Charter 2004 Annual Report Download - page 137

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2004 FORM 10-K
Notes to Consolidated Financial Statements (continued)
recognized expense of $8 million in the first three quarters of 21. INCOME TAXES
2004. However, in the fourth quarter of 2004, the Company All operations are held through Charter Holdco and its direct
reversed the entire $8 million of expense based on the and indirect subsidiaries. Charter Holdco and the majority of its
Company’s assessment of the probability of achieving the subsidiaries are not subject to income tax. However, certain of
financial performance measures established by Charter and these subsidiaries are corporations and are subject to income
required to be met for the performance shares to vest. tax. All of the taxable income, gains, losses, deductions and
credits of Charter Holdco are passed through to its members:
20. SPECIAL CHARGES Charter, Charter Investment, Inc. (‘‘Charter Investment’’) and
In the fourth quarter of 2002, the Company began a workforce Vulcan Cable III Inc. (‘‘Vulcan Cable’’). Charter is responsible for
reduction program and consolidation of its operations from its share of taxable income or loss of Charter Holdco allocated
three divisions and ten regions into five operating divisions, to Charter in accordance with the Charter Holdco limited
eliminating redundant practices and streamlining its manage- liability company agreement (‘‘LLC Agreement’’) and partner-
ment structure. The Company has recorded special charges as a ship tax rules and regulations.
result of reducing its workforce and consolidating administrative The LLC Agreement provides for certain special allocations
offices in 2003 and 2004. The activity associated with this of net tax profits and net tax losses (such net tax profits and net
initiative is summarized in the table below. tax losses being determined under the applicable federal income
tax rules for determining capital accounts). Pursuant to the LLC
Total Agreement, through the end of 2003, net tax losses of Charter
Severance Special
/Leases Litigation Other Charge Holdco that would otherwise have been allocated to Charter
Special Charges $ 31 $—$5 $ 36 based generally on its percentage ownership of outstanding
common units were allocated instead to membership units held
Balance at December 31, 2002 31 by Vulcan Cable and Charter Investment (the ‘‘Special Loss
Special Charges 26 $—$(5) $ 21 Allocations’’) to the extent of their respective capital account
Payments (43) balances. After 2003, pursuant to the LLC Agreement, net tax
losses of Charter Holdco are to be allocated to Charter, Vulcan
Balance at December 31, 2003 14 Cable and Charter Investment based generally on their respec-
Special Charges 12 $92 $—$104 tive percentage ownership of outstanding common units to the
Payments (20) extent of their respective capital account balances. The LLC
Agreement further provides that, beginning at the time Charter
Balance at December 31, 2004 $ 6 Holdco generates net tax profits, the net tax profits that would
For the year ended December 31, 2002 special charges otherwise have been allocated to Charter based generally on its
include $4 million related to legal and other costs associated percentage ownership of outstanding common membership units
with the Company’s ongoing grand jury investigation, share- will instead generally be allocated to Vulcan Cable and Charter
holder lawsuits and SEC investigation and $1 million associated Investment (the ‘‘Special Profit Allocations’’). The Special Profit
with severance costs related to a 2001 restructuring plan. For Allocations to Vulcan Cable and Charter Investment will
the year ended December 31, 2003, the severance and lease generally continue until the cumulative amount of the Special
costs were offset by a $5 million settlement from the Internet Profit Allocations offsets the cumulative amount of the Special
service provider Excite@Home related to the conversion of Loss Allocations. The amount and timing of the Special Profit
high-speed data customers to Charter Pipeline service in 2001. Allocations are subject to the potential application of, and
For the year ended December 31, 2004, special charges include interaction with, the Curative Allocation Provisions described in
approximately $85 million, representing the aggregate value of the following paragraph. The LLC Agreement generally pro-
the Charter Class A common stock and warrants to purchase vides that any additional net tax profits are to be allocated
Charter Class A common stock contemplated to be issued as among the members of Charter Holdco based generally on their
part of a settlement of consolidated federal and state class respective percentage ownership of Charter Holdco common
actions and federal derivative action lawsuits and approximately membership units.
$10 million of litigation costs related to the tentative settlement Because the respective capital account balance of each of
of a national class action suit, all of which are subject to final Vulcan Cable and Charter Investment was reduced to zero by
documentation and court approval (see Note 23). For the year December 31, 2002, certain net tax losses of Charter Holdco
ended December 31, 2004, special charges were offset by that were to be allocated for 2002, 2003, 2004 and possibly later
$3 million received from a third party in settlement of a dispute. years (subject to resolution of the issue described in Note 22) to
Vulcan Cable and Charter Investment instead have been and
will be allocated to Charter (the ‘‘Regulatory Allocations’’). The
LLC Agreement further provides that, to the extent possible, the
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