Filed Pursuant to Rule 424(b)1
Registration No. 333-56679
PROSPECTUS
LOGO
RENAISSANCE MEDIA GROUP LLC
RENAISSANCE MEDIA (LOUISIANA) LLC
RENAISSANCE MEDIA (TENNESSEE) LLC
RENAISSANCE MEDIA CAPITAL CORPORATION
OFFER TO EXCHANGE 10% SENIOR DISCOUNT NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR ANY AND ALL OUTSTANDING 10% SENIOR DISCOUNT NOTES DUE 2008
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON OCTOBER 6, 1998, UNLESS EXTENDED
Renaissance Media (Louisiana) LLC ("Renaissance Louisiana"), Renaissance
Media (Tennessee) LLC ("Renaissance Tennessee") and Renaissance Media Capital
Corporation ("Renaissance Capital" and, together with Renaissance Louisiana
and Renaissance Tennessee, the "Obligors") hereby offer, upon the terms and
subject to the conditions set forth in this Prospectus and the accompanying
Letter of Transmittal (which together constitute the "Exchange Offer"), to
exchange $1,000 original principal amount at maturity of 10% Senior Discount
Notes due 2008 of the Obligors (the " New Notes"), which have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant
to a Registration Statement (as defined herein) of which this Prospectus
constitutes a part, for each $1,000 original principal amount at maturity of
the Obligors' issued and outstanding 10% Senior Discount Notes due 2008 (the
"Old Notes," and collectively with the New Notes, the "Notes"). As of the date
of this Prospectus, $163,175,000 aggregate original principal amount at
maturity of the Old Notes are outstanding. The New Notes will be fully and
unconditionally guaranteed (the "New Guaranty") on a senior basis by
Renaissance Media Group LLC (the "Guarantor"). Each of the Obligors is a
wholly owned subsidiary of the Guarantor. The Guarantor and its subsidiaries,
including the Obligors and Renaissance Media LLC, are hereinafter referred to
as the "Company."
The form and terms of the New Notes are the same in all material respects as
the form and terms of the Old Notes except that (i) the issuance of the New
Notes will have been registered under the Securities Act and, therefore, the
New Notes will not bear legends restricting the transfer thereof and (ii)
holders of the New Notes will not be entitled to certain rights of holders of
Old Notes under the Registration Rights Agreement (as defined herein). The New
Notes will evidence the same debt as the Old Notes (which they replace) and
will be issued under and be entitled to the benefits of the Indenture, dated
as of April 9, 1998 (the "Indenture"), by and among the Obligors, the
Guarantor and United States Trust Company of New York, as Trustee, governing
the Old Notes. The form and terms of the New Guaranty are the same in all
material respects as the guaranty issued in connection with the Old Notes. See
"The Exchange Offer" and "Description of the Notes."
The Obligors and the Guarantor will accept for exchange any and all Old
Notes that are validly tendered on or prior to 5:00 p.m., New York City time,
on the Expiration Date. The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Notes being tendered for exchange. However,
the Exchange Offer is subject to certain conditions which may be waived by the
Obligors and the Guarantor and to the terms and provisions of the Registration
Rights Agreement (as defined herein). Old Notes may be tendered only in
denominations of $1,000 and integral multiples thereof. The Exchange Offer
will expire at 5:00 p.m., New York City time, on October 6, 1998, unless the
Obligors, in their sole discretion, extend the Exchange Offer (as it may be so
extended, the "Expiration Date"), in which case the term "Expiration Date"
shall mean the latest date and time to which the Exchange Offer is extended.
Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any time
prior to 5:00 p.m., New York City time on the Expiration Date; otherwise such
tenders are irrevocable.
SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------
The Old Notes were, and the New Notes will be issued at a substantial
discount from their principal amount at maturity and there will not be any
payment of interest in respect of the Notes prior to October 15, 2003. Each
New Note will have a principal amount at maturity of $1,000 and has an
Accreted Value of $638.33 as of the date hereof. Interest on the New Notes
will be paid semi-annually in cash at a rate of 10% per annum on each April 15
and October 15, beginning on October 15, 2003. The New Notes are redeemable at
the option of the Obligors, in whole or in part, at any time on or after April
15, 2003, at the redemption prices set forth herein, plus accrued interest, if
any, to the date of redemption. In addition, at any time prior to April 15,
2001, the Obligors may redeem up to 35% of the aggregate principal amount at
maturity of the New Notes with the proceeds of one or more sales of Capital
Stock (other than Disqualified Stock) at the redemption price set forth
herein; provided, however, that after any such redemption at least $106.0
million aggregate principal amount at maturity of Notes remains outstanding.
The New Notes and the New Guaranty will be unsecured, unsubordinated
indebtedness of the Obligors and the Guarantor, respectively, ranking pari
passu with all unsecured unsubordinated indebtedness of the Obligors and the
Guarantor and senior in right of payment to all subordinated indebtedness of
the Obligors and the Guarantor. At June 30, 1998, assuming all Old Notes have
been exchanged for New Notes pursuant to the Exchange Offer, the Obligors and
the Guarantor had no indebtedness outstanding ranking pari passu with the New
Notes. The New Notes and the New Guaranty will be effectively subordinated to
all liabilities of their respective subsidiaries, including all indebtedness
under the Senior Credit Facility (as defined herein) and trade payables. At
June 30, 1998, the Obligors had $204.8 million of indebtedness outstanding and
the Obligors' subsidiaries had $112.8 million of liabilities (including $102.5
million of indebtedness under the Senior Credit Facility).
(Cover page continued on following page)
The date of this Prospectus is September 8, 1998.
(Cover page continued)
The Exchange Offer is being made to satisfy certain obligations of the
Obligors and the Guarantor under the Registration Rights Agreement, dated as
of April 6, 1998 (the "Registration Rights Agreement"), among the Obligors,
the Guarantor and Morgan Stanley & Co. Incorporated, as the placement agent
("Morgan Stanley" or the "Placement Agent"). Upon consummation of the Exchange
Offer, holders of Old Notes that were not prohibited from participating in the
Exchange Offer and did not tender their Old Notes will not have any
registration rights under the Registration Rights Agreement with respect to
such nontendered Old Notes and, accordingly, such Old Notes will continue to
be subject to the restrictions on transfer contained in the legend thereon.
Based upon interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in certain no-action letters issued to
third parties the Obligors believe that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by any holder thereof (other than a broker-dealer, as
set forth below, or any such holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act of 1933, as amended
(the "Securities Act")) without compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and that
such holder has no arrangement or understanding with any person to participate
in the distribution of such New Notes. See "The Exchange Offer--Resale of the
New Notes." Holders of Old Notes wishing to accept the Exchange Offer must
represent to the Obligors, as required by the Registration Rights Agreement,
that such conditions have been met and that such holder is not an "affiliate"
of the Company within the meaning of Rule 405 under the Securities Act. Each
broker-dealer that is the beneficial owner (within the meaning of Rule 13d-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of
New Notes for its own account pursuant to the Exchange Offer (a "Participating
Broker-Dealer") must represent that the Old Notes tendered in exchange
therefor were acquired as a result of market-making activities and or other
trading activities and must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by any broker-dealer (other than
an affiliate of the Company) in connection with resales of New Notes received
in exchange for Old Notes where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities.
The Obligors and the Guarantor have agreed that, for a period of up to 180
days after the Expiration Date (as defined herein), they will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution." No affiliate of the Company may rely on
such no-action letters and such affiliate must comply with registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction.
The Company has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer. The
Old Notes were originally issued and sold on April 9, 1998 in an offering of
$163,175,000 aggregate original principal amount at maturity of the Old Notes
(the "Offering"). The Offering was exempt from registration under the
Securities Act in reliance upon the exemptions provided by Rule 144A, Section
4(2) and Regulation S of the Securities Act. Accordingly, the Old Notes may
not be reoffered, resold or otherwise pledged, hypothecated or transferred in
the United States unless so registered or unless an exemption from the
registration requirements of the Securities Act and applicable state
securities laws is available. Upon completion of the Exchange Offer, Old Notes
which have not been exchanged for New Notes will remain outstanding. See "The
Exchange Offer--Consequences of Failure to Exchange."
The Company will not receive any proceeds from the Exchange Offer.
There has not previously been any public market for the Old Notes or the New
Notes. The Obligors do not intend to list the New Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system. Morgan Stanley has indicated to the Company that it intends to effect
offers and sales of the
2
New Notes in market-making transactions at negotiated prices related to
prevailing market prices at the time of the sale, but is not obligated to do
so and such market-making activities may be discontinued at any time. Morgan
Stanley may act as principal or agent in such transactions. There can be no
assurance that an active market for the New Notes will develop. If Morgan
Stanley conducts any market-making activities, it may be required to deliver a
"market-making" prospectus when affecting offers and sales in New Notes
because of the equity ownership by the Morgan Stanley entities (as defined
below), all of which are affiliates of Morgan Stanley and own, in the
aggregate, approximately 87.6% of the outstanding equity interests of
Holdings. For so long as a market-making prospectus is required to be
delivered, the ability of Morgan Stanley to make a market in the New Notes
may, in part, be dependent on the ability of the Company to maintain a current
market-making prospectus. See "Risk Factors--Lack of Public Market for the
Notes."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE OBLIGORS ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
OR THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE OBLIGORS. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE
ACCOMPANYING LETTER OF TRANSMITTAL NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
3
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TABLE OF CONTENTS
Available Information.................................................. 5
Prospectus Summary..................................................... 6
The Company............................................................ 16
Risk Factors........................................................... 17
Use of Proceeds........................................................ 27
Capitalization......................................................... 28
Selected Financial and Other Data...................................... 29
Pro Forma Financial Data............................................... 31
Management's Discussion and Analysis
of Financial Condition and Results
of Operations......................................................... 36
Business............................................................... 44
Legislation and Regulation............................................. 55
Certain Organizational Documents....................................... 64
Management............................................................. 65
Certain Relationships and Related Transactions......................... 68
Principal Securityholders.............................................. 69
Description of Certain Indebtedness.................................... 70
The Exchange Offer..................................................... 72
Description of the Notes............................................... 81
Material United States Federal Income Tax Consequences................. 108
Plan of Distribution................................................... 115
Legal Matters.......................................................... 116
Experts................................................................ 116
Index to Financial Statements.......................................... F-1
THIS PROSPECTUS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS. ALL STATEMENTS
REGARDING THE EXPECTED FINANCIAL POSITION, BUSINESS AND FINANCING PLANS OF THE
OBLIGORS AND THE GUARANTOR ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE
OBLIGORS AND THE GUARANTOR BELIEVE THAT THE EXPECTATIONS REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS ARE REASONABLE, THEY CAN GIVE NO ASSURANCE THAT SUCH
EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH EXPECTATIONS ("CAUTIONARY
STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION,
IN CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS
AND UNDER "RISK FACTORS." ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING
STATEMENTS ATTRIBUTABLE TO THE OBLIGORS, THE GUARANTOR, THEIR RESPECTIVE
SUBSIDIARIES OR PERSONS ACTING ON BEHALF OF ANY OF THEM ARE EXPRESSLY QUALIFIED
IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
4
AVAILABLE INFORMATION
The Obligors and the Guarantor have filed with the Commission a Registration
Statement on Forms S-1 and S-4 (of which this Prospectus is a part and which
term shall encompass any amendments thereto) pursuant to the Securities Act
with respect to the Exchange Offer. As permitted by the rules and regulations
of the Commission, this Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
For further information about the Obligors and the Exchange Offer, reference
is hereby made to the Registration Statement and to such exhibits and
schedules. Statements contained herein concerning the provisions of any
documents filed as an exhibit to the Registration Statement or otherwise filed
with the Commission are not necessarily complete, and in each instance
reference is made to the copy of such document so filed. Each such statement
is qualified in its entirety by such reference.
In addition, the Obligors and the Guarantor will be subject to the
informational requirements of the Exchange Act, and, in accordance therewith,
will file reports and other information with the Commission. In addition,
under the Indenture governing the Notes, the Obligors will be required to
furnish to the Trustee and to registered holders of the Notes audited annual
consolidated financial statements, unaudited quarterly consolidated financial
reports and certain other reports. The Registration Statement, the exhibits
and schedules forming a part thereof and the reports and other information
filed by the Obligors with the Commission pursuant to the informational
requirements of the Exchange Act may be inspected without charge and copied
upon payment of certain fees at the public reference facilities maintained by
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following Regional Offices of the
Commission: New York Regional Office, Seven World Trade Center, 13th Floor,
New York, New York 10048, and Chicago Regional Office, Northwestern Atrium,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission
also maintains a World Wide Web site on the Internet at http://www.sec.gov
that contains reports and other information regarding registrants that file
electronically with the Commission.
5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements and
notes thereto included elsewhere in this Prospectus. Unless the context
otherwise requires: (i) all references to the "Company" refer collectively to
Renaissance Media Group LLC and its subsidiaries, including the Obligors and
Renaissance Media LLC ("Renaissance Media"); (ii) all references to "Time
Warner" refer collectively to TWI Cable, Inc. and its cable-related affiliates;
and (iii) all information relating to the Company contained in this Prospectus,
other than historical financial information, gives effect to the Acquisition
described below. See "--The Acquisition and the Financing." References to
EBITDA refer to income (loss) before interest, income taxes and depreciation,
amortization and loss (gain) on disposal of fixed assets.
THE COMPANY
The Company was formed to acquire, operate and develop medium-sized cable
television systems. The Company acquired (the "Acquisition") six cable
television systems (the "Systems") from Time Warner on April 9, 1998, the date
of the initial sale of the Old Notes by the Obligors to the Placement Agent.
The Systems are clustered in southern Louisiana and western Mississippi (the
"Louisiana Systems") and western Tennessee (the "Tennessee System") and, as of
June 30, 1998, passed 180,561 homes and served 126,985 subscribers. The Company
is the 4th largest cable television system operator in Louisiana and the 5th
largest cable television system operator in Tennessee based upon the Systems'
numbers of subscribers at June 30, 1998.
The following table illustrates certain subscriber and operating statistics
for the Systems as of June 30, 1998:
AVERAGE
PREMIUM MONTHLY
TOTAL SERVICE REVENUE
HOMES PLANT BASIC BASIC UNITS PREMIUM PER BASIC
SYSTEM PASSED (1) MILES SUBSCRIBERS (2) PENETRATION (3) (4) PENETRATION (5) SUBSCRIBER
------ ---------- ----- --------------- --------------- ------- --------------- ----------
Louisiana Systems...... 131,915 2,816 94,740 71.8% 49,274 52.0% $38.34
Tennessee System....... 48,646 914 32,245 66.3% 10,915 33.9% 33.94
------- ----- ------- ------
Total Systems.......... 180,561 3,730 126,985 70.3% 60,189 47.4% 37.29
======= ===== ======= ======
- --------
(1) Homes passed refers to estimates of the number of dwelling units and
commercial establishments in a particular community that can be connected
to the distribution system without any further extension of principal
transmission lines. Such estimates are based upon a variety of sources,
including billing records, house counts, city directories and other local
sources.
(2) The number of basic subscribers has been computed by adding the actual
number of subscribers for all non-bulk accounts and the equivalent
subscribers for all bulk accounts. The number of such equivalent
subscribers has been calculated by dividing aggregate basic service revenue
for bulk accounts by the full basic service rate for the community in which
the accounts are located. Bulk accounts consist of commercial
establishments and multiple dwelling units.
(3) Basic penetration represents the number of basic subscribers as a
percentage of the total number of homes passed in the system.
(4) Premium service units represent the number of subscriptions to premium
channels offered for a monthly fee per channel.
(5) Premium penetration represents the number of premium service units as a
percentage of the total number of basic subscribers.
6
The Guarantor and the Obligors were formed in 1998 by Renaissance Media
Holdings LLC ("Holdings"). Holdings is owned by Morgan Stanley Capital Partners
III, L.P. ("MSCPIII"), Morgan Stanley Capital Investors, L.P. ("MSCI"), MSCP
III 892 Investors, L.P. ("MSCP Investors" and, collectively with its
affiliates, MSCPIII, MSCI and their respective affiliates, the "Morgan Stanley
Entities"), Time Warner and six former senior managers (the "Management
Investors") of Cablevision Industries Corporation ("CVI") who have an average
of 17 years experience in the cable television industry.
The Company intends to increase its subscriber base and operating cash flow
by pursuing cable television system acquisitions, improving and upgrading its
technical plant and expanding its service offerings.
BUSINESS STRATEGY
The Company's strategy is to increase its revenues and EBITDA by acquiring,
operating and developing cable television systems and capitalizing on the
expertise of management, as well as the Company's relationship with the
Management Investors and Time Warner. The key components of the Company's
strategy include pursuing strategic acquisitions, operating technologically
advanced systems, capitalizing on its relationships with the Management
Investors and Time Warner, focusing on operations and service and developing
ancillary businesses.
THE ACQUISITION AND THE FINANCING
At the time of the initial sale of the Old Notes by the Obligors and the
Guarantor to the Placement Agent: (i) Holdings received equity contributions of
$95.1 million from the Morgan Stanley Entities and $3.9 million from the
Management Investors, which were contributed to the Company as equity
(collectively, the "Equity Contributions"); (ii) Renaissance Media, as
borrower, and Renaissance Louisiana, Renaissance Tennessee and Renaissance
Capital, as guarantors, entered into a credit agreement (the "Senior Credit
Facility"), consisting of $110.0 million of term loan facilities (the "Term
Loans") and a $40.0 million revolving credit facility (the "Revolver") with
Morgan Stanley Senior Funding, Inc. ("MSSF"), as syndication agent, and
arranger, and the other lenders party thereto; and (iii) Renaissance Media
acquired the Systems from Time Warner for $300.0 million in cash and the
issuance to Time Warner of a $9.5 million equity interest in Holdings
(representing approximately an 8.8% equity ownership interest in Holdings)
pursuant to an asset purchase agreement dated as of November 14, 1997, between
Holdings and Time Warner, as amended (the "Asset Purchase Agreement"). The
Acquisition (including the issuance to Time Warner of a $9.5 million equity
ownership interest in Holdings), the Equity Contributions, the establishment of
the Senior Credit Facility, borrowings under the Term Loans and the Offering
are hereinafter referred to as the "Transactions."
The Company used the net proceeds from the Offering, together with the Equity
Contributions and borrowings under the Term Loans to consummate the
Acquisition. The Company believes that borrowings expected to be available
under the Revolver and anticipated cash flow from operations will be sufficient
to upgrade the Systems as currently contemplated and satisfy the Company's
anticipated working capital and debt service requirements. However, the actual
amount and timing of the Company's capital requirements may differ materially
from the Company's estimates as a result of, among other things, the demand for
the Company's services and regulatory, technological and competitive
developments (including additional market developments and new opportunities)
in the Company's industry. The Company also expects that it will require
additional financing if the Company's development plans or projections change
or prove to be inaccurate or the Company engages in any acquisitions. Sources
of additional financing may include commercial bank borrowings, vendor
financing or the private or public sale of equity or debt securities. There can
be no assurances that such financing will be available on terms acceptable to
the Company or at all.
7
THE EXCHANGE OFFER
Securities Offered.......... $163,175,000 aggregate original principal amount
at maturity of 10% Senior Discount Notes due
2008.
The Exchange Offer.......... $1,000 original principal amount at maturity of
New Notes will be issued in exchange for each
$1,000 original principal amount at maturity of
Old Notes. As of the date hereof, $163,175,000
aggregate original principal amount at maturity
of Old Notes are outstanding. The Obligors will
issue the New Notes to holders on or promptly
after the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued
to third parties the Obligors believe that New
Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale,
resold and otherwise transferred by any holder of
such New Notes (other than a broker-dealer as set
forth below, or any such holder which is an
"affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) without
compliance with the registration and prospectus
delivery requirements of the Securities Act,
provided that such New Notes are acquired in the
ordinary course of such holder's business and
that such holder has no arrangement or
understanding with any person to participate in
the distribution of such New Notes. Holders of
Old Notes wishing to accept the Exchange Offer
must represent to the Obligors, as required by
the Registration Rights Agreement, that such
conditions have been met and that such holder is
not an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act.
Each Participating Broker-Dealer that receives
New Notes for its own account pursuant to the
Exchange Offer must represent that the Old Notes
tendered in exchange therefor were acquired as a
result of market-making activities and
acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus,
as it may be amended or supplemented from time to
time, may be used by any broker-dealer (other
than an affiliate of the Company) in connection
with resales of New Notes received in exchange
for Old Notes where such Old Notes were acquired
by such broker-dealer as a result of market-
making activities or other trading activities.
The Obligors and the Guarantor have agreed that,
for a period of up to 180 days after the
Expiration Date (as defined below), they will
make this Prospectus available to any broker-
dealer for use in connection with any such
resale. See "Plan of Distribution."
No holder who tenders in the Exchange Offer with
the intention to participate or for the purpose
of participating, in a distribution of the
8
New Notes nor any holder who is an affiliate of
the Company may rely on such no action letters
and must, in the absence of an exemption
therefrom, comply with registration and
prospectus delivery requirements of the
Securities Act in connection with a secondary
resale transaction. Failure to comply with such
requirements in such instance may result in
liability under the Securities Act for which the
holder is not indemnified by the Company.
Expiration Date............. 5:00 p.m., New York City time, on October 6, 1998
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest
date and time to which the Exchange Offer is
extended.
Accreted Value on the New
Notes and the Old Notes.... Each New Note will have an Accreted Value equal
to that of the Old Note for which it is
exchanged.
Conditions to the Exchange
Offer...................... The Exchange Offer is subject to certain
customary conditions, which may be waived by the
Obligors. See "The Exchange Offer--Conditions."
The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being
tendered.
Procedures for Tendering
Old Notes.................. Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a
facsimile thereof or transmit an Agents' Message
(as defined) in connection with a book-entry
transfer, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or
such facsimile of such Agent's Message, together
with the Old Notes and any other required
documentation to the Exchange Agent (as defined)
at the address set forth herein prior to 5:00
p.m., New York City Time, on the Expiration Date.
By executing the Letter of Transmittal or Agent's
Message, each holder will represent to the
Obligors that, among other things, the New Notes
acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of
the person receiving such New Notes, whether or
not such person is the holder, that neither the
holder nor any such other person has any
arrangement or understanding with any person to
participate in the distribution of such New Notes
and that neither the holder nor any such other
person is an "affiliate," as defined under Rule
405 of the Securities Act, of the Obligors. See
"The Exchange Offer--Purpose and Effect of the
Exchange Offer" and "--Procedures for Tendering."
Untendered Old Notes........ Following the consummation of the Exchange Offer,
holders of Old Notes eligible to participate, but
who do not tender their Old Notes, will not have
any further exchange rights and such Old Notes
will continue to be subject to certain
restrictions on transfer. Accordingly, the
liquidity of the market for such Old Notes could
be adversely affected.
9
Consequences of Failure to
Exchange................... The Old Notes that are not exchanged pursuant to
the Exchange Offer will remain restricted
securities. Accordingly, a holder of an Old Note,
other than a foreign purchaser outside the United
States, may resell or otherwise transfer the Old
Notes within the time period referred to in Rule
144(k) under the Securities Act after the Closing
Date, only (i) to the Guarantor or any subsidiary
thereof, (ii) to a "qualified institutional
buyer" (as defined in Rule 144A under the
Securities Act) ("QIB") in compliance with Rule
144A, (iii) inside the United States to a limited
number of other institutional "accredited
investors" (as defined in Rule 501(a)(1), (2),
(3) or (7) under the Securities Act
("Institutional Accredited Investors") that,
prior to such transfer, furnish to the Trustee a
signed letter containing certain representations
and agreements relating to the restrictions on
transfer of the Old Notes (the form of which
letter can be obtained from the Trustee) and, if
such transfer is in respect of an aggregate
Accreted Value of Old Notes at the time of
transfer of less than $100,000, an opinion of
counsel acceptable to the Obligors that such
transfer is in compliance with the Securities
Act, (iv) outside the United States in compliance
with Rule 904 under the Securities Act, (v)
pursuant to the exemption from registration
provided by Rule 144 under the Securities Act (if
available) or (vi) pursuant to an effective
registration statement under the Securities Act.
See "The Exchange Offer--Consequences of Failure
to Exchange."
Shelf Registration
Statement.................. In the event that changes in the law or the
applicable interpretations of the staff of the
Commission do not permit the Obligors to effect
such an Exchange Offer, if for any other reason
the Exchange Offer is not commenced and not
consummated by October 9, 1998, or under certain
other circumstances, the Obligors will use their
best efforts to cause to become effective a shelf
registration statement (the "Shelf Registration
Statement") with respect to resales of the Old
Notes and to keep such Shelf Registration
Statement effective until the expiration of the
time period referred to in Rule 144(k) under the
Securities Act after the original issuance of the
Old Notes (or for so long as any holder is an
affiliate of the Obligors), or such shorter
period that will terminate when all Notes covered
by the Shelf Registration Statement have been
sold pursuant to the Shelf Registration
Statement.
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender should contact such
registered holder promptly and instruct such
registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes
to tender on such owner's own behalf, such owner
must, prior to completing and executing the
Letter of Transmittal and delivering its Old
Notes, either make appropriate arrangements to
register ownership of the Old Notes in such
owner's name or obtain a properly completed bond
power from the registered holder. The transfer of
registered ownership may take considerable time.
The
10
Obligors will keep the Exchange Offer open for
not less than twenty business days in order to
provide for the transfer of registered ownership.
Guaranteed Delivery
Procedures................. Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes,
the Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent (or comply with the procedures for
book-entry transfer) prior to the Expiration Date
must tender their Old Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
Withdrawal Rights........... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration
Date.
Acceptance of Old Notes and
Delivery of New Notes...... The Obligors will accept for exchange any and all
Old Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Notes
issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date.
See "The Exchange Offer--Terms of the Exchange
Offer."
Federal Income Tax
Consequences............... The exchange pursuant to the Exchange Offer will
not be a taxable event for federal income tax
purposes. See "Material Federal Income Tax
Consequences."
Use of Proceeds............. There will be no cash proceeds to the Obligors
from the Exchange Offer.
Exchange Agent.............. United States Trust Company of New York.
11
THE NEW NOTES
New Notes................... $163,175,000 aggregate principal amount at
maturity ($104,159,462 Accreted Value as of the
date hereof) of 10% Senior Discount Notes due
2008.
General..................... The form and terms of the New Notes are the same
in all material respects as the form and terms of
the Old Notes (which they replace) except that
(i) the New Notes have been registered under the
Securities Act and, therefore, will not bear
legends restricting the transfer thereof, and
(ii) the holders of New Notes will not be
entitled to certain rights under the Registration
Rights Agreement, including the provisions
providing for an increase in the interest rate on
the Old Notes in certain circumstances relating
to the timing of the Exchange Offer, which rights
will terminate when the Exchange Offer is
consummated. See "The Exchange Offer--Purpose and
Effect of the Exchange Offer." The New Notes will
evidence the same debt as the Old Notes and will
be entitled to the benefits of the Indenture. See
"Description of the Notes."
Maturity Date............... April 15, 2008.
Yield and Interest.......... The Old Notes were, and the New Notes will be,
issued at a substantial discount from their
principal amount at maturity and there will not
be any payment of interest on the New Notes prior
to October 15, 2003. For a discussion of the U.S.
federal income tax treatment of the New Notes
under the original issue discount rules, see
"Material United States Federal Income Tax
Consequences." The New Notes will fully accrete
to face value on April 15, 2003. From and after
April 15, 2003, the New Notes will bear interest,
payable semi-annually in cash, at a rate of 10%
per annum on April 15 and October 15 of each
year, commencing October 15, 2003.
Optional Redemption......... The New Notes are redeemable, at the option of
the Obligors, in whole or in part, at any time on
or after April 15, 2003, initially at 105.000% of
their principal amount at maturity, plus accrued
interest, declining to 100% of their principal
amount at maturity, plus accrued interest, on or
after April 15, 2006. In addition, at any time
prior to April 15, 2001, the Obligors may redeem
up to 35% of the aggregate principal amount at
maturity of the Notes with the proceeds of one or
more sales of Capital Stock (other than
Disqualified Stock) of the Company or an Obligor,
at 110.000% of their Accreted Value on the
redemption date; provided, however, that after
any such redemption at least $106.0 million
aggregate principal amount at maturity of Notes
remains outstanding. See "Description of the
Notes--Optional Redemption."
Change of Control........... Upon a Change of Control (as defined herein), the
Obligors will be required to make an offer to
purchase the New Notes at a purchase price equal
to 101% of their Accreted Value on the date of
purchase,
12
plus accrued interest, if any. There can be no
assurance that the Obligors will have sufficient
funds available at the time of any Change of
Control to make any required debt repayment
(including repurchases of the Notes). The
Obligors default in the performance or breach of
the provisions of the Indenture related to a
repurchase of the New Notes upon a Change of
Control shall constitute an Event of Default
under the Indenture. See "Description of the
Notes--Repurchase of Notes upon a Change of
Control" and "--Events of Default."
Ranking..................... The New Notes will be unsecured, unsubordinated
indebtedness of the Obligors, will rank pari
passu in right of payment with all unsecured,
unsubordinated indebtedness of the Obligors and
will be senior in right of payment to all
subordinated indebtedness of the Obligors. At
June 30, 1998, the Obligors had approximately
$204.8 million of indebtedness outstanding and
the Obligors' subsidiaries had $112.8 million of
liabilities (including $102.5 million of
indebtedness under the Senior Credit Facility).
See "Risk Factors--Substantial Leverage" and "--
Holding Company Structure; Structural
Subordination."
Guaranty.................... All payments with respect to the New Notes
(including principal and interest) will be fully
and unconditionally guaranteed on a senior basis
by the Guarantor. The New Guaranty will rank pari
passu with all existing and future unsecured,
unsubordinated indebtedness of the Guarantor and
will be effectively subordinated to all
liabilities of the Guarantor's subsidiaries,
including the Obligors and Renaissance Media.
Certain Covenants........... The Indenture contains certain covenants that,
among other things, restrict the ability of the
Company and its Restricted Subsidiaries (as
defined herein) to incur additional indebtedness,
create liens, engage in sale-leaseback
transactions, pay dividends or make distributions
in respect of their capital stock, redeem capital
stock, make investments or certain other
restricted payments, sell assets, issue or sell
stock of Restricted Subsidiaries, enter into
transactions with stockholders or affiliates or
effect a consolidation or merger. However, these
limitations are subject to a number of important
qualifications and exceptions. See "Risk
Factors--Restrictions Imposed by Terms of the
Company's Indebtedness" and "Description of the
Notes--Covenants."
RISK FACTORS
Potential investors should consider carefully certain factors relating to an
investment in the Notes. See "Risk Factors."
13
SUMMARY FINANCIAL AND OTHER DATA
The summary financial and other data set forth below were derived from the
historical combined financial statements of the Systems acquired in the
Acquisition and the historical and pro forma combined and consolidated
financial statements of the Company. The summary statement of operations data
for the years ended December 31, 1995, 1996 and 1997 and the balance sheet data
as of December 31, 1997 were derived from the audited combined financial
statements of the Systems and the Company included elsewhere in this
Prospectus. The summary statement of operations data for the years ended
December 31, 1993 and 1994, the period January 1, to April 8, 1998 and the six
months ended June 30, 1998 were derived from unaudited combined and
consolidated financial statements of the Systems and the Company which, in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Systems' and
the Company's results of operations for such periods. The summary financial and
other data presented below should be read in conjunction with, and are
qualified in their entirety by, "Pro Forma Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this
Prospectus.
HOLDINGS
AND MEDIA
SYSTEMS COMBINED
------------------------------------------------------------------- ------------
YEAR ENDED DECEMBER 31, JANUARY 1- YEAR ENDED
------------------------------------------------------- APRIL 8, DECEMBER 31,
1993 1994 1995 1996 1997 1997(1) 1998 1997
------- ------- ------- -------- ------- --------- ---------- ------------
HISTORICAL PRO FORMA HISTORICAL HISTORICAL
-------------------------------------------- --------- ---------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SUBSCRIBER DATA)
(PREDECESSOR) (2) (PREDECESSOR) (2)
STATEMENT OF OPERATIONS
DATA:
Revenues (3).... $38,125 $40,168 $43,549 $ 47,327 $50,987 $ 50,987 $15,221 $ 65
System operating
expenses (3)
(4)............ 17,618 18,656 20,787 22,626 23,142 24,157 6,952 --
Non-system
operating
expenses (5)... 765 2,032 2,200 2,733 2,782 2,782 785 25
Depreciation,
amortization
and loss (gain)
on disposal of
fixed assets... 16,305 16,583 17,610 18,116 19,317 26,683 4,935 --
------- ------- ------- -------- ------- --------- ------- -------
Operating income
(loss)......... 3,437 2,897 2,952 3,852 5,746 (2,635) 2,549 40
------- ------- ------- -------- ------- --------- ------- -------
Interest
expense, net... (12,058) (11,603) (11,871) -- -- (19,117) -- 4
Income tax
benefit
(expense)...... 3,449 3,482 3,567 (1,502) (2,262) -- (1,191) --
------- ------- ------- -------- ------- --------- ------- -------
Net (loss)
income......... $(5,172) $(5,224) $(5,352) $ 2,350 $ 3,484 $ (21,752) $ 1,358 $ 36
======= ======= ======= ======== ======= ========= ======= =======
OTHER FINANCIAL
DATA:
Net cash
provided by
operations..... 7,025 8,019 $ 7,523 $ 23,088 $23,604 $ 15,043 $ 6,999 $ (97)
Net cash (used
in) investing
activities..... (7,777) (9,964) (7,376) (257,643) (6,390) (302,623) (613) (15,000)
Net cash
provided by
(used in)
financing
activities..... 683 2,041 0 235,125 (16,413) 287,668 (7,750) 16,000
EBITDA (6)...... $19,742 $19,480 20,562 21,968 25,063 $ 24,048 7,484 40
System cash flow
(7)............ 20,507 21,512 22,762 24,701 27,845 26,830 8,269 40
Capital
expenditures... 7,777 9,152 7,376 8,170 6,390 6,390 613 0
EBITDA margin
(3)............ 51.8% 48.5% 47.2% 46.4% 49.2% 47.2% 49.2% 61.5%
Ratio of
earnings to
fixed
charges (8).... -- -- -- -- -- -- -- --
OTHER DATA:
Homes passed (at
period end)
(9)............ 141,402 143,248 145,148 175,522 178,449 178,449 179,402 N.A.
