Charter 2005 Annual Report Download - page 35

CHARTER COMMUNICATIONS, INC. 2005 FORM 10-K
power of our capital stock, Mr. Allen is entitled to elect all but The special tax allocation provisions of the Charter Holdco limited
one of our board members and effectively has the voting power liability company agreement may cause us in some circumstances to
to elect the remaining board member as well. Mr. Allen thus pay more taxes than if the special tax allocation provisions were not
has the ability to control fundamental corporate transactions in effect.
requiring equity holder approval, including, but not limited to,
the election of all of our directors, approval of merger Charter Holdco’s limited liability company agreement provided
transactions involving us and the sale of all or substantially all of that through the end of 2003, net tax losses (such net tax losses
our assets. being determined under the federal income tax rules for
Mr. Allen is not restricted from investing in, and has determining capital accounts) of Charter Holdco that would
invested in, and engaged in, other businesses involving or related otherwise have been allocated to us based generally on our
to the operation of cable television systems, video programming, percentage ownership of outstanding common membership units
high-speed Internet service, telephone or business and financial of Charter Holdco would instead be allocated to the member-
transactions conducted through broadband interactivity and ship units held by Vulcan Cable III Inc. (‘‘Vulcan Cable’’) and
Internet services. Mr. Allen may also engage in other businesses Charter Investment, Inc. (‘‘CII’’). The purpose of these special
that compete or may in the future compete with us. tax allocation provisions was to allow Mr. Allen to take
Mr. Allen’s control over our management and affairs could advantage, for tax purposes, the losses generated by Charter
create conflicts of interest if he is faced with decisions that could Holdco during such period. In some situations, these special tax
have different implications for him, us and the holders of our allocation provisions could result in our having to pay taxes in
Class A common stock. Further, Mr. Allen could effectively an amount that is more or less than if Charter Holdco had
cause us to enter into contracts with another entity in which he allocated net tax losses to its members based generally on the
owns an interest or to decline a transaction into which he (or percentage of outstanding common membership units owned by
another entity in which he owns an interest) ultimately enters. such members. For further discussion on the details of the tax
Current and future agreements between us and either allocation provisions see ‘‘Item 7. Management’s Discussion and
Mr. Allen or his affiliates may not be the result of arm’s-length Analysis of Financial Condition and Results of Operations —
negotiations. Consequently, such agreements may be less Critical Accounting Policies and Estimates — Income Taxes.’’
favorable to us than agreements that we could otherwise have The recent issuance of our Class A common stock, as well as possible
entered into with unaffiliated third parties. See ‘‘Item 13. — future conversions of our convertible notes, significantly increase the
Certain Relationships and Related Transactions.’’ risk that we will experience an ownership change in the future for tax
We are not permitted to engage in any business activity other than the purposes, resulting in a material limitation on the use of a substantial
cable transmission of video, audio and data unless Mr. Allen amount of our existing net operating loss carryforwards.
authorizes us to pursue that particular business activity, which could As of December 31, 2005, we had approximately $5.9 billion of
adversely affect our ability to offer new products and services outside tax net operating losses (resulting in a gross deferred tax asset of
of the cable transmission business and to enter into new businesses, approximately $2.4 billion) expiring in the years 2006 through
and could adversely affect our growth, financial condition and results 2025. Due to uncertainties in projected future taxable income,
of operations. valuation allowances have been established against the gross
Our certificate of incorporation and Charter Holdco’s limited deferred tax assets for book accounting purposes except for
liability company agreement provide that Charter and Charter deferred benefits available to offset certain deferred tax liabilities.
Holdco and our subsidiaries, cannot engage in any business Currently, such tax net operating losses can accumulate and be
activity outside the cable transmission business except for used to offset any of our future taxable income. An ‘‘ownership
specified businesses. This will be the case unless Mr. Allen change’’ as defined in Section 382 of the Internal Revenue Code
consents to our engaging in the business activity. The cable of 1986, as amended, would place significant limitations, on an
transmission business means the business of transmitting video, annual basis, on the use of such net operating losses to offset
audio (including telephone services), and data over cable any future taxable income we may generate. Such limitations, in
television systems owned, operated or managed by us from time conjunction with the net operating loss expiration provisions,
to time. These provisions may limit our ability to take advantage could effectively eliminate our ability to use a substantial portion
of attractive business opportunities. of our net operating losses to offset future taxable income.
The issuance of up to a total of 150 million shares of our
The loss of Mr. Allen’s services could adversely affect our ability to Class A common stock (of which a total of 116.9 million have
manage our business. been issued through February 2006) offered pursuant to a share
Mr. Allen is Chairman of our board of directors and provides lending agreement executed by Charter in connection with the
strategic guidance and other services to us. If we were to lose issuance of the 5.875% convertible senior notes in Novem-
his services, our growth, financial condition and results of ber 2004, as well as possible future conversions of our
operations could be adversely impacted. convertible notes, significantly increases the risk that we will
experience an ownership change in the future for tax purposes,
resulting in a material limitation on the use of a substantial
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