he was responsible for operations. Mr. Lovett was Senior Vice President at Jones Intercable from October 1989 to June 1999 where he was responsible for operations in nine states.
Jeffrey T. Fisher, 44, Executive Vice President and Chief Financial Officer. Mr. Fisher was appointed to the position of Executive Vice President and Chief Financial Officer, in February 2006. Prior to joining Charter, Mr. Fisher was employed by Delta Airlines, Inc. from 1998 to 2006 in a number of positions including Senior Vice President Restructuring from September 2005 until January 2006, President and General Manager of Delta Connection, Inc. from January to September 2005, Chief Financial Officer of Delta Connection from 2001 until January 2005, Vice President of Finance, Marketing and Sales Controller of Delta Airlines in 2001 and Vice President of Financial Planning and Analysis of Delta Airlines from 2000 to 2001. Delta Airlines filed a petition under Chapter 11 of the Bankruptcy Code on September 14, 2005. Mr. Fisher received a B.B.M. degree from Embry Riddle University and a M.B.A. degree in International Finance from University of Texas in Arlington, Texas.
Grier C. Raclin, 54, Executive Vice President, General Counsel and Corporate Secretary. Mr. Raclin joined Charter in his current position in October 2005. Prior to joining Charter, Mr. Raclin had served as the Chief Legal Officer and Corporate Secretary of Savvis Communications Corporation from January 2003 until October 2005. Prior to joining Savvis, Mr. Raclin served as Executive Vice President, Chief Administrative Officer, General Counsel and Corporate Secretary from 2000 to 2002 and as Senior Vice President of Corporate Affairs, General Counsel and Corporate Secretary from 1997 to 2000 of Global TeleSystems Inc. (GTS). Prior to joining GTS, Mr. Raclin was Vice-Chairman and a Managing Partner of Gardner, Carton and Douglas in Washington, D.C. Mr. Raclin earned a J.D. degree from Northwestern University Law School, where he served on the Editorial Board of the Northwestern University Law School Law Review, attended business school at the University of Chicago Executive Program and earned a B.S. degree from Northwestern University, where he was a member of Phi Beta Kappa.
Marwan Fawaz, 44, Executive Vice President and Chief Technical Officer. Mr. Fawaz joined Charter in his current position in August 2006. Prior to that, he served as Senior Vice President and Chief Technical Officer for Adelphia Communications Corporation (Adelphia) from March 2003 until July 2006. Adelphia filed a petition under Chapter 11 of the Bankruptcy Code in June 2002. From May 2002 to March 2003, he served as Investment Specialist/ Technology Analyst for Vulcan, Inc. Mr. Fawaz served as Regional Vice President of Operations for the Northwest Region for Charter from July 2001 to March 2002. From July 2000 to December 2000, he served as Chief Technology Officer for Infinity Broadband. He served as Vice President Engineering and Operations at MediaOne, Inc. from January 1996 to June 2000. Mr. Fawaz received a B.S. degree in electrical engineering and a M.S. in electrical/communication-engineering from California State University Long Beach.
Robert A. Quigley, 63, Executive Vice President and Chief Marketing Officer. Mr. Quigley joined Charter in his current position in December 2005. Prior to joining Charter, Mr. Quigley was President and CEO at Quigley Consulting Group, LLC, a private consulting group, from April 2005 to December 2005. From March 2004 to March 2005, he was Executive Vice President of Sales and Marketing at Cardean Education Group (formerly UNext com LLC), a private online education company. From February 2000 to March 2004, Mr. Quigley was Executive Vice President of America Online and Chief Operating Officer of its Consumer Marketing division. Prior to America Online, he was owner, President and CEO of Wordsquare Publishing Co. from July 1994 to February 2000. Mr. Quigley is a graduate of Wesleyan University with a B.A. degree in history and is a member of the Direct Marketing Association board of directors.
Lynne F. Ramsey, 49, Senior Vice President, Human Resources. Ms. Ramsey joined Charters Human Resources group in March 2001 and served as Corporate Vice President, Human Resources. She was promoted to her current position in July 2004. Before joining Charter, Ms. Ramsey was Executive Vice President of Human Resources for Broadband Infrastructure Group from March 2000 through November 2000. From 1994 to 1999, Ms. Ramsey served as Senior Vice President of Human Resources for Firstar Bank, previously Mercantile Bank of St. Louis. She served as Vice President of Human Resources for United Postal Savings from 1982 through 1994, when it was acquired by Mercantile Bank of St. Louis. Ms. Ramsey received a bachelors degree in Education from Maryville College and a masters degree in Human Resources Management from Washington University.
Kevin D. Howard, 37, Vice President and Chief Accounting Officer. Mr. Howard was promoted to his current position in April 2006. Prior to that, he served as Vice President of Finance from April 2003 until April 2006 and as Director of Financial Reporting since joining Charter in April 2002. Mr. Howard began his career at Arthur Andersen LLP in 1993 where he held a number of positions in the audit division prior to leaving in April 2002. Mr. Howard received a B.S.B.A. degree in finance and economics from the University of Missouri Columbia and is a certified public accountant and certified managerial accountant.
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 or the Securities Exchange Act of 1934, 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 this proxy statement and incorporated into the Companys 2006 Annual Report on Form 10-K.
PAUL G. ALLEN
ROBERT P. MAY
DAVID C. MERRITT
MARC B. NATHANSON
During 2006, the Compensation and Benefits Committee was comprised of Messrs. Allen, May, Merritt and Nathanson. No member of Charters Compensation and Benefits Committee was an officer or employee of Charter or any of its subsidiaries during 2006, except for Mr. Allen who served as a non-employee Chairman of the Board. Mr. Nathanson held the title of Vice Chairman of Charters board of directors, a non-executive, non-salaried position in 2006. Mr. Allen is the 100% owner and a director of Vulcan Inc. and certain of its affiliates, which employs Mr. Conn and Ms. Patton as executive officers.
During 2006, (1) none of Charters executive officers served on the compensation committee of any other company that has an executive officer currently serving on Charters board of directors or Compensation and Benefits Committee and (2) none of Charters executive officers served as a director of another entity, one of whose executive officers served on the Compensation Committee or Option Plan Committee, except for Messrs. Lovett and Fawaz who served as directors, until their resignations in October 2006, of Digeo, Inc., an entity of which Paul Allen is a director and by virtue of his position as Chairman of the board of directors of Digeo, Inc. is also a non-employee executive officer.
Compensation Discussion and Analysis
The following discussion and analysis of compensation arrangements of our Named Executive Officers (including our Chief Executive Officer, Chief Financial Officer, Former Interim Chief Financial Officer and other executive officers appearing in the Summary Compensation Table) in 2006 should be read together with the compensation tables and related disclosures set forth elsewhere in this proxy statement.
The Compensation and Benefits Committee of our board of directors is responsible for overseeing the overall compensation structure, policies and programs of our company, assessing whether our compensation structure results in appropriate compensation levels and incentives for executive management and employees of the Company and 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, 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 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 CEOs recommendations along with analysis provided by the Committees compensation consultants, it retains full discretion to set all compensation for the Companys Named Executive Officers other than the CEO. The Compensation and Benefits Committees recommendations for the CEOs compensation goes before our full board of directors, with non-employee directors voting on the approval of any recommendations.
The Compensation and Benefits Committee has the discretion to directly engage the services of a compensation consultant and has done so in the past. In March 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 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 Companys business strategy, identify data questions or other similar issues, if any, prior to presentation to the Compensation and Benefits Committee.
The Compensation and Benefits Committee believes that attracting and retaining well-qualified executives is a top priority. The Compensation and Benefits Committees approach is to compensate executives commensurate with their experience, expertise and performance, as well as to ensure that its 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 executives 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, 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 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 key financial measurements which we believe closely correlate to long-term stakeholder value creation. The annual cash bonus and long-term stock-based 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 Companys financial strength and stakeholder value. Moreover, we believe that compensation in the form of equity inherently aligns the interests of our management team with those of shareholders.
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 skill sets possessed by our current management team are attractive to many companies outside of the cable industry and the members of our new management team do not have close ties to the St. Louis area. Two programs have fostered our focus on retention.
First, our Executive Cash Award Plan provides for a cash award to be paid at the end of a pre-determined period, discussed in detail below. Second, we adopted a Special Compensation Award in March 2007, discussed below.
The Compensation and Benefits Committee makes compensation decisions after reviewing the performance of the Company and carefully evaluating an executives 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:
The main components of the Companys compensation program:
Details of Each Element
Base salaries are set with regard to the level of the position within the Company and the individuals 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 executives significant impact on then current Company goals. Salary adjustments may also be based on changes in market pay levels for comparable positions in our geographic markets. However, 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 Committees judgment. Although salaries are generally targeted at market median compared to an industry peer group (discussed below) 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.
