Charter 2007 Annual Report Download - page 89

respectively, are reported as revenues on a gross basis with a
corresponding operating expense. Sales taxes collected and remit-
ted to state and local authorities are recorded on a net basis.
The Company’s revenues by product line are as follows:
2007 2006 2005
Year Ended December 31,
Video $3,392 $3,349 $3,248
High-speed Internet 1,252 1,051 875
Telephone [phone]
Advertising sales 298 319 284
Commercial 341 305 266
Other 376 345 324
$6,002 $5,504 $5,033
Programming Costs
The Company has various contracts to obtain analog, digital and
premium video programming from program suppliers whose
compensation is typically based on a flat fee per customer. The
cost of the right to exhibit network programming under such
arrangements is recorded in operating expenses in the month the
programming is available for exhibition. Programming costs are
paid each month based on calculations performed by the Com-
pany and are subject to periodic audits performed by the
programmers. Certain programming contracts contain launch
incentives to be paid by the programmers. The Company
receives these payments related to the activation of the pro-
grammer’s cable television channel and recognizes the launch
incentives on a straight-line basis over the life of the program-
ming agreement as a reduction of programming expense. This
offset to programming expense was $22 million, $32 million, and
$41 million for the years ended December 31, 2007, 2006, and
2005, respectively. Programming costs included in the accompa-
nying statement of operations were $1.6 billion, $1.5 billion, and
$1.4 billion for the years ended December 31, 2007, 2006, and
2005, respectively. As of December 31, 2007 and 2006, the
deferred amounts of launch incentives, included in other long-
term liabilities, were $65 million and $67 million, respectively.
Advertising Costs
Advertising costs associated with marketing the Company’s
products and services are generally expensed as costs are
incurred. Such advertising expense was $187 million, $131 million,
and $94 million for the years ended December 31, 2007, 2006,
and 2005, respectively.
Multiple-element Transactions
In the normal course of business, the Company enters into
multiple-element transactions where it is simultaneously both a
customer and a vendor with the same counterparty or in which
it purchases multiple products and/or services, or settles out-
standing items contemporaneous with the purchase of a product
or service from a single counterparty. Transactions, although
negotiated contemporaneously, may be documented in one or
more contracts. The Company’s policy for accounting for each
transaction negotiated contemporaneously is to record each
element of the transaction based on the respective estimated fair
values of the products or services purchased and the products or
services sold. In determining the fair value of the respective
elements, the Company refers to quoted market prices (where
available), historical transactions or comparable cash transactions.
Stock-Based Compensation
On January 1, 2006, the Company adopted SFAS No. 123(R),
Share – Based Payment, which addresses the accounting for share-
based payment transactions in which a company receives
employee services in exchange for (a) equity instruments of that
company or (b) liabilities that are based on the fair value of the
company’s equity instruments or that may be settled by the
issuance of such equity instruments. Because the Company
adopted the fair value recognition provisions of SFAS No. 123
on January 1, 2003, the revised standard did not have a material
impact on its financial statements. The Company recorded
$18 million, $13 million, and $14 million of option compensation
expense which is included in general and administrative expenses
for the years ended December 31, 2007, 2006, and 2005,
respectively.
The fair value of each option granted is estimated on the
date of grant using the Black-Scholes option-pricing model. The
following weighted average assumptions were used for grants
during the years ended December 31, 2007, 2006, and 2005,
respectively; risk-free interest rates of 4.6%, 4.6%, and 4.0%;
expected volatility of 70.3%, 87.3%, and 70.9% based on historical
volatility; and expected lives of 6.3 years, 6.3 years, and 4.5 years,
respectively. The valuations assume no dividends are paid.
Income Taxes
The Company recognizes deferred tax assets and liabilities for
temporary differences between the financial reporting basis and
the tax basis of the Company’s assets and liabilities and expected
benefits of utilizing net operating loss carryforwards. The impact
on deferred taxes of changes in tax rates and tax law, if any,
applied to the years during which temporary differences are
expected to be settled, are reflected in the consolidated financial
statements in the period of enactment (see Note 22).
Minority Interest
Minority interest on the consolidated balance sheets represents
preferred membership interests in CC VIII, LLC (“CC VIII”), an
indirect subsidiary of Charter held by Mr. Paul G. Allen. Minor-
ity interest totaled $199 million and $192 million as of Decem-
ber 31, 2007 and 2006, respectively, on the accompanying
consolidated balance sheets.
Reported losses allocated to minority interest on the state-
ment of operations reflect the minority interests in CC VIII.
Because minority interest in Charter Holdco was eliminated,
Charter absorbs all losses before income taxes that otherwise
would have been allocated to minority interest (see Note 11).
F-11
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES 2007 FORM 10-K
Notes to Consolidated Financial Statements (continued)