Charter 2004 Annual Report Download - page 39

CHARTER COMMUNICATIONS, INC. 2004 FORM 10-K
In September 2004, EITF Topic D-108, Use of the Residual Income Taxes. All operations are held through Charter
Method to Value Acquired Assets Other than Goodwill, was issued, Holdco and its direct and indirect subsidiaries. Charter Holdco
which requires the direct method of separately valuing all and the majority of its subsidiaries are not subject to income tax.
intangible assets and does not permit goodwill to be included in However, certain of these subsidiaries are corporations and are
franchise assets. We performed an impairment assessment as of subject to income tax. All of the taxable income, gains, losses,
September 30, 2004, and adopted Topic D-108 in that assess- deductions and credits of Charter Holdco are passed through to
ment resulting in a total franchise impairment of approximately its members: Charter, Charter Investment, Inc. and Vulcan
$3.3 billion. We recorded a cumulative effect of accounting Cable III Inc. Charter is responsible for its share of taxable
change of $765 million (approximately $875 million before tax income or loss of Charter Holdco allocated to it in accordance
effects of $91 million and minority interest effects of $19 mil- with the Charter Holdco limited liability company agreement
lion) for the year ended December 31, 2004 representing the (‘‘LLC Agreement’’) and partnership tax rules and regulations.
portion of our total franchise impairment attributable to no The LLC Agreement provided for certain special alloca-
longer including goodwill with franchise assets. The effect of the tions of net tax profits and net tax losses (such net tax profits
adoption was to increase net loss and loss per share by and net tax losses being determined under the applicable federal
$765 million and $2.55 for the year ended December 31, 2004. income tax rules for determining capital accounts). Under the
The remaining $2.4 billion of the total franchise impairment was LLC Agreement, through the end of 2003, net tax losses of
attributable to the use of lower projected growth rates and the Charter Holdco that would otherwise have been allocated to
resulting revised estimates of future cash flows in our valuation Charter based generally on its percentage ownership of out-
and was recorded as impairment of franchises in our consoli- standing common units were allocated instead to membership
dated statements of operations for the year ended December 31, units held by Vulcan Cable III Inc. and Charter Investment, Inc.
2004. Sustained analog video customer losses by us and our (the ‘‘Special Loss Allocations’’) to the extent of their respective
industry peers in the third quarter of 2004 primarily as a result capital account balances. After 2003, under the LLC Agreement,
of increased competition from DBS providers and decreased net tax losses of Charter Holdco are allocated to Charter,
growth rates in our and our industry peers’ high speed data Vulcan Cable III Inc. and Charter Investment, Inc. based
customers in the third quarter of 2004, in part as a result of generally on their respective percentage ownership of outstand-
increased competition from DSL providers, led us to lower our ing common units to the extent of their respective capital
projected growth rates and accordingly revise our estimates of account balances. The LLC Agreement further provides that,
future cash flows from those used at October 1, 2003. See beginning at the time Charter Holdco generates net tax profits,
‘‘Business — Competition.’’ the net tax profits that would otherwise have been allocated to
The valuation completed at October 1, 2003 showed Charter based generally on its percentage ownership of out-
franchise values in excess of book value and thus resulted in no standing common membership units will instead generally be
impairment. Our annual impairment assessment as of October 1, allocated to Vulcan Cable III Inc. and Charter Investment, Inc.
2002, based on revised estimates from January 1, 2002 of future (the ‘‘Special Profit Allocations’’). The Special Profit Allocations
cash flows and projected long-term growth rates in our to Vulcan Cable III Inc. and Charter Investment, Inc. will
valuation, led to the recognition of a $4.6 billion impairment generally continue until the cumulative amount of the Special
charge in the fourth quarter of 2002. Profit Allocations offsets the cumulative amount of the Special
The valuations used in our impairment assessments involve Loss Allocations. The amount and timing of the Special Profit
numerous assumptions as noted above. While economic condi- Allocations are subject to the potential application of, and
tions, applicable at the time of the valuation, indicate the interaction with, the Curative Allocation Provisions described in
combination of assumptions utilized in the valuations are the following paragraph. The LLC Agreement generally pro-
reasonable, as market conditions change so will the assumptions vides that any additional net tax profits are to be allocated
with a resulting impact on the valuation and consequently the among the members of Charter Holdco based generally on their
potential impairment charge. respective percentage ownership of Charter Holdco common
Sensitivity Analysis. The effect on the impairment membership units.
charge recognized in the third quarter of 2004 of the indicated Because the respective capital account balance of each of
increase/decrease in the selected assumptions is shown below: Vulcan Cable III Inc. and Charter Investment, Inc. was reduced
Percentage/ to zero by December 31, 2002, certain net tax losses of Charter
Percentage Point Impairment Charge Holdco that were to be allocated for 2002, 2003, 2004 and
Assumption Change Increase/(Decrease) possibly later years, subject to resolution of the issue described
(Dollars in millions)
in ‘‘Certain Relationships and Related Transactions — Transac-
Annual Operating Cash Flow(1) +/-5% $ (890)/$921
Long-Term Growth Rate(2) +/- 1pts(3) (1,579)/1,232 tions Arising out of Our Organizational Structure and
Discount Rate +/- 0.5 pts(3) 1,336/(1,528) Mr. Allen’s Investment in Charter Communications, Inc. and Its
(1) Operating Cash Flow is defined as revenues less operating expenses and selling Subsidiaries — Equity Put Rights — CC VIII,’’ to Vulcan Cable III
general and administrative expenses. Inc. and Charter Investment, Inc. instead have been and will be
(2) Long-Term Growth Rate is the rate of cash flow growth beyond year ten.
(3) A percentage point change of one point equates to 100 basis points. allocated to Charter (the ‘‘Regulatory Allocations’’). The LLC
Agreement further provides that, to the extent possible, the
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