(2) Executive Bonus Plan
Executive Officers of Charter and certain other managerial and professional employees of Charter and its subsidiaries were eligible to participate in Charters 2006 Executive Bonus Plan. The annual incentive award program provides executive officers an opportunity to receive cash incentive awards contingent on achieving certain performance objectives. It focuses on providing rewards for short-term Company or divisional financial performance. In keeping with the Companys compensation philosophy for annual cash compensation, target annual incentive opportunities are set at levels consistent with the median level of the industry peer group. Bonuses for eligible employees for 2006 were determined based on the extent to which Charters (or, if applicable, an employees particular divisions or key market areas (KMA)) performance during 2006 met or exceeded budgeted goals with respect to four performance measures. These measures, and the percentage of an employees bonus allocated to each measure, were revenue (40%), adjusted EBITDA excluding corporate marketing (operating cash flow for divisional and KMA employees) (20%), unlevered free cash flow (20%) and customer satisfaction (20%). Customer satisfaction was measured against quantifiable statistics determined by the board of directors or Compensation and Benefits Committee, and which included 1) repeat service calls within 30 days, 2) total trouble call rate and 3) call center service level.
With respect to each performance measure listed above, the eligible employee would receive 100% of the portion of his or her target bonus allocated to that performance measure if Charters (or such employees divisions) performance reached the budgeted goal for that measure. Also, for each performance measure, the employee would receive a portion of the allocated percentage provided the performance exceeded a minimum of 95% of the budgeted goal, and could receive as much as 200% (for Revenue) and 150% (for all other measures) of the allocated percentage if the performance exceeded the applicable budgeted goal by 5% representing a maximum payout of 170% of target. Each employees target bonus was determined based on market data and position within the Company. Target bonuses for executive officers ranged from 40% to 125% of base salary.
In February 2007, the Compensation and Benefits Committee determined that the budgeted goals for 2006 had been exceeded and approved bonuses under the 2006 Executive Bonus Plan in the amount of 115% of targeted bonuses, as detailed in the following chart and disclosed 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. The Compensation and Benefits Committee made certain revisions to the 2006 measures to account for Board-approved actions after the measures were initially adopted.
For 2007, bonuses for eligible employees will be determined based on the extent to which Charters (or, if applicable, an employees particular divisions or KMAs) performance during 2007 meets or exceeds budgeted goals with respect to four performance measures. These measures, and the percentage of an employees bonus
allocated to each measure, are revenue (30%), adjusted EBITDA for corporate employees (excluding corporate marketing) or operating cash flow for divisional employees (30%), unlevered free cash Flow (20%) and customer satisfaction (20%). The individual target bonuses for Named Executive Officers remained unchanged from 2006. However, as a result of these revised weightings, the 2007 maximum target payout decreased to 165% from 170% in 2006. Target bonuses for executive officers range from 50% to 125% of base salary.
The Companys long-term equity 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 retain the executives through the term of the awards. We consider the grant size and the appropriate combination of stock options and full value shares when making award decisions. In 2006, we began to shift a greater portion of our long-term incentive grants away from stock options and towards performance units, which we believe will provide for better retention incentives. We believe that performance units help to drive Company performance through their direct linkage to controllable business results while, at the same time, rewarding executives for the value created through share appreciation. Making grants of full value awards 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, in accordance with our compensation philosophy, grant levels are generally targeted at the median of our industry peer group.
The 2001 Stock Incentive Plan provides for the 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. Generally, options expire 10 years from the grant date. Unless terminated sooner by our board of directors, the 2001 Stock Incentive Plan will terminate on February 12, 2011, and no option or award can be granted thereafter under that plan.
At December 31, 2006, 2,366,760 shares had been issued under the plan upon exercise of options, 3,103,759 shares had been issued upon vesting of restricted stock granted under the plan. Of the remaining 84,529,481 shares covered by the plan, as of December 31, 2006, 3,033,043 shares were subject to future vesting under restricted stock agreements, 26,403,200 were subject to outstanding options (42% of which were vested), and there were 11,438,566 performance units and shares granted under Charters Long-Term Incentive Program as of December 31, 2006, to vest on the third anniversary of the date of grant conditional upon Charters performance against certain financial targets approved by Charters board of directors at the time of the award. As of December 31, 2006, 34,327,388 shares remained available for future grants under the plan (assuming maximum attainment of performance units). As of December 31, 2006, there were 4,459 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.
The 2001 Stock Incentive Plan must be administered by, and grants and awards to eligible individuals must be approved by our board of directors or a committee thereof consisting solely of nonemployee directors as defined in Section 16b-3 under the Securities Exchange Act of 1934, as amended. The Compensation and Benefits Committee approves the grants for Senior Vice Presidents and Executive Vice Presidents and grant levels for all other eligible employees and it determines the terms of each stock option grant, restricted stock grant or other award at the time of grant, including the exercise price to be paid for the shares, the vesting schedule for each option, the price, if any, to be paid by the grantee for the restricted stock, the restrictions placed on the shares, and the time or times when the restrictions will lapse. The board of directors or such committee also has the power to accelerate the vesting of any grant or extend the term thereof.
Upon a change of control of Charter, the board of directors or the administering committee can shorten the exercise period of any option, have the survivor or successor entity assume the options with appropriate adjustments, or cancel options and pay out in cash. If an optionees or grantees employment is terminated by the Company without cause or by the optionee or grantee for good reason within one year following a change in control (as those terms are defined in the plans), unless otherwise provided in an agreement pursuant to the plan, with respect to such optionees or grantees awards under the plans, all outstanding options will become immediately and fully exercisable, all outstanding stock appreciation rights will become immediately and fully exercisable, the restrictions on the outstanding restricted stock will lapse, and a number of performance units shall immediately vest, which such number shall be the number of units that would have vested at the end of the vesting period if he or she had continued in employment until the end of such vesting period, assuming that the actual performance of the Company from the grant date through the end of the calendar month before the termination date had continued throughout the entire performance cycle.
Grants are made from the available shares discussed above to our Named Executive Officers through our Long-Term Incentive Program (LTI Plan), which is administered under the 2001 Stock Incentive Plan. Under the LTI Plan, certain employees are eligible to receive stock options, and more senior level employees are eligible to receive stock options and performance units. The stock options vest 25% on each of the first four anniversaries of the date of grant. Grants of performance units made in 2006 converted to a delineated number of shares upon the achievement of the performance targets, dependent on the attainment of pre-established revenue growth and unlevered free cash flow performance objectives, with payouts of actual shares occurring on the third anniversary of the date of grant. Performance units may convert to performance shares in the amounts of 0% to 200% of units granted, based on performance attainment. The amount of equity incentive compensation granted in 2006 was based upon the strategic, operational and financial performance of the Company overall and reflects the executives expected contributions to the Companys future success. In 2006 as well as prior years, we have placed a greater emphasis on performance units rather than stock options (70% / 30% split, respectively). We believe that performance units help to drive Company performance through their direct linkage to controllable business results while, at the same time, rewarding executives for the value created through share appreciation.
Charters Compensation and Benefits Committee approved conversion of the 2006 performance units to performance shares at the level of 160% of granted units as a result of the achievement of the financial performance measures. The attainment level was based on revenue growth of 10.1% versus a target of 7.6% and unlevered free cash flow growth of 8.0% versus a target of 4.7%. These shares will vest in 2009 on the third anniversary of the performance unit grant.
(4) Retention Programs
In June 2005, Charter adopted the 2005 Executive Cash Award Plan 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 Plan participants by the Compensation and Benefits Committee of Charters board of directors. At the time the Plan 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 Plan provides that each participant be granted an award which represents an opportunity to receive cash payments in accordance with the Plan. An award will be credited in book entry format to a participants account in
an amount equal to 100% of a participants base salary on the date of Plan approval in 2005 and 20% of participants base salary in each year 2006 through 2009, based on that participants base salary as of May 1 of the applicable year. The Plan awards will vest at the rate of 50% of the plan award balance at the end of 2007 and 100% of the plan award balance at the end of 2009. Participants will be entitled to receive payment of the vested portion of the award if the participant remains employed by Charter continuously from the date of the participants 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 Plan.
A participants eligibility for, and right to receive, any payment under the Plan (except in the case of intervening death) is 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 additional restrictions on post-employment use of confidential information, non-competition and nonsolicitation and recruitment of customers and employees.
In 2006, the Plan was revised to allow the participation of a new senior executive who became eligible for the Plan beginning in August 2006. For each new participant, an award was credited in book entry format to the participants account in an amount equal to 100% of a participants base salary on the date of eligibility approval or hire in 2006 and 20% of participants base salary in each year 2007 through 2010, based on that participants base salary as of May 1 of the applicable year. The Plan awards will 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.
All Named Executive Officers, except Mr. Martin, participate in this Plan.