Basic
subscribers (at
period end).... 109,026 115,075 120,340 123,203 126,558 126,558 127,191 N.A.
Basic
penetration (at
period end)
(9)............ 77.1% 80.3% 82.9% 70.2% 70.9% 70.9% 70.9% N.A.
Premium units
(at period
end)........... 56,764 62,434 60,462 64,716 64,963 64,963 61,053 N.A.
Premium
penetration (at
period end).... 52.1% 54.3% 50.2% 52.5% 51.3% 51.3% 48.0% N.A.
Average monthly
revenue per
basic
subscriber
(10)........... $ 29.78 $ 29.87 $ 30.83 $ 32.39 $ 34.02 $ 34.02 $ 36.73 N.A.
Annual EBITDA
per basic
subscriber
(11)........... 185.03 173.85 174.69 180.40 200.70 192.57 216.69 N.A.
Annual system
cash flow per
basic
subscriber
(12)........... 192.20 191.98 193.38 202.85 222.97 214.85 239.42 N.A.
Annual capital
expenditures
per basic
subscriber
(13)........... 72.89 81.68 62.66 67.09 51.17 51.17 17.75 N.A.
RENAISSANCE MEDIA GROUP LLC
CONSOLIDATED
--------------------------------
SIX MONTHS ENDED JUNE 30,
--------------------------------
1998 1997 1998
----------- --------- ----------
HISTORICAL PRO FORMA
----------- --------------------
STATEMENT OF OPERATIONS
DATA:
Revenues (3).... $ 12,921 $ 25,176 $ 28,142
System operating
expenses (3)
(4)............ 5,996 11,976 13,218
Non-system
operating
expenses (5)... 662 1,410 1,447
Depreciation,
amortization
and loss (gain)
on disposal of
fixed assets... 5,457 13,341 13,342
----------- --------- ----------
Operating income
(loss)......... 806 (1,551) 135
----------- --------- ----------
Interest
expense, net... 4,329 9,546 9,546
Income tax
benefit
(expense)...... (75) (75) (75)
----------- --------- ----------
Net (loss)
income......... $ (3,598) $(11,172) $ (9,486)
=========== ========= ==========
OTHER FINANCIAL
DATA:
Net cash
provided by
operations..... $ 12,534 N.A. $ 17,448
Net cash (used
in) investing
activities..... (296,915) N.A. (297,528)
Net cash
provided by
(used in)
financing
activities..... 287,668 N.A. 287,668
EBITDA (6)...... 6,263 N.A. 13,477
System cash flow
(7)............ 6,925 13,200 14,924
Capital
expenditures... 691 1,046 1,046
EBITDA margin
(3)............ 48.5% N.A. 47.9%
Ratio of
earnings to
fixed
charges (8).... -- -- --
OTHER DATA:
Homes passed (at
period end)
(9)............ 180,561 176,985 180,561
Basic
subscribers (at
period end).... 126,985 124,880 126,985
Basic
penetration (at
period end)
(9)............ 70.3% 70.6% 70.3%
Premium units
(at period
end)........... 60,189 64,800 60,189
Premium
penetration (at
period end).... 47.4% 51.9% 47.4%
Average monthly
revenue per
basic
subscriber
(10)........... $ 37.29 $ 33.83 $ 37.00
Annual EBITDA
per basic
subscriber
(11)........... 216.89 190.10 214.75
Annual system
cash flow per
basic
subscriber
(12)........... 239.82 212.83 237.63
Annual capital
expenditures
per basic
subscriber
(13)........... 15.00 16.87 16.50
14
RENAISSANCE
MEDIA GROUP HOLDINGS
LLC AND MEDIA
CONSOLIDATED SYSTEMS COMBINED COMBINED
------------- ----------------- -----------------
AS OF AS OF AS OF
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1997
------------- ----------------- -----------------
BALANCE SHEET DATA:
Cash and cash equivalents... 3,287 1,371 903
Property, plant and
equipment, net............. 64,375 36,944 --
Total assets................ 319,945 288,914 17,003
Total debt.................. 204,786 -- --
Net assets/members' equity.. 104,879 224,546 15,036
(1) See "Pro Forma Financial Data."
(2) Prior to January 4, 1996, the Systems were owned by certain subsidiaries
of CVI and for the period January 4, 1996 through April 8, 1998, the
Systems were owned by Time Warner.
(3) Prior to 1997, franchise fees were included in both revenues and expenses.
In 1997, the Systems began itemizing franchise fees on subscriber billing
invoices and recorded such fees as an offset to system operating expenses.
Had the itemization process occurred prior to 1997, the estimated amount
of franchise fees that would have been reflected as an offset to the
system operating expenses and not included in revenue in 1993, 1994, 1995
and 1996 would have been approximately $1.0 million, $1.3 million, $1.4
million and $1.5 million, respectively. The effect on EBITDA margin of
this change would have resulted in EBITDA margins of 53.0%, 50.1%, 48.9%
and 48.0% for the years 1993, 1994, 1995 and 1996, respectively.
(4) Represents all system operating expenses and excludes management fees and
corporate overhead.
(5) Represents management fees and corporate overhead.
(6) EBITDA represents income before interest, income taxes and depreciation,
amortization and loss (gain) on disposal of fixed assets. EBITDA is not
intended to represent cash flow from operations or net (loss) income as
defined by generally accepted accounting principles and should not be
considered as a measure of liquidity or an alternative to, or more
meaningful than, operating income or operating cash flow as an indication
of the Company's operating performance. Moreover, EBITDA is not a
standardized measure and may be calculated in a number of ways.
Accordingly, the EBITDA information provided may not be comparable to
other similarly titled measures provided by other companies. EBITDA is
included herein because management, certain investors, and industry
analysts consider EBITDA to be a relevant and useful measure of
comparative operating performance in the cable television industry, and
when used in comparison to debt levels or the coverage of interest
expense, as a measure of liquidity. In addition, certain covenants under
the Indenture require a determination of EBITDA.
(7) Represents EBITDA before non-system operating expenses. System cash flow
should not be considered as a measure of liquidity or an alternative to,
or more meaningful than, operating cash flow as defined by generally
accepted accounting principles.
(8) For purposes of this calculation, "earnings" is defined as earnings before
fixed charges. Fixed charges consist of interest expense, amortization of
deferred financing costs, income taxes and the portion of rent expense
under operating leases representative of interest. For the years ended
December 31, 1993, 1994 and 1995, the Systems' earnings before fixed
charges were insufficient to cover their fixed charges by $8.7 million,
$9.0 million and $9.1 million. For the years ended December 31, 1996 and
1997, the Systems did not have indebtedness and a ratio of earnings to
fixed charges would not be meaningful for such years. For the six months
ended June 30, 1998, the Company's earnings before fixed changes were
insufficient to cover its fixed charges by $3.5 million. The Company had
no indebtedness at December 31, 1997. On a pro forma basis for the six
months ended June 30, 1998 and 1997, the Company's earnings before fixed
charges would have been insufficient to cover fixed charges by $9.5
million and $11.2 million, respectively.
(9) Based on a homes passed audit conducted in 1996 which showed an increase
in homes passed of approximately 27,000 homes, the homes passed may be
understated in 1993, 1994 and 1995 and basic penetration may be overstated
for such periods.
(10) Reflects revenues for the applicable period divided by the average number
of basic subscribers for the applicable period divided by the number of
months in the applicable period.
(11) Reflects EBITDA for the applicable period divided by the average number of
basic subscribers for the applicable period. For purposes of this
calculation, EBITDA was annualized for all periods presented that are less
than one year.
(12) Reflects system cash flow divided by the average number of basic
subscribers for the applicable period. For purposes of this calculation,
cash flow was annualized for all periods presented that are less than one
year.
(13) Reflects capital expenditures for the applicable period divided by the
average number of basic subscribers for the applicable period. For
purposes of this calculation, capital expenditures were annualized for all
periods presented that are less than one year.
15
THE COMPANY
Holdings is owned by the Morgan Stanley Entities, Time Warner and the
Management Investors. Renaissance Louisiana, Renaissance Tennessee and
Renaissance Capital are wholly owned subsidiaries of the Guarantor.
Renaissance Louisiana and Renaissance Tennessee own all the equity interests
in Renaissance Media. The Guarantor and Renaissance Capital have no assets and
do not, and will not, conduct any operations.
The following chart sets forth the structure of the Company and the
ownership interests of its principal owners:
[CHART DEPICTING COMPANY STRUCTURE APPEARS HERE]
- --------
(1) Excludes certain carried interests of the Management Investors in
affiliates of Time Warner and the Morgan Stanley Entities which hold the
respective equity interests in Holdings. These carried interests
represent the right to participate in additional distributions of such
affiliates.
Renaissance Louisiana and Renaissance Tennessee were formed by Holdings on
January 7, 1998. The Guarantor and Renaissance Capital were formed by Holdings
on March 13, 1998 and March 12, 1998, respectively. On February 13, 1998,
Renaissance Louisiana and Renaissance Tennessee acquired their respective
equity interests in Renaissance Media from the general partner of the general
partner of each of the Morgan Stanley Entities.
ASSET PURCHASE AGREEMENT
On November 14, 1997, Holdings and Time Warner entered into the Asset
Purchase Agreement. The Asset Purchase Agreement was assigned by Holdings to
Renaissance Media, and, on April 9, 1998, Renaissance Media purchased
substantially all of the assets of the Systems for approximately $300.0
million in cash, plus the issuance to Time Warner of a $9.5 million equity
ownership interest in Holdings, subject to adjustment based upon working
capital and subscriber amounts at the time of closing. Time Warner has agreed
to indemnify Renaissance Media in an amount not to exceed $26.0 million in the
aggregate for any losses arising out of any representation or warranty made by
Time Warner in connection with the Acquisition not being true and accurate.
The foregoing summary of certain provisions of the Asset Purchase Agreement
does not purport to be complete and is qualified in its entirety by reference
to the Asset Purchase Agreement, a copy of which is available from the Company
upon request.
16
RISK FACTORS
An investment in the Notes offered hereby involves a significant degree of
risk. Prospective investors should consider carefully all of the information
set forth herein, and in particular the following factors.
SUBSTANTIAL LEVERAGE
As of June 30, 1998, the Company had approximately $204.8 million of
indebtedness outstanding. See "Capitalization" and "Selected Financial and
Other Data." The accretion of original issue discount on the Notes will cause
an increase in indebtedness of $63.2 million by April 15, 2003. In addition,
subject to the restrictions in the Senior Credit Facility and the Indenture,
the Company plans to incur additional indebtedness under the Revolver for
capital expenditures, working capital and acquisitions. As a result, the
Company anticipates that it will continue to be highly leveraged for the
foreseeable future. The Company's highly leveraged capital structure could
adversely affect the Company's ability to service the Notes and could
significantly limit the Company's ability to finance its operations and fund
its capital expenditure requirements, to compete effectively, to expand its
business, to comply with its obligations under its franchise agreements, to
plan for or react to changes in its business or to operate under adverse
economic conditions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
INSUFFICIENCY OF EARNINGS TO COVER FIXED CHARGES
On a pro forma basis, the Company's earnings before fixed charges would have
been insufficient to cover its fixed charges for the year ended December 31,
1997 by $21.8 million and for the six months ended June 30, 1998 by $9.5
million (unaudited). See "Selected Financial and Other Data" and "Pro Forma
Financial Data."
The Company used the net proceeds from the Offering, together with the
Equity Contributions and borrowings under the Term Loans to consummate the
Acquisition. The Company believes that the borrowings expected to be available
under the Revolver and anticipated cash flow from operations will be
sufficient to upgrade the Systems as currently contemplated and satisfy the
Company's anticipated working capital and debt service requirements. However,
the actual amount and timing of the Company's capital requirements may differ
materially from the Company's estimates as a result of, among other things,
the demand for the Company's services and regulatory, technological and
competitive developments (including additional market developments and new
opportunities) in the Company's industry. The ability of the Company to meet
its debt service and other obligations will depend upon the future performance
of the Company which, in turn, is subject to general economic conditions and
to financial, political, competitive, regulatory and other factors, many of
which are beyond the Company's control. The Company's ability to meet its debt
service and other obligations also may be affected by changes in prevailing
interest rates, as borrowings under the Senior Credit Facility will bear
interest at floating rates, subject to certain interest rate protection
agreements. See "Description of Certain Indebtedness."
The Company believes that it will continue to generate cash flow from
operations and obtain financing sufficient to meet the costs and expenses of
future acquisitions, capital expenditures, working capital needs and debt
service requirements; however, there can be no assurance that the terms on
which any such financing may be available would be favorable to the Company or
that, if it were able to obtain financing, the Company will be able to meet
its debt service and other obligations. If the Company were unable to meet its
debt service or other obligations, it would have to refinance its indebtedness
or obtain new financing. There can be no assurance that such financing will be
available to the Company on acceptable terms or at all. See "Selected
Financial and Other Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Description of Certain Indebtedness"
and "Description of the Notes."
17
The Company expects that the Obligors will be required to refinance a
portion of the Notes at the maturity thereof. In addition, the Company expects
that Renaissance Media may refinance a portion of the indebtedness under the
Senior Credit Facility at its maturity. There can be no assurance that the
Obligors or Renaissance Media will be able to obtain such refinancing upon
acceptable terms or at all.
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION
The Guarantor is a holding company which has no significant operations or
assets other than its equity interests in Renaissance Louisiana, Renaissance
Tennessee and Renaissance Capital. Renaissance Louisiana and Renaissance
Tennessee are holding companies which have no significant operations or assets
other than their equity interests in Renaissance Media. Renaissance Capital
has no operations or assets and was formed solely for the purpose of serving
as a co-obligor of the Notes. Accordingly, the Obligors must rely entirely
upon distributions from Renaissance Media to generate the funds necessary to
meet the Obligors' obligations, including the payment of principal and
interest on the Notes. Renaissance Media is a separate legal entity that has
no obligation to pay any amounts due pursuant to the Notes or to make any
funds available therefor, whether by dividends, loans or other payments. The
Senior Credit Facility contains significant restrictions on the ability of
Renaissance Media to distribute funds to Renaissance Louisiana and Renaissance
Tennessee. See "Description of Certain Indebtedness."
The Obligors' equity interests in Renaissance Media are pledged as
collateral under the Senior Credit Facility. Therefore, if the Obligors were
unable to pay the principal or interest on the Notes when due (whether at
maturity, upon acceleration or otherwise), the ability of the holders of the
Notes to proceed against such equity interests to satisfy such amounts would
be subject to the prior satisfaction in full of all amounts owing under the
Senior Credit Facility. Any action to proceed against such equity interests by
or on behalf of the holders of the Notes would constitute an event of default
under the Senior Credit Facility, entitling the lenders thereunder to declare
all amounts owing to be immediately due and payable. In addition, as a secured
creditor, the lenders under the Senior Credit Facility would control the
disposition and sale of such equity interests after an event of default under
the Senior Credit Facility and would not be legally required to take into
account the interests of unsecured creditors of the Obligors, such as the
holders of the Notes, with respect to any such disposition or sale. There can
be no assurance that the assets of Renaissance Media, after the satisfaction
of its secured creditors, would be sufficient to satisfy any amounts owing
with respect to the Notes.
The Guarantor, Renaissance Louisiana and Renaissance Tennessee are holding
companies and conduct their businesses through subsidiaries. The Notes are
effectively subordinated to all existing and future claims of creditors of the
Obligors' subsidiaries, including the lenders under the Senior Credit Facility
and such subsidiaries' trade and other creditors. At June 30, 1998 the
Obligors' subsidiaries had $112.8 million of liabilities (including $102.5
million of indebtedness under the Senior Credit Facility). The rights of the
Obligors and their creditors, including the holders of the Notes, to realize
upon the assets of any of the Obligors' subsidiaries upon any such
subsidiary's liquidation or reorganization (and the consequent rights of the
holders of the Notes to participate in the realization of those assets) will
be subject to the prior claims of such subsidiaries' respective creditors,
including, in the case of Renaissance Media, the lenders under the Senior
Credit Facility. In such event, there may not be sufficient assets remaining
to pay amounts due on any or all of the Notes then outstanding. See
"Description of the Notes--Ranking" and "Description of Certain Indebtedness."
The Indenture relating to the Notes will permit the Obligors' subsidiaries to
incur additional indebtedness under certain circumstances. See "Description of
the Notes--Covenants."
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture relating to the Notes and the Senior Credit Facility impose
restrictions that, among other things, limit the ability of the Company and
its subsidiaries to incur additional indebtedness, create liens upon assets,
apply the proceeds from the disposal of assets, make investments, loans and
other payments, enter into certain transactions with affiliates and certain
mergers and acquisitions. The Senior Credit Facility also requires
18
Renaissance Media to maintain specified financial ratios and to meet certain
financial tests. See "Description of the Notes" and "Description of Certain
Indebtedness." The ability of Renaissance Media to comply with such covenants
and restrictions can be affected by events beyond its control, and there can
be no assurances that Renaissance Media will achieve operating results that
would permit compliance with such provisions. The breach of any of the
provisions of the Senior Credit Facility would, under certain circumstances,
result in defaults thereunder, permitting the lenders thereunder to prevent
distributions by Renaissance Media and to accelerate the indebtedness
thereunder. If Renaissance Media were unable to pay the amounts due in respect
of the Senior Credit Facility, the lenders under the Senior Credit Facility
could foreclose upon any assets pledged to secure such payment or otherwise
prevent the distribution of funds by Renaissance Media. In such event, the
holders of the Notes might not be able to receive any payments until the
payment default was cured or waived, any such acceleration was rescinded or
the indebtedness under the Senior Credit Facility was discharged or paid in
full. Any of such events would adversely affect the Obligors' ability to
service the Notes, including but not limited to the Obligors' ability to pay
cash interest on the Notes.
OPERATIONS AS AN INDEPENDENT COMPANY
Prior to the Acquisition, the Systems were operated by Time Warner since
January 4, 1996 and prior to such time were operated by CVI from September 12,
1986 (in the case of the Tennessee System) and December 31, 1988 (in the case
of the Louisiana Systems). No financial or operating history of the Systems as
an independent entity and not as part of a large multiple cable television
system operator ("MSO") is available for potential purchasers to evaluate.
Time Warner manages certain programming for the Company, although the Company
has lost certain programming discounts that were available to the Systems when
they were part of a large MSO. In addition, as a result of the purchase
accounting adjustments arising in connection with the Acquisition, the
Company's annual depreciation and amortization charges will increase. The
above factors, together with increased interest expense associated with the
Notes and the Senior Credit Facility, will have a material adverse impact on
the Company's results in the future. See "Pro Forma Financial and Other Data."
SIGNIFICANT COMPETITION IN THE CABLE TELEVISION INDUSTRY
Cable television systems face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment such as off-air television broadcast
programming, newspapers, movie theaters, live sporting events, online computer
services and home video products, including videotape cassette recorders.
Because the Company's franchises are non-exclusive, there is the potential for
competition with the Systems from other operators of cable television systems,
including systems operated by local government authorities, and from other
distribution systems capable of delivering programming to homes or businesses,
including direct broadcast satellite ("DBS") systems and multichannel
multipoint distribution service ("MMDS") systems. Additionally, the FCC
recently adopted new regulations allocating frequencies in the 28 GHz band for
a new multichannel wireless video service called local multipoint distribution
service ("LMDS") that is similar to MMDS, and the FCC initiated spectrum
auctions for LMDS licenses in February 1998. In recent years, there has been
significant national growth in the number of subscribers to DBS services.
Subscribership to MMDS also is increasing and can be expected to grow.
Additionally, recent changes in federal law and recent administrative and
judicial decisions have removed certain of the restrictions that have limited
entry into the cable television business by potential competitors such as
telephone companies, public utility holding companies and their subsidiaries.
During 1997, the Jackson, Tennessee Public Utility Department, which as of
June 30, 1998, encompassed approximately 34,000 homes passed by the Tennessee
System, and approximately 23,000 basic subscribers (excluding bulk
subscribers), representing approximately three-quarters of the subscribers of
the Tennessee System, undertook a feasibility study with respect to providing
cable television service to customers in its service area and reportedly
concluded that a competitive cable television could be feasible under certain
circumstances. During its 1997-1998 session, the Tennessee legislature
considered several bills which would allow municipalities operating electric
utility plants and electric cooperatives to provide cable television and other
service and would authorize six pilot municipal electric systems to provide
cable television and other services. Though the authorization will terminate
on June 30, 2001,
19
any system actually providing such services to customers as a pilot system
prior to that date will be permitted to continue doing so indefinitely. As of
the date hereof, however, none of these bills has been enacted, and applicable
state and local law do not permit the Jackson Public Utility Department to
provide cable television services. See "Legislation and Regulation--State and
Local Regulation." Other new technologies, including Internet-based services,
may also become competitive with services that the Company may offer.
Many of the Company's potential competitors have substantially greater
resources than the Company, and the Company cannot predict the extent to which
competition will materialize in its franchise areas from other cable
television operators, other distribution systems for delivering video
programming and other broadband telecommunications services to the home, or
from other potential competitors, or, if such competition materializes, the
extent of its effect on the Company. See "Business--Competition" and
"Legislation and Regulation."
NON-EXCLUSIVE FRANCHISES; NON-RENEWAL OR TERMINATION OF FRANCHISES
Cable television companies operate under franchises granted by local
authorities which are subject to renewal and renegotiation from time to time.
The Company's business is dependent upon the retention and renewal of its
local franchises. A franchise is generally granted for a fixed term ranging
from five to fifteen years, but in many cases is terminable if the franchisee
fails to comply with the material provisions thereof. The Company's franchises
typically impose conditions relating to the use and operation of the cable
television system, including requirements relating to the payment of fees,
system bandwidth capacity, customer service requirements, franchise renewal
and termination. The Cable Television Consumer Protection and Competition Act
of 1992 (the "1992 Cable Act") prohibits franchising authorities from granting
exclusive cable television franchises and from unreasonably refusing to award
additional competitive franchises. It also permits municipal authorities to
operate cable television systems in their communities without franchises. The
Cable Communications Policy Act of 1984 (the "1984 Cable Act" and collectively
with the 1992 Cable Act, the "Cable Acts") provides, among other things, for
procedural and substantive safeguards for cable operators and creates an
orderly franchise renewal process in which renewal of franchise licenses can
not be unreasonably withheld or, if renewal is withheld and the franchise
authority acquires ownership of the system or effects a transfer of the system
to another person, the operator generally is entitled to the "fair market
value" for the system covered by such franchise. Although the Company believes
that the Systems generally have good relationships with their franchise
authorities, no assurances can be given that the Company will be able to
retain or renew such franchises or that the terms of any such renewals will be
as favorable to the Company as the existing franchises. The non-renewal or
termination of franchises relating to a significant portion of the Company's
subscribers could have a material adverse effect on the Company's financial
condition and results of operations. The Company's future acquisitions will be
dependent on its ability to obtain franchise transfer approvals in a timely
manner. Each city has some flexibility in determining the terms of a franchise
(including franchise fees), and to some extent can impose conditions on such
franchise, such as build-out and upgrade requirements. See "Business--
Franchises."
FEDERAL LAW AND REGULATION IN THE CABLE TELEVISION INDUSTRY
The cable television industry is subject to extensive regulation by federal,
local and, in some instances, state governmental agencies. The Cable Acts,
both of which amended the Communications Act of 1934 (as amended, the
"Communications Act"), established a national policy to guide the development
and regulation of cable television systems. The Communications Act was
substantially amended by the Telecommunications Act of 1996 (the "1996 Telecom
Act"). Principal responsibility for implementing the policies of the Cable
Acts and the 1996 Telecom Act has been allocated between the Federal
Communications Commission (the "FCC") and state or local regulatory
authorities. Advances in communications technology as well as changes in the
marketplace and the regulatory and legislative environment are constantly
occurring. Thus, it is not possible to predict the effect that ongoing or
future developments might have on the cable television industry or on the
operations of the Company.
The 1992 Cable Act and the FCC's rules implementing that Act generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have
20
established, among other things: (i) rate regulations; (ii) mandatory carriage
and retransmission consent requirements that require a cable system under
certain circumstances to carry a local broadcast station or to obtain consent
to carry a local or distant broadcast station; (iii) rules for franchise
renewals and transfers; and (iv) other requirements covering a variety of
operational areas such as technical standards and equal employment opportunity
and customer service requirements.
The 1996 Telecom Act deregulates rates for CPSTs after March 31, 1999 for
most MSOs and, for certain small cable operators, immediately eliminates rate
regulation of CPSTs, and, in certain circumstances, basic services and
equipment. Time Warner and its affiliates entered into a "Social Contract"
with the FCC which became effective on January 1, 1996. Under the Social
Contract, which terminates December 31, 2000, Time Warner is permitted to make
the same rate adjustments on CPSTs which operators are permitted to make under
the FCC's rules for "external costs," including programming and franchise-
related costs and inflation, except that Time Warner may not adjust rates for
channel additions to the CPSTs pursuant to the FCC's rules, nor may it use
cost of service showings to adjust rates. In addition, Time Warner is
permitted to increase monthly CPST rates by an additional $1.00 per year above
other permissible increases in return for certain upgrade commitments through
the contract term. See "Regulation and Legislation--The Social Contract." The
FCC is conducting various rulemakings and reconsidering other regulations
adopted pursuant to the 1996 Telecom Act. The Company is currently unable to
predict the ultimate effect of the 1992 Cable Act or the 1996 Telecom Act, the
ultimate outcome of the various FCC rulemaking proceedings, or the litigation
challenging various aspects of this federal legislation and the FCC's
regulations implementing the legislation. In addition, the FCC and Congress
continue to be concerned that rates for regulated services are rising at a
rate exceeding inflation. Recently several bills have been introduced in
Congress which address cable rates. These bills would, alternatively, repeal
the sunset of the regulation of CPSTs now scheduled for March 1999, sunset
CPST rates except when a franchising authority certifies to the FCC that an
operator is not providing subscribers an acceptable range of programming
choices to the extent technically feasible and economically reasonable, and
freeze cable rates pending the receipt by Congress of a report from the FCC
regarding the causes of cable television rate increases. The Company cannot
predict the outcome of these bills or whether additional cable rate
legislation will be introduced in Congress. See "Regulation and Legislation."
A bill, which was pending in the 1997 term of the Louisiana legislature and
which provided for the certification and regulation of cable television
systems by the Louisiana Public Service Commission ("PUC"), was not re-
introduced in the 1998 term. The bill, if adopted, among other provisions,
would have: (i) allowed the PUC to void, order new rates or reduce rates found
to be discriminatory or necessary to reflect adequate service; (ii) required
that all cable television systems commencing or expanding service be
franchised conditioned upon confirmation by the PUC; and (iii) provided the
PUC with the authority to order construction, operation, or an extension of
cable service on such terms and conditions as it deems reasonable where cable
service has been unreasonably delayed or withheld. However, this bill could be
re-introduced for the 1999 legislative session, which begins on the last
Monday of March 1999. During its 1997-1998 term, the Tennessee legislature
considered a bill which would permit municipalities operating electric utility
plants and electric cooperatives authorization to provide cable television and
other services. This bill was not enacted by the Tennessee legislature. The
Company cannot predict whether any of the states in which it currently
operates will engage in such regulation in the future.
RISKS RELATING TO ACQUISITION STRATEGY
A significant element of the Company's business strategy is to expand by
acquiring cable television systems located in reasonable proximity to existing
systems or of a sufficient size to enable the acquired system to serve as the
basis for a new local cluster. Any acquisition may have an adverse effect upon
the Company's operating results or cash flow. There is substantial competition
for attractive acquisition candidates. There can be no assurances that the
Company will be able to acquire suitable acquisition candidates on favorable
terms or that it will be able to integrate successfully any acquired business
with its existing operations or realize any efficiencies therefrom. There can
also be no assurances that any such acquisition, if consummated, will perform
as expected. In connection with such acquisitions, the Company may have to
upgrade a significant portion of the cable television systems it acquires
21
to, among other things, increase bandwidth and channel capacity. The Company's
inability to upgrade these systems could have a material adverse effect on its
operations and competitive position. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Business."
The Company will be required to seek additional financing to fund
acquisitions of additional cable television systems and any capital
expenditures required to upgrade such systems. There can be no assurance that
such financing will be available on terms acceptable to the Company or at all.
Sources of additional financing may include commercial bank borrowings, vendor
financing or the private or public sale of equity or debt securities.
ABILITY TO MANAGE GROWTH
The Company's future performance will depend, in part, upon its ability to
successfully implement its acquisition strategy, evaluate markets, secure
financing, effect transfers of pole attachment agreements and obtain any
required governmental authorizations, all in a timely manner, at reasonable
costs and on satisfactory terms and conditions. Rapid growth may place a
significant strain on the Company's management. The Company's success will
also depend in part upon its ability to hire and retain qualified sales,
marketing, administrative, operating and technical personnel. There can be no
assurance that the Company will be able to recruit, train, manage and retain
sufficient qualified personnel. In addition, as the Company increases its
service offerings and expands its targeted markets, there will be additional
demands on customer support, sales and marketing, administrative resources and
network infrastructure. The Company's inability to effectively manage its
growth could have a material adverse effect on the Company's business, results
of operations and financial condition.
RAPID TECHNOLOGICAL ADVANCEMENTS
The cable television business is characterized by rapid technological change
and the introduction of new products and services. There can be no assurance
that the Company will be able to fund the capital expenditures necessary to
keep pace with technological developments or that the Company will
successfully anticipate the demand of its subscribers for products or services
requiring new technology. The Company's inability to provide enhanced services
in a timely manner or to anticipate the demands of the marketplace could have
a material adverse effect on the Company's business, results of operations and
financial condition. See "Business--Competition."
In addition, the Company's introduction of new technologies or services is
subject to uncertainties regarding subscriber demand, future competition,
appropriate pricing, and the costs and timing with respect to marketing and
sales efforts. There can be no assurances as to the effect of such
technological changes on the Company's business, results of operations and
financial condition or that the Company will not be required to expend
substantial financial resources to implement new technologies, that capital
expenditures for new technologies or services will approximate Management's
expectations, or that sufficient demand exists to recoup such expenditures.
DEPENDENCE ON KEY PERSONNEL
The Company is managed by a small number of key executive officers,
including the Management Investors. The loss of services of one or more of
these key individuals could materially and adversely affect the business of
the Company and its prospects. The Company believes that its success will
depend in large part on its ability to attract and retain highly skilled and
qualified personnel. All of the Management Investors have employment and
related agreements upon consummation of the Transactions. Pursuant to these
agreements, the Management Investors may own or manage other cable television
systems after 2001. The competing claims upon the Management Investors' time
and energies could divert their attention from the affairs of the Company. The
Company does not maintain key person life insurance for any of its executive
officers.
DEPENDENCE ON BILLING, ACCOUNTING AND INFORMATION SYSTEMS
The Company relies on CSG Systems International Inc. ("CSG") for the
provision of its billing and subscriber management information systems. As
there are only a limited number of companies providing these
22
services, the loss of CSG's services would have a material adverse effect on
the Company. While the Company believes CSG will resolve its Year 2000
concerns prior to 1999, there can be no assurance that the systems of
companies on which the Company's Systems and operations rely, including CSG,
will be converted on a timely basis and will not have a material adverse
effect on the Company.
YEAR 2000 ISSUES
The Company relies on computer systems, related software applications and
other control devices in operating and monitoring all major aspects of its
business, including, but not limited to, its financial systems (such as
general ledger, accounts payable and payroll modules), subscriber billing
systems, internal networks and telecommunications equipment. The Company also
relies, directly and indirectly, on the external systems of various
independent business enterprises, such as its suppliers and financial
organizations, for the accurate exchange of date and related information.
