Time Warner Cable 2007 Annual Report Download - page 39

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TWC may have to pay fees in connection with its cable modem service.
Local franchising authorities generally require cable operators to pay a franchise fee of five percent of revenue,
which cable operators collect in turn from their subscribers. TWC has taken the position that under the
Communications Act, local franchising authorities are allowed to impose a franchise fee only on revenue from
“cable services.” Following the FCC’s March 2002 determination that cable modem service does not constitute a
“cable service,” TWC and most other multiple system operators stopped collecting and paying franchise fees on
cable modem revenue.
The FCC has initiated a rulemaking proceeding to explore the consequences of its March 2002 order. If either
the FCC or a court were to determine that, despite the March 2002 order, TWC is required to pay franchise fees on
cable modem revenue, TWC’s franchise fee burden could increase going forward. TWC would be permitted to
collect those increased fees from its subscribers, but doing so could impair its competitive position as compared to
high-speed data service providers who are not required to collect and pay franchise fees. TWC could also become
liable for franchise fees back to the time TWC stopped paying them. TWC may not be able to recover those fees
from subscribers. Most courts interpreting the rules, including several instances involving TWC, have determined
that cable operators are not required to pay these fees on cable modem service. In 2007, an intermediate state
appellate court decided, in a case not involving TWC, that cable operators can be required to pay franchise fees on
cable modem service. This decision may encourage other franchise authorities to seek such fees.
Applicable law is subject to change.
The exact requirements of applicable law are not always clear, and the rules affecting TWC’s businesses are
always subject to change. For example, the FCC may interpret its rules and regulations in enforcement proceedings
in a manner that is inconsistent with the judgments TWC has made. Likewise, regulators and legislators at all levels
of government may sometimes change existing rules or establish new rules. Congress, for example, considers new
legislative requirements for cable operators virtually every year, and there is always a risk that such proposals will
ultimately be enacted. See “Business—Regulatory Matters.”
Risks Related to TWC’s Relationship with Time Warner
Time Warner controls approximately 90.6% of the voting power of TWC’s outstanding common stock and has the
ability to elect a majority of TWC’s directors, and its interest may conflict with the interests of TWC’s other
stockholders.
Time Warner indirectly holds all of TWC’s outstanding Class B common stock and approximately 82.7% of
TWC’s outstanding Class A common stock. The common stock held by Time Warner represents approximately
90.6% of TWC’s combined voting power and 84.0% of the total number of shares of capital stock outstanding of all
classes of TWC’s voting stock. Accordingly, Time Warner can control the outcome of most matters submitted to a
vote of TWC’s stockholders. In addition, Time Warner, because it is the indirect holder of all of TWC’s outstanding
Class B common stock, and because it also indirectly holds a majority of TWC’s outstanding Class A common
stock, is able to elect all of TWC’s directors and will continue to be able to do so as long as it owns a majority of
TWC’s Class A common stock and Class B common stock. As a result of Time Warner’s share ownership and
representation on TWC’s board of directors, Time Warner is able to influence all of TWC’s affairs and actions,
including matters requiring stockholder approval such as the election of directors and approval of significant
corporate transactions. The interests of Time Warner may differ from the interests of TWC’s other stockholders.
TWC’s Certificate of Incorporation requires that TWC’s board of directors include independent members, subject
to certain limitations, and TWC’s By-laws require that certain related party transactions be approved by a majority
of these independent directors.
Some of TWC’s officers and directors may have interests that diverge from TWC in favor of Time Warner
because of past and ongoing relationships with Time Warner and its affiliates.
Some of TWC’s officers and directors may experience conflicts of interest with respect to decisions involving
business opportunities and similar matters that may arise in the ordinary course of TWC’s business or the business
of Time Warner and its affiliates. One of TWC’s directors is an executive officer of a subsidiary of Time Warner that
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