Pursuant to the Compensation and Benefits Committees request of management, Pearl Meyer & Partners conducted a compensation analysis of existing special cash and equity compensation plans and programs to determine retention value for key executives. Pearl Meyer & Partners provided us with data regarding marketplace practices and costs associated with retention programs. As a result of the 2006 Pearl Meyer & Partners compensation analysis, the Compensation and Benefits Committee determined that the language and basic provisions of the employment contracts for select executives should be made consistent to reflect some of the market terms suggested by the Pearl Meyer & Partners analysis and recommendations including:
Also, as a result of the analysis and as furtherance of the retention of the select executives, the Compensation and Benefits Committee provided for a special equity award that would be conditioned upon the executive executing an employment agreement with the standard language as is acceptable to the Company. The special equity award would consist of a mixture of performance units tied to 2007 performance and restricted shares. The performance units would vest after three years (March 9, 2010), and the restricted shares would vest annually over three years at the rate of one-third per year.
Pay levels for executives are determined based on a number of factors, including the individuals roles and responsibilities within the Company, the individuals 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 concerning executive compensation levels paid by other competitors, and in the industry generally.
In 2006, Hewitt Associates (the Companys former compensation consultants) provided the Compensation and Benefits Committee with information concerning executive compensation levels paid by a large, diverse group of companies which included Comcast Corporation, Bell South Corporation, Sprint Corporation, Tribune Company and Qwest Communications. This information was considered by the Compensation and Benefits Committee in setting base salary and target annual incentive levels for 2006, as well as in determining target levels of long-term incentive grants.
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 2007. 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. These companies include companies in cable, telecommunication or other related industries of similar size and business strategy.
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.
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 officers compensation based on performance (i.e., at risk) and because most of our performance targets represent stretch goals, the Compensation and Benefits Committee generally examines peer company data at the average, the 25th percentile, the median and the 75th percentile, for performance at target and in excess of target, respectively, or for specialization of skill set. The Compensation and Benefits Committee generally sets compensation for our Named Executive Officers at the median of industry peer group with the opportunity to reach the 75th percentile based on the criteria above.
As noted above, notwithstanding the Companys 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 creation of shareholder value. In some instances, the amount and structure of compensation results from arms-length negotiations with executives, which reflect an increasingly competitive market for quality, proven managerial talent.
We utilize the particular elements of compensation described above because we believe that it provides a well-proportioned mix of security-oriented 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 security 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 heavily toward at-risk pay (annual incentives and long-term incentives). Maintaining this pay mix results fundamentally in a pay-for-performance 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.
Grants of equity-based awards are determined by the Compensation and Benefits Committee and typically made each calendar year following review by the Compensation and Benefits Committee of the prior years Company performance. Grants may also be 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.
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 four other most highly compensated executive officers 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 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 companys 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. 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, 2006, 2005 and 2004, respectively: risk-free interest rates of 4.6%, 4.0% and 3.3%; expected volatility of 87.3%, 70.9%, and 92.4% based on historical volatility; and expected lives of 6.3 years, 4.5 years and 4.6 years, respectively. The valuations assume no dividends are paid. Expenses related to restricted stock, performance shares and stock option grants are amortized over the requisite service period, or vesting period of the instruments. Dollar values included in the Non-Employee Director Compensation Table and the Summary Compensation Table represent the expense recognized in 2006 relating to all awards granted in 2006 and prior.
Summary Compensation Table
The following table sets forth information as of December 31, 2006 regarding the compensation to those executive officers listed below for services rendered for the fiscal year ended December 31, 2006. These officers consist of the Chief Executive Officer, Chief Financial Officer, Former Interim Chief Financial Officer and each of the other three most highly compensated executive officers as of December 31, 2006. None of the Named Executive Officers participated in the Supplemental Deferred Compensation Plan.
Grants of Plan-Based Awards
The following table shows information on stock option, restricted stock and performance unit awards granted in 2006 to each of the Companys Named Executive Officers.
Charter and Mr. Smit entered into an agreement as of August 9, 2005 whereby Mr. Smit will serve as Charters President and Chief Executive Officer (the Employment Agreement) for a term expiring on December 31, 2008; Charter may extend the Employment Agreement for an additional two years by giving Mr. Smit written notice of its intent to extend not less than six months prior to the expiration of the contract (Mr. Smit has the right to reject the extension within a certain time period as set forth in the contract). Under the Employment Agreement, Mr. Smit will receive a $1,200,000 base salary per year, through the third anniversary of the agreement, and thereafter $1,440,000 per year for the remainder of the Employment Agreement. Mr. Smit shall be eligible to receive a performance-based target bonus of 125% of annualized salary, with a maximum bonus of 200% of annualized salary, as determined by the Compensation and Benefits Committee of Charters Board of Directors. Performance criteria shall not include Charters stock trading price, and may include revenue, ARPU, RGU, OCF, new product growth operational improvements, and/or such other metrics as the Compensation and Benefits Committee shall determine. Under Charters Long-Term Incentive Plan he received options to purchase 3,333,333 shares of Class A common stock, exercisable for 10 years, with annual vesting of one-third of the grant in each of the three years from the employment date; a performance share award for a maximum of 4,123,720 shares of Class A common stock, one third of which can be earned in each of three one year performance periods starting January 2006; and a restricted stock award of 1,562,500 shares of Class A common stock, with annual vesting over three years following employment date. In addition, Mr. Smit received another restricted stock award for 1,250,000 shares of Class A common stock vesting on the first anniversary of his employment date. He is eligible for other or additional long-term incentives in the sole discretion of the Compensation and Benefits Committee and/or the Board, including additional stock option grants and restricted stock option awards. The Company has agreed to pay or reimburse him for professional fees he incurs in connection with financial counseling, estate planning, tax preparation and the like, up to a maximum of $15,000 for each calendar year during the Employment Agreement. Mr. Smit receives employee benefits and perquisites consistent with those made generally available to other senior executives.
As of January 20, 2006, Charter entered into an employment agreement with Jeffrey Fisher, Executive Vice President and Chief Financial Officer (the Fisher Agreement). The Fisher Agreement provides that Mr. Fisher serves in an executive capacity as its Executive Vice President at a salary of $500,000, to perform such executive,
managerial and administrative duties as are assigned or delegated by the President and/or Chief Executive Officer, including but not limited to serving as Chief Financial Officer. The term of the Fisher Agreement is two years from the effective date. Under the Fisher Agreement, Mr. Fisher received a signing bonus of $100,000 and he shall be eligible to receive a performance-based target bonus of up to 70% of salary and to participate in the Long-Term Incentive Plan and to receive such other employee benefits as are available to other senior executives. Mr. Fisher participates in the 2005 Executive Cash Award Plan, as amended, commencing in 2006, and, in addition, Charter will provide the same benefit to Mr. Fisher that he would have been entitled to receive under the Plan if he had participated in the Plan at the time of its inception in 2005. He also received a grant of 50,000 restricted shares of Charters Class A common stock, which will vest in equal installments over a three-year period from his employment date; an award of options to purchase 1,000,000 shares of Charters Class A common stock under terms of the 2001 Stock Incentive Plan on the effective date of the Fisher Agreement; and in the first quarter of 2006, an award of additional options to purchase 145,800 shares of Charters Class A common stock under the 2001 Stock Incentive Plan. Those options shall vest in equal installments over a four-year time period from the grant date. In addition, in the first quarter of 2006, he received 83,700 performance units under the 2001 Stock Incentive Plan which converted into 133,920 performance shares in 2007 and will vest in 2009. Mr. Fisher received relocation assistance pursuant to Charters executive homeowner relocation plan and the costs for temporary housing.
Charter and Michael Lovett entered into an employment agreement, effective as of February 28, 2006 (the Lovett Agreement), whereby Mr. Lovett will serve as its Executive Vice President and Chief Operating Officer at a salary of $700,000 per year which is to be reviewed annually, and will perform such duties and responsibilities set forth in the Lovett Agreement. The term of the Agreement is three years from the effective date and will be reviewed and considered for extension at 18-month intervals during Mr. Lovetts employment. Under the Lovett Agreement, Mr. Lovett will be entitled to receive cash bonus payments in an amount per year targeted at 100% of salary in accordance with the senior management plan and to participate in all employee benefit plans that are offered to other senior executives. Mr. Lovett received a grant of 150,000 restricted shares of Charters Class A common stock on the effective date of the Lovett Agreement, which will vest in equal installments over a three-year period from his employment date; an award of options to purchase 432,000 shares of Charters Class A common stock under terms of Charters 2001 Stock Incentive Plan on the effective date of the Lovett Agreement; an award of 259,200 performance units under the 2001 Stock Incentive Plan on the effective date of the Lovett Agreement and will be eligible to earn these shares over a performance cycle from January 2006 to December 2006. On the first anniversary of the Lovett Agreement, he will receive an award of 300,000 restricted shares of Charters Class A common stock, vesting in equal installments over a three-year period; an award of options to purchase 864,000 shares of Charters Class A common stock under the terms of the 2001 Stock Incentive Plan; and an award of 518,400 performance units under the 2001 Stock Incentive Plan and will be eligible to earn shares in the 2007 performance period and which would vest in 2010.