The Company cannot be certain that it or third parties supporting its
systems have resolved or will resolve all Year 2000 issues in a timely manner.
Failure by the Company or any such third party to successfully address the
relevant Year 2000 issues could result in disruptions of the Company's
business and the incurrence of significant expenses by the Company.
Additionally, the Company could be affected by any disruption to third parties
with which the Company does business if such third parties have not
successfully addressed their Year 2000 issues.
CONTROL BY THE MORGAN STANLEY ENTITIES; CONFLICTS OF INTEREST
The Morgan Stanley Entities, each of which is an affiliate of Morgan
Stanley, beneficially own 87.6% and Time Warner beneficially owns 8.8% of the
outstanding equity of Holdings. The Guarantor, the Obligors and Renaissance
Media are directly or indirectly wholly owned by Holdings. Currently, two of
the seven members of the Board of Representatives of Holdings are employed
with Morgan Stanley. The Morgan Stanley Entities and the Management Investors
each have the right to appoint three Representatives (only one of whom shall
have the right to vote) to the Board of Holdings. Time Warner has the right to
appoint one Representative to the Board of Holdings. Representatives who have
the right to vote shall have the right to cast votes which are proportional to
the respective equity ownership interests in Holdings of the entities which
appointed them. See "Management" and "Certain Relationships and Related
Transactions."
As a result of their ownership interest in Holdings, the Morgan Stanley
Entities control the management policies of the Company and matters requiring
securityholder approval. See "Principal Securityholders." Certain decisions
concerning the operations or financial structure of the Company may present
conflicts of interest between the Morgan Stanley Entities and the holders of
the Notes. For example, if the Company encounters financial difficulties or is
unable to pay its debts as they mature, the interests of the Morgan Stanley
Entities may conflict with those of the holders of Notes. In addition, the
Morgan Stanley Entities may have an interest in pursuing acquisitions,
divestitures, financings or other transactions that, in their judgment, could
enhance their equity investment in the Company, even though such transactions
might involve increased risk to the holders of the Notes.
The employment and related agreements of the Management Investors permit the
Management Investors to own or manage other cable television systems after
2001, although the Management Investors are obligated to first offer
acquisition opportunities to the Morgan Stanley Entities. In the event that
the Management Investors acquire or manage other cable television systems, the
competing claims on their time and energy could divert their attention from
the affairs of the Company.
Time Warner and its affiliates currently operate cable television systems
and have significant investments in such systems. Time Warner has invested in
the past, and may invest in the future, in other entities engaged in the
operation of cable television systems or in related businesses (including
entities engaged in business in areas in which the Company operates). As a
result, Time Warner or its affiliates may compete with the Company for
23
acquisition targets. Time Warner has, and may develop, relationships with
businesses that are or may be competitive with the Company. Conflicts may also
arise in the negotiation or enforcement of arrangements entered into by the
Company and Time Warner or entities in which Time Warner has an interest. In
addition, Time Warner has no obligation to bring to the Company any investment
or business opportunities of which it becomes aware, even if such
opportunities are within the scope and objectives of the Company.
MSSF, an affiliate of the Placement Agent and the Morgan Stanley Entities,
is the syndication agent and arranger under the Senior Credit Facility. In
connection with such services, MSSF will receive customary fees and be
reimbursed for expenses.
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON RESALES
There presently is no active trading market for the Notes and none may
develop. If the Notes are traded after their initial issuance, they may trade
at a discount from their initial offering price, depending upon prevailing
interest rates, the market for similar securities, the financial condition and
prospects of the Obligors and the Guarantor and other factors beyond the
control of the Obligors and the Guarantor, including general economic
conditions. Although Morgan Stanley has informed the Company that it currently
intends to make a market in the Notes, Morgan Stanley is not obligated to do
so and any market-making may be discontinued at any time without notice, at
its sole discretion. Accordingly, there can be no assurance as to the
development or liquidity of any market for the Notes. If Morgan Stanley
conducts any market-making activities, it may be required to deliver a
"market-making prospectus" when effecting offers and sales in the Notes
because of the beneficial ownership in the equity of Holdings by the Morgan
Stanley Entities. For so long as a market-making prospectus is required to be
delivered, the ability of Morgan Stanley to make a market in the Notes may, in
part, be dependent on the ability of the Guarantor and the Obligors to
maintain a current market-making prospectus. See "Plan of Distribution."
The Old Notes have not been registered under the Securities Act and were
offered in reliance upon exemptions from registration under the Securities Act
and applicable state securities laws. Therefore, the Old Notes may be
transferred or resold only in a transaction registered under or exempt from
the Securities Act and applicable state securities laws. Pursuant to the
Registration Rights Agreement, the Guarantor and each Obligor have agreed to
file a registration statement relating to the Exchange Offer with the
Commission and to use their best efforts to cause such registration statement
to become effective with respect to the New Notes. If issued, the New Notes
generally will be permitted to be resold or otherwise transferred by each
holder without the requirement of further registration. The New Notes,
however, will also constitute a new issue of securities with no established
trading market. No assurance can be given as to the liquidity of the trading
market for the New Notes or, in the case of non-exchanging holders of Old
Notes, the trading market for the Old Notes following the Exchange Offer.
Holders who do not participate in the Exchange Offer may thereafter hold a
less liquid security. See "Description of Notes--Registration Rights."
ORIGINAL ISSUE DISCOUNT CONSEQUENCES OF THE NOTES
The Old Notes were, and the New Notes will be, issued at a substantial
discount from their principal amount at maturity. Consequently, the purchasers
of the Notes generally will be required to include amounts in gross income for
federal income tax purposes in advance of receipt of the cash payments to
which such income is attributable. See "Material United States Federal Income
Tax Consequences" for a more detailed discussion of the U.S. federal income
tax consequences to the holders of the Notes of the purchase, ownership and
disposition of the Notes.
If a bankruptcy case is commenced by or against the Guarantor or the
Obligors under the U.S. Bankruptcy Code after the issuance of the Notes, the
claim of a holder of Notes with respect to the principal amount thereof may be
limited to an amount equal to the sum of (i) the initial public offering
price, and (ii) that portion of the original issue discount that is not deemed
to constitute "unmatured interest" for purposes of the U.S. Bankruptcy Code.
Any original issue discount that was not amortized as of any such bankruptcy
filing would constitute "unmatured interest."
24
CONSEQUENCES OF EXCHANGING OR FAILURE TO FOLLOW EXCHANGE OFFER PROCEDURES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legends thereon. In general,
the Old Notes may not be offered or sold, unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state securities laws. The
Company does not intend to register the Old Notes under the Securities Act.
Based on an interpretation by the staff of the Commission set forth in no-
action letters issued to third parties, the Obligors believe that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by any holder of such New Notes
(other than a broker-dealer, as set forth below, or any such holder which is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's business and that such holder
has no arrangement or understanding with any person to participate in the
distribution of such New Notes. Any Participating Broker-Dealer that acquired
Old Notes for its own account as a result of market-making activities or other
trading activities may be a statutory underwriter. Each Participating Broker-
Dealer that receives New Notes for its own account pursuant to the Exchange
Offer must represent that the Old Notes tendered in exchange therefor were
acquired as a result of market-making activities and acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. This Prospectus,
as it may be amended or supplemented from time to time, may be used by any
broker-dealer (other than an affiliate of the Company) in connection with
resales of New Notes received in exchange for Old Notes where such Old Notes
were acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities. The Obligors and the Guarantor have
agreed that, for a period of 180 days after the Expiration Date, they will
make this Prospectus available to any Participating Broker-Dealer for use in
connection with any such resale. See "Plan of Distribution."
Any holder who tenders in the Exchange Offer with the intention to
participate, or for the purpose of participating, in a distribution of the New
Notes could not rely on the position of the staff of the Commission enunciated
in no-action letters and, in the absence of an exemption therefrom, must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Failure to comply
with such requirements in such instance may result in such holder incurring
liability under the Securities Act for which the holder is not indemnified by
the Company.
To comply with the securities laws of certain jurisdictions, it may be
necessary to qualify for sale or register the New Notes prior to offering or
selling such New Notes. The Obligors currently do not intend to register or
qualify the sale of the New Notes in any such jurisdictions. Upon consummation
of the Exchange Offer, holders that were not prohibited from participating in
the Exchange Offer and did not tender their Old Notes will not have any
registration rights under the Registration Rights Agreement with respect to
such nontendered Old Notes, and accordingly, such Old Notes will continue to
be subject to the restrictions on transfer contained in the legend thereon.
See "The Exchange Offer--Consequences of Failure to Exchange."
Issuance of the New Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Obligors of
such Old Notes, a properly completed and duly executed Letter of Transmittal
and all other required documents. Therefore, holders of the Old Notes desiring
to tender such Old Notes in exchange for New Notes should allow sufficient
time to ensure timely delivery. The Obligors are under no duty to give
notification of defects or irregularities with respect to the tenders of Old
Notes for exchange. Old Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to
be subject to the existing restrictions upon transfer thereof, and, upon
consummation of the Exchange Offer, certain registration rights with respect
to the Old Notes under the Registration Rights Agreement will terminate. No
holder who tenders in the Exchange Offer with the intention to participate, or
for the purpose of participating, in a distribution of the New Notes, nor any
holder who is an affiliate of the Company may rely on such no action letters
and must, in the absence of an exemption therefrom, comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. Failure
25
to comply with such requirements in such instance may result in liability
under the Securities Act for which the holder is not indemnified by the
Company. See "Plan of Distribution." To the extent that Old Notes are tendered
and accepted in the Exchange Offer, the trading market for untendered and
tendered but unaccepted Old Notes could be adversely affected. See "The
Exchange Offer."
FORWARD LOOKING STATEMENTS
This Prospectus contains forward-looking statements which can be identified
by terminology such as "believes," "anticipates," "intends," "expects" and
words of similar import. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, events or developments to be materially different from any future
results, events or developments expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general
economic and business conditions, both nationally and in the regions in which
the Company operates; technology changes; competition; changes in business
strategy or development plans; the high leverage of the Company; the ability
to attract and retain qualified personnel; existing governmental regulations
and changes in, or the failure to comply with, governmental regulations;
liability and other claims asserted against the Company; and other factors
referenced in this Prospectus, including, without limitation, under the
captions "Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business." GIVEN THESE
UNCERTAINTIES, PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON SUCH FORWARD-LOOKING STATEMENTS. The Company disclaims any obligation to
update any such factors or to publicly announce the result of any revisions to
any of the forward-looking statements contained herein to reflect future
results, events or developments.
26
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Obligors'
obligations under the Placement Agreement and the Registration Rights
Agreement. The Obligors will not receive any cash proceeds from the issuance
of the New Notes offered hereby. In consideration for issuing the New Notes
contemplated in this Prospectus, the Obligors will receive Old Notes in like
original principal amount at maturity, the form and terms of which are the
same as the form and terms of the New Notes (which replace the Old Notes),
except as otherwise described herein.
The net proceeds to the Obligors from the Offering of the Old Notes were
approximately $95.3 million, after deducting the estimated underwriting
discounts and commissions and other Offering expenses payable by the Obligors.
The Obligors used the net proceeds from the Offering of the Old Notes,
together with the Equity Contributions and borrowings under the Term Loans, to
consummate the Acquisition and to pay certain fees and expenses in connection
with the Transactions. The cash purchase price for the Systems was
approximately $300.0 million. Time Warner received a $9.5 million equity
ownership interest in Holdings in connection with the consummation of the
Transactions. See "The Company."
The sources and uses of funds for the Transactions were as follows:
SOURCES OF FUNDS AMOUNT
---------------- -------------
(IN MILLIONS)
Old Notes................. $100.0
Equity Contributions(1)... 99.0
Borrowings under the Term
Loans.................... 110.0
Working Capital
Adjustments(2)........... 1.0
------
Total Sources of Funds.... $310.0
======
USES OF FUNDS AMOUNT
------------- -------------
(IN MILLIONS)
Cash purchase price for the Systems(1)....................... $300.0
Estimated transaction fees and expenses...................... 10.0
------
Total Uses of Funds.......................................... $310.0
======
- --------
(1) Does not include the portion of the purchase price that was paid to Time
Warner as a $9.5 million equity ownership interest in Holdings.
(2) Working Capital Adjustments consists of certain net liabilities of the
Systems assumed by the Company at the time the Acquisition was
consummated.
27
CAPITALIZATION
The following table sets forth the combined capitalization of the Systems
and Holdings and Renaissance Media as of December 31, 1997, and the pro forma
capitalization of the Company as of December 31, 1997, as adjusted to give
effect to the Transactions, and the consolidated capitalization of the
Guarantor as of June 30, 1998. This table should be read in conjunction with
"Selected and Other Financial Data," "Pro Forma Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the financial statements and the notes thereto included elsewhere in this
Prospectus.
AS OF AS OF
DECEMBER 31, 1997 JUNE 30, 1998
------------------------------------ -------------
HOLDINGS
AND
RENAISSANCE RENAISSANCE
MEDIA MEDIA GROUP
SYSTEMS COMBINED LLC
HISTORICAL HISTORICAL PRO FORMA (1) CONSOLIDATED
---------- ----------- ------------- -------------
(IN THOUSANDS)
Long-term debt:
Senior Credit Facility
(2)...................... $ -- $ -- $110,000 $102,500
Notes offered hereby, at
accreted value........... -- -- 100,012 102,286
-------- ------- -------- --------
Total long-term debt...... -- -- 210,012 204,786
-------- ------- -------- --------
Equity:
Total net assets/equity .. 224,546 15,037 108,537(3) 104,879(3)
-------- ------- -------- --------
Total capitalization.... $224,546 $15,037 $318,549 $309,665
======== ======= ======== ========
- --------
(1) See "Pro Forma Financial Data."
(2) Does not reflect the $40.0 million of financing available under the
Revolver. See "Description of Certain Indebtedness."
(3) Consists in part of the Equity Contributions to Holdings which were
contributed to the Company as equity.
28
SELECTED FINANCIAL AND OTHER DATA
The selected financial and other data set forth below were derived from the
historical combined financial statements of the Systems acquired in the
Acquisition and the historical combined and consolidated financial statements
of the Company. The financial data as of December 31, 1996 and 1997 and for
the years ended December 31, 1995, 1996 and 1997 were derived from the
combined financial statements of the Systems and the Company which have been
audited by Ernst & Young LLP, independent auditors. The financial data for the
Systems as of December 31, 1993, 1994, 1995 and for the years ended December
31, 1993 and 1994, the period January 1, to April 8, 1998, and the six months
ended June 30, 1998 were derived from unaudited combined and consolidated
financial statements of the Systems and the Company which, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the results of operations
and financial condition of the Systems and the Company for such periods. The
selected financial and other data set forth below should be read in
conjunction with, and are qualified in their entirety by, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto include elsewhere in this
Prospectus.
RENAISSANCE
HOLDINGS AND MEDIA GROUP
MEDIA LLC
SYSTEMS COMBINED CONSOLIDATED
------------------------------------------------------------- ------------ ------------
JANUARY 1- YEAR ENDED SIX MONTHS
APRIL 8, DECEMBER 31, ENDED
YEAR ENDED DECEMBER 31, 1998 1997 JUNE 30,
------------------------------------------------- ---------- ------------ ------------
1993 1994 1995 1996 1997 1998
-------- -------- -------- --------- -------- ------------
HISTORICAL HISTORICAL HISTORICAL HISTORICAL
------------------------------------------------- ---------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SUBSCRIBER DATA)
(PREDECESSOR) (1) (PREDECESSOR) (1)
STATEMENT OF OPERATIONS
DATA:
Revenues (2)........... $ 38,125 $ 40,168 $ 43,549 $ 47,327 $ 50,987 $ 15,221 $ 65 $ 12,921
System operating
expenses (2) (3)...... 17,618 18,656 20,787 22,626 23,142 6,952 -- 5,996
Non-system operating
expenses (4).......... 765 2,032 2,200 2,733 2,782 785 25 662
Depreciation,
amortization and loss
(gain) on disposal of
fixed assets.......... 16,305 16,583 17,610 18,116 19,317 4,935 -- 5,457
-------- -------- -------- --------- -------- -------- -------- --------
Operating income....... 3,437 2,897 2,952 3,852 5,746 2,549 40 806
-------- -------- -------- --------- -------- -------- -------- --------
Interest expense....... (12,058) (11,603) (11,871) -- -- -- 4 4,329
Income tax benefit
(expense)............. 3,449 3,482 3,567 (1,502) (2,262) (1,191) -- (75)
-------- -------- -------- --------- -------- -------- -------- --------
Net (loss) income ..... $ (5,172) $ (5,224) $ (5,352) $ 2,350 $ 3,484 $ 1,358 $ 36 $ (3,598)
======== ======== ======== ========= ======== ======== ======== ========
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash
equivalents........... $ 322 $ 419 $ 566 $ 570 $ 1,371 $ 7 $ 903 $ 3,287
Property, plant and
equipment, net........ 32,297 34,739 34,426 36,966 36,944 35,992 -- 64,375
Total assets........... 148,405 142,316 132,905 300,049 288,914 282,943 17,003 319,945
Total debt............. 133,520 130,068 128,328 -- -- -- -- 204,786
Net (liabilities)
assets ............... (43,716) (48,939) (54,292) 237,475 224,546 218,154 15,036 104,879
OTHER FINANCIAL DATA:
Net cash provided by
operations ........... 7,025 8,019 $ 7,523 $ 23,088 $ 23,604 $ 6,999 $ (97) $ 12,534
Net cash (used in)
investing activities.. (7,777) (9,964) (7,376) (257,643) (6,390) (613) $(15,000) (296,915)
Net cash provided by
(used in) financing
activities............ 683 2,041 0 235,125 (16,413) (7,750) 16,000 287,668
EBITDA (5)............. $ 19,742 $ 19,480 20,562 21,968 25,063 7,484 40 6,263
System cash flow (6)... 20,507 21,512 22,762 24,701 27,845 8,269 -- 6,925
Capital expenditures... 7,777 9,152 7,376 8,170 6,390 613 -- 691
EBITDA margin (2)...... 51.8% 48.5% 47.2% 46.4% 49.2% 49.2% 61.5% 48.5%
Ratio of earnings to
fixed charges (7)..... -- -- -- -- -- -- -- --
OTHER DATA:
Homes passed (at period
end) (8).............. 141,402 143,248 145,148 175,522 178,449 179,402 N.A. 180,561
Basic subscribers (at
period end)........... 109,026 115,075 120,340 123,203 126,558 127,191 N.A. 126,985
Basic penetration (at
period end) (8)....... 77.1% 80.3% 82.9% 70.2% 70.9% 70.9% N.A. 70.3%
Premium units (at
period end)........... 56,764 62,434 60,462 64,716 64,963 61,053 N.A. 60,189
Premium penetration (at
period end)........... 52.1% 54.3% 50.2% 52.5% 51.3% 48.0% 47.4%
Average monthly revenue
per basic
subscriber (9)........ $ 29.78 $ 29.87 $ 30.83 $ 32.39 $ 34.02 $ 36.73 N.A. $ 37.29
Annual EBITDA per basic
subscriber (10)....... 185.03 173.85 174.69 180.40 200.70 216.69 N.A. 216.89
Annual system cash flow
per basic
subscriber (11) ...... 192.20 191.98 193.38 202.85 222.97 239.42 N.A. 239.82
Annual capital
expenditures per basic
subscriber (12)....... 72.89 81.68 62.66 67.09 51.17 17.75 N.A. 15.00
29
- --------
(1) Prior to January 4, 1996, the Systems were owned by certain subsidiaries
of CVI, and for the period January 4, 1996 through April 8, 1998, the
Systems were owned by Time Warner.
(2) Prior to 1997, franchise fees were included in both revenues and
expenses. In 1997, the Systems began itemizing franchise fees on
subscriber billing invoices and recorded such fees as an offset to system
operating expenses. Had the itemization process occurred prior to 1997,
the estimated amount of franchise fees that would have been reflected as
an offset to System operating expenses and not included in revenues in
1993, 1994, 1995 and 1996 would have been approximately $1.0 million,
$1.3 million, $1.4 million and $1.5 million, respectively. The effect of
this change on EBITDA margin would have resulted in EBITDA margins of
53.0%, 50.1%, 48.9% and 48.0% for the years 1993, 1994, 1995 and 1996,
respectively.
(3) Represents all system operating expenses and excludes management fees and
corporate overhead.
(4) Represents management fees and corporate overhead.
(5) EBITDA represents income before interest, income taxes and depreciation,
amortization and loss (gain) on disposal of fixed assets. EBITDA is not
intended to represent cash flow from operations or net (loss) income as
defined by generally accepted accounting principles and should not be
considered as a measure of liquidity or an alternative to, or more
meaningful than, operating income or operating cash flow as an indication
of the Company's operating performance. Moreover, EBITDA is not a
standardized measure and may be calculated in a number of ways.
Accordingly, the EBITDA information provided may not be comparable to
other similarly titled measures provided by other companies. EBITDA is
included herein because management, certain investors, and industry
analysts consider EBITDA to be a relevant and useful measure of
comparative operating performance in the cable television industry, and
when used in comparison to debt levels or the coverage of interest
expense, as a measure of liquidity. In addition, certain covenants under
the Indenture require a determination of EBITDA.
(6) Represents EBITDA before non-system operating expenses. System cash flow
should not be considered as a measure of liquidity or an alternative to,
or more meaningful than, operating cash flow as defined by generally
accepted accounting principles.
(7) For purposes of this calculation, "earnings" is defined as earnings
before fixed charges. Fixed charges consist of interest expense,
amortization of deferred financing costs, income taxes and the portion of
rent expense under operating leases representative of interest. For the
years ended December 31, 1993, 1994 and 1995, the Systems' earnings
before fixed charges were insufficient to cover their fixed charges by
$8.7 million, $9.0 million and $9.1 million, respectively. For the years
ended December 31, 1996 and 1997, the Systems did not have indebtedness
and a ratio of earnings to fixed charges would not be meaningful. For the
six months ended June 30, 1998, the Company's earnings before fixed
charges were insufficient to cover its fixed charges by $3.5 million. The
Company had no indebtedness at December 31, 1997.
(8) Based on a homes passed audit conducted in 1996 which showed an increase
in homes passed of approximately 27,000 homes, the homes passed may be
understated in 1993, 1994 and 1995 and basic penetration may be
overstated for such periods.
(9) Reflects revenues for the applicable period divided by the average number
of basic subscribers for the applicable period divided by the number of
months in the applicable period.
(10) Reflects EBITDA for the applicable period divided by the average number
of basic subscribers for the applicable period. For purposes of this
calculation, EBITDA was annualized for all periods presented that are
less than one year.
(11) Reflects system cash flow for the applicable period divided by the
average number of basic subscribers for the applicable period. For
purposes of this calculation, cash flow was annualized for all periods
presented that are less than one year.
(12) Reflects capital expenditures for the applicable period divided by the
average number of basic subscribers for the applicable period. For
purposes of this calculation, capital expenditures were annualized for
all periods presented that are less than one year.
30
PRO FORMA FINANCIAL DATA
Holdings and Renaissance Media were formed in November 1997. The Obligors
and the Guarantor were formed in 1998. The following unaudited Pro Forma
Combined (for the year ended December 31, 1997) and Consolidated (as of and
for the six months ended June 30, 1998) Financial Statements have been
prepared to give effect to the formation of the Obligors and the Guarantor and
to the Transactions, including the Offering.
The pro forma adjustments are based upon available information and certain
assumptions that the Company believes are reasonable under the circumstances.
Pro forma adjustments are applied to the historical financial statements of
the Systems to account for the Acquisition under the purchase method of
accounting. Under purchase accounting, the total purchase price for the
Acquisition will be allocated to the Systems' assets and liabilities based on
their relative fair values. Allocations are subject to valuations as of the
date of the Acquisition based on appraisals and other studies which are not
yet completed. Accordingly, the final allocations may be different from the
amounts reflected herein, although management currently does not believe that
any material adjustment to such allocations is expected.
The unaudited pro forma combined statement of operations for the year ended
December 31, 1997 and the unaudited pro forma consolidated statement of
operations for the six months ended June 30, 1998, respectively, gives effect
to the Transactions as if they had occurred as of January 1, 1997. The pro
forma financial statements are provided for informational purposes only and do
not purport to be indicative of the results which would have actually been
obtained had the Transactions been completed on the dates indicated or which
may be expected to occur in the future. The pro forma financial statements
should be read in conjunction with "Selected Financial and Other Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the historical financial statements and notes thereto included
elsewhere in this Prospectus.
31
RENAISSANCE MEDIA GROUP LLC
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
HOLDINGS
AND
RENAISSANCE
SYSTEMS MEDIA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ---------
Revenues........................ $50,987 $ 65 $ (65)(1) $ 50,987
Costs and expenses:
System operating expenses..... 23,142 25 990 (2) 24,157
Non-System operating
expenses..................... 2,782 -- -- 2,782
Depreciation, amortization and
loss (gain) on disposal of
fixed assets................. 19,317 -- 1,031 (3) 26,683
6,335 (4)
------- ------- -------- --------
Total costs and expenses.... 45,241 25 8,356 53,622
------- ------- -------- --------
Operating income (loss)......... 5,746 40 (8,421) (2,635)
Interest expense, net........... -- 4 19,178 (5) 19,117
(65)(1)
------- ------- -------- --------
Income (loss) before income
taxes.......................... 5,746 36 (27,534) (21,752)
Income tax expense.............. 2,262 -- (2,262)(6) --
------- ------- -------- --------
Net income (loss)........... $ 3,484 $ 36 $(25,272) $(21,752)
======= ======= ======== ========
See accompanying notes to pro forma combined statement of operations.
32
RENAISSANCE MEDIA GROUP LLC
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
The unaudited pro forma combined statement of operations gives effect to the
following pro forma adjustments:
(1) Reflects the reclassification of Renaissance Media's interest income
from revenues to interest expense, net.
(2) Reflects the estimated additional programming expenses, which would
have been incurred if the Systems had been operating under the program
management agreement with Time Warner.
(3) Represents the amortization of debt issuance costs and organization
costs over periods ranging from five to ten years.
(4) Represents the depreciation and amortization of the write up (down) of
property, plant and equipment, franchise assets and goodwill arising
from the allocation of the purchase price to the Systems' assets under
the purchase method of accounting. Pro forma depreciation amounts have
been computed based on an estimate of the composite useful life of such
assets (approximately 7 years), giving consideration to the planned
upgrades of the cable infrastructure, which has resulted in a shorter
composite useful life of such assets compared to Time Warner
(approximately 11 years). Pro forma amortization amounts have been
computed based on an estimate of the useful lives of franchise assets
and goodwill (approximately 15 years and 25 years, respectively) using
Renaissance Media's accounting policy estimates, which differ from the
estimated useful lives of franchise assets and goodwill previously used
by Time Warner (over periods up to 20 years and over periods up to 40
years, respectively). The net adjustment was computed as follows:
Pro forma depreciation of property, plant and equipment....... $ 9,514
Pro forma amortization of franchise assets and goodwill....... 16,138
Elimination of historical depreciation and amortization....... (19,317)
--------
Pro forma increase in depreciation and amortization........... $ 6,335
========
(5) Reflects the following interest expense that would have been incurred
based on the Acquisition financing:
Interest on the Term Loans at an assumed weighted average
interest
rate of 8.11% (including commitment fees of $200)............ $ 8,877
Interest on the Notes......................................... 10,250
Amortization of interest rate cap agreement................... 51
--------
$ 19,178
========
For each .25% change in the assumed interest rate on the Term Loans,
pro forma interest expense would change by approximately $275.
(6) Represents elimination of income tax expense because the Company will
be treated as a partnership for federal income tax purposes.
33
RENAISSANCE MEDIA GROUP LLC
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
RENAISSANCE MEDIA
SYSTEMS HISTORICAL GROUP LLC PRO FORMA
FOR THE PERIOD HISTORICAL FOR FOR THE SIX
JANUARY 1, 1998 THE SIX MONTHS MONTHS ENDED
THROUGH ENDED JUNE 30, JUNE 30,
APRIL 8, 1998 1998 ADJUSTMENTS 1998
------------------ ----------------- ----------- ------------
Revenues................ $15,221 $12,921 $ -- $28,142
Costs and expenses:
System operating
expenses............. 6,952 5,996 270 (1) 13,218
Non-System operating
expenses............. 785 662 -- 1,447
Depreciation,
amortization and loss
(gain) on disposal of
fixed assets......... 4,935 5,457 280 (2) 13,342
2,670 (3)
------- ------- ------- -------
Total costs and
expenses........... 12,672 12,115 3,220 28,007
------- ------- ------- -------
Operating income........ 2,549 806 (3,220) 135
Interest expense, net... -- 4,329 5,217 (4) 9,546
------- ------- ------- -------
Income (loss) before
income taxes........... 2,549 (3,523) (8,437) (9,411)
Income tax expense...... 1,191 75 (1,191)(5) 75
------- ------- ------- -------
Net income (loss)... $ 1,358 $(3,598) $(7,246) $(9,486)
======= ======= ======= =======
See accompanying notes to pro forma statement of operations.
34
RENAISSANCE MEDIA GROUP LLC
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS)
The unaudited pro forma consolidated statement of operations gives effect to
the following pro forma adjustments:
(1) Reflects the estimated additional programming expenses, which would
have been incurred if the Systems had been operating under the program
management agreement with Time Warner.
(2) Represents the amortization of debt issuance costs and organization
costs over periods ranging from five to ten years.
(3) Represents the depreciation and amortization of the write up (down) of
property, plant and equipment, franchise assets and goodwill arising
from the allocation of the purchase price to the Systems' assets under
the purchase method of accounting. Pro forma depreciation amounts have
been computed based on an estimate of the composite useful life of such
assets (approximately 7 years), giving consideration to the planned
upgrades of the cable infrastructure, which has resulted in a shorter
composite useful life of such assets compared to Time Warner
(approximately 11 years). Pro forma amortization amounts have been
computed based on an estimate of the useful lives of franchise assets
and goodwill (approximately 15 years and 25 years, respectively) using
Renaissance Media's accounting policy estimates, which differ from the
estimated useful lives of franchise assets and goodwill previously used
by Time Warner (over periods up to 20 years and over periods up to 40
years, respectively). The net adjustment was computed as follows:
Pro forma depreciation of property, plant and equipment........ $ 3,211
Pro forma amortization of franchise assets and goodwill........ 4,393
Elimination of historical depreciation and amortization........ (4,934)
-------
Pro forma increase in depreciation and amortization............ $ 2,670
=======
(4) Reflects the following interest expense that would have been incurred
based on the Acquisition financing:
Interest on the Term Loans at an assumed weighted average
interest
rate of 8.11% (including commitment fees of $54).............. $ 2,481
Interest on the Notes.......................................... 2,722
Amortization of interest rate cap agreement.................... 14
-------
$ 5,217
=======
For each .25% change in the assumed interest rate on the Term Loans,
pro forma interest expense would change by approximately $138.
(5) Represents elimination of income tax expense.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Holdings was formed on November 5, 1997 and entered into the Asset Purchase
Agreement dated November 14, 1997 with Time Warner to acquire the Systems. The
Acquisition was consummated on April 9, 1998. Holdings was initially
capitalized with a $15.0 million capital contribution from MSCPIII, MSCP
Investors and MSCI and received a $1.0 million advance capital contribution
from the Management Investors. The $16.0 million in funds received by Holdings
was utilized to fund the escrow deposit of $15.0 million required under the
Asset Purchase Agreement and to provide working capital. For the period from
inception through March 31, 1998, Holdings has earned interest income on the
escrow deposit and the working capital fund and has incurred costs, primarily
related to the Acquisition. Prior to the consummation of the Acquisition,
Holdings assigned all of its interest in the Asset Purchase Agreement to
Renaissance Media, and all assets and liabilities of Holdings became assets
and liabilities of Renaissance Media. The Systems are clustered in southern
Louisiana, western Mississippi and western Tennessee and, as of June 30, 1998,
passed 180,561 homes, served 126,985 basic subscribers and had 60,189 premium
service units. The Company is the 4th largest cable television system operator
in Louisiana and the 5th largest cable television system operator in Tennessee
based upon the Systems' numbers of subscribers at June 30, 1998.
The Systems were owned and operated by CVI or related entities prior to the
acquisition of CVI by Time Warner on January 4, 1996 and were owned and
operated by Time Warner since that date until April 9, 1998. As a result, the
assets of the Systems have been reflected utilizing Time Warner's basis from
January 4, 1996 to April 9, 1998 and at CVI's basis prior to January 4, 1996.
The Company intends to increase its subscriber base and operating cash flow
by pursuing cable television system acquisitions, improving and upgrading its
technical plant and expanding its service offerings. The Company will pursue
selective acquisitions in markets which are contiguous to the Systems and in
non-contiguous mid-sized markets serving more than 30,000 subscribers where
local or regional clusters can be formed. The Company believes that by
clustering systems it will be able to realize economies of scale, such as
reduced payroll, reduced billing and technical costs per subscriber, reduced
advertising sales costs, increased local advertising sales, more efficient
roll-out and utilization of new technologies and consolidation of its customer
service functions. The Company plans to improve and upgrade its technical
plant, which should allow it to provide a wide array of new services and
service tiers, as well as integrate new interactive features into advanced
analog and digital set-top consumer equipment. The Company also plans to
develop and provide new cable and broadband services and develop ancillary
businesses including digital video and high speed Internet access services.
