Time Warner Cable 2006 Annual Report Download - page 111

Employees, and disclose the pro forma effects on net income (loss) had the fair value of the equity awards been
expensed. In connection with adopting FAS 123R, the Company elected to adopt the modified retrospective
application method provided by FAS 123R and, accordingly, financial statement amounts for all prior periods
presented herein reflect results as if the fair value method of expensing had been applied from the original effective
date of FAS 123. The following tables set forth the changes to the Company’s consolidated statement of operations
and balance sheet as a result of the adoption of FAS 123R for the years ended December 31, 2005 and 2004 (in
millions, except per share data):
2005 2004
Year Ended December 31,
increase (decrease)
Consolidated Statement of Operations:
Operating Income .............................................. $ (53) $ (66)
Income before income taxes, discontinued operations and cumulative effect of
accounting change ............................................ (50) (63)
Net income ................................................... (30) (38)
Net income per common share ..................................... $(0.03) $(0.04)
2005 2004
As of December 31,
increase (decrease)
Consolidated Balance Sheet:
Deferred income tax obligations, net.................................. $(135) $(130)
Minority interest ................................................ (10) (7)
Shareholders’ equity.............................................. 145 137
Prior to the adoption of FAS 123R, for disclosure purposes, the Company recognized stock-based compen-
sation expense for awards with graded vesting by treating each vesting tranche as a separate award and recognizing
compensation expense ratably for each tranche. For equity awards granted subsequent to the adoption of FAS 123R,
the Company treats such awards as a single award and recognizes stock-based compensation expense on a straight-
line basis (net of estimated forfeitures) over the employee service period. Stock-based compensation expense is
recorded in costs of revenues or selling, general and administrative expense depending on the employee’s job
function.
Additionally, when recording compensation cost for equity awards, FAS 123R requires companies to estimate
the number of equity awards granted that are expected to be forfeited. Prior to the adoption of FAS 123R, for
disclosure purposes, the Company recognized forfeitures when they occurred, rather than using an estimate at the
grant date and subsequently adjusting the estimated forfeitures to reflect actual forfeitures. Accordingly, the
Company recorded a benefit of $2 million, net of tax, as the cumulative effect of a change in accounting principle
upon the adoption of FAS 123R in 2006, to recognize the effect of estimating the number of Time Warner equity-
based awards granted to TWC employees prior to January 1, 2006 that are not ultimately expected to vest.
Discontinued operations. As discussed more fully in Note 5, the Company has reflected the operations of the
Transferred Systems (as defined in Note 5 below) as discontinued operations for all periods presented.
Stock dividend. Immediately prior to the consummation of the Adelphia Acquisition (as defined in Note 5
below), TWC effected a stock dividend and distributed approximately 999,999 shares of Class A common stock for
each share of Class A common stock outstanding and 999,999 shares of Class B common stock for each share of
Class B common stock outstanding as of the record date for such dividend. All prior period common stock
information has been recast to reflect the effect of the stock dividend.
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TIME WARNER CABLE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)