On November 14, 2005, Charter executed an employment agreement with Grier Raclin, effective as of October 10, 2005 (the Raclin Agreement). The Raclin Agreement provides that Mr. Raclin shall be employed in an executive capacity as Executive Vice President and General Counsel with management responsibility for Charters legal affairs, governmental affairs, compliance and regulatory functions and to perform such other legal, executive, managerial and administrative duties as are assigned or delegated by the Chief Executive Officer or the equivalent position, at a salary of $425,000, to be reviewed on an annual basis. The agreement also provides for a one time signing bonus of $200,000, the grant of 50,000 restricted shares of Charters Class A common stock, an option to purchase 100,000 shares of Charters Class A common stock under the 2001 Stock Incentive Plan, an option to purchase 145,800 shares of Charters Class A common stock under the 2001 Stock Incentive Plan, and 62,775 performance units under the 2001 Stock Incentive Plan. He is eligible to participate in the incentive bonus plan with a target bonus of at least 60% of salary, the 2005 Executive Cash Award Plan and to receive such other employee benefits as are available to other senior executives. The term of this agreement is two years from the effective date of the agreement.
On December 9, 2005, Charter executed an employment agreement with Robert Quigley, Executive Vice President and Chief Marketing Officer (the Quigley Agreement). The Quigley Agreement provides that Mr. Quigley shall be employed in an executive capacity to perform such executive, managerial and administrative duties as are assigned or delegated by the President and Chief Executive Officer or the designee thereof, at a salary of $450,000. He is eligible to participate in the incentive bonus plan, the 2001 Stock Incentive Plan and to receive such other employee benefits as are available to other senior executives. The term of the Quigley Agreement is two years from the effective date of the agreement. In addition, at the time of his employment, Charter agreed to pay him a signing bonus of $200,000 deferred until January 2006; grant options to purchase 145,800 shares of Charters Class A common stock under the 2001 Stock Incentive Plan; an allocation of 2006 performance units in line with other executives at his level under our 2001 Stock Incentive Plan; and 50,000 shares of restricted stock which vest over a three year period.
On September 2, 2005, Charter had entered into an employment agreement with Paul Martin. The agreement provided that Mr. Martin would be employed in an executive capacity to perform such duties as were assigned or delegated by the President and Chief Executive Officer or the designee thereof, at a salary of $240,625. The term of this agreement was two years from the date of the agreement. Mr. Martin was eligible to participate in Charters Long-Term Incentive Plan, 2001 Stock Incentive Plan and to receive such employee benefits as available to other senior executives. In the event that he was terminated by Charter without cause or for good reason, as those terms are defined in the agreement, he would receive his salary for the remainder of the term of the agreement or twelve months salary, whichever was greater; a pro rata bonus for the year of termination; a lump sum payment equal to payments due under COBRA for the greater of twelve months or the number of full months remaining in the term of the agreement; and the vesting of options and restricted stock for as long as severance payments are made. The agreement contained one-year, non-compete provisions (or until the end of the term of the agreement, if longer) in a Competitive Business, as such term was defined in the agreement, and two-year non-solicitation clauses.
Previously, effective April 15, 2005, Charter had entered into an agreement governing the terms of the service of Mr. Martin as Interim Chief Financial Officer. Under the terms of the agreement, Mr. Martin received approximately $13,700 each month for his service in the capacity of Interim Chief Financial Officer until a permanent Chief Financial Officer was employed. Under the agreement, Mr. Martin was also eligible to receive an additional bonus opportunity of up to approximately $13,600 per month while serving as Interim Chief Financial Officer, payable in accordance with Charters 2005 Executive Bonus Plan. The amounts payable to Mr. Martin under the agreement were in addition to all other amounts Mr. Martin received for his services in his capacity as Senior Vice President, Principal Accounting Officer and Corporate Controller.
Outstanding Equity Awards At Fiscal Year End
The following table provides information concerning unexercised options and unvested restricted stock and performance units for each of the Companys Named Executive Officers, which remained outstanding as of
December 31, 2006. None of the Companys Named Executive Officers have been granted incentive-based stock options.
In addition to his annual grant of 579,154 units, Mr. Smit, pursuant to his employment agreement, was granted 2,061,860 units, one-third of which (687,287 units) were or will be awarded based on the one-year performance in 2006, 2007 and 2008. If the Company meets its performance criteria in each year, the units will turn into performance shares on March 10th of 2007, 2008 and 2009. Since Charter met its performance criteria in 2006 at 160% of its target, Mr. Smit received 1,099,659 performance shares in 2007.
The following table provides information on stock options which were exercised and restricted stock awards which vested during 2006 for each of the Companys Named Executive Officers.
Separation and Related Arrangements
The following tables show payments due to each of the Named Executive Officers upon termination of employment (and for Mr. Smit, upon a Going Private Event), assuming that the triggering of payments had occurred on December 31, 2006. The stock price used in these calculations is $3.06, the closing price of Charter Class A common stock on December 29, 2006, the last trading date of the year. The paragraphs that follow each table describe the termination provisions that are contained in each named executives employment agreement, or in the case of Mr. Martin, were otherwise agreed to. These descriptions cover only information regarding benefits that are not generally available to other employees. Benefits generally available to other employees are:
In the event that Charters common stock is no longer traded on a national market (a Going Private Event), then Charter, in its sole discretion, shall adjust Mr. Smits outstanding equity-based awards using one of three approaches:
Following a Going Private Event, to the extent that Mr. Smits restricted shares, stock options and/or performance shares remain outstanding under approach (b) Adjust Awards above, then he shall have the right to put any or all securities for a prompt cash payment equal to their fair market value during the 180 days following the settlement date, i.e., the date of vesting or removal of restrictions on any restricted stock, the delivery date of securities in respect of a performance share award or the exercise date of any stock option and/or his termination of employment for any reason following such settlement date. Charter shall also have the right to call the securities for the same amount.
In the event that Mr. Smits employment is terminated during the term of the Employment Agreement due to his death or disability, he or his estate or beneficiaries shall be entitled to receive:
In the event that Mr. Smits employment is terminated for cause or he terminates his employment on his own initiative, he shall be entitled to the right to exercise any vested stock option for the lesser of 30 days or the remainder of the options maximum stated term.
In the event that Mr. Smit is terminated by Charter without cause or for good reason termination, which includes Mr. Smits right to voluntarily terminate employment during a 60-day period starting 180 days after a change in control, he will receive:
In consideration of the compensation and benefits to be paid to Mr. Smit, the Employment Agreement contains non-compete provisions, non-solicitation of employees and non-solicitation of customers lasting from six months to two years after termination, depending on the type of termination. The Employment Agreement also provides that he not ever reveal or use any confidential information obtained in the course of his employment.
The Employment Agreement also provides tax gross-up payments for certain excise taxes. In the event that Mr. Smit is subject to any excise tax imposed under Section 4999 of the Internal Revenue Code, Charter will gross
up Mr. Smit for such excise tax and any taxes, penalties and interest associated with such excise tax. In the event that Mr. Smit is subject to any 409A excise tax, e.g., additional tax, interest, or penalty under Section 409A of the Internal Revenue Code, Charter will gross up Mr. Smit for such 409A excise tax and any taxes, penalties and interest associated with such 409A excise tax.
In the event that Mr. Fisher is terminated by Charter without cause or, upon his election, for good reason, Mr. Fisher will receive:
In the event that within 12 months following the occurrence of a Change in Control, Charter or any of its subsidiaries, terminate his employment without cause or he terminates his employment with Charter and its subsidiaries for good reason, Mr. Fisher will receive:
In the event that Mr. Fisher is terminated for a disability, Mr. Fisher will receive:
In the event that Mr. Fishers employment is terminated as a result of his death, his estate or beneficiaries shall be entitled to receive:
The Fisher Agreement contains a two-year non-disparagement clause, a two-year non-solicitation clause for customers and employees and a one-year non-compete provision (or until the end of the term of the Fisher Agreement, if longer). As of December 31, 2006, the term of the Fisher Agreement which ends on January 20, 2008, would have resulted in a non-compete period of slightly longer than one year. The Fisher Agreement provides that he not ever reveal or use any confidential information obtained in the course of his employment.