Industry analysts generally consider EBITDA to be an important measure of
comparative operating performance in the cable television industry, and when
used in comparison to debt levels or the coverage of interest expense, as a
measure of liquidity. However, EBITDA should be considered in addition to, not
as a substitute for, operating income, net income, cash flow and other
measures of financial performance and liquidity reported in accordance with
generally accepted accounting principles. EBITDA as defined herein may not be
comparable to similarly titled measures reported by other companies. An
analysis of changes in EBITDA are set forth below under "--Liquidity and
Capital Resources."
Revenues. The Systems' revenues are primarily attributable to subscription
fees charged to subscribers for basic and premium cable television programming
services. Basic revenue consists of monthly subscription fees for basic and
CPST services. Multiple dwelling unit accounts typically are offered a bulk
rate in exchange for single point billing and basic service to all units.
Premium revenue consists of monthly subscription fees for programming provided
on a per-channel basis. In addition, other revenue is derived from new product
tiers, pay-per-view fees, installation and reconnection fees charged to
subscribers to receive service, monthly equipment rental fees, advertising
revenue and commissions related to the sale of goods by home shopping services
and
36
in-home wiring maintenance contracts. The table below sets forth for the
periods indicated basic, premium and other revenues expressed as a percentage
of total revenues:
RENAISSANCE MEDIA
SYSTEMS GROUP LLC
-------------------------------------- -------------------
YEAR ENDED DECEMBER 31, JANUARY 1 -
------------------------- APRIL 8, SIX MONTHS
1995 1996 1997 1998 ENDED JUNE 30, 1998
------- ------- ------- ----------- -------------------
Basic............. 65.9% 68.4% 70.6% 71.6% 72.2%
Premium........... 14.7 13.4 12.8 11.6 11.5
Other............. 19.4 18.2 16.6 16.8 16.3
------- ------- ------- ----- -----
Revenues.......... 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ===== =====
Basic revenue has been increasing as a percentage of total revenues since
1995 due primarily to increases in subscription rates offset by a change in
the treatment of the portion of franchise fees that are passed through
directly to subscribers on their monthly billing invoices ("subscriber
franchise fees"). Prior to 1997, subscriber franchise fees were not itemized
on subscribers' monthly billing invoices, but were included in the total
monthly service charge paid by subscribers. As a result, when the Systems
recorded monthly revenue it included subscriber franchise fees. Franchise fee
expense, prior to 1997, included non-subscriber franchise fees paid directly
by the Systems and subscriber franchise fees that were paid by and collected
from subscribers. Beginning in 1997, the Systems began itemizing subscriber
franchise fees on customers' billing invoices. As such, the Systems ceased
recording subscriber franchise fees to revenue and began recording subscriber
franchise fees to an accrual account. As a result of such change, franchise
fee expense only reflects the franchise fees paid directly by the Systems. The
effect of this change in the treatment of subscriber franchise fees was a
reduction of revenue in direct proportion to the reduction of franchise fee
expense, resulting in no impact to net income on a comparative basis. Premium
revenues have been decreasing as a percentage of total revenues due to
marginal growth in this revenue category. Other revenue has been decreasing as
a percentage of total revenues due primarily to the elimination in 1996 and
1995 of additional outlet charges, offset in part, by increases in other
revenue items.
System Operating Expenses. System operating expenses are comprised of
variable operating expenses and selling, service and administrative expenses
directly attributable to the Systems. Variable operating expenses consist of
costs directly attributable to providing cable services to customers and
therefore generally vary directly with revenues. Variable operating expenses
include programming fees paid to suppliers of programming included in the
Systems' basic and premium cable television services, as well as expenses
related to copyright fees, franchise fees and bad debt expenses. Programming
costs have historically increased at rates in excess of inflation due, in
part, to improvements in the quality of programming. Cable programming costs
are expected to continue to increase due to additional programming being
provided to customers, inflationary increases and other factors. Programming
costs as a percentage of revenue increased to 20.5% in 1997 from 20.1% in 1996
and to 20.8% for the period January 1, 1998 to April 8, 1998. For the period
from April 9, 1998 to June 30, 1998, the Company's programming costs as a
percentage of revenue were 23.3%. The increase is due to the loss of certain
programming discounts that were realized as a result of being part of a large
MSO. See "Pro Forma Financial Data." Selling, service and administrative
expenses directly attributable to the Systems include the salaries and wages
of field and office personnel, plant operating expenses, office and
administrative expenses and sales costs.
Non-System Operating Expenses. Non-system operating expenses consist
primarily of corporate related expenses, which are not directly attributable
to the Systems. These expenses include personnel costs, rent, legal, audit,
tax and other corporate overhead costs.
Depreciation, Amortization and Loss (Gain) on Disposal of Fixed
Assets. Depreciation, amortization and loss (gain) on disposal of fixed assets
include depreciation of the Systems' network and equipment, amortization of
goodwill and intangibles assets and losses or gains recognized on the disposal
of assets. Management expects depreciation, amortization and loss (gain) on
disposal of fixed assets to increase as a result of the purchase accounting
adjustments arising in connection with the Acquisition. See "Pro Forma
Financial Data."
37
The table below sets forth for the periods indicated certain data regarding
expenses expressed as a percentage of total revenues:
RENAISSANCE
MEDIA
SYSTEMS GROUP LLC
-------------------------------------- -----------
SIX MONTHS
YEAR ENDED DECEMBER 31, JANUARY 1 - ENDED
------------------------- APRIL 8, JUNE
1995 1996 1997 1998 30, 1998
------- ------- ------- ----------- -----------
Revenues.................... 100.0% 100.0% 100.0% 100.0% 100.0%
System operating
expenses................. 47.7 47.8 45.4 45.8 46.4
Non-system operating
expenses................. 5.1 5.8 5.5 5.0 5.1
Depreciation, amortization
and loss (gain) on
disposal of fixed
assets................... 40.4 38.3 37.9 32.4 42.2
Operating income......... 6.8 8.1 11.2 16.8 6.3
Interest expense.......... 27.3 -- -- -- 33.5
Income tax (benefit)
expense.................. (8.2) 3.2 4.4 7.8 .6
Net (loss) income......... (12.3) 4.9 6.8 9.0 (27.8)
The Systems have not had any material acquisitions during these periods and
thus the growth since 1995 represents internal growth resulting from
subscriber additions, rate increases and additional services purchased by
subscribers and advertisers.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
The Systems served 126,558 basic subscribers at December 31, 1997 compared
with 123,203 basic subscribers at December 31, 1996, an increase of 3,355
subscribers or 2.7%. Homes passed increased to 178,449 at December 31, 1997
from 175,522 at December 31, 1996, an increase of 2,927 homes or 1.7%. Premium
service units increased to 64,963 at December 31, 1997 from 64,716 at December
31, 1996.
Revenues. Revenues increased $3.7 million, or 7.7%, to $51.0 million in 1997
from $47.3 million in 1996. Adjusting for the change in the method of
recording franchise fees, as described above, revenues increased $5.2 million
or 11.1%.
The increase in revenues in 1997 resulted primarily from increases in basic
revenue and other revenue. Basic revenue increased due to an increase in the
weighted average monthly subscription rate for basic service to $7.69 in 1997
from $6.38 in 1996 and an increase in the weighted average monthly
subscription rate for CPST to $17.33 in 1997 from $16.19 in 1996. In addition,
basic revenue increased due to the increase in subscribers in 1997. Other
revenue components including home shopping, pay-per-view and advertising
revenue increased, while additional outlet revenue decreased.
System Operating Expenses. System operating expenses increased $.5 million,
or 2.3%, to $23.1 million in 1997 from $22.6 million in 1996. Adjusting for
the change in the method of recording franchise fees, system operating
expenses increased $2.0 million or 8.8%. The increase in system operating
expenses in 1997 resulted primarily from increases in salaries and programming
costs.
Non-System Operating Expenses. Non-system operating expenses increased $.1
million, or 1.8%, to $2.8 million in 1997 from $2.7 million in 1996.
Depreciation, Amortization and Loss (Gain) on Disposal of Fixed
Assets. Depreciation, amortization and loss (gain) on disposal of fixed assets
increased $1.2 million, or 6.6%, to $19.3 million in 1997 from $18.1 million
in 1996. This increase resulted primarily from $.6 million of losses on
miscellaneous asset disposals during the year.
38
Operating Income. Operating income increased $1.9 million, or 49.2%, to $5.7
million in 1997 from $3.9 million in 1996.
Income Tax (Benefit) Expense. Income tax (benefit) expense increased $.8
million, or 50.6%, to $2.3 million in 1997 from $1.5 million in 1996. This
increase is due to the increase in operating income in 1997.
Net (Loss) Income. For the reasons discussed above, net (loss) income
increased $1.1 million, or 48.3%, to $3.5 million in 1997 from $2.4 million in
1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
The Systems served 123,203 basic subscribers at December 31, 1996 compared
with 120,340 basic subscribers at December 31, 1995, an increase of 2,863
basic subscribers or 2.4%. Homes passed increased to 175,522 homes at December
31, 1996 compared to 145,148 at December 31, 1995. This increase resulted
primarily from a homes passed audit of the Systems during 1996, which added
approximately 27,000 homes to the Systems' database, and estimated real growth
in the number of homes passed by the Systems of approximately 1.7%. Premium
service units increased 4,254, or 7.0%, to 64,716 at December 31, 1996 from
60,462 at December 31, 1995.
Revenues. Revenues increased $3.8 million, or 8.7%, to $47.3 million in 1996
from $43.5 million in 1995. Basic revenue increased due to increases in the
weighted average monthly subscription rate for CPST to $16.19 in 1996 from
$13.09 in 1995, offset in part by a decrease in the weighted average monthly
subscription rate for basic service to $6.38 in 1996 from $6.75 in 1995. In
addition, basic revenue increased due to the increase in the number of basic
subscribers in 1996. Premium and other revenue remained the same due to a
reduction in advertising and additional outlet revenue, offset by increases in
pay-per-view revenue and other revenue.
System Operating Expenses. System operating expenses increased $1.8 million,
or 8.8%, to $22.6 million in 1996 from $20.8 million in 1995. The 1996
expenses reflect increased payroll expenses, pay-per-view expenses, marketing
and other miscellaneous costs, offset in part by reductions in programming
costs resulting from the lower rates incurred by Time Warner.
Non-System Operating Expenses. Non-system operating expenses increased $.5
million, or 24.2%, to $2.7 million in 1996 from $2.2 million in 1995 due to
the different amounts of corporate overhead and regional expenses incurred by
Time Warner in 1996 and CVI in 1995.
Depreciation, Amortization and Loss (Gain) on Disposal of Fixed
Assets. Depreciation, amortization and loss (gain) on disposal of fixed assets
increased $.5 million, or 2.9%, to $18.1 million in 1996 from $17.6 million in
1995. This net increase resulted primarily from the net write-up of assets in
1996 under the purchase method of accounting following the acquisition of the
Systems when Time Warner acquired CVI.
Operating Income. Operating income increased $.9 million, or 30.5%, to $3.9
million in 1996 from $3.0 million in 1995.
Interest Expense. Interest expense was $11.9 million in 1995 which related
to debt recorded at the System level by CVI. The Systems recorded no interest
expense in 1996 because Time Warner met the Systems' financing needs through
non-interest bearing capital advances.
Income Taxes (Benefit) Expense. Income tax (benefit) expense increased $5.1
million to an expense of $1.5 million in 1996 from a benefit of $3.6 million
in 1995. The increase in income tax (benefit) expense resulted from the
increase in operating income in 1996.
Net (Loss) Income. For the reasons discussed above, net (loss) income
increased $7.7 million to net income of $2.4 million in 1996 from a net loss
of $5.4 million in 1995.
39
SIX MONTHS ENDED JUNE 30, 1998
The Company's Systems passed 180,561 homes, had 126,985 basic subscribers
and had 60,189 premium service units at June 30, 1998.
Revenues. The Company had revenue of $12.9 million for the six months ended
June 30, 1998. This revenue represents the revenue of the Systems for the
period from April 9, 1998 to June 30, 1998. Revenue per basic subscriber per
month was $37.29.
System Operating Expenses. System operating expenses were $6.0 million for
the six months ended June 30, 1998. These expenses represent the costs
incurred at the Systems' locations for the period from April 9, 1998 to June
30, 1998 and include among other costs, programming costs, employee costs,
repairs and maintenance costs, insurance costs and marketing costs.
Non-System Operating Expenses. Non-system operating expenses were $.7
million for the six months ended June 30, 1998. These costs represent
corporate overhead costs and include approximately $.2 million of corporate
overhead incurred prior to the consummation of the Acquisition of the Systems
on April 9, 1998.
Depreciation, Amortization and Loss (Gain) on Disposal of Fixed
Assets. Depreciation, amortization and loss (gain) on disposal of fixed assets
consists of depreciation and amortization primarily for the period from April
9, 1998 to June 30, 1998 as the Company had no material assets subject to
depreciation or amortization prior to April 9, 1998.
Interest Expense. Interest expense was $4.3 million for the six months ended
June 30, 1998. This amount represents interest on the Notes and the Senior
Credit Facility for the period April 9, 1998 to June 30, 1998 and amortization
of the Company's interest rate cap agreement for the six month period ended
June 30, 1998.
Income Tax Expense. Renaissance Louisiana and Renaissance Tennessee have
elected to be treated as corporations for United States federal income tax
purposes. The provisions for income tax expense for the six months ended June
30, 1998 represent Tennessee franchise tax expense. No income tax benefit for
the loss incurred through June 30, 1998 has been recorded due to the
uncertainty of the realization of such loss during the related carry forward
period.
Net Loss. Net loss for the six months ended June 30, 1998 was $3.6 million,
of which approximately $3.4 million was incurred during the period April 9,
1998 through June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1998 (PRO FORMA) COMPARED WITH SIX MONTHS ENDED JUNE
30, 1997 (PRO FORMA)
The following discussion gives pro forma effect to the Transactions as if
they had occurred as of January 1, 1998 and 1997, and is provided for
informational purposes. It does not purport to be indicative of the results
which would have actually been obtained had the Transactions been completed on
the dates indicated or which may be expected to occur in the future.
The Systems served 126,985 basic subscribers at June 30, 1998 compared with
124,880 basic subscribers at June 30, 1997, an increase of 2,105 subscribers
or 1.7%. Homes passed increased to 180,561 at June 30, 1998 from 176,985 at
June 30, 1997, an increase of 3,576 homes passed or 2.0%. Premium service
units decreased to 60,189 at June 30, 1998 from 64,800 at June 30, 1997.
Revenues. Revenues increased $2.9 million, or 11.8%, to $28.1 million for
the six months ended June 30, 1998 from $25.2 million for the six months ended
June 30, 1997. There were no pro forma adjustments to revenues.
The increase in revenues for the six months ended June 30, 1998 resulted
primarily from increases in basic revenue and other revenue. Basic revenue
increased due to an increase in the weighted average monthly subscription rate
for basic service to $7.88 in 1998 from $7.69 in 1997 and an increase in the
weighted average monthly subscription rate from CPST to $20.28 in 1998 from
$17.33 in 1997. In addition, basic revenue increased due to the increase in
subscribers in the six months ended June 30, 1998. Other revenue components
including home shopping, pay per view and advertising revenue increased, while
additional outlet revenue decreased.
40
System Operating Expenses. System operating expenses increased $1.2 million,
or 10.4%, to $13.2 million for the six months ended June 30, 1998 from $12.0
million for the six months ended June 30, 1997. The increase in system
operating expenses for the six months ended June 30, 1998 resulted primarily
from increases in programming costs due to annual price increases and the
addition of new programming services and increases in other overhead costs
such as electricity, pole rents and property taxes.
Operating Income. Operating income increased $1.7 million to $.1 million for
the six months ended June 30, 1998 from an operating loss of $1.6 million for
the six months ended June 30, 1997. The increase in operating income resulted
from the increase in revenue of $2.9 million offset in part by the increase in
operating expenses of $1.2 million for the six month period ended June 30,
1998.
Net Loss. For the reasons discussed above, net loss decreased $1.7 million,
or 15.0%, to $9.5 million for the six months ended June 30, 1998 from $11.2
million for the six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
From January 4, 1996 until April 9, 1998, the Systems were owned by Time
Warner and their liquidity and capital resources needs were evaluated and met
based upon funding from Time Warner. The Systems' cash balances were generally
minimized with excess cash balances transferred to corporate cash management
accounts.
The cable television business requires substantial capital for the
upgrading, expansion and maintenance of signal distribution equipment, as well
for home subscriber devices and wiring and for service vehicles. The Company
will continue to deploy fiber optic technology and to upgrade the Systems to a
minimum of 550 MHz and to 750 MHz where system characteristics warrant. The
deployment of fiber optic technology will allow the Company to complete future
upgrades to the Systems in a cost-effective manner. In addition, the Company
believes that the application of digital compression technology will likely
reduce the requirement in the future for upgrades to increase capacity beyond
750 MHz.
The working capital requirements of a cable television business are
generally not significant since subscribers are billed for services monthly in
advance, while the majority of expenses incurred (except for payroll) are paid
generally 30 to 60 days after their incurrence.
The Systems' net cash provided by operations was $23.6 million in 1997
compared to $23.1 million in 1996 and $7.5 million in 1995. The System's net
cash provided by operations was $6.0 million and $4.8 million for the three
months ended March 31, 1998 and 1997, respectively. The Systems' net cash used
in investing activities was $6.4 million, $8.2 million and $7.4 million in
1997, 1996 and 1995, respectively, and in 1996 Time Warner allocated $249.5
million of the purchase price paid (net of cash acquired) for CVI to the
Systems. The System's net cash used in investing activities was $.5 million
and $1.6 million for the three months ended March 31, 1998 and 1997,
respectively. The Systems' net cash used in financing activities which related
to distributions of excess cash to their parent companies, amounted to $16.4
million, $14.9 million and none, in 1997, 1996 and 1995, respectively, and in
1996 Time Warner allocated $250.0 million of the purchase price paid for CVI
to the Systems. The System's net cash used in financing activities was $7.8
million for the period January 1, 1998 to April 8, 1998. The Systems' EBITDA
increased to $25.1 million in 1997 from $22.0 million in 1996 and $20.6
million in 1995. EBITDA as a percentage of revenue increased to 49.2% in 1997
from 46.4% in 1996, primarily resulting from a change in the method of
recording franchise fees, and 47.2% in 1995. Had the method of recording
franchise fees been changed in 1995 and 1996, the effect of this change would
have resulted in EBITDA margins of 48.0% and 48.9% for 1996 and 1995,
respectively. The System's EBITDA was $7.5 million and $6.0 million for the
period January 1, 1998 to April 8, 1998. As a percentage of revenue, EBITDA
was 49.2% for the period January 1, 1998 to April 8, 1998.
41
Simultaneously with the Offering of the Old Notes: (i) the Company received
equity contributions of $95.1 million from the Morgan Stanley Entities and
$3.9 million from the Management Investors; (ii) Renaissance Media, as
borrower, and Renaissance Louisiana, Renaissance Tennessee and Renaissance
Capital, as guarantors, entered into the Senior Credit Facility, consisting of
$110.0 million in Term Loans and the $40.0 million Revolver; and (iii)
Renaissance Media acquired the Systems from Time Warner for $300.0 million in
cash and the issuance to Time Warner of a $9.5 million equity interest in
Holdings.
The Company used the net proceeds from the Offering, together with the
Equity Contributions and borrowings under the Term Loans, to consummate the
Acquisition. The Company has approximately $204.8 million of indebtedness
outstanding and unused commitments under the Revolver of $40.0 million.
Subject to compliance with the terms of the Senior Credit Facility, borrowings
under the Revolver will be available for working capital purposes, capital
expenditures and acquisitions.
The Company expects to make substantial investments in capital to: (i)
upgrade its cable plant; (ii) build line extensions; (iii) purchase new
equipment; and (iv) acquire the equipment necessary to implement its digital
and Internet and data transmission strategy. In 1998, the Company estimates it
will make capital expenditures of approximately $9.8 million. The Company
believes that the borrowings expected to be available under the Revolver and
anticipated cash flow from operations will be sufficient to upgrade the
Systems as currently contemplated and to satisfy the Company's working
capital, capital expenditure and debt service requirements. However, the
actual amount and timing of the Company's capital requirements may differ
materially from the Company's estimates as a result of, among other things,
the demand for the Company's services and regulatory, technological and
competitive developments (including additional market developments and new
opportunities) in the Company's industry. The Company also expects that it
will require additional financing if the Company's development plans or
projections change or prove to be inaccurate or the Company engages in any
acquisitions. Sources of additional financing may include commercial bank
borrowings, vendor financing or the private or public sale of equity or debt
securities. There can be no assurances that such financing will be available
on terms acceptable to the Company or at all.
Borrowings under the Senior Credit Facility bear interest at floating rates,
although the Company is required to maintain interest rate protection
programs. Renaissance Media's obligations under the Senior Credit Facility is
secured by substantially all the assets of Renaissance Media. See "Description
of Certain Indebtedness--Senior Credit Facility."
The Company is subject to interest rate fluctuations on its Senior Credit
Facility, ($102.5 million outstanding at June 30, 1998), and accordingly has
entered into an interest rate cap agreement with a notional amount of $100.0
million. This agreement serves to cap the interest rates associated with the
Company's variable rate debt under the Senior Credit Facility. The cap
agreement protects the Company from increased interest costs if LIBOR exceeds
7.25% and expires on December 1, 1999.
The Company assesses its interest rate protection options on an ongoing
basis with a goal of having in place interest rate protection plans as it
deems appropriate, based on its assessment of future interest rates balanced
against the cost of such plans and the degree of interest rate fluctuation
risk the Company believes is appropriate.
YEAR 2000 ISSUES
The Company relies on computer systems, related software applications and
other control devices in operating and monitoring all major aspects of its
business, including, but not limited to, its financial systems (such as
general ledger, accounts payable and payroll modules), subscriber billing
systems, internal networks and telecommunications equipment. The Company also
relies, directly and indirectly, on the external systems of various
independent business enterprises, such as its suppliers and financial
organizations, for the accurate exchange of date and related information.
The Company continues to assess the likely impact of Year 2000 issues on its
business operations, including its material information technology ("IT") and
non-IT applications. These material applications include all
42
billing and subscriber information systems, general ledgers, phone switches
and certain headend applications, all of which are third party supported. The
Company has received written assurances from the providers of all third party-
supported applications to the effect that such applications are either Year
2000 compliant or subject to plans to become Year 2000 compliant. The Company
is currently quantifying its non-IT applications which may be affected by Year
2000 issues and have an effect on its operations.
The Company continues to monitor Year 2000 issues and expect to have all
systems identified by the end of 1998 and compliance determinations completed
by the end of the first calendar quarter of 1999. Based on the results of its
compliance determinations, appropriate contingency plans will be finalized to
the extent possible.
The Company has not incurred any material Year 2000 costs to date, and
excluding the need for contingency plans, does not expect to incur any
material Year 2000 costs in the future because most of the applications it
uses are maintained by third parties who have borne such Year 2000 compliance
costs.
The Company cannot be certain that it or third parties supporting its
systems have resolved or will resolve all Year 2000 issues in a timely manner.
Failure by the Company or any such third party to successfully address the
relevant Year 2000 issues could result in disruptions of the Company's
business and the incurrence of significant expenses by the Company.
Additionally, the Company could be affected by any disruption to third parties
with which the Company does business if such third parties have not
successfully addressed their Year 2000 issues.
IMPACT OF INFLATION
With the exception of programming costs, the Company does not believe that
inflation has had or will likely have a significant effect on its results of
operations or capital expenditure programs. Programming cost increases in the
past have tended to exceed inflation and may continue to do so in the future.
The Company, in accordance with FCC regulations, may pass along programming
cost increases to its subscribers.
NEW ACCOUNTING STANDARDS
During fiscal 1997 and 1998, the Financial Accounting Standards Board
("FASB") issued Statement No. 130, "Reporting Comprehensive Income" ("FAS
130"), Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("FAS 131"), Statement No. 132, "Employers' Disclosures
about Pension and Other Postretirement Benefits" ("FAS 132"), and Statement
No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 130 establishes standards
for reporting and display of comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of financial statements. The Company
expects to adopt FAS 130 as of the second quarter of 1998. FAS 131 requires
disclosure of financial and descriptive information about an entity's
reportable operating segments under the "management approach" as defined in
such Statement. The Company will adopt FAS 131 as of December 31, 1998. FAS
132 standardizes the disclosure requirements for pensions and other
postretirement benefits. The Company expects to adopt FAS 132 as of the second
quarter of 1998. FAS 133 provides a comprehensive and consistent standard for
the recognition and measurement of derivatives and hedging activities. The
Company will adopt FAS 133 as of January 1, 2000. The impact of the adoption
of these standards on the Company's financial statements is not expected to be
material.
43
BUSINESS
GENERAL
The Company was formed to acquire, operate and develop medium-sized cable
television systems. The Company acquired six cable television Systems from
Time Warner on April 9, 1998. The Systems are clustered in southern Louisiana
and western Mississippi (the Louisiana Systems) and western Tennessee (the
Tennessee System) and, as of June 30, 1998, passed approximately 180,561 homes
and served approximately 126,985 subscribers. The Company is the 4th largest
cable television system operator in Louisiana and the 5th largest cable
television system operator in Tennessee based upon the Systems' numbers of
subscribers at June 30, 1998.
The Guarantor and the Obligors were formed in 1998 by Holdings. Holdings is
owned by the Morgan Stanley Entities, Time Warner and the Management
Investors, who have an average of 17 years of experience in the cable
television industry. At CVI, the Management Investors were largely responsible
for the management of 55 cable television systems serving 600 communities in
18 states, including operating the Louisiana Systems for seven years and the
Tennessee System for nine years. In addition, the Company's regional
management has significant experience in the critical functions of operations,
management, sales, marketing, back office, finance and regulatory affairs.
The Company intends to increase its subscriber base and operating cash flow
by pursuing cable television system acquisitions, improving and upgrading its
technical plant and expanding its service offerings. The Company will pursue
selective acquisitions in markets which are contiguous to the Systems and in
non-contiguous mid-sized markets serving more than 30,000 subscribers where
local or regional clusters can be formed. The Company believes that by
clustering systems it will be able to realize economies of scale, such as
reduced payroll, reduced billing and technical costs per subscriber, reduced
advertising sales costs, increased local advertising sales, more efficient
roll-out and utilization of new technologies and consolidation of its customer
service functions. The Company plans to improve and upgrade its technical
plant, which should allow it to provide a wide array of new services and
service tiers, as well as integrate new interactive features into advanced
analog and digital set-top consumer equipment. The Company also plans to
develop and provide new cable and broadband services and develop ancillary
businesses including digital video and high speed Internet access services.
The Guarantor's and the Obligors' principal executive offices are located at
One Cablevision Center, Suite 100, Ferndale, New York 12734 and the telephone
number is (914) 295-2600.
BUSINESS STRATEGY
The Company's strategy is to increase its revenues and EBITDA by acquiring,
operating and developing cable television systems and capitalizing on the
expertise of management, as well as the Company's relationship with the
Management Investors and Time Warner. The key components of the Company's
strategy include the following:
Pursue Strategic Acquisitions. Management believes that attractive
acquisition opportunities will be available as large cable television system
operators divest non-strategic assets and small operators sell their systems.
The Company intends to pursue system acquisitions in markets which are
contiguous to the Systems and in non-contiguous markets serving more than
30,000 subscribers where local or regional clusters can be formed. The Company
believes that by clustering systems it will be able to realize economies of
scale, such as reduced payroll, reduced billing and technical costs per
subscriber, reduced advertising sales costs, increased local advertising
sales, more efficient roll-out and utilization of new technologies and
consolidation of customer service functions. The Management Investors'
experience in operating cable television systems in urban, suburban and rural
markets will enable the Company to pursue a wide range of potential
acquisition opportunities.
44
Operate Technologically Advanced Systems. The Company will seek to operate
cable television systems with bandwidths of 550 MHz to 750 MHz (78 to 110
analog channels) that include the use of hybrid fiber-coaxial cable plant, bi-
directional transmission capability, small-cluster nodes, advanced subscriber
set-top devices and digital compression technology. The Company will continue
to upgrade the Systems and will selectively upgrade systems acquired in the
future depending on market conditions. Many of the upgraded systems will
likely incorporate digital compression technology which would increase the
number of programming channels that may be transmitted over a given amount of
bandwidth, in many cases resulting in up to 10 digital channels transmitted in
the space required for a single analog channel. The Company expects that such
technology will also permit it to offer new services such as high speed
Internet access and data transmission and additional programming tiers, as
well as new interactive features being integrated into advanced analog and
digital set-top consumer equipment.
Capitalize on Relationships with Management Investors and Time Warner. The
Company will benefit from the depth and breadth of the experience of the
Management Investors in acquiring, operating and developing cable television
systems, including the Systems, as well as the expertise of its regional
marketing, sales and technical personnel. The Company believes that it will
benefit from its relationship with Time Warner through access to certain of
Time Warner's programming arrangements and technical and engineering
expertise. In addition, the Company believes it will be able to coordinate its
equipment purchasing with Time Warner.
Focus on Operations and Service. Management believes that its focus on
system operations and customer service will increase subscriber penetration,
revenues and cash flow margins. The Company will implement its comprehensive
training and certification program which provides specific technical training
to further improve operations performance and customer service. In addition,
the Company will actively monitor the performance of its systems and the
quality of its customer service, using criteria such as picture quality,
service call response times, average outage durations, telephone answer rates
and installation response times. The Company will also use market research
tools to gauge its performance and customer satisfaction and to tailor its
local service offerings to the particular community.
Develop Ancillary Businesses. The Company intends to pursue new business
opportunities that complement its core video delivery systems. The Company
intends to expand its advertising sales operations in each of its cable
television systems and create local production businesses in markets that can
support that activity. Management will also concentrate on the marketing of
special events and pay-per-view movies. In the future, the Company plans to
offer digital services such as near video on demand as an alternative to video
rentals. In addition, the Company plans to offer high speed Internet access
and data transmission via certain of its cable networks.
THE SYSTEMS
Overview. The following table illustrates certain subscriber and operating
statistics for the Systems as of June 30, 1998. The Systems are divided into
two geographical regions, southern Louisiana and western Mississippi (the
Louisiana Systems) and western Tennessee (the Tennessee System):
AVERAGE
PREMIUM MONTHLY
TOTAL SERVICE REVENUE
HOMES PLANT BASIC BASIC UNITS PREMIUM PER BASIC
SYSTEM PASSED (1) MILES SUBSCRIBERS (2) PENETRATION (3) (4) PENETRATION (5) SUBSCRIBER
------ ---------- ----- --------------- --------------- ------- --------------- -----------
Louisiana Systems:
St. Tammany System..... 62,973 1,341 43,152 68.5% 24,749 57.4%
Lafourche System....... 28,518 560 22,233 78.0% 12,258 55.1%
St. Landry System...... 26,990 529 19,319 71.6% 7,560 39.1%
Picayune System........ 7,184 224 5,565 77.5% 2,788 50.1%
Pointe Coupee System... 6,250 162 4,471 71.5% 1,919 42.9%
------- ----- ------- ------
Total.................. 131,915 2,816 94,740 71.8% 49,274 52.0% $38.34
------- ----- ------- ------
Tennessee System........ 48,646 914 32,245 66.3% 10,915 33.9% 33.94
------- ----- ------- ------
Total Systems........... 180,561 3,730 126,985 70.3% 60,189 47.4% 37.29
======= ===== ======= ======
45
- --------
(1) Homes passed refers to estimates of the number of dwelling units and
commercial establishments in a particular community that can be connected
to the distribution system without any further extension of principal
transmission lines. Such estimates are based upon a variety of sources,
including billing records, house counts, city directories and other local
sources.
(2) The number of basic subscribers has been computed by adding the actual
number of subscribers for all non-bulk accounts and the equivalent
subscribers for all bulk accounts. The number of such equivalent
subscribers has been calculated by dividing aggregate basic service
revenue for bulk accounts by the full basic service rate for the community
in which the accounts are located. Bulk accounts consist of commercial
establishments and multiple dwelling units.
(3) Basic penetration represents the number of basic subscribers as a
percentage of the total number of homes passed in the system.
(4) Premium service units represent the number of subscriptions to premium
channels offered for a monthly fee per channel.
(5) Premium penetration represents the number of premium service units as a
percentage of the total number of basic subscribers.
