Charter 2009 Annual Report Download - page 65

CCH II, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009, 2008, AND 2007
(dollars in millions, except where indicated)
F-17
subject to periodic audits performed by the programmers. Certain programming contracts contain incentives to be
paid by the programmers. The Company receives these payments and recognizes the incentives on a straight-line
basis over the life of the programming agreement as a reduction of programming expense. This offset to
programming expense was $2 million, $24 million, $33 million, and $25 million for the one month ended December
31, 2009, eleven months ended November 30, 2009 and years ended December 31, 2008, and 2007, respectively.
As of December 31, 2009 and 2008, the deferred amounts of such economic consideration, included in other long-
term liabilities, were $36 million and $61 million, respectively. Programming costs included in the accompanying
statements of operations were $146 million, $1.6 billion, $1.6 billion, and $1.6 billion for the one month ended
December 31, 2009, eleven months ended November 30, 2009 and years ended December 31, 2008, and 2007,
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 $20 million, $230 million, $229 million, and $187 million for the one
month ended December 31, 2009, eleven months ended November 30, 2009 and years ended December 31, 2008,
and 2007, 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 outstanding 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
The Company recorded $1 million, $26 million, $33 million, and $18 million of option compensation expense which
is included in general and administrative expenses for the one month ended December 31, 2009, eleven months
ended November 30, 2009 and years ended December 31, 2008, and 2007, 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, 2008, and
2007, respectively; risk-free interest rates of 3.5% and 4.6%; expected volatility of 88.1% and 70.3% based on
historical volatility; and expected lives of 6.3 years and 6.3 years, respectively. The valuations assume no dividends
are paid. The Company did not grant stock options in 2009.
Income Taxes
CCH II is a single member limited liability company not subject to income tax. CCH II holds all operations through
indirect subsidiaries. The majority of these indirect subsidiaries are limited liability companies that are also not
subject to income tax. However, certain of CCH II’ s indirect subsidiaries are corporations that are subject to income
tax. The Company recognizes deferred tax assets and liabilities for temporary differences between the financial
reporting basis and the tax basis of these indirect subsidiaries’ 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 19).
Charter, the Company’ s indirect parent company, is subject to income taxes. Accordingly, in addition to the
Company’ s deferred tax liabilities, Charter has recorded net deferred tax liabilities of approximately $93 million
related to their investment in Charter Holdco which is not reflected at the Company.