In the event that Mr. Lovett is terminated as a result of death or disability, Mr. Lovett, his estate or beneficiaries shall be entitled to receive:
In the event that Mr. Lovett is terminated by Charter without Cause, by Mr. Lovett for good reason or, following a change in control, for any reason within 60 days other than for death, disability or for Cause, and after 60 days and up to 12 months without Cause or for good reason, Mr. Lovett will receive:
In consideration of the compensation and benefits to be paid to Mr. Lovett, the Lovett Agreement contains limited non-compete provisions and provisions for non-solicitation of employees and non-solicitation of customers lasting from six months to two years after termination, depending on the type of termination. The Lovett Agreement provides that he not ever reveal or use any confidential information obtained in the course of his employment.
In the event that Mr. Quigleys employment is terminated by Charter without cause or by Mr. Quigley for good reason, Mr. Quigley will receive:
In the event that within 12 months following the occurrence of a Change in Control, Charter or any of its subsidiaries, terminate his employment without cause or he terminates his employment with Charter and its subsidiaries for good reason, Mr. Quigley will receive:
In the event that Mr. Quigley is terminated for a disability, Mr. Quigley will receive:
In the event that Mr. Quigleys employment is terminated as a result of his death, Mr. Quigleys estate or beneficiaries shall be entitled to receive:
The Quigley Agreement contains a two-year non-disparagement clause, a two-year non-solicitation clause for customer and employees and a one-year non-compete provision (or until the end of the term of the Quigley Agreement, if longer).The Quigley Agreement provides that he not ever reveal or use any confidential information obtained in the course of his employment.
In the event that Mr. Raclins employment is terminated by Charter without cause or by Mr. Raclin for good reason, Mr. Raclin will receive:
In the event that within 12 months following the occurrence of a Change in Control, Charter or any of its subsidiaries, terminate his employment without cause or he terminates his employment with Charter and its subsidiaries for good reason, Mr. Raclin will receive:
In the event that Mr. Raclin is terminated for a disability, Mr. Raclin will receive:
In the event that Mr. Raclins employment is terminated as a result of his death, Mr. Raclins estate or beneficiaries shall be entitled to receive:
The Raclin Agreement contains a two-year non-disparagement clause, a two-year non-solicitation clause for customers and employees and a one-year non-compete provision (or until the end of the term of the agreement, if longer) in a Competitive Business, as such term is defined in the Agreement. The Raclin Agreement provides that he not ever reveal or use any confidential information obtained in the course of his employment.
Until his resignation in April 2006, Mr. Martin was employed as Senior Vice President, Principal Accounting Officer and Corporate Controller. Upon his resignation, the termination terms of his retention agreement went into effect. Effective January 9, 2006, Charter had entered into a retention agreement with Mr. Martin, in which he agreed to remain as Interim Chief Financial Officer until at least March 31, 2006 or such time as Charter reassigned or terminated his employment, whichever occurred first (the Termination Date). On the Termination Date, Charter paid Mr. Martin a special retention bonus in a lump sum of $116,200. This special retention bonus was in addition to Mr. Martins bonus paid under the 2005 Executive Bonus Plan and a guarantee bonus of $27,396 paid pursuant to his April 15, 2005 agreement to serve as Interim Chief Financial Officer. Mr. Martin did not participate in any executive incentive or bonus plan for 2006. Pursuant to this agreement, Charter treated the termination by Mr. Martin of his employment on April 7, 2006 as if his employment terminated without cause. Therefore, in addition to the special retention and guaranteed bonuses, Charter paid as severance to Mr. Martin the amount of $180,469 in 2006, calculated pursuant to his employment agreement on the basis of his base salary as Controller and without regard to any additional compensation he had been receiving as Interim Chief Financial Officer. He also received a lump sum amount of $18,506 for COBRA and three months of outplacement assistance, valued at $3,000. In 2007, Mr. Martin will continue to receive severance payments until September 2, 2007, the original expiration date of his employment agreement, estimated to be $180,469.
We have established separation guidelines which generally apply to all employees in situations where management determines that an employee is entitled to severance benefits. Severance benefits are granted solely in managements discretion and are not an employee entitlement or guaranteed benefit. The guidelines provide that persons employed at the level of Senior Vice President may be eligible to receive between six and fifteen months of
severance benefits. Currently, all Executive Vice Presidents have employment agreements with Charter which provide for specific separation arrangements ranging from the payment of twelve to twenty-four months of severance benefits. Separation benefits are contingent upon the signing of a separation agreement containing certain provisions including a release of all claims against us. Severance amounts paid under these guidelines are distinct and separate from any one-time, special or enhanced severance programs that may be approved by us from time to time.
Our Certificate of Incorporation limits the liability of directors to the maximum extent permitted by Delaware law. The Delaware General Corporation Law provides that a corporation may eliminate or limit the personal liability of a director for monetary damages for breach of fiduciary duty as a director, except for liability for:
(1) any breach of the directors duty of loyalty to the corporation and its shareholders;
(2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
(3) unlawful payments of dividends or unlawful stock purchases or redemptions; or
(4) any transaction from which the director derived an improper personal benefit.
Our Bylaws provide that we will indemnify all persons whom we may indemnify pursuant thereto to the fullest extent permitted by law.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial ownership of the Companys Class A common stock (Class A common stock) as of March 31, 2007 by:
With respect to the percentage of voting power set forth in the following table:
The 50,000 shares of Class B common stock owned by Mr. Allen represents 100% of the outstanding Class B common stock.
The Company maintains written policies and procedures covering related party transactions. The Audit Committee reviews the material facts of related party transactions in accordance with NASDAQ rules. Management has various procedures in place, e.g., the Companys Code of Conduct which requires annual certifications from employees that are designed to identify potential related party transactions. Management brings those to the Audit Committee for review as appropriate.
The following sets forth certain transactions in which we are involved and in which the directors, executive officers and affiliates of Charter have or may have a material interest. The transactions fall generally into three broad categories:
A number of our debt instruments and those of our subsidiaries require delivery of fairness opinions for transactions with Mr. Allen or his affiliates involving more than $50 million. Such fairness opinions have been obtained whenever required. All of our transactions with Mr. Allen or his affiliates have been considered for approval either by the board of directors of Charter or a committee of the board of directors. All of our transactions with Mr. Allen or his affiliates have been deemed by the board of directors or a committee of the board of directors to be in our best interest. Related party transactions are approved by our Audit Committee or another independent body of the board of directors in compliance with the listing requirements applicable to NASDAQ Global Market listed companies.
Transactions Arising Out of Our Organizational Structure and Mr. Allens Investment in Charter Communications, Inc. and Its Subsidiaries
As noted above, a number of our related party transactions arise out of Mr. Allens investment in Charter and its subsidiaries. Some of these transactions are with CII and Vulcan Ventures (both owned 100% by Mr. Allen), Charter (controlled by Mr. Allen) and Charter Holdco (approximately 55% owned by us and 45% owned by other affiliates of Mr. Allen).
Charter Communications Holdings, LLC (Charter Holdings) and its wholly owned subsidiaries, CCH I, LLC and CCH II, LLC, completed the exchange of approximately $797 million in total principal amount of outstanding debt securities of Charter Holdings in a private placement for new CCH I and CCH II debt securities. Affiliates of Mr. Allen held approximately $56 million of Charter Holdings notes which were exchanged for CCH I debt securities pursuant to the debt exchange completed in September 2006. Mr. Allens affiliates received the same terms as all others holders that participated in the debt exchange.
Charter is a party to management arrangements with Charter Holdco and certain of its subsidiaries. Under these agreements, Charter provides management services for the cable systems owned or operated by its subsidiaries. These management agreements provide for reimbursement to Charter for all costs and expenses incurred by it for activities relating to the ownership and operation of the managed cable systems, including corporate overhead, administration and salary expense.
The total amount paid by Charter Holdco and all of its subsidiaries is limited to the amount necessary to reimburse Charter for all of its expenses, costs, losses, liabilities and damages paid or incurred by it in connection with the performance of its services under the various management agreements and in connection with its corporate overhead, administration, salary expense and similar items. The expenses subject to reimbursement include fees Charter is obligated to pay under the mutual services agreement with CII. Payment of management fees by Charters operating subsidiaries is subject to certain restrictions under the credit facilities and indentures of such subsidiaries and the indentures governing the Charter Holdings and its subsidiaries public debt. If any portion of the management fee due and payable is not paid, it is deferred by Charter and accrued as a liability of such subsidiaries. Any deferred amount of the management fee will bear interest at the rate of 10% per year, compounded annually, from the date it was due and payable until the date it is paid. For the year ended December 31, 2006, the subsidiaries of Charter Holdings paid a total of $132 million in management fees to Charter.