The following table sets forth certain information regarding the analog
channel capacities of the Systems as of December 31, 1997:
330 MHZ 450 MHZ 550 MHZ
40 CHANNELS 62 CHANNELS 78 CHANNELS TOTAL
----------- ----------- ----------- -------
Number of headends............... 1 9 4 14
Subscribers as of December 31,
1997............................ 1,702 83,906 40,950 126,558
% of total subscribers........... 1.3% 66.3% 32.4% 100.0%
Miles of plant................... 60 2,226 1,444 3,730
% of total plant................. 1.6% 59.7% 38.7% 100.0%
The Company will continue to deploy fiber optic technology and to upgrade
the Systems to a minimum of 550 MHz and to 750 MHz where system
characteristics warrant. The deployment of fiber optic technology will allow
the Company to complete future upgrades to the Systems in a cost-effective
manner. The Company also plans to use fiber optic technology to interconnect
headends and to create fiber optic backbones to reduce amplifier cascades,
thereby gaining operational efficiencies and improved picture quality and
system reliability.
The Company plans to upgrade the Systems according to the following table:
CURRENT PLANNED UPGRADE
SYSTEM (MHZ) (MHZ)
------ ------- ---------------
Jackson, TN............................................ 330/450 750
Picayune, MS........................................... 550 550
St. Tammany, LA........................................ 450/550* 550/750
Lafourche, LA.......................................... 450/550* 550/750
St. Landry, LA......................................... 450 750
Pointe Coupee, LA...................................... 550 550
- --------
* Some sections of these systems are currently 450 or 330 MHz and the rest
were recently upgraded to 550 MHz. The Company plans to upgrade the 450 MHz
and 330 MHz sections to 750 MHz.
THE LOUISIANA SYSTEMS
The Louisiana Systems consist of five cable television systems serving
94,740 basic subscribers as of June 30, 1998, located in southern Louisiana
and western Mississippi: the St. Tammany system, the St. Landry system, the
Lafourche system, the Picayune system and the Pointe Coupee system. As of June
30, 1998, approximately one-half of the Louisiana Systems' subscribers were
served by the St. Tammany system. The Louisiana Systems are operated from the
Regional Office located in Thibodaux, Louisiana which provides certain support
services for the Systems. The Systems' regional management has 15 years
average experience in the cable television industry.
The St. Tammany System. The St. Tammany system comprises one consolidated
headend, and serves the communities of Slidell, Mandeville and St. Tammany,
the towns of Pearl River, Abita Springs and Madisonville and the City of
Covington. St. Tammany is a suburb located approximately 40 miles northeast of
New Orleans. Recognized as Louisiana's fastest growing parish since 1995.
The Lafourche System. The Lafourche system comprises two headends, one of
which is a consolidated headend, and serves the communities of Lafourche,
Assumption and St. James. Lafourche is located in southeast Louisiana along
the Gulf of Mexico, approximately 60 miles from New Orleans. Commercial
fishing and the oil
46
and gas extraction industries dominate the local economy in the southern
portion of the system's service area, comprising a significant portion of the
manufacturing work force there. In the northern portion of the system's
service area, sugar is a prominent industry, as are other farming related
industries.
The St. Landry System. The St. Landry system comprises four headends and
serves the communities of Jennings, Church Point, Eunice and Opelousas.
Located 61 miles from Baton Rouge, St. Landry's economy is primarily focused
on agriculture.
The Picayune System. The Picayune system comprises one headend and serves
the communities of Picayune and parts of Pearl County. Picayune, 25 miles
northeast of Slidell and 60 miles northeast of New Orleans, is in Pearl
County, Mississippi. The John C. Stennis Space Center is one of the largest
employers in the Picayune area and is the main testing facility for NASA's
large propulsion systems including the Space Shuttle.
The Pointe Coupee System. The Pointe Coupee system comprises one headend and
serves the community of New Roads and the Village of Morganza. Pointe Coupee
is a suburb of Baton Rouge and is Louisiana's second oldest settlement. Pointe
Coupee's major industry is agriculture.
THE TENNESSEE SYSTEM
As of June 30, 1998, the Tennessee System served 32,245 basic subscribers
located in Jackson, Tennessee and surrounding counties. The Tennessee System
is managed from the Regional Office located in Thibodaux, Louisiana. The
Tennessee System comprises five headends and serves the communities of
Jackson, Selmer, Bethel Springs, Adamsville, Camden, Alamo, Bells, Maury City,
Newbern, Trimble, Obion, Troy and the counties of Madison, Crockett, McNairy,
Benton, Dyer and Obion. Jackson is the medical, retail, cultural and
geographic center of west Tennessee. As of June 30, 1998, approximately 22,000
basic subscribers (excluding bulk subscribers), or almost three-quarters of
the Tennessee System's subscribers, were served from a single headend.
THE SOCIAL CONTRACT
The Social Contract between Time Warner and the FCC, which became effective
on January 1, 1996, resolved certain outstanding cable rate cases involving
Time Warner that arose in connection with regulations promulgated by the FCC
pursuant to the 1992 Cable Act. The Social Contract established parameters
within which Time Warner and subsequent buyers of Time Warner's cable
television systems might determine certain subscriber rates and maintain a
high level of technical capacity in such systems. Among other obligations,
Time Warner agreed to upgrade one-half of its systems to 550 MHz capacity and
the balance to 750MHz capacity within the term of the Social Contract, of
which at least 200 MHz is expected to be allocated to digital compression
technology by January 1, 2001. In exchange, the Social Contract settled those
certain outstanding rate cases and established a right of Time Warner to
increase monthly CPST rates by an additional $1.00 per year above other
permissible increases resulting from inflation and so-called "external costs"
for the term of the Social Contract through the year 2000. The Social Contract
provides that Time Warner may petition the FCC to modify or terminate the
Social Contract based on any relevant change in applicable law, regulation or
circumstance.
In connection with the Acquisition, the Company received the FCC's consent
to the assignment of the Social Contract as it applies to the Systems. By
assuming Time Warner's unsatisfied obligations with respect to the Systems,
the Company has gained certain rate benefits described above. The principal
remaining obligations of the Social Contract as they relate to the Systems
will be to upgrade the Tennessee System, the St. Landry system and
approximately one-half of the St. Tammany and Lafourche systems to 750 MHz
capacities. The failure to comply with the upgrade requirements will subject
the Company to refund liability under the terms of the Social Contract. The
Company also is required to ensure that at least 60% of new analog services in
the Systems are added to the CPST, and add at least 15 new channels on average
(weighted by CPST subscribers) to the CPST of the Systems. The Company
believes the upgrades are prudent both due to the competitive advantages to be
47
gained by technologically advanced facilities and from the rate increases the
Company will be permitted to implement.
INDUSTRY OVERVIEW
A cable television system receives television, radio and data signals at the
system's "headend" site by means of off-air antennas, microwave relay systems
and satellite earth stations. These signals are then modulated, amplified and
distributed, primarily through coaxial and fiber optic distribution systems,
to deliver a wide variety of channels of television programming, primarily
entertainment and informational video programming, to the homes of subscribers
who pay fees for this service, generally on a monthly basis. A cable
television system may also produce its own television programming and other
information services for distribution through the system. Cable television
systems generally are constructed and operated pursuant to non-exclusive
franchises or similar licenses granted by local governmental authorities for a
specified period of time, generally up to ten years.
Cable television systems offer customers various levels (or "tiers") of
cable services consisting of broadcast television signals of local network
affiliates, independent and educational television stations, a limited number
of broadcast television signals from so-called "super stations" originating
from distant cities (such as WGN), various satellite-delivered, non-broadcast
channels (such as Cable News Network (CNN), MTV: Music Television (MTV), the
USA Network, ESPN and Turner Network Television (TNT), programming originated
locally by the cable television system (such as public, educational and
governmental access programs) and informational displays featuring news,
weather and public service announcements. Cable television systems also offer
"premium" television services to customers on a monthly charge per-channel
basis and sometimes on a pay-per-view basis. These services (such as Home Box
Office ("HBO") and Showtime and selected regional sports networks) are
satellite channels that consist principally of feature films, live sporting
events, concerts and other special entertainment features, usually presented
without commercial interruption.
A customer generally pays an initial installation charge and fixed monthly
fees for basic, tier and premium television services and for other services
(such as the rental of converters and remote control devices). Such monthly
service fees constitute the primary source of revenue for cable television
systems. In addition to customer revenue, cable television systems also
frequently offer to their customers home shopping services, which pay such
systems a share of revenue from products sold in the systems' service areas.
Some cable television systems also receive revenue from the sale of available
spots on advertiser-supported programming.
PROGRAMMING AND SUBSCRIBER RATES
Cable television systems offer their customers programming that includes the
local network, independent and educational broadcast television stations, a
limited number of broadcast television signals from distant cities, numerous
satellite-delivered, non-broadcast channels and in some systems local
information and public, educational and governmental access channels.
Depending upon each system's channel capacity and viewer interests, the
Company offers tiers of cable television programming: a basic programming tier
(consisting generally of network, independent and public television signals
available over-the-air), an "expanded basic" programming tier (consisting
generally of satellite-delivered programming services with broad based
viewership appealing to a wide variety of subscriber tastes), one or more
specialty tiers (consisting of satellite-delivered programming, services
tailored to particular niche subscriber groups such as the Sci-Fi Channel,
Home & Garden, The Cartoon Network, American Movie Classics, ESPN2 and
regional sports programming) and per channel and pay-per-view premium services
purchased from content suppliers such as HBO, Cinemax and The Disney Channel.
In connection with the Acquisition, the Company has retained Time Warner
under an exclusive arrangement to manage all of the Company's programming,
except local programming, at rates which the Company believes will be
favorable. Time Warner has various contracts and arrangements to obtain basic,
satellite and premium programming for the Systems from program suppliers,
including, in limited circumstances, some broadcast stations, with
compensation generally based on a fixed fee per customer or a percentage of
the gross receipts for
48
the particular service. Some program suppliers provide volume discount pricing
structures and/or offer marketing support. Through Time Warner, the Company
has long-term programming contracts for the supply of a substantial amount of
its programming. Such contracts generally are for fixed periods of time
ranging from one to five years and will be subject to negotiated renewal. Time
Warner invoices the Company on a monthly basis for the programming services it
provides to the Company (approximately 35 services as of the date hereof) in
an amount equal to the amount such programming services charge Time Warner,
plus an administrative fee. For the period through the date hereof the average
monthly per subscriber programming cost payable to Time Warner was $3.85. The
loss of contracts with certain programming suppliers could have a material
adverse effect on the Company, its financial condition, prospects and debt
service ability. In the event that the Company's arrangement with Time Warner
is terminated, the Company expects it will be able to obtain other programming
arrangements, although such arrangements may be at higher rates. This
arrangement with Time Warner lasts only as long as Time Warner retains an
equity interest in Holdings and Holdings holds all or substantially all of the
Systems.
Cable programming costs are expected to continue to increase due to
additional programming being provided to customers, inflationary increases and
other factors. In 1996 and 1997, programming costs as a percentage of the
System's revenues were approximately 20.1% and 20.5%, respectively and 20.8%
for the period January 1, 1998 to April 8, 1998. However, following the
Acquisition, the Systems will lose certain programming discounts that were
realized as a result of being part of a large MSO. See "Pro Forma Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Monthly customer rates for services offered by the Systems vary from market
to market, primarily according to the amount of program offerings and costs of
operations. As of January 1, 1998, the monthly basic service rates for
residential customers for the Systems ranged from $5.20 to $11.00, per-channel
premium service rates ranged from $7.95 to $11.95 and tier service rates
ranged from $16.80 to $21.94. As of December 31, 1997, the weighted average
price for the System's monthly full basic service rate was approximately
$7.69. During January 1998, the Systems increased their subscription rates
from $7.69 to $7.88, on a weighted average basis (excluding bulk subscribers)
for basic service, and from $17.33 to $20.28, on a weighted average basis, for
CPST.
CUSTOMER SERVICE AND MARKETING
The Company emphasizes the importance of excellent customer service, which
it believes is critical to the successful operation of its business. The
Company intends to implement business approaches which permit it to provide
high-quality locally focused service to each community served. The Company
believes that a system-by-system, decentralized approach to operations is
required as each area served has distinct characteristics such as
demographics, economic diversity and geographic setting. The Company's local
management will strive to become an integral part of the communities served.
These efforts will enable the Company periodically to adjust its local service
offerings to meet the needs of a particular community.
In the communities it will serve, the Company believes that many customers
prefer to personally visit the local office to pay their bills or ask
questions about their service. As a result, the Company intends to maintain
conveniently accessible local offices in many of its service areas. The
Systems' local staff, typically native to the areas they serve, are familiar
with the community's customer base. The Company believes that this combination
of local offices and local staffing will allow the Company to provide a high
level of customer service. Additionally, the Company believes familiarity with
its communities will allow it to customize its menu of services and respective
pricing to provide its customers with products that are both diverse and
affordable.
The Company will operate under a quality assurance program which stresses
responsibility and reliability among employees at all levels, and treats each
customer's concerns individually. To monitor the performance of its Systems
and the quality of its customer service, the Company will measure eleven
criteria on a weekly, and in some cases, daily basis. These criteria are:
service call response times, service call-to-total customers ratio,
installation response time, repeat service calls, new-customer service calls,
average outage duration, picture quality, occurrence of all-telephone-trunks
busy per measurement period, telephone answer rate and response time to
customer correspondence. The Company will also use market research tools to
gauge its performance
49
and customer satisfaction and to tailor its local service offerings to the
particular community. Management believes that its focus on system operations
and customer service will increase subscriber penetration, revenues and cash
flow margins.
The Company will aggressively market and promote its cable television
services with the objective of adding and retaining customers and increasing
subscriber revenue. The Company will actively market its basic and premium
program packages through a number of coordinated marketing techniques,
including: (i) door-to-door sales and subscriber audit programs; (ii) direct
mail for basic and upgrade acquisition campaigns; (iii) monthly subscriber
statement inserts; (iv) local newspaper and broadcast/radio advertising where
population densities are sufficient to provide a reasonable cost per sale; and
(v) cross-channel promotion of new services and pay-per-view movies and
events.
FRANCHISES
Cable television companies operate under non-exclusive franchises granted by
local authorities which are subject to renewal and renegotiation from time to
time. These franchises typically contain many conditions, including: (i) time
limitations on commencement and completion of construction; (ii) conditions of
service including customer response requests, technical standards, compliance
with FCC regulations and the provision of free service to schools and certain
other public institutions; and (iii) the maintenance of insurance and
indemnity bonds. Certain provisions of local franchises are subject to federal
regulation under the 1984 Cable Act, the 1992 Cable Act and the 1996 Telecom
Act.
As of March 31, 1998, the Systems held 46 franchises in the aggregate. These
franchises, all of which are non-exclusive, generally provide for the payment
of fees to the issuing authority. The Company's franchise fees typically range
from 3.0% to 5.0% of "revenue" (as defined in each franchise agreement). For
the past three years, franchise fee payments made by the Systems have averaged
approximately 3.7% of total gross System revenue. Franchise fees are generally
passed directly through to the customers on their monthly bills. General
business or utility taxes may also be imposed in various jurisdictions. As
amended by the 1996 Telecom Act, the 1984 Cable Act prohibits franchising
authorities from imposing franchise fees in excess of 5% of gross revenue
derived from the operation of a cable television system to provide cable
services and also permits the cable operator to seek renegotiation and
modification of franchise requirements if warranted by changed circumstances.
Most of the Company's franchises can be terminated prior to their stated
expirations for uncured breaches of material provisions. See "Legislation and
Regulation."
The following table sets forth for the Systems the number of franchises by
year of franchise expiration and the number of basic subscribers and
percentage of the Systems' basic subscribers as of December 31, 1997:
PERCENTAGE
NUMBER OF OF SYSTEMS'
NUMBER OF PERCENTAGE OF BASIC BASIC
YEAR OF FRANCHISE EXPIRATION FRANCHISES TOTAL FRANCHISES SUBSCRIBERS SUBSCRIBERS
- ---------------------------- ---------- ---------------- ----------- -----------
Prior to 2000............... 1 2.2% 3,803 3.0%
2000--2004.................. 15 32.6% 52,745 41.7
2005--2008.................. 18 39.1% 44,152 34.9
2009 and after.............. 12 26.1% 25,858 20.4
--- ----- ------- -----
Total..................... 46 100.0% 126,558 100.0%
=== ===== ======= =====
The Company believes that the Systems have good relationships with their
respective franchising authorities. However, renewals or extensions of
franchises may result in more rigorous franchise requirements.
The 1984 Cable Act provides for, among other things, procedural and
substantive safeguards for cable operators and creates an orderly franchise
renewal process in which renewal of franchise licenses issued by governmental
authorities cannot be unreasonably withheld, or, if renewal is withheld and
the franchise authority
50
acquires ownership of the system or effects a transfer of the system to
another person, such franchise authority or other person must pay the operator
either: (i) the "fair market value" (without value assigned to the franchise)
for the system if the franchise was granted after the effective date of the
1984 Cable Act (December 1984) or the franchise was pre-existing but the
franchise agreement did not provide a buyout or (ii) the price set in
franchise agreements predating the 1984 Cable Act. In addition, the 1984 Cable
Act established comprehensive renewal procedures which require that an
incumbent franchisee's renewal application be assessed on its own merits and
not as part of a comparative process with competing applications. See
"Legislation and Regulation."
The 1984 Cable Act also establishes buyout rates in the event the franchise
is terminated "for cause" and the franchise authority desires to acquire the
system. For franchises which post-date the existence of the 1984 Cable Act or
pre-date the 1984 Cable Act but do not specify buyout terms, the franchise
authority must pay the operator an "equitable" price. To date, none of the
System's franchises has been terminated.
The 1992 Cable Act prohibits the award of exclusive franchises, prohibits
franchising authorities from unreasonably refusing to award additional
franchises and permits them to operate cable systems themselves without
franchises. The 1996 Telecom Act provides that no state or local laws or
regulations may prohibit or have the effect of prohibiting any entity from
providing any interstate or intrastate telecommunications service. State and
local authorities retain authority to manage the public rights of way and
"competitively neutral" requirements concerning right of way fees, universal
service, public safety and welfare, service quality and consumer protection
are permitted with respect to telecommunications services. See "Risk Factors--
Non-Exclusive Franchises; Non-Renewal or Termination of Franchises" and
"Legislation and Regulation."
COMPETITION
Cable television systems face competition from alternative methods of
receiving and distributing television signals and from other sources of news,
information and entertainment such as off-air television broadcast
programming, newspapers, movie theaters, live sporting events, interactive
online computer services and home video products, including videotape cassette
recorders. The extent to which a cable communications system is competitive
depends, in part, upon the cable system's ability to provide, at a reasonable
price to customers, a greater variety of programming and other communications
services than those which are available off-air or through other alternative
delivery sources and upon superior technical performance and customer service.
Cable television systems generally operate pursuant to franchises granted on
a nonexclusive basis. The 1992 Cable Act prohibits franchising authorities
from unreasonably denying requests for additional franchises and permits
franchising authorities to operate cable television systems. See "Legislation
and Regulation." It is possible that a franchising authority might grant a
franchise to another company containing terms and conditions more favorable
than those afforded the Company. Well-financed businesses from outside the
cable industry (such as the public utilities that own the poles to which cable
is attached) may become competitors for franchises or providers of competing
services. See "Legislation and Regulation." Currently, the Systems' principal
competitors for receiving and distributing television signals in the areas
they serve are off-air television broadcast programming, home satellite dish
earth stations ("HSDS") and DBS, although other cable television systems
operate in other non-overlapping areas of the Company's franchise areas. See
"Risk Factors--Significant Competition in the Cable Television Industry."
The 1992 Cable Act contains provisions, which the FCC implemented with
regulations, to enhance the ability of cable competitors to purchase and make
available to HSDS owners certain satellite-delivered cable programming at
competitive costs. The 1996 Telecom Act prohibits certain local restrictions
that impair a viewer's ability to receive video programming services using
HSDS and over-the-air antennae, and the FCC adopted regulations implementing
this provision that preempt certain local restrictions on satellite and over-
the-air antenna reception of video programming services, including zoning,
land-use or building regulations, or any private covenant, homeowners'
association rule or similar restriction on property within the exclusive use
or control of the antenna user.
51
Cable operators also face competition from private satellite master antenna
television ("SMATV") systems that serve condominiums, apartment and office
complexes and private residential developments. The 1996 Telecom Act broadens
the definition of SMATV systems not subject to regulation as a franchised
cable television system, and the FCC recently revised its cable inside wiring
rules to provide a more specific procedure for the disposition of internal
cable wiring that belongs to an incumbent cable operator that is forced to
terminate its cable services in a multiple dwelling unit ("MDU") building by
the building owner. SMATV systems offer both improved reception of local
television stations and many of the same satellite-delivered program services
offered by franchised cable television systems. SMATV operators often enter
into exclusive agreements with building owners or homeowners' associations.
Although some states have enacted laws that authorize franchised cable
operators access to such private complexes, Louisiana, Mississippi and
Tennessee have not. These laws have been challenged in the courts with varying
results. In addition, some companies are developing and/or offering to these
private residential and commercial developments packages of telephony, data
and video services. The ability of the Company to compete for customers in
residential and commercial developments served by SMATV operators is
uncertain.
The FCC and the Congress have adopted policies providing a more favorable
operating environment for new and existing technologies that provide, or have
the potential to provide, substantial competition to cable television systems.
These technologies include, among others, DBS service, whereby signals are
transmitted by satellite to receiving facilities located on customer premises.
Programming is currently available to the owners of DBS dishes through
conventional, medium and high-powered satellites. DBS systems are increasing
channel capacity and are providing movies, broadcast stations, and other
program services comparable to those of cable television systems. Currently,
Primestar Partners (a consortium comprised of cable operators and a satellite
company), DirecTV and EchoStar Communications Corp. ("EchoStar") are providing
nationwide DBS services, with each company offering in excess of 100 channels
of video programming to subscribers. There are other companies that are
currently providing or are planning to provide domestic DBS services. American
Sky Broadcasting ("ASkyB"), a joint venture between MCI Communications Corp.
("MCI") and The News Corporation Limited ("News Corp."), is currently
developing high-power DBS services. Primestar, News Corp., MCI and ASkyB
recently announced several agreements in which News Corp., MCI and ASkyB will
sell to Primestar two satellites under construction and MCI will assign to
Primestar (subject to various governmental approvals) an FCC DBS license. The
satellites to be sold to Primestar, when operational, are expected to be
capable of providing approximately 200 channels of DBS service in the United
States. In 1997, the Primestar partners announced an agreement to consolidate
their DBS assets into a new company. DBS providers provide significant
competition to cable service providers, including the Company.
Digital satellite service ("DSS") offered by DBS systems currently has
certain advantages over cable systems with respect to programming and digital
quality, as well as disadvantages that include high up-front costs and a lack
of local programming, service and equipment distribution. Presently satellite
program providers are only authorized to provide the signals of television
network stations to subscribers who live in areas where over-the-air reception
of such signals cannot be received. EchoStar recently announced plans to offer
some local television signals in a limited number of markets. Efforts are
underway at the United States Copyright Office and in Congress to ensure that
such offerings are permissible under the Copyright law. Legislation recently
was introduced in Congress which would permit DBS operators to rebroadcast
local television signals upon compliance with certain requirements, including
market-specific must-carry requirements and compliance with programming black-
out obligations. The ability to provide local broadcast signals in DBS program
packages would provide substantial competition to the cable television
industry. The Company cannot predict whether such legislation will be passed,
or the effect that it will have on the Company's business. While DSS presents
a competitive threat, the Company currently has excess channel capacity
available in most of its systems, as well as strong local customer service and
technical support, which will enhance its ability to compete. By selectively
increasing channel capacities of systems to between 78 and 110 channels and
introducing new premium channels, pay-per-view and other services, the Company
will seek to maintain programming parity with DSS and competitive service
price points. The Company will continue to monitor closely the activity level
and the product and service needs of its customer base to counter potential
erosion of its market position or unit growth to DSS.
52
Cable television systems also compete with wireless program distribution
services such as MMDS, which uses low power microwave frequencies to transmit
video programming over the air to customers. Additionally, the FCC recently
adopted new regulations allocating frequencies in the 28 GHz band for a new
multichannel wireless video service called Local Multipoint Distribution
Service that is similar to MMDS, and the FCC initiated spectrum auctions for
LMDS licenses in February 1998. Wireless distribution services generally
provide many of the programming services provided by cable systems, and
digital compression technology is likely to increase significantly the channel
capacity of such wireless systems. Because MMDS and LMDS service requires
unobstructed "line of sight" transmission paths, the ability of MMDS systems
to compete may be hampered in some areas by physical terrain and large
buildings. The Company is not aware of any significant MMDS operation
currently within its cable franchise service areas.
The 1996 Telecom Act makes it easier for local exchange carriers ("LECs")
and others to provide a wide variety of video services competitive with
services provided by cable systems and to provide cable services directly to
subscribers. Other new technologies, including Internet-based services, may
become competitive with services that the Company may offer. See "Legislation
and Regulation." Various LECs currently are providing video programming
services within and outside their telephone service areas through a variety of
distribution methods, including both the deployment of broadband wire
facilities and the use of wireless transmission facilities. LECs also provide
access to interactive online computer services using conventional or
integrated service digital network ("ISDN") modems. Cable television systems
could be placed at a competitive disadvantage if the delivery of video
programming and interactive online computer services by LECs becomes
widespread, since LECs are not required, under certain circumstances, to
obtain local franchises to deliver such services or to comply with the variety
of obligations imposed upon cable television systems under such franchises.
Issues of cross-subsidization by LECs of video and telephony services also
pose strategic disadvantages for cable operators seeking to compete with LECs
that provide video services. The Company cannot predict the likelihood of
success of video service ventures by LECs or the impact on the Company of such
competitive ventures.
LECs and other companies provide facilities for the transmission and
distribution to homes and businesses of interactive computer-based services,
including Internet access, as well as data and other non-video services. The
Company is planning to market high-speed Internet access and data transmission
in certain areas served by its cable systems and expects that the competition
in the interactive online services area will be significant. The high-speed
cable modems that will be used by the Company are capable of providing access
to interactive online information services, including the Internet, at faster
speeds than that of conventional or ISDN modems used by other service
providers. Competitors in this area may include LECs, Internet service
providers, long distance carriers, satellite companies, public utilities and
others, many of whom have more substantial financial resources than the
Company. Several LECs recently requested the FCC to fully deregulate packet-
switched networks to allow the provision of high-speed broadband services
without regard to present LATA boundaries and other regulatory restrictions.
Regardless of whether this request is granted, the Company expects that
competition in the interactive online services area will be significant. The
Company cannot predict the likelihood of success of the broadband services
offered by the Company's competitors or the impact on the Company of such
competitive ventures.
The 1996 Telecom Act directed the FCC to establish, and the FCC has adopted,
regulations and policies for the issuance of licenses for digital television
("DTV") to incumbent television broadcast licensees. DTV is expected to
deliver high definition television pictures, multiple digital-quality program
streams, as well as CD-quality audio programming and advanced digital
services, such as data transfer or subscription video. The FCC also has
authorized television broadcast stations to transmit textual and graphic
information useful both to consumers and businesses. The FCC also permits
commercial and noncommercial FM stations to use their subcarrier frequencies
to provide nonbroadcast services including data transmissions. The FCC
established an over-the-air Interactive Video and Data Service that will
permit two-way interaction with commercial and educational programming along
with informational and data services.
53
Advances in communications technology as well as changes in the marketplace
and the regulatory and legislative environments are constantly occurring.
Thus, it is not possible to predict the effect that ongoing or future
developments might have on the cable industry or on the operations of the
Company.
EMPLOYEES
The Company has 181 full-time employees and 8 part-time employees, none of
whom are represented by a labor union on the date hereof.
PROPERTIES
A cable television system consists of three principal operating components.
The first component, known as the headend, receives television, radio and
information signals generally by means of special antennas and satellite earth
stations. The second component, the distribution network, which originates at
the headend and extends throughout the system's service area, consists of
microwave relays, coaxial or fiber optic cables and associated electronic
equipment placed on utility poles or buried underground. The third component
of the system is a "drop cable," which extends from the distribution network
into each customer's home and connects the distribution system to the
customer's television set. An additional component used in certain systems is
the home terminal device, or converter/descrambler, that expands channel
capacity to permit reception of more than twelve channels of programming on a
non-cable ready television set and permits the operator to control the
reception of program offerings by subscribers.
The Company's principal physical assets consist of cable television systems,
including signal-receiving, encoding and decoding apparatus, headends,
distribution systems and subscriber house drop equipment for each of the
Systems. The signal receiving apparatus typically includes a tower, antennas,
ancillary electronic equipment and earth stations for reception of satellite
signals. Headends, consisting of associated electronic equipment necessary for
the reception, amplification and modulation of signals, typically are located
near the receiving devices. The Company's distribution systems consist
primarily of coaxial cable, fiber optic cable and related electronic
equipment. As upgrades are completed, the Systems will continue to incorporate
fiber optic cable. Subscriber equipment consists of house drops,
converters/descramblers and, in some cases, traps. The Company owns its
distribution systems, various office fixtures, test equipment and certain
service vehicles. The physical components of the Systems require maintenance
and periodic upgrading to keep pace with technological advances.
The Company's cables are generally attached to utility poles under pole
rental agreements with local public utilities, although in some areas the
distribution cable is buried in trenches or placed in underground ducts. The
FCC regulates most pole attachment rates under the Federal Pole Attachment Act
although in certain cases attachment rates are regulated by state law.
The Company owns or leases 27 parcels of real property for signal reception
sites (antenna towers and headends), microwave complexes and business offices.
The Company believes that its properties, both owned and leased, are in good
condition and are suitable and adequate for the Company's business operations
as presently conducted.
LEGAL PROCEEDINGS
As of the date hereof, the Company is not a party to any litigation
proceedings. The Systems are subject to certain litigation proceedings
incidental to their businesses. Pursuant to the Asset Purchase Agreement, the
Company did not assume any liabilities related to litigation commenced on or
prior to the Acquisition Date, and Time Warner has agreed to indemnify the
Company from and against any such liabilities, subject to the terms and
provisions of the Asset Purchase Agreement. See "The Company--Asset Purchase
Agreement." The Company's management believes that the outcome of all pending
legal proceedings will not, individually or in the aggregate, have a material
adverse effect on the Company's business, results of operations or financial
condition.
54
LEGISLATION AND REGULATION
The cable television industry currently is regulated by the FCC and certain
state and local governments. In addition, legislative and regulatory proposals
under consideration by the Congress and federal agencies may materially affect
the cable television industry.
The Cable Acts and the 1996 Telecom Act amended the Communications Act and
established a national policy to guide the development and regulation of cable
television systems. The 1996 Telecom Act, which became effective in February
1996, was the most comprehensive reform of the nation's telecommunications
laws since the Communications Act. Although the long term goal of the 1996
Telecom Act is to promote competition and decrease regulation of various
communications industries, in the short term, the law delegates to the FCC
(and in some cases to the states) broad new rulemaking authority. Principal
responsibility for implementing the policies of the Cable Acts and the 1996
Telecom Act is allocated between the FCC and state or local franchising
authorities. The FCC and state regulatory agencies are required to conduct
numerous rulemaking and regulatory proceedings to implement the 1996 Telecom
Act and such proceedings may materially affect the cable television industry.
The following is a summary of federal laws and regulations materially
affecting the growth and operation of the cable television industry and a
description of certain state and local laws.
THE COMMUNICATIONS ACT AND FCC REGULATIONS
Rate Regulation
The 1992 Cable Act authorized rate regulation for certain cable
communications services and equipment in communities that are not subject to
"effective competition" as defined by federal law. Most cable television
systems are now subject to rate regulation for basic cable service and
equipment by local officials under the oversight of the FCC which prescribed
detailed guidelines for such rate regulation. The 1992 Cable Act also required
the FCC to resolve complaints about rates for nonbasic cable programming
services (other than programming offered on a per channel or per program
basis) and to reduce any such rates found to be unreasonable. The 1996 Telecom
Act eliminates the right of individual customers to file rate complaints with
the FCC concerning certain CPSTs and requires the FCC to issue a final order
within 90 days after receipt of CPST rate complaints filed by any franchising
authority after the date of enactment of the 1996 Telecom Act. The 1992 Cable
Act limits the ability of cable television systems to raise rates for basic
and certain cable programming services (collectively, the "Regulated
Services"). Cable services offered on a per channel (a la carte) or per
program (pay-per-view) basis are not subject to rate regulation by either
local franchising authorities or the FCC.
The 1996 Telecom Act deregulates rates for CPSTs after March 31, 1999 for
most MSOs and, for certain small cable operators, immediately eliminates rate
regulation of CPSTs and, in certain circumstances, basic services and
equipment. Deregulation will occur sooner for systems in markets where
comparable video programming services, other than DBS, are offered by local
telephone companies, or their affiliates, or by third parties using the local
telephone company's facilities, or where "effective competition" is
established under the 1992 Cable Act. The 1996 Telecom Act also modifies the
uniform rate provisions of the 1992 Cable Act by prohibiting regulation of
non-predatory bulk discount rates offered to subscribers in commercial and
residential developments and permits regulated equipment rates to be computed
by aggregating costs of broad categories of equipment at the franchise,
system, regional or company level. The FCC and Congress continue to be
concerned that cable rates are rising too rapidly. The FCC has begun to
explore ways of addressing this issue, and several bills have been introduced
in Congress which address cable rates. These bills would, alternatively,
repeal the sunset of the regulation of CPSTs now scheduled for March 1999,
sunset CPST rates except where a franchising authority certifies to the FCC
that an operator is not providing subscribers an acceptable range of
programming choices to the extent technically feasible and economically
reasonable, and freeze cable rates pending the receipt by Congress of a report
from the FCC regarding the causes of cable television rate increases. The
Company cannot predict the outcome of these bills or whether additional cable
rate legislation will be introduced in Congress.
