Charter 2003 Annual Report Download - page 50

In the fourth quarter of 2002, we recorded a special charge of $35 million, of which $31 million is associated
with our workforce reduction program. The remaining $4 million is related to legal and other costs associated
with our shareholder lawsuits and governmental investigations. We expect to continue to record additional
special charges in 2004 related to the reorganization of our operations and costs of litigation.
Unfavorable contracts and other settlements. Unfavorable contracts and other settlements of $72 mil-
lion for the year ended December 31, 2003 represents the settlement of estimated liabilities recorded in
connection with prior business combinations. The majority of this beneÑt (approximately $52 million) is due
to the renegotiation in 2003 of a major programming contract, for which a liability had been recorded for the
above market portion of that agreement in conjunction with the Falcon acquisition in 1999 and the Bresnan
acquisition in 2000. The remaining beneÑt relates to the reversal of previously recorded liabilities, which,
based on an evaluation of current facts and circumstances, are no longer required.
Interest expense, net. Net interest expense increased by $54 million, or 4%, from $1.5 billion for the year
ended December 31, 2002 to $1.6 billion for the year ended December 31, 2003. The increase in net interest
expense was a result of increased average debt outstanding in 2003 of $18.9 billion compared to $17.8 billion in
2002, partially oÅset by a decrease in our average borrowing rate from 8.02% in 2002 to 7.99% in 2003. The
increased debt was primarily used for capital expenditures.
Gain (loss) on derivative instruments and hedging activities, net. Net gain on derivative instruments
and hedging activities increased $180 million from a loss of $115 million for the year ended December 31,
2002 to a gain of $65 million for the year ended December 31, 2003. The increase is primarily due to an
increase in gains on interest rate agreements, which do not qualify for hedge accounting under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which increased from a loss of $101 million for
the year ended December 31, 2002 to a gain of $57 million for the year ended December 31, 2003.
Gain on debt exchange, net. Net gain on debt exchange of $267 million for the year ended
December 31, 2003 represents the gain realized on the purchase, in a non-monetary transaction, of a total of
$609 million principal amount of our outstanding convertible senior notes and $1.3 billion principal amount of
Charter Holdings' senior notes and senior discount notes in consideration for a total of $1.6 billion principal
amount of 10.25% notes due 2010 issued by our indirect subsidiary, CCH II. The gain is net of the write-oÅ of
deferred Ñnancing costs associated with the retired debt of $27 million.
Loss on equity investments. Loss on equity investments remained constant at $3 million for the years
ended December 31, 2003 and 2002. Loss on equity investments is primarily due to losses on investments
carried under the equity method of accounting oÅset by realized gains on marketable securities.
Other expense, net. Other expense increased by $12 million from $1 million in 2002 to $13 million in
2003. This increase is primarily due to increases in costs associated with amending a revolving credit facility of
our subsidiaries and costs associated with terminated debt transactions.
Minority interest. Minority interest represents the allocation of losses to the minority interest based on
ownership of Charter Holdco, the 10% dividend on preferred membership units in our indirect subsidiary,
Charter Helicon, LLC and the 2% accretion of the preferred membership interests in our indirect subsidiary,
CC VIII, LLC, and since June 6, 2003, the pro rata share of the proÑts of CC VIII, LLC. See ""Certain
Relationships and Related Transactions Ì Transactions Arising Out of Our Organizational Structure and
Mr. Allen's Investment in Charter Communications, Inc. and Its Subsidiaries Ì Equity Put Rights Ì CC
VIII'' in the Charter Communications, Inc. 2004 Proxy Statement available at www.sec.gov. Additionally,
reported losses allocated to minority interest on the statement of operations will be limited to the extent of any
remaining minority interest on the balance sheet related to Charter Holdco. Accordingly, commencing in
2004, Charter expects to absorb all, or substantially all, future losses before income taxes because minority
interest in Charter Holdco was substantially eliminated at December 31, 2003. For the year ended
December 31, 2003, 53.5% of our losses before income taxes were classiÑed as minority interest.
Income Tax BeneÑt. Income tax beneÑt of $110 million and $460 million was recognized for the years
ended December 31, 2003 and 2002, respectively. The income tax beneÑt was realized through decreases in
certain deferred tax liabilities related to our investment in Charter Holdco, as well as to the change in the
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