Charter, Charter Holdco and CII are parties to a mutual services agreement whereby each party shall provide rights and services to the other parties as may be reasonably requested for the management of the entities involved and their subsidiaries, including the cable systems owned by their subsidiaries all on a cost-reimbursement basis. The officers and employees of each party are available to the other parties to provide these rights and services, and all expenses and costs incurred in providing these rights and services are paid by Charter. Each of the parties will indemnify and hold harmless the other parties and their directors, officers and employees from and against any and all claims that may be made against any of them in connection with the mutual services agreement except due to its or their gross negligence or willful misconduct. The mutual services agreement expires on November 12, 2009, and may be terminated at any time by any party upon thirty days written notice to the other. For the year ended December 31, 2006, Charter paid approximately $105 million to Charter Holdco for services rendered pursuant to the mutual services agreement. All such amounts are reimbursable to Charter pursuant to a management arrangement with our subsidiaries. CII no longer provides services pursuant to this agreement.
Prior to November 12, 1999, CII provided management and consulting services to our operating subsidiaries for a fee equal to 3.5% of the gross revenues of the systems then owned, plus reimbursement of expenses. The balance of management fees payable under the previous management agreement was accrued with payment at the discretion of CII, with interest payable on unpaid amounts. For the year ended December 31, 2006, Charters subsidiaries did not pay any fees to CII to reduce management fees payable. As of December 31, 2006, total management fees payable by our subsidiaries to CII were approximately $14 million, exclusive of any interest that may be charged.
The limited liability company agreement of Charter Holdco contains special provisions regarding the allocation of tax losses and profits among its members Vulcan Cable III Inc., CII and us. In some situations, these provisions may cause us to pay more tax than would otherwise be due if Charter Holdco had allocated profits and losses among its members based generally on the number of common membership units.
Vulcan Ventures, an entity controlled by Mr. Allen, Charter, CII and Charter Holdco are parties to an agreement dated September 21, 1999 granting to Vulcan Ventures the right to use up to eight of our digital cable channels as partial consideration for a prior capital contribution of $1.325 billion. Specifically, at Vulcan Ventures request, we will provide Vulcan Ventures with exclusive rights for carriage of up to eight digital cable television programming services or channels on each of the digital cable systems with local and to the extent available, national control of the digital product owned, operated, controlled or managed by Charter or its subsidiaries now or in the future of 550 megahertz or more. If the system offers digital services but has less than 550 megahertz of capacity, then the programming services will be equitably reduced. Upon request of Vulcan Ventures, we will attempt to reach a comprehensive programming agreement pursuant to which it will pay the programmer, if possible, a fee per digital video customer. If such fee arrangement is not achieved, then we and the programmer shall enter into a standard programming agreement. The initial term of the channel access agreement was 10 years, and the term extends by one additional year (such that the remaining term continues to be 10 years) on each anniversary
date of the agreement unless either party provides the other with notice to the contrary at least 60 days prior to such anniversary date. To date, Vulcan Ventures has not requested to use any of these channels. However, in the future it is possible that Vulcan Ventures could require us to carry programming that is less profitable to us than the programming that we would otherwise carry and our results would suffer accordingly.
As part of the acquisition of the cable systems owned by Bresnan Communications Company Limited Partnership in February 2000 and a subsequent settlement in 2005 regarding an issue as to whether the documentation for the Bresnan transaction was correct and complete with regard to the ultimate ownership of the interest in CC VIII, LLC, 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 CCHC note is exchangeable, at CIIs 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 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 Charters convertible senior notes and Charters outstanding preferred stock. In 2006, Charter Holdco paid to Charter $51 million related to interest on the mirror notes. In connection with our November 2004 sale of the $862.5 million principal amount of 5.875% convertible senior notes due 2009, Charter Holdco issued to us mirror notes in identical principal amount in exchange for the proceeds from our offering. Charter Holdco then purchased and pledged certain U.S. government securities to us as security for the mirror notes (which were in turn repledged by us to the trustee for the benefit of holders of our 5.875% convertible senior notes and which we expect to use to fund the first six interest payments on the notes), and agreed to lend common units to us, the terms of which will, to the extent practicable, mirror the terms of the shares. Charter Holdco also redeemed the remaining $588 million principal amount of the mirror notes in respect of our 5.75% convertible senior notes due 2005 concurrently with our December 23, 2004 redemption of our 5.75% convertible senior notes. In addition, 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 Charters 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, 77.1 million shares of Class A common stock were returned pursuant to the share lending agreement.
As described under Third Party Business Relationships in which Mr. Allen has or had an Interest in this section, Mr. Allen and a number of his affiliates have interests in various entities that provide services or programming to our subsidiaries. Given the diverse nature of Mr. Allens investment activities and interests, and to avoid the possibility of future disputes as to potential business, Charter and Charter Holdco, under the terms of their respective organizational documents, may not, and may not allow their subsidiaries, to engage in any business transaction outside the cable transmission business except for the Digeo, Inc. joint venture; a joint venture to develop a digital video recorder set-top terminal; an existing investment in Cable Sports Southeast, LLC, a provider of regional sports programming; an investment in @Security Broadband Corp., a company developing broadband security applications; and incidental businesses engaged in as of the closing of Charters initial public offering in November 1999. This restriction will remain in effect until all of the shares of Charters high-vote Class B common stock have been converted into shares of Charters Class A common stock due to Mr. Allens equity ownership falling below specified thresholds.
Charter or Charter Holdco or any of their subsidiaries may not pursue, or allow their subsidiaries to pursue, a business transaction outside of this scope, unless Mr. Allen consents to Charter or its subsidiaries engaging in the business transaction. In any such case, the restated certificate of incorporation of Charter and the limited liability company agreement of Charter Holdco would need to be amended accordingly to modify the current restrictions on the ability of such entities to engage in any business other than the cable transmission business. The cable transmission business means the business of transmitting video, audio, including telephone, and data over cable systems owned, operated or managed by Charter, Charter Holdco or any of their subsidiaries from time to time.
Under Delaware corporate law, each director of Charter, including Mr. Allen, is generally required to present to Charter, any opportunity he or she may have to acquire any cable transmission business or any company whose principal business is the ownership, operation or management of cable transmission businesses, so that we may determine whether we wish to pursue such opportunities. However, Mr. Allen and the other directors generally will not have an obligation to present other types of business opportunities to Charter and they may exploit such opportunities for their own account.
Also, conflicts could arise with respect to the allocation of corporate opportunities between us and Mr. Allen and his affiliates in connection with his investments in businesses in which we are permitted to engage under Charters restated certificate of incorporation. Certain of the indentures of Charter and its subsidiaries require the applicable issuer of notes to obtain, under certain circumstances, approval of the board of directors of Charter and, where a transaction or series of related transactions is valued at or in excess of $50 million, a fairness opinion with respect to transactions in which Mr. Allen has an interest. Related party transactions are approved by our Audit Committee in compliance with the listing requirements applicable to NASDAQ national market listed companies. We have not instituted any other formal plan or arrangement to address potential conflicts of interest.
As previously noted, Mr. Allen has and has had extensive investments in the areas of media and technology. We have a number of commercial relationships with third parties in which Mr. Allen has an interest. Mr. Allen or his affiliates own equity interests or warrants to purchase equity interests in various entities with which we do business or which provide us with products, services or programming. Mr. Allen owns 100% of the equity of Vulcan Ventures Incorporated and Vulcan Inc. and is the president of Vulcan Ventures. Ms. Jo Allen Patton is a director and the President and Chief Executive Officer of Vulcan Inc. and is a director and Vice President of Vulcan Ventures. Mr. Lance Conn is Executive Vice President of Vulcan Inc. and Vulcan Ventures. The various cable, media, Internet and telephone companies in which Mr. Allen has invested may mutually benefit one another. We can give no assurance, nor should you expect, that any of these business relationships will be successful, that we will realize any benefits from these relationships or that we will enter into any business relationships in the future with Mr. Allens affiliated companies.
Oxygen Media LLC (Oxygen) provides programming content aimed at the female audience for distribution over cable systems and satellite. On July 22, 2002, Charter Holdco entered into a carriage agreement with Oxygen, whereby we agreed to carry programming content from Oxygen. Under the carriage agreement, we currently make Oxygen programming available to approximately 5 million of our video customers. In August 2004, Charter Holdco and Oxygen entered into agreements that amended and renewed the carriage agreement. The amendment to the carriage agreement (a) revised the number of our customers to which Oxygen programming must be carried and for which we must pay, (b) released Charter Holdco from any claims related to the failure to achieve distribution benchmarks under the carriage agreement, (c) required Oxygen to make payment on outstanding receivables for launch incentives due to us under the carriage agreement; and (d) requires that Oxygen provide its programming content to us on economic terms no less favorable than Oxygen provides to any other cable or satellite operator having fewer subscribers than us. The renewal of the carriage agreement (a) extends the period that we will carry Oxygen programming to our customers through January 31, 2008, and (b) requires license fees to be paid based on customers receiving Oxygen programming, rather than for specific customer benchmarks. For the year ended December 31, 2006, we paid Oxygen approximately $8 million for programming content. In addition, Oxygen pays us launch incentives for customers launched after the first year of the term of the carriage agreement up to a total of $4 million. We recorded $0 related to these launch incentives as a reduction of programming expense for the year ended December 31, 2006.