55
The FCC's regulations govern rates that may be charged to subscribers for
Regulated Services. The FCC uses a benchmark methodology as the principal
method of regulating rates for Regulated Services. Cable operators may also
justify rates using a cost-of-service methodology. The FCC has also adopted
comprehensive and restrictive regulations allowing operators to modify their
regulated rates on a quarterly or annual basis using various methodologies
that account for changes in the number of regulated channels, inflation, and
increases in certain external costs, such as franchise and other governmental
fees, copyright and retransmission consent fees, taxes, programming fees and
franchise related obligations. The FCC's regulations also permit cable
operators to create new programming packages, called new product tiers
("NPTs"), that are not subject to rate regulation upon compliance with certain
conditions, including affirmatively marketing NPT services and adding to an
NPT only new services which had not been previously carried by the system in
the past two years, among other conditions. The Company cannot predict whether
the FCC will modify these comprehensive regulations in the future.
The 1996 Telecom Act provides for the deregulation of the CPST of certain
cable systems owned by "small cable operators." Among other requirements, an
eligible small operator is one which does not serve, directly or through an
affiliate, one percent or more of cable subscribers nationwide and is not
affiliated with any entity or entities whose gross annual revenues aggregate
more than $250,000,000. The Company will not be eligible for small cable
operator status under the 1996 Telecom Act because the Morgan Stanley Entities
own more than 20% of the Company and those investors and their affiliated
companies have aggregated revenues in excess of $250,000,000.
In addition to rate deregulation for certain small cable operators under the
1996 Telecom Act, the FCC adopted regulations in June 1995 ("Small System
Regulations") pursuant to the 1992 Cable Act that were designed to reduce the
substantive and procedural burdens of rate regulation on "small cable
systems." For purposes of these FCC regulations, a "small cable system" is a
system serving 15,000 or fewer subscribers that is owned by or affiliated with
a cable company which serves, in the aggregate, 400,000 or fewer subscribers.
Under the FCC's Small System Regulations, qualifying systems may justify their
regulated service and equipment rates using a simplified cost-of-service
formula. The regulatory benefits accruing to qualified small cable systems
under certain circumstances remain effective even if such systems are later
acquired by a larger cable operator that serves in excess of 400,000
subscribers. Various franchising authorities and municipal groups have
requested the FCC to reconsider its Small System Regulations. Renaissance
Media's assumption of Time Warner's Social Contract precludes such exemption
from rate regulation for systems that serve 15,000 or fewer subscribers, but
ameliorates the effect of such preclusion by permitting the Company to benefit
from automatic rate adjustments during the term of the Social Contact for all
of the Systems acquired from Time Warner. The Company will have the right to
increase monthly CPST rates by $1.00 during each year of the Social Contact
above other permissible increases resulting from inflation and so-called
"external costs."
Franchising authorities are empowered to regulate the rates charged for
additional outlets and for the installation, lease and sale of equipment used
by customers to receive the basic service tier, such as converter boxes and
remote control units. The FCC's rules require franchising authorities to
regulate these rates on the basis of actual cost plus a reasonable profit as
defined by the FCC. The FCC's regulations permit operators to compute
regulated equipment rates by aggregating costs of broad categories of
equipment at the franchise, system, regional or company level.
Cable operators required to reduce rates may also be required to refund
overcharges with interest. Rate reductions will not be required where a cable
operator can demonstrate that rates for Regulated Services are reasonable
using the FCC's cost-of-service rate regulations which require, among other
things, the exclusion of 34% of system acquisition costs related to intangible
and tangible assets used to provide Regulated Services. The FCC's cost-of-
service regulations contain a rebuttable presumption of an industry-wide
11.25% after-tax rate of return on an operator's allowable rate base, but the
FCC has initiated a further rulemaking in which it proposes to use an
operator's actual debt cost and capital structure to determine an operator's
cost of capital or rate of return.
56
"Anti-Buy Through" Provisions
The 1992 Cable Act also requires cable systems to permit customers to
purchase video programming offered by the operator on a per channel or a per
program basis without the necessity of subscribing to any tier of service,
other than the basic service tier, unless the system's lack of addressable
converter boxes or other technological limitations does not permit it to do
so. The statutory exemption for cable systems that do not have the
technological capacity to offer programming in the manner required by the
statute is available until a system obtains such capability, but not later
than December 2002. The FCC may waive such time periods, if deemed necessary.
Most of the Company's cable systems do not have the technological capability
to offer programming in the manner required by the statute and currently are
exempt from complying with the requirement.
Must Carry/Retransmission Consent
The 1992 Cable Act contains broadcast signal carriage requirements that
allow local commercial television broadcast stations to elect once every three
years to require a cable system to carry the station, subject to certain
exceptions, or to negotiate for "retransmission consent" to carry the station.
A cable system generally is required to devote up to one-third of its
activated channel capacity for the carriage of local commercial television
stations whether pursuant to the mandatory carriage or retransmission consent
requirements of the 1992 Cable Act. Local noncommercial television stations
are also given mandatory carriage rights; however, such stations are not given
the option to negotiate retransmission consent for the carriage of their
signals by cable systems. Additionally, cable systems are required to obtain
retransmission consent for all "distant" commercial television stations
(except for commercial satellite-delivered independent "superstations" such as
WGN), commercial radio stations and certain low power television stations
carried by such systems after October 1993. In March 1997, the U.S. Supreme
Court affirmed a three-judge district court decision upholding the
constitutional validity of the 1992 Cable Act's mandatory signal carriage
requirements. The FCC has initiated rulemaking to consider the requirements,
if any, for mandatory carriage of DTV signals. The Company cannot predict the
ultimate outcome of such a rulemaking or the impact of new carriage
requirements on the Company or its business. As a result of the mandatory
carriage rules, some of the Systems have been required to carry television
broadcast stations that otherwise would not have been carried and may be
required to displace possibly more attractive programming. The retransmission
consent rules have resulted in the deletion of certain local and distant
television broadcast stations which various Systems were carrying. To the
extent retransmission consent fees must be paid for the continued carriage of
certain television stations, the Company's cost of doing business will
increase with no assurance that such fees can be recovered through rate
increases.
Designated Channels
The Communications Act permits franchising authorities to require cable
operators to set aside certain channels for public, educational and
governmental access programming. Federal law also requires a cable system with
36 or more activated channels to designate a portion of its channel capacity
for commercial leased access by third parties to provide programming that may
compete with services offered by the cable operator. The U.S. Supreme Court
has upheld the statutory right of cable operators to prohibit or limit the
provision of indecent or obscene programming on commercial leased access
channels. The FCC has adopted rules regulating: (i) the maximum reasonable
rate a cable operator may charge for commercial use of the designated channel
capacity; (ii) the terms and conditions for commercial use of such channels;
and (iii) the procedures for the expedited resolution of disputes concerning
rates or commercial use of the designated channel capacity.
Franchise Procedures
The 1984 Cable Act affirms the right of franchising authorities (state or
local, depending on the practice in individual states) to award one or more
franchises within their jurisdictions and prohibits non-grandfathered cable
systems from operating without a franchise in such jurisdictions. The 1992
Cable Act encourages competition with existing cable systems by (i) allowing
municipalities to operate their own cable systems without franchises, (ii)
preventing franchising authorities from granting exclusive franchises or
unreasonably refusing to award
57
additional franchises covering an existing cable system's service area, and
(iii) prohibiting (with limited exceptions) the common ownership of cable
systems and co-located MMDS or SMATV systems. In January 1995, the FCC relaxed
its restrictions on ownership of SMATV systems to permit a cable operator to
acquire SMATV systems in the operator's existing franchise area so long as the
programming services provided through the SMATV system are offered according
to the terms and conditions of the cable operator's local franchise agreement.
The 1996 Telecom Act provides that the cable/SMATV and cable/MMDS cross-
ownership rules do not apply in any franchise area where the cable operator
faces "effective competition" as defined by federal law. The 1996 Telecom Act
also permits local telephone companies to provide video programming services
as traditional cable operators with local franchises.
The 1984 Cable Act also provides that in granting or renewing franchises,
local authorities may establish requirements for cable-related facilities and
equipment, but not for video programming or information services other than in
broad categories. The 1984 Cable Act limits franchise fees to 5% of cable
system revenue derived from the provision of cable services and permits cable
operators to obtain modification of franchise requirements by the franchising
authority or judicial action if warranted by changed circumstances. The
Company's franchises typically provide for payment of fees to franchising
authorities in the range of 3% to 5% of "revenue" (as defined by each
franchise agreement). Recently, a federal appellate court held that a cable
operator's gross revenue includes all revenue received from subscribers,
without deduction, and overturned an FCC order which had held that a cable
operator's gross revenue does not include money collected from subscribers
that is allocated to pay local franchise fees. The 1996 Telecom Act generally
prohibits franchising authorities from: (i) imposing requirements in the cable
franchising process that require, prohibit or restrict the provision of
telecommunications services by an operator; (ii) imposing franchise fees on
revenue derived by the operator from providing telecommunications services
over its cable system; or (iii) restricting an operator's use of any type of
subscriber equipment or transmission technology.
The 1984 Cable Act provides for, among other things, procedural and
substantive safeguards for cable operators and creates an orderly franchise
renewal process in which renewal of franchise licenses issued by governmental
authorities cannot be unreasonably withheld, or, if renewal is withheld and
the franchise authority acquires ownership of the system or effects a transfer
of the system to another person, such franchise authority or other person must
pay the operator either: (i) the "fair market value" (without value assigned
to the franchise) for the system if the franchise was granted after the
effective date of the 1984 Cable Act (December 1984) or the franchise was pre-
existing but the franchise agreement did not provide a buyout or (ii) the
price set in franchise agreements predating the 1984 Cable Act. In addition,
the 1984 Cable Act established comprehensive renewal procedures which require
that an incumbent franchisee's renewal application be assessed on its own
merits and not as part of a comparative process with competing applications.
The 1984 Cable Act also establishes buyout prices in the event the franchise
is terminated "for cause" and the franchise authority desires to acquire the
system. For franchises which post-date the existence of the 1984 Cable Act or
pre-date the 1984 Cable Act but do not specify buyout terms, the franchise
authority must pay the operator an "equitable" price. As amended by the 1996
Telecom Act, the 1984 Cable Act permits the cable operator to seek
renegotiation and modification of franchise requirements if warranted by
changed circumstances.
The 1992 Cable Act made several changes to the renewal process which could
make it easier for a franchising authority to deny renewal. Moreover, even if
the franchise is renewed, the franchising authority may seek to impose new and
more onerous requirements such as significant upgrades in facilities and
services or increased franchise fees as a condition of renewal. Similarly, if
a franchising authority's consent is required for the purchase or sale of a
cable system or franchise, such authority may attempt to impose more
burdensome or onerous franchise requirements in connection with a request for
such consent. Historically, franchises have been renewed for cable operators
that have provided satisfactory services and have complied with the terms of
their franchises. Most of the Company's franchises can be terminated prior to
their stated expirations for uncured breaches of material provisions.
Various courts have considered whether franchising authorities have the
legal right to limit franchise awards to a single cable operator and to impose
certain substantive franchise requirements (i.e., access channels,
58
universal service and other technical requirements). These decisions have been
somewhat inconsistent and, until the U.S. Supreme Court rules definitively on
the scope of cable operators' First Amendment protections, the legality of the
franchising process generally and of various specific franchise requirements
is likely to be in a state of flux.
Ownership Limitations
Pursuant to the 1992 Cable Act, the FCC adopted rules prescribing national
customer limits and limits on the number of channels that can be occupied on a
cable system by a video programmer in which the cable operator has an
attributable interest. The FCC's horizontal ownership limits have been stayed
because a federal district court found the statutory limitation to be
unconstitutional. An appeal of that decision is pending and has been
consolidated with an appeal of the FCC's regulations which implemented the
national customer and channel limitation provisions of the 1992 Cable Act. The
1996 Telecom Act eliminates the statutory prohibition on the common ownership,
operation or control of a cable system and a television broadcast station in
the same service area and directs the FCC to eliminate its regulatory
restrictions on cross-ownership of cable systems and national broadcasting
networks and to review its broadcast-cable ownership restrictions to determine
if they are necessary in the public interest. Pursuant to the mandate of the
1996 Telecom Act, the FCC eliminated its regulatory restriction on cross-
ownership of cable systems and national broadcasting networks. In March 1998,
the FCC initiated a rulemaking proceeding to determine whether the cable
television/broadcast cross-ownership ban is necessary and in the public
interest or should be eliminated.
Telephone Company Ownership of Cable Systems
The 1996 Telecom Act makes far-reaching changes in the regulation of
telephone companies that provide video programming services. The new law
eliminates federal legal barriers to competition in the local telephone and
cable communications businesses, preempts legal barriers to competition that
previously existed in state and local laws and regulation and sets basic
standards for relationships between telecommunications providers. The 1996
Telecom Act eliminates the requirement that LECs obtain FCC approval under
Section 214 of the Communications Act before providing video services in their
telephone service areas and removes the statutory telephone company/cable
television cross-ownership prohibition, thereby allowing LECs to offer video
services in their telephone service areas. LECs may provide service as
traditional cable operators with local franchises or they may opt to provide
their programming over unfranchised "open video systems," subject to certain
conditions, including, but not limited to, setting aside a portion of their
channel capacity for use by unaffiliated program distributors on a non-
discriminatory basis.
The 1996 Telecom Act generally limits acquisitions and prohibits certain
joint ventures between LECs and cable operators in the same market. There are
some statutory exceptions to the buy-out and joint venture prohibitions,
including exceptions for certain small cable systems (as defined by federal
law) and for cable systems or telephone facilities serving certain rural
areas, and the FCC is authorized to grant waivers of the prohibitions under
certain circumstances. The FCC adopted regulations implementing the 1996
Telecom Act requirement that LECs open their telephone networks to competition
by providing competitors interconnection, access to unbundled network elements
and retail services at wholesale rates. Numerous parties appealed these
regulations. The U.S. Court of Appeals for the Eighth Circuit, where the
appeals were consolidated, recently vacated key portions of the FCC's
regulations, including the FCC's pricing and nondiscrimination rules, and in
January 1998, the United States Supreme Court agreed to review the lower
court's decision. SBC Communications, Inc. also filed suit in Texas seeking to
overturn the long distance entry provisions of the 1996 Telecom Act on
constitutional grounds and obtained a favorable decision from the U.S.
District Court in Wichita Falls, Texas. This decision has been stayed pending
appeal. The ultimate outcome of the litigation and the FCC's rulemakings, and
the ultimate impact of the 1996 Telecom Act or any final regulations adopted
pursuant to the new law on the Company or its business cannot be determined at
this time.
59
Pole Attachment
The Communications Act requires the FCC to regulate the rates, terms and
conditions imposed by public utilities for cable systems' use of utility pole
and conduit space unless state authorities can demonstrate that they
adequately regulate pole attachment rates, as is the case in Louisiana. In the
absence of state regulation, the FCC administers pole attachment rates through
the use of a formula that it has devised. In some cases, utility companies
have increased pole attachment fees for cable systems that have installed
fiber optic cables and that are using such cables for the distribution of
nonvideo services. The FCC concluded that, in the absence of state regulation,
it has jurisdiction to determine whether utility companies have justified
their demand for additional rental fees and that the Communications Act does
not permit disparate rates based on the type of service provided over the
equipment attached to the utility's pole. The 1996 Telecom Act and the FCC's
implementing regulations modify the current pole attachment provisions of the
Communications Act by immediately permitting certain providers of
telecommunications services to rely upon the protections of the current law
and by requiring that utilities provide cable systems and telecommunications
carriers with nondiscriminatory access to any pole, conduit or right-of-way
controlled by the utility. The FCC recently initiated a rulemaking to consider
revisions to its existing rate formula, which revisions may increase the fees
paid by cable operators to utilities for pole attachments and conduit space.
Additionally, in February 1998, the FCC adopted new regulations to govern the
charges for pole attachments used by companies providing telecommunications
services, including cable operators. Several parties have requested the FCC to
reconsider some provisions of its new regulations. These new pole attachment
rate regulations will become effective five years after enactment of the 1996
Telecom Act, and any increase in attachment rates resulting from the FCC's new
regulations will be phased in equal annual increments over a period of five
years beginning on the effective date of the new FCC regulations. The ultimate
outcome of these rulemakings and the ultimate impact of any revised FCC rate
formula or of any new pole attachment rate regulations on the Company or its
business cannot be determined at this time.
Other Statutory Provisions
The 1992 Cable Act, the 1996 Telecom Act and FCC regulations preclude a
satellite video programmer affiliated with a cable company, or with a common
carrier providing video programming directly to customers, from favoring an
affiliated company over competitors and require such a programmer to sell its
programming to other multichannel video distributors. These provisions limit
the ability of cable program suppliers affiliated with cable companies or with
common carriers providing satellite-delivered video programming directly to
customers to offer exclusive programming arrangements to their affiliates. The
1992 Cable Act requires operators to block fully both the video and audio
portion of sexually explicit or indecent programming on channels that are
primarily dedicated to sexually oriented programming or, alternatively, to
carry such programming only at "safe harbor" time periods currently defined by
the FCC as the hours between 10 p.m. to 6 a.m. Several adult-oriented cable
programmers have challenged the constitutionality of this statutory provision,
but the U.S. Supreme Court recently refused to overturn a lower court's denial
of a preliminary injunction motion seeking to enjoin the enforcement of this
law. The 1996 Telecom Act also contains provisions regulating the content of
video programming and computer services and specifically prohibits the use of
computer services to transmit "indecent" material to minors. The United States
Supreme Court has found these provisions unconstitutional to the extent they
regulated the transmission of indecent material. The Communications Act also
includes provisions, among others, concerning horizontal and vertical
ownership of cable systems, customer service, customer privacy, marketing
practices, equal employment opportunity, technical standards, and consumer
equipment compatibility.
Other FCC Regulations
The FCC has numerous rulemaking proceedings pending that will implement
various provisions of the 1996 Telecom Act; it also has adopted regulations
implementing various provisions of the 1992 Cable Act and the 1996 Telecom Act
that are the subject of petitions requesting reconsideration of various
aspects of its rulemaking proceedings. In addition to the FCC regulations
noted above, there are other FCC regulations covering such areas as equal
employment opportunity, syndicated program exclusivity, network program
nonduplication, closed
60
captioning of video programming, registration of cable systems, maintenance of
various records and public inspection files, microwave frequency usage,
lockbox availability, origination cablecasting and sponsorship identification,
antenna structure notification, marking and lighting, carriage of local sports
broadcast programming, application of rules governing political broadcasts,
limitations on advertising contained in nonbroadcast children's programming,
consumer protection and customer service, ownership of home wiring and MDU
building inside wiring, indecent programming, programmer access to cable
systems, programming agreements, technical standards and consumer electronics
equipment compatibility. The FCC has the authority to enforce its regulations
through the imposition of substantial fines, the issuance of cease and desist
orders and/or the imposition of other administrative sanctions, such as the
revocation of FCC licenses needed to operate certain transmission facilities
often used in connection with cable operations.
The 1992 Cable Act, the 1996 Telecom Act and the FCC's rules implementing
these statutory provisions generally have increased the administrative and
operational expenses of cable systems and have resulted in additional
regulatory oversight by the FCC and local franchise authorities. The Company
will continue to develop strategies to minimize the adverse impact that the
FCC's regulations and the other provisions of the 1992 Cable Act and the 1996
Telecom Act have on the Company's business. However, no assurances can be
given that the Company will be able to develop and successfully implement such
strategies to minimize the adverse impact of the FCC's rate regulations, the
1992 Cable Act or the 1996 Telecom Act on the Company's business.
THE SOCIAL CONTRACT
The Social Contract between Time Warner and the FCC, which became effective
on January 1, 1996, resolved certain outstanding cable rate cases involving
Time Warner that arose in connection with regulations promulgated by the FCC
pursuant to the 1992 Cable Act. The Social Contract established parameters
within which Time Warner and subsequent buyers of Time Warner's cable
television systems might determine certain subscriber rates and maintain a
high level of technical capacity in such systems. Among other obligations,
Time Warner agreed to upgrade one-half of its systems to 550 MHz capacity and
the balance to 750 MHz capacity within the term of the Social Contract of
which at least 200 MHz is expected to be allocated to digital compression
technology by January 1, 2001. In exchange, the Social Contract settled those
certain outstanding rate cases and established a right of Time Warner to
increase monthly CPST rates by an additional $1.00 per year above other
permissible increases resulting from inflation and so-called "external costs"
for the term of the Social Contract through the year 2000. The Social Contract
provides that Time Warner may petition the FCC to modify or terminate the
Social Contract based on any relevant change in applicable law, regulation or
circumstance.
In connection with the Acquisition, the Company received the FCC's consent
to the assignment of the Social Contract as it applies to the Systems. By
assuming Time Warner's unsatisfied obligations with respect to the System, the
Company will gain certain rate benefits described above. The principal
remaining obligations of the Social Contract as they relate to the Systems
will be to upgrade the Tennessee System, the St. Landry system and
approximately one-half of the St. Tammany and Lafourche systems to 750 MHz
capacities. The failure to comply with the Social Contract's upgrade
requirements will subject the Company to refund liability under the terms of
the Social Contract. The Company is also required to ensure that at least 60%
of new analog services in the Systems are added to the CPST and add at least
15 new channels on average (weighted by CPST subscribers) to the CPST of the
Systems. The Company believes the upgrades are prudent both due to the
competitive advantages to be gained by technologically advanced facilities and
from the rate increases the Company will be permitted to implement.
COPYRIGHT
Cable systems are subject to federal copyright licensing covering carriage
of television and radio broadcast signals. In exchange for filing certain
reports and contributing a percentage of their revenue to a federal copyright
royalty pool, cable operators can obtain blanket permission to retransmit
copyrighted material on broadcast
61
signals. The nature and amount of future payments for broadcast signal
carriage cannot be predicted at this time. In a recent report to Congress, the
Copyright Office recommended that Congress make major revisions of both the
cable television and satellite compulsory licenses to make them as simple as
possible to administer, to provide copyright owners with full compensation for
the use of their works, and to treat every multichannel video delivery system
the same, except to the extent that technological differences or differences
in the regulatory burdens placed upon the delivery system justify different
copyright treatment. The possible simplification, modification or elimination
of the compulsory copyright license is the subject of continuing legislative
review. The elimination or substantial modification of the cable compulsory
license could adversely affect the Company's ability to obtain suitable
programming and could substantially increase the cost of programming that
remained available for distribution to the Company's customers. The Company
cannot predict the outcome of this legislative activity.
Cable operators distribute programming and advertising that use music
controlled by the two major music performing rights organizations, ASCAP and
BMI. In October 1989, the special rate court of the U.S. District Court for
the Southern District of New York imposed interim rates on the cable
industry's use of ASCAP-controlled music. The same federal district court
recently established a special rate court for BMI. BMI and certain cable
industry representatives recently concluded negotiations for a standard
licensing agreement covering the usage of BMI music contained in advertising
and other information inserted by operators into cable programming and on
certain local access and origination channels carried on cable systems. ASCAP
and cable industry representatives have met to discuss the development of a
standard licensing agreement covering ASCAP music in local origination and
access channels and pay-per-view programming. Although the Company cannot
predict the ultimate outcome of these industry negotiations or the amount of
any license fees it may be required to pay for past and future use of ASCAP-
controlled music, it does not believe such license fees will be material to
the Company's operations.
STATE AND LOCAL REGULATION
Cable systems are subject to state and local regulation, typically imposed
through the franchising process, because they use local streets and rights-of-
way. Regulatory responsibility for essentially local aspects of the cable
business such as franchisee selection, billing practices, system design and
construction, and safety and consumer protection remains with either state or
local officials and, in some jurisdictions, with both.
Cable systems generally are operated pursuant to nonexclusive franchises,
permits or licenses granted by a municipality or other state or local
government entity. Franchises generally are granted for fixed terms and in
many cases are terminable if the franchisee fails to comply with material
provisions. The terms and conditions of franchises vary materially from
jurisdiction to jurisdiction. Each franchise generally contains provisions
governing payment of franchise fees, franchise term, system construction and
maintenance obligations, system channel capacity, design and technical
performance, customer service standards, franchise renewal, sale or transfer
of the franchise, territory of the franchisee, indemnification of the
franchising authority, use and occupancy of public streets and types of cable
services provided. A number of states subject cable systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility. Attempts in
other states to regulate cable systems are continuing and can be expected to
increase. To date, Louisiana, Mississippi and Tennessee have not enacted such
state level regulation. However, a bill which was pending in the 1997 term of
the Louisiana legislature and which provided for the certification and
regulation of cable television systems by the PUC was not re-introduced in the
1998 term. The bill, if adopted, would have (i) allowed the PUC to void, order
new rates or reduce rates found to be discriminatory or necessary to reflect
adequate service; (ii) required that all cable television systems commencing
or expanding service be franchised conditioned upon confirmation by the PUC;
and (iii) provided the PUC with the authority to order construction,
operation, or an extension of cable service on such terms and conditions as it
deems reasonable where cable service has been unreasonably delayed or
withheld. However, this bill could be re-introduced for the 1999 legislative
session, which begins on the last Monday of March 1999. During its 1997-1998
session, the Tennessee legislature considered a bill which would authorize
municipalities operating electric
62
utility plants and electric cooperatives authorization to provide cable
television and other services. A second bill which was also considered would
authorize six pilot municipal electric systems to provide cable television and
other services. Though the authorization will terminate on June 30, 2001, any
system actually providing such services to customers as a pilot system prior
to that date will be permitted to continue doing so indefinitely. Neither of
these bills has been enacted by the Tennessee legislature. A bill which was
pending in the Mississippi legislature and which would have prohibited
landlords and condominium boards from preventing any tenant of a dwelling unit
or condominium owner from procuring cable television service from a cable
television system operating pursuant to a written franchise agreement with a
municipality or county lapsed in the senate Public Utilities Committee on
March 3, 1998. The Company cannot predict whether any of the states in which
it currently operates will engage in such regulation in the future. State and
local franchising jurisdiction is not unlimited, however, and must be
exercised consistently with federal law. The 1992 Cable Act immunizes
franchising authorities from monetary damage awards arising from regulation of
cable systems or decisions made on franchise grants, renewals, transfers and
amendments.
The foregoing does not purport to describe all present and proposed federal,
state, and local regulations and legislation affecting the cable industry.
Other existing federal regulations, copyright licensing, and, in many
jurisdictions, state and local franchise requirements, are currently the
subject of judicial proceedings, legislative hearings and administrative and
legislative proposals which could change, in varying degrees, the manner in
which cable systems operate. Neither the outcome of these proceedings nor the
impact on the cable communications industry or the Company can be predicted at
this time.
63
CERTAIN ORGANIZATIONAL DOCUMENTS
Holdings was formed under the laws of the State of Delaware on November 5,
1997, pursuant to a Limited Liability Company Agreement dated as of November
14, 1997, as amended (the "Holdings Operating Agreement"). Renaissance Media
was formed under the laws of the State of Delaware on November 24, 1997
pursuant to a Limited Liability Company Agreement dated as of February 13,
1998 (the "Media Operating Agreement"). The Guarantor, Renaissance Louisiana
and Renaissance Tennessee were formed under the laws of the State of Delaware
on March 13, 1998, January 7, 1998 and January 7, 1998 pursuant to separate
Limited Liability Company Agreements, each dated as of March 20, 1998
(collectively, together with the Media Operating Agreement, the "Group
Operating Agreements"), and Renaissance Capital was incorporated under the
laws of the State of Delaware on March 12, 1998. Holdings, the Guarantor,
Renaissance Louisiana, Renaissance Tennessee and Renaissance Media are each
governed by a Board of Representatives, and Renaissance Capital is governed by
a Board of Directors. Pursuant to the Holdings Operating Agreement and the
Media Operating Agreement, the Morgan Stanley Entities and the Management
Investors each have the right to appoint three Representatives (only one of
whom shall have the right to cast votes) to each of the Holdings Board of
Representatives and the Renaissance Media Board of Representatives, and Time
Warner has the right to appoint one Representative to each of the Holdings
Board of Representatives and the Renaissance Media Board of Representatives.
Representatives on such Boards who have the right to vote shall have the right
to cast votes which are proportional to the respective equity ownership
interests in Holdings of the entities which appointed them.
Each Representative or voting Representative is authorized to act only as
directed by the appointing entity. The Boards of Representatives of Holdings
and Renaissance Media will approve all significant actions taken by Holdings
and Renaissance Media, respectively, including: (i) the modification of their
respective long-term business strategy or scope; (ii) the approval of their
respective capital and operating budgets and strategic plans; (iii) subject to
certain conditions, the issuance of additional equity or the sale, repurchase
or redemption of outstanding equity; and (iv) any financings or refinancings
or other matters affecting Holdings' or Renaissance Media's capital structure,
respectively. Subject to certain exceptions, the Management Investors and Time
Warner may not transfer their interests in Holdings without prior approval of
the Morgan Stanley Entities. Each of the Management Investors and Time Warner
have certain rights to participate in any sale by the Morgan Stanley Entities
of their equity interests in Holdings and the Morgan Stanley Entities have
certain rights to cause the Management Investors and Time Warner to
participate with the Morgan Stanley Entities in any sale of equity interests
in Holdings by the Morgan Stanley Entities.
Each of the Guarantor, Renaissance Louisiana, Renaissance Tennessee and
Renaissance Capital is managed by a Board consisting of at least one
individual, initially Fred Schulte.
64
MANAGEMENT
BOARDS OF REPRESENTATIVES, BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the members of
the Boards of Representatives and executive officers of Holdings and
Renaissance Media. See "Certain Organizational Documents." All persons
specified as executive officers of Holdings and Renaissance Media also hold
such offices with the Guarantor and the Obligors.
NAME AGE (1) POSITION
---- ------- --------
Fred Schulte............ 47 Representative and President, Chief Executive
Officer and Chairman(2)
Rodney Cornelius........ 47 Representative and Vice Chairman
Michael J. Egan......... 45 Executive Vice President
Darlene Fedun........... 40 Executive Vice President
Mark Halpin............. 49 Representative, Executive Vice President, Chief
Financial Officer and Treasurer
David L. Testa.......... 49 Executive Vice President
Alan E. Goldberg........ 43 Representative
Leonard J. Baxt......... 50 Representative
Amy Rosen Wildstein..... 27 Representative
David E. O'Hayre........ 55 Representative
- --------
(1) As of March 20, 1998.
(2) Also a Representative of the Guarantor, Renaissance Louisiana and
Renaissance Tennessee and a Director of Renaissance Capital.
Fred Schulte, the President, Chief Executive Officer and Chairman, as well
as a founder of the Company, founded Renaissance Media Partners, L.L.C., the
predecessor of the Company ("RMP"), and has served as President since its
formation in 1996. From 1980 until January 1996, Mr. Schulte held several key
management positions, including Chief Operating Officer, at CVI. Mr. Schulte's
23-year career in the cable industry includes a number of field operations
positions with several companies, although the majority of his career was at
CVI. He has served as a Director of the Cable Television Association of New
York from 1986 to 1990.
Rodney Cornelius, the Vice Chairman of Renaissance Media and a founder of
the Company and RMP, has worked as a cable television industry consultant to
RMP from January 1996 through November 1997 and previously served as the Vice
Chairman of CVI and held several other key management positions at CVI from
1980 to 1995. Before joining CVI, Mr. Cornelius was the Chief Operating
Officer of Robotics, Inc., and prior to that he spent ten years in public
accounting.
Michael J. Egan, an Executive Vice President and a founder of the Company,
is a founder of RMP and spent over 15 years at CVI in various senior
management positions, most recently as Vice President of Programming and New
Product Development. Mr. Egan is the recipient of several cable industry
awards and was twice elected to the Board of Governors of the National Academy
of Cable Programming.
Darlene Fedun, an Executive Vice President and a founder of the Company, is
also a founding member of RMP. Prior to her association with RMP, Ms. Fedun
served for 15 years in various marketing, sales and customer service functions
at CVI, where she was a Vice President of Operations. Ms. Fedun is an active
member of several cable industry groups including the Cable Television
Administration and Marketing Society and the Cable Television Human Resource
Association.
Mark Halpin, an Executive Vice President, Chief Financial Officer and
Treasurer, as well as a founder of the Company and RMP, worked as a cable
television industry consultant to RMP from January 1996 through
65
November, 1997 and previously was Executive Vice President for Administration
at CVI since 1990. Mr. Halpin's professional career spans 18 years during
which he worked in a wide variety of industries as a partner at Arthur
Andersen, including being a member of Arthur Andersen's cable television
industry committee. Mr. Halpin is a member of the AICPA and the Connecticut
State Society of CPA's.
