Charter 2003 Annual Report Download - page 54

bad debt expense. These increases were partially oÅset by a decrease in billing expenses of $12 million as a
result of renegotiated contracts with third-party billing providers.
Marketing expenses increased $16 million, or 12%, due to increased costs associated with promotions of
our service oÅerings including advertising, telemarketing and direct sales.
Depreciation and amortization. Depreciation and amortization expense decreased by $1.3 billion, or
47%, from $2.7 billion in 2001 to $1.4 billion in 2002. This decrease was due primarily to the adoption on
January 1, 2002 of SFAS No. 142, which requires that franchise intangible assets that meet the indeÑnite life
criteria of SFAS No. 142 no longer be amortized against earnings but instead be tested for impairment on an
annual basis. As a result of this change, total amortization of franchise assets decreased from $1.5 billion in
2001 to $9 million in 2002. The decrease was partially oÅset by the increase in depreciation expense related to
additional capital expenditures in 2002.
Impairment of franchises. We performed our annual impairment assessment on October 1, 2002 using
an independent third-party appraiser. Revised estimates of future cash Öows and the use of a lower projected
long-term growth rate in our valuation led to a $4.6 billion impairment charge in the fourth quarter of 2002.
We do not expect to incur impairment charges of comparable magnitude in the future.
Option compensation expense (income), net. Option compensation expense increased by $10 million
from $5 million of net beneÑt in 2001 to $5 million of expense in 2002. The net beneÑt in 2001 was primarily
the result of the reversal of $22 million of expense previously recorded in connection with approximately
7 million options for which the rights were waived by our former President and Chief Executive OÇcer as part
of his September 2001 separation agreement. Option compensation expense was recorded in 2002 because
exercise prices on certain options issued prior to our initial public oÅering in 1999 were less than the estimated
fair values of our common stock at the time of grant. Compensation expense is being recognized over the
vesting period of such options, which ends in April 2004. On January 1, 2003, we adopted SFAS No. 123
using the prospective method under which we recognize compensation expense of a stock-based award to an
employee over the vesting period based on the fair value of the award on the grant date. For more information,
see Note 19 to our consolidated Ñnancial statements contained herein.
Special charges, net. 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. Special charges of
$18 million in 2001 represent charges associated with the transition of approximately 145,000 data customers
from the Excite@Home Internet service to our Charter Pipeline service, as well as employee severance costs.
Interest expense, net. Net interest expense increased by $193 million, or 15%, from $1.3 billion in 2001
to $1.5 billion in 2002. The increase in net interest expense was a result of increased average debt outstanding
in 2002 of $17.8 billion compared to $15.7 billion in 2001, partially oÅset by a decrease in our average
borrowing rate from 8.40% in 2001 to 8.02% in 2002. The increased debt was used for capital expenditures.
Gain (loss) on derivative instruments and hedging activities, net. Loss on derivative instruments and
hedging activities increased $65 million from $50 million for the year ended December 31, 2001 to
$115 million for the year ended December 31, 2002. The increase is primarily due to an increase in losses on
interest rate agreements, which do not qualify for hedge accounting under SFAS No. 133, which increased
from $48 million for the year ended December 31, 2001 to $101 million for the year ended December 31,
2002.
Loss on equity investments. Loss on equity investments decreased by $51 million, or 94%, from
$54 million for the year ended December 31, 2001 to $3 million for the year ended December 31, 2002. This
decrease is primarily due to a decrease of $38 million in our investment in High Speed Access, a related party
until our acquisition of certain of its assets by Charter, as described more fully in the section entitled ""Certain
Relationships and Related Transactions'' in the Charter Communications, Inc. 2004 Proxy Statement
available at www.sec.gov.
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