In August 2004, Charter Holdco and Oxygen amended an equity issuance agreement to provide for the issuance of 1 million shares of Oxygen Preferred Stock with a liquidation preference of $33.10 per share plus accrued dividends to Charter Holdco in place of the $34 million of unregistered shares of Oxygen Media common stock required under the original equity issuance agreement. Oxygen Media delivered these shares in March 2005. The preferred stock is convertible into common stock after December 31, 2007 at a conversion ratio, the numerator of which is the liquidation preference and the denominator which is the fair market value per share of Oxygen Media common stock on the conversion date.
We recognized the guaranteed value of the investment over the life of the carriage agreement as a reduction of programming expense. For the year ended December 31, 2006, we did not record any reduction of programming expense. The carrying value of our investment in Oxygen was approximately $33 million as of December 31, 2006.
As of December 31, 2006, through Vulcan Programming, Mr. Allen owned an approximate 14% interest in Oxygen assuming no exercises of outstanding warrants or conversion or exchange of convertible or exchangeable securities. Ms. Jo Allen Patton is a director and the President of Vulcan Programming. Mr. Lance Conn is a Vice President of Vulcan Programming. Marc Nathanson has an indirect beneficial interest of less than 1% in Oxygen.
A subsidiary of Vulcan has entered into an agreement with New Cingular Wireless National Accounts, LLC (Cingular) to receive discounted wireless services for use by Vulcan and its named affiliates. Charter is named as one of Vulcans affiliates to receive discounted wireless services. Charter is billed directly by Cingular with the discounts applied, and Charters portion of the discounted wireless services under the agreement results in approximately $1 million per year. Charter paid to Cingular approximately $1.1 million for the year ended December 31, 2006 in connection with the discounted wireless services. Charter made no payments to Vulcan in connection with the Cingular wireless services.
In March 2001, a subsidiary of Charter, Charter Communications Ventures, LLC (Charter Ventures) and Vulcan Ventures Incorporated formed DBroadband Holdings, LLC for the sole purpose of purchasing equity interests in Digeo, Inc. (Digeo), an entity controlled by Paul Allen. In connection with the execution of the broadband carriage agreement, DBroadband Holdings, LLC purchased an equity interest in Digeo funded by contributions from Vulcan Ventures Incorporated. At that time, the equity interest was subject to a priority return of capital to Vulcan Ventures up to the amount contributed by Vulcan Ventures on Charter Ventures behalf. After Vulcan Ventures recovered its amount contributed (the Priority Return), Charter Ventures would have had a 100% profit interest in DBroadband Holdings, LLC. Charter Ventures was not required to make any capital contributions,
including capital calls to DBroadband Holdings, LLC. Pursuant to an amended version of this arrangement, in 2003, Vulcan Ventures contributed a total of $29 million to Digeo, $7 million of which was contributed on Charter Ventures behalf, subject to the Priority Return. Vulcan Ventures has contributed approximately $56 million on Charter Ventures behalf. On October 3, 2006, Vulcan Ventures and Digeo recapitalized Digeo. In connection with such recapitalization, DBroadband Holdings, LLC consented to the conversion of its preferred stock holdings in Digeo to common stock and Vulcan Ventures surrendered the Priority Return to Charter Ventures.
On March 2, 2001, Charter Ventures entered into a broadband carriage agreement with Digeo Interactive, LLC (Digeo Interactive), a wholly owned subsidiary of Digeo. On September 28, 2002, Charter entered into an amendment to its broadband carriage agreement with Digeo Interactive. This amendment provided for the development by Digeo Interactive of future features to be included in the Basic i-TV service to be provided by Digeo and for Digeos development of an interactive toolkit to enable Charter to develop interactive local content. Furthermore, Charter could request that Digeo Interactive manage local content for a fee. The amendment provided for Charter to pay for development of the Basic i-TV service as well as license fees for customers who would receive the service, and for Charter and Digeo to split certain revenues earned from the service. In 2006, we paid Digeo Interactive approximately $2 million for customized development of the i-channels and the local content tool kit. This amendment expired pursuant to its terms on December 31, 2003. Digeo Interactive is continuing to provide the Basic i-TV service on a month-to-month basis.
On June 30, 2003, Charter Holdco entered into an agreement with Motorola, Inc. for the purchase of 100,000 digital video recorder (DVR) units. The software for these DVR units is being supplied by Digeo Interactive, LLC under a license agreement entered into in April 2004. Under the license agreement Digeo Interactive granted to Charter Holdco the right to use Digeos proprietary software for the number of DVR units that Charter deployed from a maximum of 10 headends through year-end 2004. This maximum number of headends restriction was expanded and eventually eliminated through successive agreement amendments and the date for entering into license agreements for units deployed was extended. The license granted for each unit deployed under the agreement is valid for five years. In addition, Charter will pay certain other fees including a per-headend license fee and maintenance fees. Maximum license and maintenance fees during the term of the agreement are expected to be approximately $7 million. The agreement includes an MFN clause pursuant to which Charter is entitled to receive contract terms, considered on the whole, and license fees, considered apart from other contract terms, no less favorable than those accorded to any other Digeo customer. Charter paid approximately $3 million in license and maintenance fees in 2006.
In May 2004, Charter Holdco entered into a binding term sheet with Digeo Interactive for the development, testing and purchase of 70,000 Digeo PowerKey DVR units. The term sheet provided that the parties would proceed in good faith to negotiate, prior to year-end 2004, definitive agreements for the development, testing and purchase of the DVR units and that the parties would enter into a license agreement for Digeos proprietary software on terms substantially similar to the terms of the license agreement described above. In November 2004, Charter Holdco and Digeo Interactive executed the license agreement and in December 2004, the parties executed the purchase agreement, each on terms substantially similar to the binding term sheet. Total purchase price and license and maintenance fees during the term of the definitive agreements are expected to be approximately $41 million. The definitive agreements are terminable at no penalty to Charter in certain circumstances. Charter paid approximately $11 million for the year ended December 31, 2006 in capital purchases under this agreement.
In late 2003, Microsoft filed suit against Digeo for $9 million in a breach of contract action, involving an agreement that Digeo and Microsoft had entered into in 2001. Digeo informed Charter that it believed it had an indemnification claim against Charter for half that amount. Digeo settled with Microsoft agreeing to make a cash payment and to purchase certain amounts of Microsoft software products and consulting services through 2008. In consideration of Digeo agreeing to release Charter from its potential claim against Charter, after consultation with outside counsel Charter agreed, in June 2005, to purchase a total of $2.3 million in Microsoft consulting services through 2008, a portion of which amounts Digeo has informed Charter will count against Digeos purchase obligations with Microsoft.
We believe that Vulcan Ventures, an entity controlled by Mr. Allen, owns an approximate 74% equity interest in Digeo, Inc., on a fully-converted non-diluted basis. Messrs. Allen and Conn and Ms. Patton are directors of Digeo. Mr. Lovett and Mr. Fawaz were directors of Digeo until October 2006.
Proposal No. 2: Ratification of the Appointment of Independent
Registered Public Accounting Firm
(Item 2 on Proxy Card)
The Audit Committee of the board of directors has appointed KPMG LLP (KPMG) as the Companys independent registered public accounting firm for 2007. Stockholder ratification of the selection of KPMG as the Companys independent registered public accounting firm is not required by the Companys Bylaws or other applicable requirement. However, as a matter of corporate responsibility, the Audit Committee decided to solicit stockholder ratification of this appointment. Ratification of the appointment of KPMG as the Companys independent registered public accounting firm is not required for KPMGs retention; however, if the appointment is not ratified, the Audit Committee may consider re-evaluating the appointment.
KPMG has been serving as the Companys independent registered public accounting firm since 2002. The Company has been advised that no member of KPMG had any direct financial interest or material indirect financial interest in the Company or any of its subsidiaries or, during the past three years, has had any connection with the Company or any of its subsidiaries in the capacity of promoter, underwriter, voting trustee, director, officer or employee. The Company has been advised that no other relationship exists between KPMG and the Company that impairs KPMGs status as the independent registered public accounting firm with respect to the Company within the meaning of the Federal securities laws and the requirements of the Independence Standards Board.
Representatives of KPMG will be in attendance at the Annual Meeting and will have an opportunity to make a statement if they so desire. The representatives will also be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION OF THE APPOINTMENT OF KPMG LLP AS THE COMPANYS INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.
KPMG acted as the Companys principal accountant in 2006 and 2005 and, subject to ratification by stockholders at the Annual Meeting, KPMG is expected to serve as the Companys independent registered public accounting firm for 2007. Representatives of KPMG will be in attendance at the Annual Meeting and will have an opportunity to make a statement if they so desire. The representatives will also be available to respond to appropriate questions.
