Charter 2005 Annual Report Download - page 45

CHARTER COMMUNICATIONS, INC. 2005 FORM 10-K
value of the customer relationships. Substantially all our acquisi- Sensitivity analysis. The effect on franchise values as of October 1,
tions occurred prior to January 1, 2002. We did not record any 2005 of the indicated increase/decrease in the selected assump-
value associated with the customer relationship intangibles tions is shown below:
related to those acquisitions. For acquisitions subsequent to
Percentage/
January 1, 2002, we did assign a value to the customer
Percentage Point Franchise Value
relationship intangible, which is amortized over its estimated Assumption Change Increase/(Decrease)
useful life. (Dollars in millions)
In September 2004, EITF Topic D-108, Use of the Residual Annual Operating Cash Flow(1) +/-5% $1,200/$(1,200)
Long-Term Growth Rate(2) +/-1 pts(3) 1,700/(1,300)
Method to Value Acquired Assets Other than Goodwill, was issued, Discount Rate +/-0.5 pts(3) (1,300)/1,500
which requires the direct method of separately valuing all (1) Operating Cash Flow is defined as revenues less operating expenses and selling
intangible assets and does not permit goodwill to be included in general and administrative expenses.
franchise assets. We performed an impairment assessment as of (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.
September 30, 2004, and adopted Topic D-108 in that assess-
ment resulting in a total franchise impairment of approximately Income taxes. All operations are held through Charter Holdco
$3.3 billion. We recorded a cumulative effect of accounting and its direct and indirect subsidiaries. Charter Holdco and the
change of $765 million (approximately $875 million before tax majority of its subsidiaries are not subject to income tax.
effects of $91 million and minority interest effects of $19 mil- However, certain of these subsidiaries are corporations and are
lion) for the year ended December 31, 2004 representing the subject to income tax. All of the taxable income, gains, losses,
portion of our total franchise impairment attributable to no deductions and credits of Charter Holdco are passed through to
longer including goodwill with franchise assets. The effect of the its members: Charter, CII and Vulcan Cable III Inc. Charter is
adoption was to increase net loss and loss per share by responsible for its share of taxable income or loss of Charter
$765 million and $2.55, respectively, for the year ended Holdco allocated to it in accordance with the Charter Holdco
December 31, 2004. The remaining $2.4 billion of the total limited liability company agreement (‘‘LLC Agreement’’) and
franchise impairment was attributable to the use of lower partnership tax rules and regulations.
projected growth rates and the resulting revised estimates of The LLC Agreement provides for certain special allocations
future cash flows in our valuation and was recorded as of net tax profits and net tax losses (such net tax profits and net
impairment of franchises in our consolidated statements of tax losses being determined under the applicable federal income
operations for the year ended December 31, 2004. Sustained tax rules for determining capital accounts). Under the LLC
analog video customer losses by us and our industry peers in Agreement, through the end of 2003, net tax losses of Charter
the third quarter of 2004 primarily as a result of increased Holdco that would otherwise have been allocated to Charter
competition from DBS providers and decreased growth rates in based generally on its percentage ownership of outstanding
our and our industry peers’ high-speed Internet customers in the common units were allocated instead to membership units held
third quarter of 2004, in part as a result of increased competition by Vulcan Cable III Inc. and CII (the ‘‘Special Loss Allocations’’)
from DSL providers, led us to lower our projected growth rates to the extent of their respective capital account balances. After
and accordingly revise our estimates of future cash flows from 2003, under the LLC Agreement, net tax losses of Charter
those used at October 1, 2003. See ‘‘Item 1. Business — Holdco are allocated to Charter, Vulcan Cable III Inc. and CII
Competition.’’ based generally on their respective percentage ownership of
The valuations completed at October 1, 2003 and Octo- outstanding common units to the extent of their respective
ber 1, 2005 showed franchise values in excess of book value and capital account balances. Allocations of net tax losses in excess
thus resulted in no impairment. of the members’ aggregate capital account balances are allocated
The valuations used in our impairment assessments involve under the rules governing Regulatory Allocations, as described
numerous assumptions as noted above. While economic condi- below. Subject to the Curative Allocation Provisions described
tions, applicable at the time of the valuation, indicate the below, the LLC Agreement further provides that, beginning at
combination of assumptions utilized in the valuations are the time Charter Holdco generates net tax profits, the net tax
reasonable, as market conditions change so will the assumptions profits that would otherwise have been allocated to Charter
with a resulting impact on the valuation and consequently the based generally on its percentage ownership of outstanding
potential impairment charge. common membership units will instead generally be allocated to
Vulcan Cable III Inc. and CII (the ‘‘Special Profit Allocations’’).
The Special Profit Allocations to Vulcan Cable III Inc. and CII
will generally continue until the cumulative amount of the
Special Profit Allocations offsets the cumulative amount of the
Special Loss Allocations. The amount and timing of the Special
Profit Allocations are subject to the potential application of, and
interaction with, the Curative Allocation Provisions described
in the following paragraph. The LLC Agreement generally
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