Charter 2006 Annual Report Download - page 109

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2006 FORM 10-K
Notes to Consolidated Financial Statements (continued)
Incentive Plan that had an exercise price over $10 per share for 21. INCOME TAXES
shares of restricted Charter Class A common stock or, in some All operations are held through Charter Holdco and its direct
instances, cash. The offer applied to options (vested and and indirect subsidiaries. Charter Holdco and the majority of its
unvested) to purchase a total of 22,929,573 shares of Class A subsidiaries are not subject to income tax. However, certain of
common stock, or approximately 48% of the Company’s these subsidiaries are corporations and are subject to income
47,882,365 total options issued and outstanding as of Decem- tax. All of the taxable income, gains, losses, deductions and
ber 31, 2003. Participation by employees was voluntary. Those credits of Charter Holdco are passed through to its members:
members of the Company’s board of directors who were not Charter, Charter Investment, Inc. (‘‘CII’’) and Vulcan Cable III
also employees of the Company or any of its subsidiaries were Inc. (‘‘Vulcan Cable’’). Charter is responsible for its share of
not eligible to participate in the exchange offer. taxable income or loss of Charter Holdco allocated to Charter
The Company accepted for cancellation eligible options to in accordance with the Charter Holdco limited liability com-
purchase approximately 18,137,664 shares of its Class A com- pany agreement (the ‘‘LLC Agreement’’) and partnership tax
mon stock. In exchange, the Company granted 1,966,686 shares rules and regulations. Charter also records financial statement
of restricted stock, including 460,777 performance shares to deferred tax assets and liabilities related to its investments in
eligible employees of the rank of senior vice president and Charter Holdco.
above, and paid a total cash amount of approximately $4 million The LLC Agreement provides for certain special allocations
(which amount includes applicable withholding taxes) to those of net tax profits and net tax losses (such net tax profits and net
employees who received cash rather than shares of restricted tax losses being determined under the applicable federal income
stock. tax rules for determining capital accounts). Under the LLC
The cost to the Company of the stock option exchange Agreement, through the end of 2003, net tax losses of Charter
program was approximately $10 million, with a 2004 cash Holdco that would otherwise have been allocated to Charter
compensation expense of approximately $4 million and a non- based generally on its percentage ownership of outstanding
cash compensation expense of approximately $6 million to be common units were allocated instead to membership units held
expensed ratably over the three-year vesting period of the by Vulcan Cable and CII (the ‘‘Special Loss Allocations’’) to the
restricted stock in the exchange. extent of their respective capital account balances. Since 2003,
In January 2004, the Compensation Committee of the under the LLC Agreement, net tax losses of Charter Holdco are
board of directors of Charter approved Charter’s Long-Term to be allocated to Charter, Vulcan Cable and CII based generally
Incentive Program (‘‘LTIP’’), which is a program administered on their respective percentage ownership of outstanding com-
under the 2001 Stock Incentive Plan. Under the LTIP, employ- mon units to the extent of their respective capital account
ees of Charter and its subsidiaries whose pay classifications balances. Allocations of net tax losses in excess of the members’
exceed a certain level are eligible to receive stock options, and aggregate capital account balances are allocated under the rules
more senior level employees are eligible to receive stock options governing Regulatory Allocations, as described below. Subject to
and performance shares. The stock options vest 25% on each of the Curative Allocation Provisions described below, the LLC
the first four anniversaries of the date of grant. The performance Agreement further provides that, beginning at the time Charter
shares vest on the third anniversary of the grant date and shares Holdco generates net tax profits, the net tax profits that would
of Charter Class A common stock are issued, conditional upon otherwise have been allocated to Charter based generally on its
Charter’s performance against financial performance measures percentage ownership of outstanding common membership units
established by Charter’s management and approved by its board will instead generally be allocated to Vulcan Cable and CII (the
of directors as of the time of the award. Charter granted ‘‘Special Profit Allocations’’). The Special Profit Allocations to
10.0 million shares in the year ended December 31, 2006 under Vulcan Cable and CII will generally continue until the cumula-
this program, respectively, and recognized expense of $4 million. tive amount of the Special Profit Allocations offsets the
In 2005 and 2004, Charter granted 3.2 million and 6.9 million cumulative amount of the Special Loss Allocations. The amount
shares under this program and recognized no expense in 2005 and timing of the Special Profit Allocations are subject to the
or 2004 based on the Company’s assessment of the probability potential application of, and interaction with, the Curative
of achieving the financial performance measures established by Allocation Provisions described in the following paragraph. The
Charter and required to be met for the performance shares to LLC Agreement generally provides that any additional net tax
vest. In February 2006, the Compensation and Benefits Commit- profits are to be allocated among the members of Charter
tee of Charter’s Board of Directors approved a modification to Holdco based generally on their respective percentage owner-
the financial performance measures under Charter’s LTIP ship of Charter Holdco common membership units.
required to be met for the 2005 performance shares to vest. Because the respective capital account balance of each of
Such expense is being recognized over the remaining two year Vulcan Cable and CII was reduced to zero by December 31,
service period. 2002, certain net tax losses of Charter Holdco that were to be
allocated for 2002, 2003, 2004 and 2005, to Vulcan Cable and
F-28