David Testa, an Executive Vice President, a founder of the Company and one
of the founding members of RMP, served as a Vice President of CVI since 1987.
Mr. Testa's career in the cable industry spans 18 years with Warner Cable,
Teleprompter, Group W Cable and CVI. He has served on several national
industry committees and was a Director of the Cable Television Association of
New York.
Alan E. Goldberg, the Head of the Morgan Stanley Dean Witter Private Equity
Group, has been a Managing Director of Morgan Stanley & Co. Incorporated since
January 1988. Mr. Goldberg is a Managing Director of Morgan Stanley Capital
Partners III, Inc., the general partner of the general partner of Morgan
Stanley Capital Partners III, L.P. He also serves as director of Catalytica,
Inc., Amerin Corporation, Jefferson Smurfit Corporation, Direct Response
Corporation, Homeowners Direct Corporation, Equant, N.V. and several private
companies.
Leonard J. Baxt, the Chief Executive Officer and the head of the Corporate
Department of Dow, Lohnes & Albertson, PLLC, has been a member of such firm
since 1980. Mr. Baxt specializes in the acquisition and financing of media and
telecommunications companies. He is also a director of Falcon Holding Group,
Inc.
Amy Rosen Wildstein, an Associate of Morgan Stanley & Co. Incorporated and
of Morgan Stanley Capital Partners III, Inc., has been employed by Morgan
Stanley & Co. Incorporated since 1994. Ms. Wildstein was previously employed
by the Blackstone Group. She is also a director of The Compucare Company.
David E. O'Hayre, the Senior Vice President, Investments, for Time Warner
Cable Ventures, joined American Television and Communications Corporation
("ATC"), a principal owner of Time Warner Cable, in 1973. Mr. O'Hayre held a
number of key positions at ATC, including Vice President, Cable Investments,
and was responsible for the acquisition, sale and trade of cable television
systems of ATC nationwide.
COMMITTEES OF THE BOARDS
The Board of Representatives of Holdings is expected to have an Audit
Committee and a Compensation Committee, and the Board of Representatives of
Renaissance Media is expected to have at least two committees: (i) an Audit
Committee; and (ii) a Compensation Committee. The Audit Committees' primary
responsibilities will be to review and recommend to the Board internal
accounting and financial controls and the accounting principles and auditing
practices and procedures to be employed in preparation and review of financial
statements and to make recommendations concerning the engagement of
independent public accountants and the scope of the audit to be undertaken by
such accountants. The Compensation Committee's primary responsibilities will
be to review and recommend policies, practices and procedures relating to the
compensation of the officers and other managerial employees and the
establishment and administration of employee benefit plans, including the
Renaissance Media Executive Bonus Incentive Plan (the "Plan").
REPRESENTATIVE AND DIRECTOR COMPENSATION
Representatives and Directors will not receive any compensation for their
services as Representatives/ Directors of Holdings, the Obligors, the
Guarantor and Renaissance Media. Representatives and Directors will be
reimbursed by the Company for their reasonable out-of-pocket expenses accrued
in connection with acting as Representatives and Directors.
APPOINTMENT OF EXECUTIVE OFFICERS
Executive officers are appointed at the first meeting of the Boards of
Representatives/Directors after each annual meeting of members/stockholders
and are elected to serve until they resign or are removed, or are otherwise
disqualified to serve, or until their successors are elected and qualified.
66
EXECUTIVE COMPENSATION
During 1998, Renaissance Media expects to pay Messrs. Schulte, Cornelius,
Egan, Halpin and Testa and Ms. Fedun annual base salaries of $225,000,
$225,000, $175,000, $175,000, $175,000 and $175,000, respectively. In
addition, such executives will be eligible to receive bonuses if certain
performance goals are met. See "--Executive Employment Arrangements" and "--
Executive Bonus Incentive Plan."
EXECUTIVE EMPLOYMENT ARRANGEMENTS
Renaissance Media has entered into an employment agreement with each of the
Management Investors. Each of the employment agreements provides for an annual
base salary and an incentive bonus determined according to the Renaissance
Media Executive Bonus Incentive Plan. Each agreement has an initial term of
five years, except for that of Mr. Cornelius which has a one year initial
term. The initial terms will automatically be extended if a sale of
Renaissance Media is in process at the expiration of such term. Each
employment agreement may be terminated by the Company with or without cause or
upon an executive's continued disability. Each Management Investor may
terminate the employment agreement with or without good reason, including for
material reduction in position or responsibilities or termination of certain
other executives by Renaissance Media, other than for cause, subject to
certain exceptions. If an employment agreement is terminated by Renaissance
Media without cause or by the Management Investor with good reason,
Renaissance Media is obligated to pay the applicable Management Investor
(other than Mr. Cornelius), subject to certain exceptions, any accrued unpaid
base salary, any prior year bonus earned but not paid, a pro rata bonus for
the year in which the termination occurs and severance for the remainder of
the term of the agreement equal to the base salary and bonus at the annual
rate for the year prior to the termination. It is anticipated that Mr.
Cornelius will be entitled to one year severance payments upon his termination
without cause or for good reason. In certain circumstances where Renaissance
Media fails to meet certain financial targets, the term of severance may be
limited to the lesser of the remainder of the employment term and two years.
It is anticipated that Mr. Cornelius will be entitled to one year severance
payments in such circumstances. Pursuant to the terms of the employment
agreement, each Management Investor is subject to a (i) confidentiality
covenant, (ii) a non-compete covenant for a period from the date of the
employment agreement until the earlier of: (a) the expiration of the
employment term; (b) the last day of any period of severance payments; and (c)
two years following termination of employment; and (iii) for a period of two
years following termination of employment, a non-solicitation covenant.
The exclusivity agreement between Renaissance Media and each of the
Management Investors permits the Management Investors to manage other cable
television systems after 2001 subject to first offering such acquisition
opportunities to the Morgan Stanley Entities.
EXECUTIVE BONUS INCENTIVE PLAN
Renaissance Media has established the Plan to provide its executive
officers, including the Management Investors, and other key employees with
bonuses based upon the achievement of annual performance goals. The Plan will
be administered by the Compensation Committee of the Board of Renaissance
Media, consisting of at least three Representatives. The Compensation
Committee will establish performance goals based on the Company's EBITDA. The
award of bonuses will be based on the attainment of the Company's performance
goals and the performance of individual executives.
67
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH THE MORGAN STANLEY ENTITIES AND RELATED PARTIES
In connection with the consummation of the Transactions, Renaissance Media
entered into the Senior Credit Facility with MSSF, an affiliate of the Morgan
Stanley Entities, as syndication agent and arranger. The Senior Credit
Facility establishes an eight-year revolving credit facility in the initial
aggregate principal amount of $40.0 million, an eight-year term loan in the
initial aggregate principal amount of $60.0 million and an eight and one-half-
year term loan in the initial aggregate principal amount of $50.0 million. See
"Description of Certain Indebtedness." In connection with its services, MSSF
will receive customary fees and be reimbursed for expenses.
TRANSACTIONS WITH TIME WARNER AND RELATED PARTIES
The Systems were owned by CVI from December 31, 1988 through January 4,
1996, in the case of the Louisiana Systems, and from September 12, 1986
through January 4, 1996, in the case of the Tennessee System. On January 4,
1996, the Systems were acquired by Time Warner as a result of the acquisition
of CVI by Time Warner. The Company purchased the Systems from Time Warner on
April 9, 1998 in accordance with the terms and provisions of the Asset
Purchase Agreement and Time Warner received approximately $300.0 million in
cash and a $9.5 million equity ownership interest in Holdings, subject to
adjustment.
In connection with the Acquisition, the Company entered into an agreement
with Time Warner, pursuant to which Time Warner manages the Company's
programming. See "Business--Programming and Subscription Rates." The Company
believes it will benefit from its relationship with Time Warner from access to
certain of Time Warner's programming arrangements. The Company believes that
the rates at which Time Warner will make any such programming available to the
Company will be at least as favorable as the rates the Company could obtain
from unaffiliated third parties.
The Asset Purchase Agreement provides that Time Warner will provide certain
interim operational services to the Company. In addition, the Company will
assume Time Warner's obligations under the Social Contract with respect to the
Systems. See "Regulation and Legislation--The Social Contract."
OTHER
Leonard J. Baxt is a member of the Board of Representatives of Holdings and
Renaissance Media. Mr. Baxt is also a member of Dow, Lohnes & Albertson, PLLC,
which has served as counsel to the Company in connection with the issuance and
sale of the Old Notes, the Transactions and the Exchange Offer. Dow, Lohnes &
Albertson, PLLC, has provided other legal services to the Company from time to
time and has received customary fees for such services.
68
PRINCIPAL SECURITYHOLDERS
The Guarantor and the Obligors are wholly owned subsidiaries of Holdings.
The following table sets forth certain information, following the
Transactions, regarding beneficial ownership of the membership interests in
Holdings by: (i) each person known by the Company to beneficially own more
than 5% of the outstanding equity interests of Holdings; (ii) each member of
the Boards of Representatives or Board of Directors, as applicable, of
Holdings, the Obligors and the Guarantor; (iii) each executive officers of
Holdings, the Obligors and the Guarantor; and (iv) all members of the Boards
of Representatives, Board of Directors and executive officers of Holdings, the
Guarantor and the Obligors as a group. The information as to beneficial
ownership has been furnished by the respective equity holders,
Representatives, Directors and executive officers of Holdings, the Guarantor
and Obligors, and, unless otherwise indicated, each of the equity holders has
the sole voting and investment power with respect to the equity interests
beneficially owned. The address for each Representative, Director and
executive officer of Holdings, the Obligors and the Guarantor is c/o
Renaissance Media, One Cablevision Center, Suite 100, Ferndale, New York
12734. The address for each of MSCPIII, MSCI and MSCP Investors is 1221 Avenue
of the Americas, New York, New York 10020. The address for Time Warner is 290
Harbor Drive, Stamford, Connecticut 06902.
PERCENT OF
NAME OF BENEFICIAL OWNER EQUITY OWNERSHIP
------------------------ ----------------
Morgan Stanley Entities (1).................................. 87.6%
Time Warner.................................................. 8.8
Fred Schulte (2)............................................. .9
Rodney Cornelius (2)......................................... .9
Michael J. Egan (2).......................................... .4
Darlene Fedun (2)............................................ .4
Mark Halpin (2).............................................. .4
David L. Testa (2)........................................... .4
Alan E. Goldberg (3)......................................... -
Leonard J. Baxt.............................................. .1
Amy Rosen Wildstein (3)...................................... -
David E. O'Hayre............................................. -
All Representatives, Directors and executive officers as a
group....................................................... 3.6
- --------
(1) The equity ownership interests of the Morgan Stanley Entities in Holdings
are owned, directly or indirectly, by MSCPIII, MSCI and MSCP Investors in
the following percentages: 88.5%, 9.1% and 2.4%, respectively,
representing percentage equity interests in Holdings of 77.5%, 8.0% and
2.1%, respectively.
(2) Excludes certain carried interests in affiliates of Time Warner and the
Morgan Stanley Entities which hold their respective equity interests in
Holdings. These carried interests represent the right to participate in
future distributions of such affiliates.
(3) Mr. Goldberg is a Managing Director of, and Ms. Wildstein is an associate
of, Morgan Stanley Capital Partners III, Inc., the general partner of the
general partner of MSCPIII.
69
DESCRIPTION OF CERTAIN INDEBTEDNESS
THE SENIOR CREDIT FACILITY
General
Renaissance Media is a party to a senior secured credit facility with MSSF,
an affiliate of the Morgan Stanley Entities and the Placement Agent, as lender
and agent (the "Senior Credit Facility").
The following summary of the material provisions of the Senior Credit
Facility does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, the Senior Credit Facility Commitment Letter
and the definitive loan document therefor (the "Senior Credit Facility
Agreement"), copies of which are available from the Company upon request.
The Senior Credit Facility establishes (i) the $40.0 million Revolver, an
eight-year revolving credit facility (including a $4.0 million letter of
credit facility) and (ii) the Term Loans, consisting of a $60.0 million,
eight-year term loan facility (the "Term Loan A Facility"), and a $50.0
million, eight and one-half-year term loan facility (the "Term Loan B
Facility"). Availability under the Revolver is subject to compliance with all
covenants contained in the Senior Credit Facility Agreement (as hereinafter
defined), including a minimum combined interest coverage ratio and a maximum
combined total leverage ratio as described below.
Loans under the Senior Credit Facility bear interest at the option of
Renaissance Media, subject to certain limitations, based upon a base rate or
LIBOR, plus an interest rate margin. The initial interest rate margins for
borrowing under the Revolver and the Term Loan A Facility are between 1.25%
and 1.625% for base rate loans and between 2.25% and 2.625% for LIBOR loans;
and the initial interest rate margins for borrowing under the Term Loan B
Facility will be between 1.625% and 1.875% for base rate loans and between
2.625% and 2.875% for LIBOR loans. Beginning six months after the
effectiveness of the Senior Credit Facility Agreement, the interest rate
margins for borrowings under the Revolver and the Term Loan A Facility will be
between .625% and 1.625% for base rate loans and between 1.625% and 2.625% for
LIBOR loans and for borrowing under the Term Loan B Facility will be between
1.375% and 1.875% for base rate loans and between 2.375% and 2.875% for LIBOR
loans. The actual margins will be based on the ratio of Renaissance Media's
consolidated senior leverage ratio as determined in accordance with the Senior
Credit Facility Agreement.
The Term Loans were drawn in full to purchase the Systems and pay related
fees and expenses. No amount was drawn under the Revolver to finance the
Acquisition. The Revolver is available to fund working capital requirements,
capital expenditures and acquisitions.
Amortization
Revolver. The loans under the Revolver shall be repaid in full, on or prior
to, and all letters of credit shall expire prior to, the eighth anniversary of
the Closing Date, and the sum of revolving credit loans and letter of credit
exposure shall at no time exceed the total commitments under the Revolver. The
commitments under the Revolver shall be reduced by $2,000,000 each quarter
from June 30, 2002 through March 31, 2005 and by $4,000,000 each quarter
thereafter.
Term Loan A Facility. The loans under the Term A Loan Facility shall be
amortized in quarterly installments aggregating 1% per annum of the amount
thereof in each of the first three years, 5% per annum of the amount thereof
in the fourth year, 20% per annum of the amount thereof in each of the fifth,
six and seventh years, and 32% per annum of the amount thereof in the eighth
year.
Term Loan B Facility. The loan under the Term Loan B Facility shall be
amortized in quarterly installments aggregating 1% per annum of the amount
thereof in each of the first seven years, 63% per annum of the amount thereof
in the eighth year and 30% per annum of the amount thereof in the last six
months.
70
Prepayments
Mandatory Prepayments. Renaissance Media is obligated to prepay the loans
outstanding under the Senior Credit Facility with: (i) the net proceeds
received from asset sales (with certain exceptions), (ii) the net proceeds
received from the issuance of certain debt, (iii) the net proceeds received
from certain issuances of equity by Renaissance Media or any of its
subsidiaries, (iv) insurance recoveries or condemnation awards not applied
within 180 days toward repair or replacement of the damaged or condemned
property, (v) the net proceeds received from the reversion of pension plans,
and (vi) in the case of the Term Loans so long as the combined total leverage
ratio exceeds 4.0:1.0 for any fiscal year of Renaissance Media (beginning with
the fiscal year ending in 1998), 50% of Renaissance Media's excess cash flow
for such fiscal year.
Voluntary Prepayments. Renaissance Media may make voluntary prepayments of
amounts outstanding under the Senior Credit Facility, in whole or in part,
with prior notice and without premium or penalty (other than payment of LIBOR
breakage costs, if any), subject to limitations as to minimum amounts of
prepayments.
Covenants. The Senior Credit Facility contains certain covenants: (i)
limiting Renaissance Media's ability to incur debt; (ii) limiting Renaissance
Media's ability to create liens; (iii) restricting Renaissance Media's ability
to merge with another entity; (iv) prohibiting Renaissance Media from selling
all or any substantial part of its assets; (v) restricting Renaissance Media's
ability to make investments, loans, advances, guarantees, acquisitions and
certain payments, to engage in transactions with affiliates, and (vi) limiting
Renaissance Media's capital expenditures. These covenants are subject to
certain permitted exceptions. So long as no default under the Senior Credit
Facility Agreement has occurred and is continuing, Renaissance Media will be
permitted to make distributions to the Obligors to pay interest on the Notes.
Financial Covenants. The Senior Credit Facility contains certain financial
covenants requiring Renaissance Media to (i) maintain a consolidated senior
leverage ratio initially not more than 5.5:1 and decreasing to 3.0:1 on April
1, 2005, (ii) a combined total leverage ratio after April 1, 2003 not more
than 7.0:1, (iii) a combined interest coverage ratio at the last day of any
fiscal quarter of not less than (a) 2.0:1 until March 31, 2003, (b) 1.5:1
thereafter until March 31, 2004, (c) 1.75:1 thereafter until March 31, 2005
and (d) 2.0:1 thereafter and (iv) a combined fixed charge coverage ratio at
the last day of any fiscal quarter of 1.25:1 or more until March 31, 2003 and
1.0:1 thereafter.
Events of Default. The Senior Credit Facility includes customary events of
default, including, without limitation, a failure to pay any loan when due, a
cross-default to certain other indebtedness of Renaissance Media, the
Guarantor and the Obligors, the failure to satisfy any of the covenants,
including the financial covenants, under the Senior Credit Facility, the
commencement of bankruptcy proceedings or the occurrence of a change of
control with respect to the Guarantor, the Obligors and Renaissance Media. An
event of default under the Senior Credit Facility would allow the lenders
thereunder to accelerate the maturity of the indebtedness under the Senior
Credit Facility and would adversely affect the ability of the Obligors to meet
their obligations under the Notes.
Security. The Senior Credit Facility, the guarantees referred to below and
any interest rate protection agreements related thereto entered into by
Renaissance Media with the lenders are secured by perfected first priority (i)
pledges of the ownership interests in Renaissance Media and its subsidiaries,
and security interests in all obligations owed to Renaissance Media from any
of its direct or indirect subsidiaries, and (ii) security interests in, and
liens upon, substantially all other assets of Renaissance Media and its
subsidiaries.
Guarantees. Borrowings under the Senior Credit Facility are guaranteed, on a
joint and several basis, by Renaissance Louisiana, Renaissance Tennessee,
Renaissance Capital and all direct and indirect subsidiaries of Renaissance
Louisiana and Renaissance Tennessee.
71
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were originally sold by the Obligors on April 9, 1998 to the
Placement Agent pursuant to the Placement Agreement. The Placement Agent
subsequently placed the Old Notes with (i) qualified institutional buyers in
reliance on Rule 144A under the Securities Act, and (ii) qualified buyers
outside the United States in reliance upon Regulation S under the Securities
Act. As a condition of the Placement Agreement, the Obligors and the Guarantor
entered into the Registration Rights Agreement with the Placement Agent
pursuant to which the Obligors and the Guarantor have agreed, for the benefit
of the holders of the Old Notes, at the Obligors' cost, to use their best
efforts to file the Exchange Offer Registration Statement with the Commission
with respect to the Exchange Offer for the New Notes; and to have such
Exchange Offer Registration Statement remain effective until the closing of
the Exchange Offer and to have the Exchange Offer consummated not later than
60 days after such effective date. Upon the Exchange Offer Registration
Statement being declared effective, the Obligors will offer the New Notes in
exchange for surrender of the Old Notes. The Obligors and the Guarantor will
keep the Exchange Offer open for not less than 20 business days (or longer if
required by applicable law) after the date on which notice of the Exchange
Offer is mailed to the holders of the Old Notes. For each Old Note surrendered
to the Obligors pursuant to the Exchange Offer, the holder of such Old Note
will receive a New Note having an original principal amount at maturity equal
to that of the surrendered Old Note.
Based on an interpretation by the staff of the Commission set forth in no
action letters issued to third parties, the Obligors believe that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by any holder of such New Notes
(other than a broker-dealer as set forth below, or any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such New Notes are acquired
in the ordinary course of such holder's business and that such holder has no
arrangement or understanding with any person to participate in the
distribution of such New Notes. Holders of Old Notes wishing to accept the
Exchange Offer must represent to the Obligors, as required by the Registration
Rights Agreement, that such conditions have been met and that such holder is
not an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act.
Each Participating Broker-Dealer that receives New Notes for its own account
pursuant to the Exchange Offer must represent that the Old Notes tendered in
exchange therefor were acquired as a result of market-making activities and
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. The Letter of Transmittal states that by so acknowledging and
by delivering a prospectus, a Participating Broker-Dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This prospectus, as it may be amended or supplemented from time to time, may
be used by any broker-dealer (other than an affiliate of the Company) in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities. The Obligors and the Guarantor
have agreed that, for a period of up to 180 days after the Expiration Date (as
defined below), they will make this prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution."
No holder who tenders in the Exchange Offer with the intention to
participate, or for the purpose of participating, in a distribution of the New
Notes nor any holder who is an affiliate of the Company may rely on such no-
action letters and must, in the absence of an exemption therefrom, comply with
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. Failure to comply with such
requirements in such instance may result in liability under the Securities Act
for which the holder is not indemnified by the Company.
As contemplated by the above-mentioned no-action letters and the
Registration Rights Agreement, each holder accepting the Exchange Offer is
required to represent to the Obligors and the Guarantor in the Letter of
Transmittal that (i) the New Notes are to be acquired by the holder or the
person receiving such New Notes,
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whether or not such person is the holder, in the ordinary course of business,
(ii) the holder or any such other person (other than a broker-dealer referred
to in the next sentence) is not engaging and does not intend to engage, in a
distribution of the New Notes, (iii) the holder or any such other person has
no arrangement or understanding with any person to participate in the
distribution of the New Notes, (iv) neither the holder nor any such other
person is an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act, and (v) the holder or any such other person acknowledges
that if such holder or any other person participates in the Exchange Offer for
the purpose of distributing the New Notes it must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any resale of the New Notes and cannot rely on those no-action letters. As
indicated above, each Participating Broker-Dealer that receives a New Note for
its own account in exchange for Old Notes must acknowledge that it (i)
acquired the Old Notes for its own account as a result of market-making
activities or other trading activities, (ii) has not entered into any
arrangement or understanding with the Obligors or any "affiliate" of the
Company (within the meaning of Rule 405 under the Securities Act) to
distribute the New Notes to be received in the Exchange Offer and (iii) will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such New Notes. For a description of the
procedures for resales by Participant Broker-Dealers, see "Plan of
Distribution."
In the event that changes in the law or the applicable interpretations of
the staff of the Commission do not permit the Obligors to effect such an
Exchange Offer, if for any other reason the Exchange Offer is commenced and
not consummated by October 9, 1998, or under certain circumstances, the
Obligors will use their best efforts to cause to become effective the Shelf
Registration Statement with respect to resales of the Old Notes; and to keep
such Shelf Registration Statement effective until the expiration of the time
period referred to in Rule 144(k) under the Securities Act after the original
issuance of the Old Notes (or for so long as any holder is an affiliate of the
Obligors), or such shorter period that will terminate when all Notes covered
by the Shelf Registration Statement have been sold pursuant to the Shelf
Registration Statement. The Obligors will, in the event of the filing of the
Shelf Registration Statement, provide to each applicable holder of the Old
Notes copies of the prospectus which is a part of the Shelf Registration
Statement, notify each such holder when the Shelf Registration Statement has
become effective and take certain other actions as are required to permit
unrestricted resales of the Old Notes. A holder of the Old Notes that sells
such Old Notes pursuant to the Shelf Registration Statement generally will be
required to be named as a selling security holder in the related prospectus
and to deliver a prospectus to purchasers, will be subject to certain of the
civil liability provisions under the Securities Act in connection with such
sales and will be bound by the provisions of the Registration Rights Agreement
which are applicable to such a holder (including certain indemnification
obligations). In addition, each holder of the Old Notes will be required to
deliver information to be used in connection with the Shelf Registration
Statement and to provide comments on the Shelf Registration Statement within
the time periods set forth in the Registration Rights Agreement in order to
have their Old Notes included in the Shelf Registration Statement and to
benefit from the provisions set forth in the following paragraph.
In the event the Exchange Offer is not consummated and the Shelf
Registration Statement is not declared effective on or prior to October 9,
1998, interest on the Notes (in addition to the accrual of original issue
discount during the period ended April 15, 2003 and in addition to interest
otherwise due on the Notes after such date) will accrue from October 9, 1998
at a rate of 0.5% per annum of the accreted value of the Notes on the
preceding semi-annual accrual date and be payable in cash semi-annually
commencing April 15, 1999 until the Exchange Offer is consummated or the Shelf
Registration Statement is declared effective.
Holders of Old Notes will be required to make certain representations to the
Obligors and the Guarantor (as described in the Registration Rights Agreement)
in order to participate in the Exchange Offer and will be required to deliver
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time
periods set forth in the Registration Rights Agreement in order to have their
Old Notes included in the Shelf Registration Statement and benefit from the
provisions regarding Additional Interest set forth above.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by, all the provisions of the Registration Rights
73
Agreement, a copy of which is filed as an exhibit to the Exchange Offer
Registration Statement of which this Prospectus is a part.
Following the consummation of the Exchange Offer, holders of the Old Notes
who were eligible to participate in the Exchange Offer but who did not tender
their Old Notes will not have any further registration rights and such Old
Notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Old Notes could be adversely
affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Obligors will accept any and all Old
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Obligors will issue $1,000 original
principal amount at maturity of New Notes in exchange for each $1,000 original
principal amount at maturity of outstanding Old Notes accepted in the Exchange
Offer. Holders may tender some or all of their Old Notes pursuant to the
Exchange Offer. However, Old Notes may be tendered only in integral multiples
of $1,000.
The form and terms of the New Notes are the same in all material respects as
the form and terms of the Old Notes except that (i) the New Notes have been
registered under the Securities Act and hence will not bear legends
restricting the transfer thereof and (ii) the holders of the New Notes will
not be entitled to certain rights under the Registration Rights Agreement,
including the provisions providing for an increase in the interest rate on the
Old Notes in certain circumstances relating to the timing of the Exchange
Offer, all of which rights will terminate when the Exchange Offer is
terminated. The New Notes will evidence the same debt as the Old Notes and
will be entitled to the benefits of the Indenture. The form and the terms of
the Guaranty are the same in all material respects as the guaranty issued in
connection with the Old Notes.
As of the date of this Prospectus, $163,175,000 aggregate original principal
amount at maturity of Old Notes were outstanding. The Obligors have fixed the
close of business on August 26, 1998 as the record date for the Exchange Offer
for purposes of determining the persons to whom this Prospectus and the Letter
of Transmittal will be mailed initially.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the Delaware General Corporation Law or the Indenture in connection with the
Exchange Offer. The Obligors intend to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Obligors shall be deemed to have accepted validly tendered Old Notes
when, as and if the Obligors have given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the New Notes from the Obligors.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Obligors will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
October 6, 1998, unless the Obligors, in their sole discretion, extend the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
74
In order to extend the Exchange Offer, the Obligors will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
The Obligors reserve the right, in their sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of
the Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral
or written notice thereof to the registered holders.
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal or transmit an Agent's
Message in connection with a book-entry transfer, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, or Agent's Message,
together with the Old Notes and any other required documents, to the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date. In
addition, either (i) certificates for such Old Notes must be received by the
Exchange Agent prior to the Expiration Date along with the Letter of
Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-
Entry Confirmation") of such Old Notes into the Exchange Agent's account at
The Depository Trust Company ("DTC" or the "Book-Entry Transfer Facility")
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date or (iii) the
holder must comply with the guaranteed delivery procedures described below. To
be tendered effectively, the Old Notes, Letter of Transmittal or Agent's
Message, and other required documents must be completed and received by the
Exchange Agent at the address set forth below under "Exchange Agent" prior to
5:00 p.m., New York City time, on the Expiration Date. Delivery of the Old
Notes may be made by book-entry transfer in accordance with the procedures
described below. Confirmation of such book-entry transfer must be received by
the Exchange Agent prior to the Expiration Date. DELIVERY OF DOCUMENTS TO THE
BOOK ENTRY TRANSFER FACILITY IN ACCORDANCE WITH ITS PROCEDURE DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
DTC has authorized DTC participants that hold Old Notes on behalf of
beneficial owners of Old Notes through DTC to tender their Old Notes as if
they were holders. To effect a tender of Old Notes, DTC participants should
either (i) complete and sign the Letter of Transmittal (or a manually signed
facsimile thereof), have the signature thereon guaranteed if required by the
instructions to the Letter of Transmittal, and mail or deliver the Letter of
Transmittal (or such manually signed facsimile) to the Exchange Agent pursuant
to the procedure set forth in "Procedures for Tendering" or (ii) transmit
their acceptance to DTC through the DTC Automated Tender Offer Program
("ATOP") for which the transaction will be eligible and follow the procedure
for book-entry transfer set forth in "--Book-Entry Transfer."
By executing the Letter of Transmittal or Agent's Message, each holder will
make to the Obligors the representations set forth above in the third
paragraph under the heading "--Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Obligors will
constitute agreement between such holder and the Obligors in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal or Agent's Message.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL OR AGENT'S
MESSAGE AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND SOLE RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL,
HOLDERS MAY WISH TO CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES,
75
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See
"Instructions to Registered Holder and/or Book-Entry Transfer Facility
Participant from Beneficial Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantee must be by a member firm
of the Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such Old Notes with the
signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Obligors of their authority to so act must be submitted with the Letter of
Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Obligors in their sole discretion, which
determination will be final and binding. The Obligors reserve the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Obligors' acceptance of which would, in the opinion of counsel for the
Obligors, be unlawful. The Obligors also reserve the right in their sole
discretion to waive any defects, irregularities or conditions of tender as to
particular Old Notes. The Obligors' interpretation of the terms and conditions
of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be
cured within such time as the Obligors shall determine. Although the Obligors
intend to notify holders of defects or irregularities with respect to tenders
of Old Notes, neither the Obligors, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount at maturity equal to that of the
surrendered Old Note. For purposes of the Exchange Offer, the Obligors shall
be deemed to have accepted properly tendered Old Notes for exchange when, as
and if the Obligors have given oral or written notice thereof to the Exchange
Agent.
76
In all cases, the issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-
Entry Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal or Agent's Message and all other required documents. If any
tendered Old Notes are not accepted for any reason set forth in the terms and
conditions of the Exchange Offer, such unaccepted or non-exchanged Old Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry
transfer procedures described below, such non-exchanged Old Notes will be
credited to an account maintained with such Book-Entry Transfer Facility) as
promptly as practicable after the Expiration Date.
BOOK-ENTRY TRANSFER
The Exchange Agent will establish a new account or utilize an existing
account with respect to the Old Notes at DTC promptly after the date of this
Prospectus, and any financial institution that is a participant in DTC and
whose name appears on a security position listing as the owner of Old Notes
may make a book-entry tender of Old Notes by causing DTC to transfer such Old
Notes into the Exchange Agent's account in accordance with DTC's procedures
for such transfer. However, although tender of Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at DTC, the
Letter of Transmittal (or a manually signed facsimile thereof), properly
completed and validly executed, with any required signature guarantees, or an
Agent's Message in lieu of the Letter of Transmittal, and any other required
documents, must, in any case, be received by the Exchange Agent at its address
set forth below under the caption "Exchange Agent" on or prior to the
Expiration Date, or the guaranteed delivery procedures described below must be
complied with. The confirmation of book-entry transfer of Old Notes into the
Exchange Agent's account at DTC as described above is referred to herein as a
"Book-Entry Confirmation." Delivery of documents to DTC in accordance with
DTC's procedures does not constitute delivery to the Exchange Agent.
