Charter 2007 Annual Report Download - page 104

In January 2004, the Compensation and Benefits Committee
of the board of directors of Charter approved Charter’s Long-
Term Incentive Program (“LTIP”), which is a program adminis-
tered under the 2001 Stock Incentive Plan. Under the LTIP,
employees of Charter and its subsidiaries whose pay classifica-
tions exceed a certain level are eligible to receive stock options,
and more senior level employees are eligible to receive stock
options and performance units. The stock options vest 25% on
each of the first four anniversaries of the date of grant. The
performance units become performance shares on or about the
first anniversary of the grant date, conditional upon Charter’s
performance against financial performance measures established
by Charter’s management and approved by its board of directors
as of the time of the award. The performance shares become
shares of Class A common stock on the third anniversary of the
grant date of the performance units. Charter granted 15.8 million
and 12.2 million performance units in the years ended Decem-
ber 31, 2007 and 2006, respectively, under this program, and
recognized expense of $10 million and $4 million, respectively. In
2005, Charter granted 3.2 million performance units under this
program but did not recognize any expense, based on the
Company’s assessment of the probability of achieving the finan-
cial performance measures established by Charter and required
to be met for the performance units to vest. In February 2006,
the Compensation and Benefits Committee of Charter’s board of
directors approved a modification to the financial performance
measures under Charter’s LTIP required to be met for the 2005
performance units to become performance shares which vest in
March 2008. Such expense is being recognized over the remain-
ing two year service period.
22. INCOME TAXES
All operations are held through Charter Holdco and its direct
and indirect subsidiaries. Charter Holdco and the majority of its
subsidiaries are generally limited liability companies that are not
subject to income tax. However, certain of these limited liability
companies are subject to state income tax. In addition, the
subsidiaries that are corporations are subject to federal and state
income tax. All of the remaining taxable income, gains, losses,
deductions and credits of Charter Holdco are passed through to
its members: Charter, Charter Investment, Inc. (“CII”) and
Vulcan Cable III Inc. (“Vulcan Cable”). Charter is responsible for
its share of taxable income or loss of Charter Holdco allocated
to Charter in accordance with the Charter Holdco limited
liability company agreement (the “LLC Agreement”) and part-
nership tax rules and regulations. Charter also records financial
statement deferred tax assets and liabilities related to its invest-
ment in Charter Holdco.
The LLC Agreement provides for certain special allocations
of net tax profits and net tax losses (such net tax profits and net
tax losses being determined under the applicable federal income
tax rules for determining capital accounts). Under the LLC
Agreement, through the end of 2003, net tax losses of Charter
Holdco that would otherwise have been allocated to Charter
based generally on its percentage ownership of outstanding
common units were allocated instead to membership units held
by Vulcan Cable and CII (the “Special Loss Allocations”) to the
extent of their respective capital account balances. After 2003,
under the LLC Agreement, net tax losses of Charter Holdco are
allocated to Charter, Vulcan Cable and CII based generally on
their respective percentage ownership of outstanding common
units to the extent of their respective capital account balances.
Allocations of net tax losses in excess of the members’ aggregate
capital account balances are allocated under the rules governing
Regulatory Allocations, as described below. Subject to the Cura-
tive Allocation Provisions described below, the LLC Agreement
further provides that, beginning at the time Charter Holdco
generates net tax profits, the net tax profits that would otherwise
have been allocated to Charter based generally on its percentage
ownership of outstanding common membership units will instead
generally be allocated to Vulcan Cable and CII (the “Special
Profit Allocations”). The Special Profit Allocations to Vulcan
Cable 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 provides that any additional net tax profits
are to be allocated among the members of Charter Holdco based
generally on their respective percentage ownership of Charter
Holdco common membership units.
Because the respective capital account balance of each of
Vulcan Cable and CII was reduced to zero by December 31,
2002, certain net tax losses of Charter Holdco that were to be
allocated for 2002, 2003, 2004 and 2005, to Vulcan Cable and CII
instead have been allocated to Charter (the “Regulatory Alloca-
tions”). As a result of the allocation of net tax losses to Charter
in 2005, Charter’s capital account balance was reduced to zero
during 2005. The LLC Agreement provides that once the capital
account balances of all members have been reduced to zero, net
tax losses are to be allocated to Charter, Vulcan Cable and CII
based generally on their respective percentage ownership of
outstanding common units. Such allocations are also considered
to be Regulatory Allocations. The LLC Agreement further
provides that, to the extent possible, the effect of the Regulatory
Allocations is to be offset over time pursuant to certain curative
allocation provisions (the “Curative Allocation Provisions”) so
that, after certain offsetting adjustments are made, each member’s
capital account balance is equal to the capital account balance
such member would have had if the Regulatory Allocations had
not been part of the LLC Agreement. The cumulative amount of
the actual tax losses allocated to Charter as a result of the
Regulatory Allocations in excess of the amount of tax losses that
would have been allocated to Charter had the Regulatory
F-26
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2007 FORM 10-K
Notes to Consolidated Financial Statements (continued)