Charter 2004 Annual Report Download - page 40

CHARTER COMMUNICATIONS, INC. 2004 FORM 10-K
effect of the Regulatory Allocations is to be offset over time Charter, or be acquired by Charter in a non-taxable reorganiza-
pursuant to certain curative allocation provisions (the ‘‘Curative tion. If such an exchange were to take place prior to the date
Allocation Provisions’’) so that, after certain offsetting adjust- that the Special Profit Allocation provisions had fully offset the
ments are made, each member’s capital account balance is equal Special Loss Allocations, Vulcan Cable III Inc. and Charter
to the capital account balance such member would have had if Investment, Inc. could elect to cause Charter Holdco to make
the Regulatory Allocations had not been part of the LLC the remaining Special Profit Allocations to Vulcan Cable III Inc.
Agreement. The cumulative amount of the actual tax losses and Charter Investment, Inc. immediately prior to the consum-
allocated to Charter as a result of the Regulatory Allocations mation of the exchange. In the event Vulcan Cable III Inc. and
through the year ended December 31, 2004 is approximately Charter Investment, Inc. choose not to make such election or to
$4.0 billion. the extent such allocations are not possible, Charter would then
As a result of the Special Loss Allocations and the be allocated tax profits attributable to the membership units
Regulatory Allocations referred to above, the cumulative amount received in such exchange pursuant to the Special Profit
of losses of Charter Holdco allocated to Vulcan Cable III Inc. Allocation provisions. Mr. Allen has generally agreed to reim-
and Charter Investment, Inc. is in excess of the amount that burse Charter for any incremental income taxes that Charter
would have been allocated to such entities if the losses of would owe as a result of such an exchange and any resulting
Charter Holdco had been allocated among its members in future Special Profit Allocations to Charter. The ability of
proportion to their respective percentage ownership of Charter Charter to utilize net operating loss carryforwards is potentially
Holdco common membership units. The cumulative amount of subject to certain limitations (See ‘‘Certain Trends and Uncer-
such excess losses was approximately $2.1 billion through tainties — Utilization of Net Operating Loss Carryforwards’’.) If
December 31, 2003 and $1.0 billion through December 31, 2004. Charter were to become subject to such limitations (whether as
In certain situations, the Special Loss Allocations, Special a result of an exchange described above or otherwise), and as a
Profit Allocations, Regulatory Allocations and Curative Alloca- result were to owe taxes resulting from the Special Profit
tion Provisions described above could result in Charter paying Allocations, then Mr. Allen may not be obligated to reimburse
taxes in an amount that is more or less than if Charter Holdco Charter for such income taxes.
had allocated net tax profits and net tax losses among its As of December 31, 2004 and 2003, we have recorded net
members based generally on the number of common member- deferred income tax liabilities of $216 million and $417 million,
ship units owned by such members. This could occur due to respectively. Additionally, as of December 31, 2004 and 2003,
differences in (i) the character of the allocated income (e.g., we have deferred tax assets of $3.5 billion and $1.7 billion,
ordinary versus capital), (ii) the allocated amount and timing of respectively, which primarily relate to financial and tax losses
tax depreciation and tax amortization expense due to the allocated to Charter from Charter Holdco. We are required to
application of section 704(c) under the Internal Revenue Code, record a valuation allowance when it is more likely than not
(iii) the potential interaction between the Special Profit Alloca- that some portion or all of the deferred income tax assets will
tions and the Curative Allocation Provisions, (iv) the amount not be realized. Given the uncertainty surrounding our ability to
and timing of alternative minimum taxes paid by Charter, if any, utilize our deferred tax assets, these items have been offset with
(v) the apportionment of the allocated income or loss among a corresponding valuation allowance of $3.2 billion and $1.3 bil-
the states in which Charter Holdco does business, and lion at December 31, 2004 and 2003, respectively.
(vi) future federal and state tax laws. Further, in the event of We are currently under examination by the Internal
new capital contributions to Charter Holdco, it is possible that Revenue Service for the tax years ending December 31, 1999
the tax effects of the Special Profit Allocations, Special Loss and 2000. Management does not expect the results of this
Allocations, Regulatory Allocations and Curative Allocation examination to have a material adverse effect on our consoli-
Provisions will change significantly pursuant to the provisions of dated financial condition, results of operations or our liquidity,
the income tax regulations or the terms of a contribution including our ability to comply with our debt covenants.
agreement with respect to such contribution. Such change could Litigation. Legal contingencies have a high degree of
defer the actual tax benefits to be derived by Charter with uncertainty. When a loss from a contingency becomes estimable
respect to the net tax losses allocated to it or accelerate the and probable, a reserve is established. The reserve reflects
actual taxable income to Charter with respect to the net tax management’s best estimate of the probable cost of ultimate
profits allocated to it. As a result, it is possible under certain resolution of the matter and is revised accordingly as facts and
circumstances, that Charter could receive future allocations of circumstances change and, ultimately when the matter is
taxable income in excess of its currently allocated tax deductions brought to closure. We have established reserves for certain
and available tax loss carryforwards. The ability to utilize net matters including those described in ‘‘Business — Legal Proceed-
operating loss carryforwards is potentially subject to certain ings.’’ If any of the litigation matters described in ‘‘Business —
limitations as discussed below. Legal Proceedings’’ is resolved unfavorably resulting in payment
In addition, under their exchange agreement with Charter, obligations in excess of management’s best estimate of the
Vulcan Cable III Inc. and Charter Investment, Inc. may outcome, such resolution could have a material adverse effect on
exchange some or all of their membership units in Charter our consolidated financial condition, results of operations or our
Holdco for Charter’s Class B common stock, be merged with liquidity.
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