Charter 2003 Annual Report Download - page 43

forecasts. Our assumptions include these and other factors: penetration rates for analog and digital video and
high-speed data, revenue growth rates, expected operating margins and capital expenditures. Considerable
management judgment is necessary to estimate future cash Öows, and such estimates include inherent
uncertainties, including those relating to the timing and amount of future cash Öows and the discount rate used
in the calculation. We utilize an independent third-party appraiser with expertise in the cable industry to assist
in the determination of the fair value of intangible assets.
During the Ñrst quarter of 2002, we had an independent appraiser perform valuations of our franchises as
of January 1, 2002. Based on the guidance prescribed in Emerging Issues Task Force (""EITF'') Issue
No. 02-7, Unit of Accounting for Testing of Impairment of IndeÑnite-Lived Intangible Assets, franchises were
aggregated into essentially inseparable asset groups to conduct the valuations. The asset groups generally
represent geographic clusters of our cable systems, which management believes represent the highest and best
use of those assets. We determined that our franchises were impaired and as a result recorded the cumulative
eÅect of a change in accounting principle of $206 million (approximately $572 million before minority interest
eÅects of $306 million and tax eÅects of $60 million). As required by SFAS No. 142, the standard has not
been retroactively applied to results for the period prior to adoption.
We performed our annual impairment assessment as of October 1, 2002 using an independent third-party
appraiser and following the guidance of EITF Issue 02-17, Recognition of Customer Relationship Intangible
Assets Acquired in a Business Combination, which was issued in October 2002 and requires the consideration
of assumptions that marketplace participants would consider, such as expectations of future contract renewals
and other beneÑts related to the intangible asset. Revised estimates of future cash Öows and the use of a lower
projected long-term growth rate in our valuation, led to recognition of a $4.6 billion impairment charge in the
fourth quarter of 2002.
The independent third party appraiser's valuations as of January 1, 2002, October 1, 2002 and October 1,
2003, yielded total enterprise values of approximately $30 billion, $25 billion and $25 billion, respectively,
which included approximately $2.4 billion, $3.1 billion and $3.2 billion, respectively, assigned to customer
relationships. SFAS No. 142 does not permit the recognition of intangible assets not previously recognized.
Accordingly, the impairment included approximately $572 million and $3.1 billion, before tax eÅects,
attributable to customer relationships as of January 1, 2002 and October 1, 2002, respectively. The valuation
completed at October 1, 2003 showed franchise values in excess of book value and thus resulted in no
impairment. Additionally, as a result of the sale of Port Orchard, Washington cable system on October 1,
2003, net carrying values of franchises were reduced by $42 million.
The valuations involve numerous assumptions as noted above. While the economic conditions at the time
of each valuation indicate that the combination of assumptions utilized in the appraisals are reasonable, as
market conditions change so will the assumptions with a resulting impact on the valuation.
Income Taxes. All operations are held through Charter Holdco and its direct and indirect subsidiaries.
Charter Holdco and the majority of its subsidiaries are not subject to income tax. However, certain of these
subsidiaries are corporations and are subject to income tax. All of the taxable income, gains, losses, deductions
and credits of Charter Holdco are passed through to its members: Charter, Charter Investment, Inc. and
Vulcan Cable III, Inc. Charter is responsible for its share of taxable income or loss of Charter Holdco
allocated to it in accordance with the Charter Holdco limited liability company agreement (""LLC
Agreement'') and partnership tax rules and regulations.
The LLC Agreement provides for certain special allocations of net tax proÑts and net tax losses (such net
tax proÑts and net tax losses being determined under the applicable federal income tax rules for determining
capital accounts). Pursuant to the LLC Agreement, through the end of 2003, net tax losses of Charter Holdco
that would otherwise have been allocated to Charter based generally on its percentage ownership of
outstanding common units were allocated instead to membership units held by Vulcan Cable III, Inc. and
Charter Investment, Inc. (the ""Special Loss Allocations'') to the extent of their respective capital account
balances. After 2003, pursuant to the LLC Agreement, net tax losses of Charter Holdco are to be allocated to
Charter, Vulcan Cable III, Inc. and Charter Investment, Inc. based generally on their respective percentage
ownership of outstanding common units to the extent of their respective capital account balances. The LLC
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