Charter 2006 Annual Report Download - page 112

CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2006 FORM 10-K
Notes to Consolidated Financial Statements (continued)
The deferred tax liability for Charter’s investment in Charter is a party to management arrangements with
Charter Holdco is largely attributable to the characterization of Charter Holdco and certain of its subsidiaries. Under these
franchises for financial reporting purposes as indefinite lived. If agreements, Charter and Charter Holdco provide management
certain exchanges, as described above, were to take place, services for the cable systems owned or operated by their
Charter would likely record for financial reporting purposes subsidiaries. The management services include such services as
additional deferred tax liability related to its increased interest in centralized customer billing services, data processing and related
Charter Holdco and the related underlying indefinite lived support, benefits administration and coordination of insurance
franchise assets. coverage and self-insurance programs for medical, dental and
The total valuation allowance for deferred tax assets as of workers’ compensation claims. Costs associated with providing
December 31, 2006 and 2005 was $4.2 billion and $3.7 billion, these services are charged directly to the Company’s operating
respectively. In assessing the realizability of deferred tax assets, subsidiaries and are included within operating costs in the
management considers whether it is more likely than not that accompanying consolidated statements of operations. Such costs
some portion or all of the deferred tax assets will be realized. totaled $231 million, $205 million, and $195 million for the
Because of the uncertainties in projecting future taxable income years ended December 31, 2006, 2005, and 2004, respectively.
of Charter Holdco, valuation allowances have been established All other costs incurred on the behalf of Charter’s operating
except for deferred benefits available to offset certain deferred subsidiaries are considered a part of the management fee and
tax liabilities. are recorded as a component of selling, general and administra-
Charter Holdco is currently under examination by the tive expense, in the accompanying consolidated financial state-
Internal Revenue Service for the tax years ending December 31, ments. For the years ended December 31, 2006, 2005, and 2004,
2003 and 2002. In addition, one of the Company’s indirect the management fee charged to the Company’s operating
corporate subsidiaries is under examination by the Internal subsidiaries approximated the expenses incurred by Charter
Revenue Service for the tax year ended December 31, 2004. The Holdco and Charter on behalf of the Company’s operating
Company’s results (excluding Charter and its indirect corporate subsidiaries. The Company’s credit facilities prohibit payments
subsidiaries, with the exception of the indirect corporate of management fees in excess of 3.5% of revenues until
subsidiary under examination) for these years are subject to this repayment of the outstanding indebtedness. In the event any
examination. Management does not expect the results of this portion of the management fee due and payable is not paid, it is
examination to have a material adverse effect on the Company’s deferred by Charter and accrued as a liability of such subsidiar-
consolidated financial condition or results of operations. ies. Any deferred amount of the management fee will bear
interest at the rate of 10% per year, compounded annually, from
22. RELATED PARTY TRANSACTIONS the date it was due and payable until the date it is paid.
Mr. Allen, the controlling shareholder of Charter, and a
The following sets forth certain transactions in which the number of his affiliates have interests in various entities that
Company and the directors, executive officers and affiliates of provide services or programming to Charter’s subsidiaries. Given
the Company are involved. Unless otherwise disclosed, manage- the diverse nature of Mr. Allen’s investment activities and
ment believes that each of the transactions described below was interests, and to avoid the possibility of future disputes as to
on terms no less favorable to the Company than could have potential business, Charter and Charter Holdco, under the terms
been obtained from independent third parties. of their respective organizational documents, may not, and may
Charter is a holding company and its principal assets are its not allow their subsidiaries to engage in any business transaction
equity interest in Charter Holdco and certain mirror notes outside the cable transmission business except for certain
payable by Charter Holdco to Charter and mirror preferred existing approved investments. Charter or Charter Holdco or
units held by Charter, which have the same principal amount any of their subsidiaries may not pursue, or allow their
and terms as those of Charter’s convertible senior notes and subsidiaries to pursue, a business transaction outside of this
Charter’s outstanding preferred stock. In 2006, 2005 and 2004, scope, unless Mr. Allen consents to Charter or its subsidiaries
Charter Holdco paid to Charter $51 million, $64 million and engaging in the business transaction. The cable transmission
$49 million, respectively, related to interest on the mirror notes, business means the business of transmitting video, audio,
and Charter Holdco paid an additional $0, $3 million and including telephone, and data over cable systems owned,
$4 million, respectively, related to dividends on the mirror operated or managed by Charter, Charter Holdco or any of
preferred membership units. Further, during 2004 Charter their subsidiaries from time to time.
Holdco issued 7,252,818 common membership units to Charter Mr. Allen or his affiliates own or have owned equity
in cancellation of $30 million principal amount of mirror notes interests or warrants to purchase equity interests in various
so as to mirror the issuance by Charter of Class A common entities with which the Company does business or which
stock in exchange for a like principal amount of its outstanding provides it with products, services or programming. Among
convertible notes. these entities are TechTV L.L.C. (‘‘TechTV’’), Oxygen Media
Corporation (‘‘Oxygen Media’’), Digeo, Inc. (‘‘Digeo’’),
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