The Audit Committee has adopted policies and procedures requiring the pre-approval of non-audit services that may be provided by our independent registered public accounting firm. We have also complied and will continue to comply with the provisions of the Sarbanes-Oxley Act of 2002 and the related SEC rules pertaining to auditor independence and audit committee pre-approval of audit and non-audit services.
During the years ended December 31, 2006 and 2005, we incurred fees and related expenses for professional services rendered by KPMG for the audits of our and our subsidiaries financial statements (including three subsidiaries in 2006 and four subsidiaries in 2005 that are also public registrants), for the review of our and our subsidiaries interim financial statements and seven offering memoranda and registration statement filings in each of 2006 and 2005 totaling approximately $5.9 million and $6.2 million, respectively.
We incurred fees to KPMG of approximately $0.01 million and $0.01 million during the years ended December 31, 2006 and 2005, respectively. These services were primarily related to certain agreed-upon procedures.
The Audit Committee appoints, retains, compensates and oversees the independent registered public accounting firm (subject, if applicable, to board of director and/or stockholder ratification), and approves in advance all fees and terms for the audit engagement and non-audit engagements where non-audit services are not prohibited by Section 10A of the Securities Exchange Act of 1934, as amended with respect to independent registered public accounting firms. Pre-approvals of non-audit services are sometimes delegated to a single member of the Audit Committee. However, any pre-approvals made by the Audit Committees designee are presented at the Audit Committees next regularly scheduled meeting. The Audit Committee has an obligation to consult with management on these matters. The Audit Committee approved 100% of the KPMG fees for the years ended December 31, 2006 and 2005. Each year, including 2006, with respect to the proposed audit engagement, the Audit Committee reviews the proposed risk assessment process in establishing the scope of examination and the reports to be rendered.
In its capacity as a committee of the board, the Audit Committee oversees the work of the independent registered public accounting firm (including resolution of disagreements between management and the public accounting firm regarding financial reporting) for the purpose of preparing or issuing an audit report or performing other audit, review or attest services. The independent registered public accounting firm reports directly to the Audit Committee. In performing its functions, the Audit Committee undertakes those tasks and responsibilities that, in its judgment, most effectively contribute to and implement the purposes of the Audit Committee charter. For more detail of the Audit Committees authority and responsibilities, see the Companys Audit Committee charter on the Companys website, www.charter.com.
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 we state otherwise.
The Audit Committee was established to oversee the Companys accounting and financial reporting processes and the audits of the Companys annual financial statements. In 2006 the Audit Committee consisted of Nathaniel A. Davis, David C. Merritt, and John H. Tory, until Mr. Torys resignation in April 2006. Rajive Johri was elected to succeed him in April 2006. All members were determined by the board to be independent in accordance with the applicable corporate governance listing standards of the NASDAQ Global Market. The Companys 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.
The Audit Committees functions are detailed in a written Audit Committee charter adopted by the board of directors in January 2003 and amended in June 2004, April 2005 and February 2006, a copy of which is available on the Companys website at www.charter.com. As more fully described in its charter, the Audit Committee reviews the Companys financial reporting process on behalf of the board. Company management has the primary responsibility for the Companys financial statements and the reporting process. The Companys independent registered public accounting firm is responsible for performing an audit of the Companys consolidated financial statements in accordance with generally accepted auditing standards and expressing an opinion on the conformity of the financial statements to generally accepted accounting principles. The internal auditors are responsible to the Audit Committee and the board for testing the integrity of the financial accounting and reporting control systems and such other matters as the Audit Committee and board determine. The Audit Committee held ten meetings in 2006.
The Audit Committee has reviewed and discussed with management the Companys audited financial statements for the year ended December 31, 2006. The Audit Committee has discussed the matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees) with KPMG, the independent registered public accounting firm for the Companys audited financial statements for the year ended December 31, 2006.
The Audit Committee has also received the written disclosures and the letter from KPMG required by Independence Standards Board Standard No. 1 (Independence Discussion with Audit Committees), and the Audit Committee has discussed the independence of KPMG with that firm and has considered the compatibility of non-audit services with KPMGs independence.
Based on the Audit Committees review and discussions noted above, the Audit Committee recommended to the board of directors that the Companys audited financial statements be included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2006 for filing with the SEC.
DAVID C. MERRITT
NATHANIEL A. DAVIS
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 Securities and Exchange Commission. Such persons are required by Securities and Exchange Commission regulations 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 applicable to our officers and directors were complied with during the 2006 fiscal year with two exceptions. Mr. Lovett filed a late Form 4 in June 2006 as a result of the record keeper of the Companys 2001 Stock Incentive Plan failing to advise of a sale for tax purposes of restricted shares of Class A common stock. Mr. Quigley sold both restricted share and exercised options, but inadvertently failed to report the sale of the restricted shares at that time. He subsequently filed an amended Form 4 in March 2007.
We have 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 directors. We also 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. A copy of our Code of Conduct is available on our website at www.charter.com.
If you want to include a stockholder proposal in the proxy statement for the 2008 annual meeting, it must be delivered to the Corporate Secretary at the Companys executive offices no later than December 28, 2007. The federal proxy rules specify what constitutes timely submission and whether a stockholder proposal is eligible to be included in the proxy statement. Stockholder nominations of directors are not stockholder proposals within the meaning of Rule 14a-8 and are not eligible for inclusion in the Companys proxy statement.
If a stockholder desires to bring business before the meeting that is not the subject of a proposal timely and properly submitted for inclusion in the proxy statement, the stockholder must follow procedures outlined in the Companys Bylaws. One of the procedural requirements in the Bylaws is timely notice in writing of the business the stockholder proposes to bring before the meeting. To be timely with respect to the 2008 annual meeting, such a notice must be delivered to the Companys Corporate Secretary at the Companys executive offices no earlier than February 17, 2008 and no later than March 13, 2008. However, in the event that the Company elects to hold its next annual meeting more than 30 days before or after the anniversary of this Annual Meeting, such stockholder proposals would have to be received by the Company not earlier than 120 days prior to the next annual meeting date and not later than 90 days prior to the next annual meeting date. Typically, the Company holds its meeting in late July.
Such notice must include: (1) for a nomination for director, all information relating to such person that is required to be disclosed in a proxy for election of directors; (2) as to any other business, a description of the proposed business, the text of the proposal, the reasons therefore, and any material interest the stockholder may have in that business; and (3) certain information regarding the stockholder making the proposal. These requirements are separate from the requirements a stockholder must meet to have a proposal included in the Companys proxy statement. The foregoing time limits also apply in determining whether notice is timely for purposes of rules adopted by the Securities and Exchange Commission relating to the exercise of discretionary voting authority.
Any stockholder desiring a copy of the Companys Bylaws will be furnished one without charge upon written request to the Corporate Secretary. A copy of the amended and restated Bylaws was filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, and is available at the Securities and Exchange Commission Internet site (http://www.sec.gov).
At the date of mailing of this proxy statement, we are not aware of any business to be presented at the annual meeting other than the matters discussed above. If other proposals are properly brought before the meeting, any proxies returned to us will be voted as the proxyholder sees fit.
Our Annual Report on Form 10-K for the year ended December 31, 2006 is available without charge by accessing the Investor section of our website at www.charter.com. You also may obtain a paper copy of the Charter Communications, Inc. 2006 10-K, without exhibits, at no charge by writing to the Company at Charter Plaza, 12405 Powerscourt Drive, St. Louis, MO 63131, Attention: Investor Relations.
In addition, certain financial and other related information, which is required to be furnished to our stockholders, is provided to stockholders concurrently with this Proxy Statement in our 2006 Annual Report. The SEC has enacted a rule that allows the Company to deliver only one copy of our Proxy Statement and 2006 Annual Report to multiple security holders sharing an address if they so consent. This is known as householding. The Householding Election, which appears on your proxy card, provides you with a means for you to notify us whether you consent to participate in householding. By marking Yes in the block provided, you will consent to participate in householding and by marking no you will withhold your consent to participate. If you do nothing, you will be deemed to have given your consent to participate in householding. Your consent to householding will be perpetual unless you withhold or revoke it. You may revoke your consent at any time by contacting Automatic Data Processing, Inc. (ADP), either by writing to ADP, Householding Department, 51 Mercedes Way, Edgewood, New York 11717, or by calling (800) 542-1061. We will remove you from the householding program within 30 days of receipt of your response, following which you will receive an individual copy of our disclosure statement. Even if your household receives only one Annual Report and one Proxy Statement, a separate proxy card will be provided for each stockholder. If you vote using the proxy card, please sign and return it in the enclosed postage-paid envelope. If you vote by Internet, there is no need to mail the proxy card.