The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Exchange Agent and forming a part of a Book-Entry
Confirmation, which states that DTC has received an express acknowledgment
from the participant in DTC tendering the Old Notes stating (i) the aggregate
principal amount of Old Notes which have been tendered by such participant,
(ii) that such participant has received and agrees to be bound by the terms of
the Letter of Transmittal and (iii) that the Obligors may enforce such
agreement against the participant.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) (or in the case of a book-entry
transfer, an Agent's Message) together with the certificate(s) representing
the Old Notes (or a confirmation of book-entry transfer of such Notes into
the Exchange Agent's account at the Book-Entry Transfer Facility), and any
other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent; and
(c) the certificate(s) representing all tendered Old Notes in proper form
for transfer (or a confirmation of book-entry transfer of such Old Notes
into the Exchange Agent's account at the Book-Entry Transfer
77
Facility), together with a Letter of Transmittal (or facsimile thereof),
properly completed and duly executed, with any required signature
guarantees (or, in the case of a book-entry transfer, an Agent's Message)
and all other documents required by the Letter of Transmittal are received
by the Exchange Agent upon five New York Stock Exchange trading days after
the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the business day prior
to the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the business day prior to the Expiration Date. Any such notice
of withdrawal must (i) specify the name of the person having deposited the Old
Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to be
withdrawn (including the certificate number(s) and principal amount of such
Old Notes, or, in the case of Old Notes transferred by book-entry transfer,
the name and number of the account at the Book-Entry Transfer Facility to be
credited), (iii) be signed by the holder in the same manner as the original
signature on the Letter of Transmittal by which such Old Notes were tendered
(including any required signature guarantees) or be accompanied by documents
of transfer sufficient to have the Trustee with respect to the Old Notes
register the transfer of such Old Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Old Notes
are to be registered, if different from that of the Depositor. All questions
as to the validity, form and eligibility (including time of receipt) of such
notices will be determined by the Obligors, whose determination shall be final
and binding on all parties. Any Old Notes so withdrawn will be deemed not to
have been validly tendered for purposes of the Exchange Offer and no New Notes
will be issued with respect thereto unless the Old Notes so withdrawn are
validly retendered. Any Old Notes which have been tendered but which are not
accepted for exchange will be returned to the holder thereof without cost to
such holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Obligors and the
Guarantor shall not be required to accept for exchange, or exchange New Notes
for, any Old Notes, and may terminate or amend the Exchange Offer as provided
herein prior to the Expiration Date, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Obligors and the Guarantor might
materially impair the ability of the Obligors and the Guarantor to proceed
with the Exchange Offer or any material adverse development has occurred in
any existing action or proceeding with respect to the Obligors and the
Guarantor or any of their subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the Staff of
the Commission is proposed, adopted or enacted, which, in the sole judgment
of the Obligors and the Guarantor might materially impair the ability of
the Obligors and the Guarantor to proceed with the Exchange Offer or
materially impair the contemplated benefits of the Exchange Offer to the
Obligors and the Guarantor; or
(c) any governmental approval has not been obtained, which approval the
Obligors and the Guarantor shall, in their sole discretion, deem necessary
for the consummation of the Exchange Offer as contemplated hereby.
78
If the Obligors and the Guarantor determine in their reasonable discretion
that any of the conditions are not satisfied, the Obligors and the Guarantor
may (i) refuse to accept any Old Notes and return all tendered Old Notes to
the tendering holders, (ii) extend the Exchange Offer and retain all Old Notes
tendered prior to the expiration of the Exchange Offer, subject, however, to
the rights of holders to withdraw such Old Notes (see "--Withdrawal of
Tenders") or (iii) waive such unsatisfied conditions with respect to the
Exchange Offer and accept all properly tendered Old Notes which have not been
withdrawn.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
By Registered or Certified Mail: By Overnight Courier:
U.S. Trust Company of New York U.S. Trust Company of New York
P.O. Box 844 770 Broadway
Cooper Station New York, New York 10003
New York, New York 10276-0844 Corporate Trust, 13th Floor
Attention:
By Hand: By Facsimile Transmission:
U.S. Trust Company of New York (212) 780-0592
111 Broadway, Lower Level
Corporation Trust Window Confirm by Telephone:
New York, New York 10006
(800) 548-6565
DELIVERY TO AN ADDRESS OR TRANSMISSION VIA A FACSIMILE NUMBER OTHER THAN SET
FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Obligors. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Obligors and their affiliates.
The Obligors have not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Obligors, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Obligor. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Obligors' and the Guarantor's
accounting records on the date of exchange. Accordingly, no gain
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or loss for accounting purposes will be recognized by the Obligors and the
Guarantor. The expenses of the Exchange Offer will be expensed over the term
of the New Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Old Notes may be
resold only (i) to the Guarantor or any subsidiary thereof, (ii) to a
"qualified institutional buyer" (as defined in Rule 144A under the Securities
Act) ("QIB") in compliance with Rule 144A, (iii) inside the United States to a
limited number of other institutional "accredited investors" (as defined in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act ("Institutional
Accredited Investors") that, prior to such transfer, furnish to the Trustee a
signed letter containing certain representations and agreements relating to
the restrictions on transfer of the Old Notes (the form of which letter can be
obtained from the Trustee) and, if such transfer is in respect of an aggregate
Accreted Value of Old Notes at the time of transfer of less than $100,000, an
opinion of counsel acceptable to the Obligors that such transfer is in
compliance with the Securities Act, (iv) outside the United States in
compliance with Rule 904 under the Securities Act, (v) pursuant to the
exemption from registration provided by Rule 144 under the Securities Act (if
available) or (vi) pursuant to an effective registration statement under the
Securities Act.
RESALE OF THE NEW NOTES
Based on an interpretation by the staff of the Commission set forth in no
action letters issued to third parties, the Obligors believe that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by any holder of such New Notes
(other than a broker-dealer as set forth below, or any such holder which is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such New Notes are acquired
in the ordinary course of such holder's business and that such holder has no
arrangement or understanding with any person to participate in the
distribution of such New Notes. Holders of Old Notes wishing to accept the
Exchange Offer must represent to the Obligors, as required by the Registration
Rights Agreement, that such conditions have been met and that such holder is
not an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act.
Each Participating Broker-Dealer that receives New Notes for its own account
pursuant to the Exchange Offer must represent that the Old Notes tendered in
exchange therefor were acquired as a result of market-making activities and
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. The Letter of Transmittal states that by so acknowledging and
by delivering a prospectus, a Participating Broker-Dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This prospectus, as it may be amended or supplemented from time to time, may
be used by any broker-dealer (other than an affiliate of the Company) in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities. The Obligors and the Gurantor
have agreed that, for a period of up to 180 days after the Expiration Date (as
defined below), they will make this prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan for Distribution."
No holder who tenders in the Exchange Offer with the intention to
participate, or for the purpose of participating, in a distribution of the New
Notes nor any holder who is an affiliate of the Company may rely on such no
action letters and must, in the absence of an exemption therefrom, comply with
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. Failure to comply with such
requirements in such instance may result in liability under the Securities Act
for which the holder is not indemnified by the Company.
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DESCRIPTION OF THE NOTES
The Old Notes were issued under an Indenture, dated as of the Closing Date
(the "Indenture"), among Renaissance Louisiana, Renaissance Tennessee and
Renaissance Capital, as joint and several Obligors (the "Obligors"), the
Company, as guarantor, and United States Trust Company of New York (the
"Trustee"). The New Notes will be issued under the Indenture, which shall
thereupon be subject to and governed by the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). A copy of the Indenture is available upon
request from the Company. The following summary of certain provisions of the
Indenture does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Indenture,
including the definitions of certain terms therein and those terms made a part
thereof by the Trust Indenture Act. For purposes of this section, all
references to the Company are to Renaissance Media Group LLC, excluding its
subsidiaries. Whenever particular defined terms of the Indenture not otherwise
defined herein are referred to, such defined terms are incorporated herein by
reference. For definitions of certain capitalized terms used in the following
summary, see "--Certain Definitions."
The form and terms of the New Notes are the same in all material respects as
the form and terms of the Old Notes (which they replace) except that (i) the
issuance of the New Notes have been registered under the Securities Act and,
therefore, the New Notes will not bear legends restricting the transfer
thereof, and (ii) the holders of New Notes will not be entitled to certain
rights under the Registration Rights Agreement, including the provisions
providing for an increase in the interest rate on the Old Notes in certain
circumstances relating to the timing of the Exchange Offer, which rights will
terminate when the Exchange Offer is consummated. A copy of the Indenture has
been filed as an exhibit to the Exchange Offer Registration Statement of which
this Prospectus forms a part. Certain definitions of terms used in the
following summary are set forth under "--Certain Definitions" below. The Old
Notes and the New Notes are sometimes referred to herein collectively as the
"Notes."
GENERAL
The New Notes will be unsecured unsubordinated obligations of the Obligors,
initially limited to $163,175,000 aggregate principal amount at maturity, and
will mature on April 15, 2008. Although for U.S. federal income tax purposes a
significant amount of original issue discount, taxable as ordinary income,
will be recognized by a Holder as such discount accrues from the issue date of
the Old Notes, no interest will be payable on the New Notes prior to October
15, 2003. From and after April 15, 2003, interest on the New Notes will accrue
at the rate shown on the front cover of this Prospectus from April 15, 2003 or
from the most recent Interest Payment Date to which interest has been paid or
provided for, payable semiannually (to Holders of record at the close of
business on April 1 or October 1 immediately preceding the Interest Payment
Date) on April 15 and October 15 of each year, commencing October 15, 2003.
The New Notes will fully accrete to face value on April 15, 2003. Interest
will be computed on the basis of a 360-day year of twelve 30-day months.
Old Notes that remain outstanding after the consummation of the Exchange
Offer and New Notes issued in connection with the Exchange Offer will be
treated as a single class of securities under the Indenture.
Principal of, premium, if any, and interest on the New Notes will be
payable, and the New Notes may be exchanged or transferred, at the office or
agency of the Obligors in the Borough of Manhattan, the City of New York
(which initially will be the corporate trust office of the Trustee); provided
that, at the option of the Obligors payment of interest may be made by check
mailed to the Holders at their addresses as they appear in the Security
Register.
The New Notes will be issued only in fully registered form, without coupons,
in denominations of $1,000 of principal amount at maturity and any integral
multiple thereof. No service charge will be made for any registration of
transfer or exchange of Notes, but the Obligors may require payment of a sum
sufficient to cover any transfer tax or other similar governmental charge
payable in connection therewith.
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Subject to the covenants described below under "Covenants" and applicable
law, the Obligors may issue additional notes under the Indenture. The Notes
and any such additional notes subsequently issued would be treated as a single
class for all purposes under the Indenture.
OPTIONAL REDEMPTION
The New Notes will be redeemable, at the Obligors' option, in whole or in
part, at any time or from time to time, on or after April 15, 2003 and prior
to maturity, upon not less than 30 nor more than 60 days' prior notice mailed
by first class mail to each Holder's last address as it appears in the
Security Register, at the following Redemption Prices (expressed in
percentages of principal amount at maturity), plus accrued and unpaid
interest, if any, to the Redemption Date (subject to the right of Holders of
record on the relevant Regular Record Date that is on or prior to the
Redemption Date to receive interest due on an Interest Payment Date), if
redeemed during the 12-month period commencing April 15 of the years set forth
below:
REDEMPTION
YEAR PRICE
---- ----------
2003........................................................... 105.000%
2004........................................................... 103.333
2005........................................................... 101.667
2006 and thereafter............................................ 100.000
In addition, at any time prior to April 15, 2001, the Obligors may redeem up
to 35% of the principal amount at maturity of the Notes with the proceeds of
one or more sales of Capital Stock (other than Disqualified Stock) of the
Company or an Obligor to a Person other than the Company or any Subsidiary of
the Company, at any time or from time to time in part, at a Redemption Price
(expressed as a percentage of Accreted Value on the Redemption Date) of
110.000%; provided that at least $106.0 million aggregate principal amount at
maturity of Notes remains outstanding after each such redemption and notice of
any such redemption is mailed within 60 days after the related sale of Capital
Stock.
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee in compliance with the requirements of the
principal national securities exchange, if any, on which the Notes are listed
or, if the Notes are not listed on a national securities exchange, by lot or
by such other method as the Trustee in its sole discretion shall deem to be
fair and appropriate; provided that no Note of $1,000 in principal amount at
maturity or less shall be redeemed in part. If any Note is to be redeemed in
part only, the notice of redemption relating to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note.
GUARANTEE
The payment and performance in full when due of the Obligors' obligations
under the Indenture and the New Notes will be fully and unconditionally
guaranteed on a senior basis by the Company. The obligations of the Company
will be limited to the maximum amount which, after giving effect to all other
contingent and fixed liabilities of the Company and after giving effect to any
collections from or payments made by or on behalf of any Obligor in respect of
the obligations of such Obligor under the Indenture, will result in the
obligations of the Company under its Guaranty not constituting a fraudulent
conveyance or fraudulent transfer under applicable law.
SINKING FUND
There will be no sinking fund payments for the New Notes.
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RANKING
The indebtedness evidenced by the New Notes will rank pari passu in right of
payment with all existing and future unsubordinated indebtedness of the
Obligors and senior in right of payment to all existing and future
subordinated indebtedness of the Obligors.
The indebtedness evidenced by the New Guaranty will rank pari passu in right
of payment will all existing and future unsubordinated indebtedness of the
Company and senior in right of payment to all subordinated indebtedness of the
Company.
As of June 30, 1998, the Company and the Obligors had $204.8 million of
indebtedness outstanding. In addition, all existing and future liabilities
(including indebtedness under the Credit Agreement and trade payables) of the
Obligors' subsidiaries will be effectively senior to the Notes. As of June 30,
1998, the Obligors' subsidiaries had $112.8 million of indebtedness and other
liabilities outstanding, including $102.5 million of indebtedness under the
Credit Agreement. See "Risk Factors--Holding Company Structure; Structural
Subordination."
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other
capitalized term used herein for which no definition is provided.
"Accreted Value" is defined to mean, for any Specified Date, the amount
calculated pursuant to (i), (ii), (iii) or (iv) below for each $1,000 of
principal amount at maturity of the Notes:
(i) if the Specified Date occurs on one or more of the following dates
(each a "Semi-Annual Accrual Date"), the Accreted Value will equal the
amount set forth below for such Semi-Annual Accrual Date:
SEMI-ANNUAL ACCRETED
ACCRUAL DATE VALUE
------------ ---------
October 15, 1998........................ $ 644.60
April 15, 1999.......................... $ 676.83
October 15, 1999........................ $ 710.68
April 15, 2000.......................... $ 746.21
October 15, 2000........................ $ 783.52
April 15, 2001.......................... $ 822.70
October 15, 2001........................ $ 863.83
April 15, 2002.......................... $ 907.02
October 15, 2002........................ $ 952.38
April 15, 2003.......................... $1,000.00
(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) $612.91 and (b) an
amount equal to the product of (1) the Accreted Value for the first Semi-
Annual Accrual Date less $612.91 multiplied by (2) a fraction, the
numerator of which is the number of days from the Closing Date to the
Specified Date, using a 360-day year of twelve 30-day months, and the
denominator of which is the number of days elapsed from the Closing Date to
the first Semi-Annual Accrual Date, using a 360-day year of twelve 30-day
months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual Dates,
the Accreted Value will equal the sum of (a) the Accreted Value for the
Semi-Annual Accrual Date immediately preceding such Specified Date and (b)
an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual
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Accrual Date multiplied by (2) a fraction, the numerator of which is the
number of days from the immediately preceding Semi-Annual Accrual Date to
the Specified Date, using a 360-day year of twelve 30-day months, and the
denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary;
provided that Indebtedness of such Person which is redeemed, defeased, retired
or otherwise repaid at the time of or immediately upon consummation of the
transactions by which such Person becomes a Restricted Subsidiary or such
Asset Acquisition shall not be Acquired Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such
period determined in conformity with GAAP; provided that the following items
shall be excluded in computing Adjusted Consolidated Net Income (without
duplication): (i) the net income (or loss) of any Person that is not a
Restricted Subsidiary, except (x) with respect to net income, to the extent of
the amount of dividends or other distributions actually paid to the Company or
any of its Restricted Subsidiaries by such Person during such period and (y)
with respect to net losses, to the extent of the amount of Investments made by
the Company or any Restricted Subsidiary in such Person during such period;
(ii) solely for the purposes of calculating the amount of Restricted Payments
that may be made pursuant to clause (C) of the first paragraph of the
"Limitation on Restricted Payments" covenant described below (and in such
case, except to the extent includable pursuant to clause (i) above), the net
income (or loss) of any Person accrued prior to the date it becomes a
Restricted Subsidiary or is merged into or consolidated with the Company or
any of its Restricted Subsidiaries or all or substantially all of the property
and assets of such Person are acquired by the Company or any of its Restricted
Subsidiaries; (iii) any gains or losses (on an after-tax basis) attributable
to Asset Sales; (iv) except for purposes of calculating the amount of
Restricted Payments that may be made pursuant to clause (C) of the first
paragraph of the "Limitation on Restricted Payments" covenant described below,
any amount paid or accrued as dividends on Preferred Stock of the Company or
any Restricted Subsidiary owned by Persons other than the Company and any of
its Restricted Subsidiaries; and (v) all extraordinary gains and extraordinary
losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of the Company and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting
from write-ups of capital assets (excluding write-ups in connection with
accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade
names, trademarks, patents, unamortized debt discount and expense and other
like intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP and filed with the Commission or provided to
the Trustee pursuant to the "Commission Reports and Reports to Holders"
covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary or shall be merged into or consolidated
with the Company or any of its Restricted Subsidiaries; provided that such
Person's primary
84
business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such investment or (ii)
an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person other than the Company or any of its
Restricted Subsidiaries that constitute substantially all of a division or
line of business of such Person; provided that the property and assets
acquired are related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale-leaseback transaction) in one transaction or
a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted
Subsidiaries or (iii) any other property and assets (other than the Capital
Stock or other Investment in an Unrestricted Subsidiary) of the Company or any
of its Restricted Subsidiaries outside the ordinary course of business of the
Company or such Restricted Subsidiary and, in each case, that is not governed
by the provisions of the Indenture applicable to mergers, consolidations and
sales of all or substantially all of the assets of the Company or an Obligor;
provided that "Asset Sale" shall not include (a) sales or other dispositions
of inventory, receivables and other current assets, (b) sales, transfers or
other dispositions of assets constituting a Restricted Payment permitted to be
made under the "Limitation on Restricted Payments" covenant, (c) sales,
transfers or other dispositions of assets with a fair market value (as
certified in an Officers' Certificate) not in excess of $1 million in any
transaction or series of transactions or (d) sales or other dispositions of
assets for consideration (including exchanges for assets) at least equal to
the fair market value of the assets sold or disposed of, to the extent that
the consideration received would constitute property or assets of the kind
described in clause (B) of the "Limitation on Asset Sales" covenant or
deposits of proceeds with a "qualified intermediary," "qualified trustee" or
similar person for purposes of facilitating a like-kind exchange under
applicable provisions of the Internal Revenue Code of 1986, as amended.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the
amount of such principal payment by (ii) the sum of all such principal
payments.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present
value of the rental obligations of such Person as lessee, in conformity with
GAAP, is required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Change of Control" means such time as (i) (a) prior to the occurrence of a
Public Market, a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act) becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of Voting Stock representing a
greater percentage of the total voting power of the Voting Stock of (x)
Holdings, on a fully diluted basis, than is beneficially owned by the Morgan
Stanley Entities and Time Warner and their Affiliates on such date or (y) the
Company, on a fully diluted basis, than is held by the Existing Stockholders
on such date and (b) after the
85
occurrence of a Public Market, a "person" or "group" (within the meaning of
Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the ultimate
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more
than 35% of the total voting power of the Voting Stock of the Company on a
fully diluted basis and such ownership represents a greater percentage of the
total voting power of the Voting Stock of the Company, on a fully diluted
basis, than is held by the Existing Stockholders on such date; or (ii)
individuals who on the Closing Date constitute the Board of Directors of
Holdings or the Company (together with any new directors (x) whose election by
such Board of Directors or whose nomination by such Board of Directors for
election by the Company's equityholders was approved by a vote of at least
two-thirds of the members of such Board of Directors then in office who either
were members of such Board of Directors on the Closing Date or whose election
or nomination for election was previously so approved or (y) so long as no
person beneficially owns a greater proportion of the total voting power of the
Voting Stock of Holdings than is beneficially owned by the Morgan Stanley
Entities and Time Warner and their Affiliates, whose election was approved by
Holdings with respect to the Company) cease for any reason to constitute a
majority of the members of the Board of Directors then in office.
"Closing Date" means the date on which the Notes are originally issued under
the Indenture.
"Common Stock" means, with respect to any Person, such Person's equity,
other than Preferred Stock of such Person, whether outstanding on the Closing
Date or issued thereafter, including, without limitation, all series and
classes of such common stock, including any and all shares, interests,
participations or other equivalents (however designated, whether voting or
non-voting) thereof.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period (x) plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest
Expense, (ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses or
sales of assets), (iii) depreciation expense, (iv) amortization expense and
(v) all other non-cash items reducing Adjusted Consolidated Net Income (other
than items that will require cash payments and for which an accrual or reserve
is, or is required by GAAP to be, made), less all non-cash items increasing
Adjusted Consolidated Net Income, all as determined on a consolidated basis
for the Company and its Restricted Subsidiaries in conformity with GAAP, and
(y) solely for purposes of calculating the amount of Restricted Payments that
may be made pursuant to clause (C) of the first paragraph of the "Limitation
on Restricted Payments" covenant described below, less (to the extent not
otherwise reduced in accordance with GAAP) the aggregate amount of deposits
made by the Company and its Restricted Subsidiaries after the Closing Date in
connection with proposed Asset Acquisitions that are forfeited by the Company
or any of its Restricted Subsidiaries; provided that, if any Restricted
Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated EBITDA
shall be reduced (to the extent not otherwise reduced in accordance with GAAP)
by an amount equal to (A) the amount of the Adjusted Consolidated Net Income
attributable to such Restricted Subsidiary multiplied by (B) the percentage
ownership interest in the income of such Restricted Subsidiary not owned on
the last day of such period by the Company or any of its Restricted
Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers'
acceptance financing; the net costs associated with Interest Rate Agreements;
and Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; excluding, however any premiums, fees and expenses (and any
amortization thereof) payable in connection with the Transactions, all as
determined on a consolidated basis (without taking into account Unrestricted
Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such
86
Transaction Date to (ii) four times the aggregate amount of Consolidated
EBITDA for the then most recent fiscal quarter for which financial statements
of the Company have been filed with the Commission or provided to the Trustee
pursuant to the "Commission Reports and Reports to Holders" covenant described
below (such fiscal quarter being the "Quarter"); provided that, in making the
foregoing calculation, (A) pro forma effect shall be given to any Indebtedness
to be Incurred or repaid on the Transaction Date; (B) pro forma effect shall
be given to Asset Dispositions and Asset Acquisitions (including giving pro
forma effect to the application of proceeds of any Asset Disposition) that
occur from the beginning of the Quarter through the Transaction Date (the
"Reference Period"), as if they had occurred and such proceeds had been
applied on the first day of such Reference Period and, in the case of any
Asset Acquisition, giving pro forma effect to any cost reductions the Company
anticipates if the Company delivers to the Trustee an officer's certificate
executed by the Chief Financial Officer of the Company certifying to and
describing and quantifying with reasonable specificity the cost reductions
expected to be attained within the first year after such Asset Acquisition;
and (C) pro forma effect shall be given to asset dispositions and asset
acquisitions (including giving pro forma effect to the application of proceeds
of any asset disposition) that have been made by any Person that has become a
Restricted Subsidiary or has been merged with or into the Company or any
Restricted Subsidiary during such Reference Period and that would have
constituted Asset Dispositions or Asset Acquisitions had such transactions
occurred when such Person was a Restricted Subsidiary as if such asset
dispositions or asset acquisitions were Asset Dispositions or Asset
Acquisitions that occurred on the first day of such Reference Period; provided
that to the extent that clause (B) or (C) of this sentence requires that pro
forma effect be given to an Asset Acquisition or Asset Disposition, such pro
forma calculation shall be based upon the fiscal quarter immediately preceding
the Transaction Date of the Person, or division or line of business of the
Person, that is acquired or disposed of for which financial information is
available.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of
the Capital Stock of the Company or any of its Restricted Subsidiaries, each
item to be determined in conformity with GAAP (excluding the effects of
foreign currency exchange adjustments under Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 52).
"Credit Agreement" means the credit agreement between Renaissance Media LLC,
the lenders party thereto, Morgan Stanley Senior Funding, Inc., as syndication
agent, CIBC Oppenheimer, as documentation agent, and Bankers Trust Company, as
administrative agent, together with any agreements, instruments and documents
executed or delivered pursuant to or in connection with such credit agreement,
as such credit agreement or such agreements, instruments or documents may be
amended, supplemented, extended, restated, renewed or otherwise modified from
time to time and any refinancing, replacement or substitution thereof or
therefor, or of or for any previous refinancing, replacement or substitution.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder
of such class or series of Capital Stock at any time prior to the Stated
Maturity of the Notes or (iii) convertible into or exchangeable for Capital
Stock referred to in clause (i) or (ii) above or Indebtedness having a
scheduled maturity prior to the Stated Maturity of the Notes; provided that
any Capital Stock that would not constitute Disqualified Stock but for
provisions thereof giving holders thereof the right to require such Person to
repurchase
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or redeem such Capital Stock upon the occurrence of an "asset sale" or "change
of control" occurring prior to the Stated Maturity of the Notes shall not
constitute Disqualified Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are no more favorable to the
holders of such Capital Stock than the provisions contained in "Limitation on
Asset Sales" and "Repurchase of Notes upon a Change of Control" covenants
described below and such Capital Stock specifically provides that such Person
will not repurchase or redeem any such stock pursuant to such provision prior
to the Obligors' repurchase of such Notes as are required to be repurchased
pursuant to the "Limitation on Asset Sales" and "Repurchase of Notes upon a
Change of Control" covenants described below.
"Existing Stockholders" means (i) the Morgan Stanley Entities and Time
Warner and their respective Affiliates and (ii) Holdings, so long as the
Morgan Stanley Entities and Time Warner, and their respective Affiliates, in
the aggregate, beneficially own a majority of the Voting Stock of Holdings.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive
if evidenced by a Board Resolution; provided that for purposes of clause
(viii) of the second paragraph of the "Limitation on Indebtedness" covenant,
(x) the fair market value of any security registered under the Exchange Act
shall be the average of the closing prices, regular way, of such security for
the 20 consecutive trading days immediately preceding the sale of Capital
Stock and (y) in the event the aggregate fair market value of any other
property (other than cash or cash equivalents) received by the Company or an
Obligor exceeds $10 million, the fair market value of such property shall be
determined by a nationally recognized investment banking firm and set forth in
the written opinion which shall be delivered to the Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or
in such other statements by such other entity as approved by a significant
segment of the accounting profession. All ratios and computations contained or
referred to in the Indenture shall be computed in conformity with GAAP applied
on a consistent basis, except that calculations made for purposes of
determining compliance with the terms of the covenants and with other
provisions of the Indenture shall be made without giving effect to (i) the
amortization of any expenses incurred in connection with the Transactions and
(ii) except as otherwise provided, the amortization of any amounts required or
permitted by Accounting Principles Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or
by agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Indebtedness by reason of a Person becoming a
Restricted Subsidiary; provided that neither the accrual of interest nor the
accretion of original issue discount shall be considered an Incurrence of
Indebtedness.
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"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v),
(vi) or (vii) below) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if drawn
upon, to the extent such drawing is reimbursed no later than the third
Business Day following receipt by such Person of a demand for reimbursement),
(iv) all obligations of such Person to pay the deferred and unpaid purchase
price of property or services, which purchase price is due more than six
months after the date of placing such property in service or taking delivery
and title thereto or the completion of such services, except Trade Payables,
(v) all Capitalized Lease Obligations, (vi) all Indebtedness of other Persons
secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; provided that the amount of such
Indebtedness shall be the lesser of (A) the fair market value of such asset at
such date of determination and (B) the amount of such Indebtedness, (vii) all
Indebtedness of other Persons Guaranteed by such Person to the extent such
Indebtedness is Guaranteed by such Person and (viii) to the extent not
otherwise included in this definition, obligations under Currency Agreements
and Interest Rate Agreements. The amount of Indebtedness of any Person at any
date shall be the outstanding balance at such date of all unconditional
obligations as described above and, with respect to contingent obligations,
the maximum liability upon the occurrence of the contingency giving rise to
the obligation, provided (A) that the amount outstanding at any time of any
Indebtedness issued with original issue discount is the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with
GAAP, (B) that money borrowed and set aside at the time of the Incurrence of
any Indebtedness in order to prefund the payment of the interest on such
Indebtedness shall not be deemed to be "Indebtedness" so long as such money is
held to secure the payment of such interest and (C) that Indebtedness shall
not include any liability for federal, state, local or other taxes.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee
or similar arrangement; but excluding (x) advances to customers or suppliers
in the ordinary course of business that are, in conformity with GAAP, recorded
as accounts receivable, prepaid expenses or deposits on the balance sheet of
the Company or its Restricted Subsidiaries and (y) deposits in connection with
any proposed Asset Acquisition not to exceed 10% of the estimated purchase
price for such Asset Acquisition) or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase or acquisition of
Capital Stock, bonds, notes, debentures or other similar instruments issued
by, such Person and shall include (i) the designation of a Restricted
Subsidiary as an Unrestricted Subsidiary and (ii) the fair market value of the
Capital Stock (or any other Investment), held by the Company or any of its
Restricted Subsidiaries, of (or in) any Person that has ceased to be a
Restricted Subsidiary, including without limitation, by reason of any
transaction permitted by clause (iii) of the "Limitation on the Issuance and
Sale of Capital Stock of Restricted Subsidiaries" covenant; provided that the
fair market value of the Investment remaining in any Person that has ceased to
be a Restricted Subsidiary shall not exceed the aggregate amount of
Investments previously made in such Person valued at the time such Investments
were made less the net reduction of such Investments. For purposes of the
definition of "Unrestricted Subsidiary" and the "Limitation on Restricted
Payments" covenant described below, (i) "Investment" shall include the fair
market value of the assets (net of liabilities (other than liabilities to the
Company or any of its Restricted Subsidiaries)) of any Restricted Subsidiary
at the time that such Restricted Subsidiary is designated an Unrestricted
Subsidiary, (ii) the fair market value of the assets (net of liabilities
(other than liabilities to the Company or any of its Restricted Subsidiaries))
of any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary
is designated a
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Restricted Subsidiary shall be considered a reduction in outstanding
Investments and (iii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof or any
agreement to give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed
or sold with recourse to the Company or any Restricted Subsidiary) and
proceeds from the conversion of other property received when converted to cash
or cash equivalents, net of (i) brokerage commissions and other fees and
expenses (including fees and expenses of counsel and investment bankers)
related to such Asset Sale, (ii) provisions for all taxes (whether or not such
taxes will actually be paid or are payable), including, without limitation,
distributions by the Company or a Restricted Subsidiary pursuant to clause
(ix) of the second paragraph of the "Limitation on Restricted Payments"
covenant, as a result of such Asset Sale without regard to the consolidated
results of operations of the Company and its Restricted Subsidiaries, taken as
a whole, (iii) payments made to repay Indebtedness or any other obligation
outstanding at the time of such Asset Sale that either (A) is secured by a
Lien on the property or assets sold or (B) is required to be paid as a result
of such sale and (iv) appropriate amounts to be provided by the Company or any
Restricted Subsidiary as a reserve against any liabilities associated with
such Asset Sale, including, without limitation, pension and other post-
employment benefit liabilities, liabilities related to environmental matters
and liabilities under any indemnification obligations associated with such
Asset Sale, all as determined in conformity with GAAP and (b) with respect to
any issuance or sale of Capital Stock, the proceeds of such issuance or sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal,
but not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to the Company or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorney's fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
"Offer to Purchase" means an offer to purchase Notes by the Obligors from
the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that
all Notes validly tendered will be accepted for payment on a pro rata basis;
(ii) the purchase price and the date of purchase (which shall be a Business
Day no earlier than 30 days nor later than 60 days from the date such notice
is mailed) (the "Payment Date"); (iii) that any Note not tendered will
continue to accrue interest pursuant to its terms; (iv) that, unless the
Obligors default in the payment of the purchase price, any Note accepted for
payment pursuant to the Offer to Purchase shall cease to accrue interest on
and after the Payment Date; (v) that Holders electing to have a Note purchased
pursuant to the Offer to Purchase will be required to surrender the Note,
together with the form entitled "Option of the Holder to Elect Purchase" on
the reverse side of the Note completed, to the Paying Agent at the address
specified in the notice prior to the close of business on the Business Day
immediately preceding the Payment Date; (vi) that Holders will be entitled to
withdraw their election if the Paying Agent receives, not later than the close
of business on the third Business Day immediately preceding the Payment Date,
a telegram, facsimile transmission or letter setting forth the name of such
Holder, the principal amount at maturity of Notes delivered for purchase and a
statement that such Holder is withdrawing his election to have such Notes
purchased; and (vii) that Holders whose Notes are being purchased only in part
will be issued new Notes equal in principal amount to the unpurchased portion
of the Notes surrendered; provided that each Note purchased and each new Note
issued shall be in a principal amount at maturity of $1,000
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or integral multiples thereof. On the Payment Date, the Obligors shall (i)
accept for payment on a pro rata basis Notes or portions thereof tendered
pursuant to an Offer to Purchase; (ii) deposit with the Paying Agent money
sufficient to pay the purchase price of all Notes or portions thereof so
accepted; and (iii) deliver, or cause to be delivered, to the Trustee all
Notes or portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof accepted for payment by the Obligors.
The Paying Agent shall promptly mail to the Holders of Notes so accepted
payment in an amount equal to the purchase price, and the Trustee shall
promptly authenticate and mail to such Holders a new Note equal in principal
amount at maturity to any unpurchased portion of the Note surrendered;
provided that each Note purchased and each new Note issued shall be in a
principal amount at maturity of $1,000 or integral multiples thereof. The
Obligors will publicly announce the results of an Offer to Purchase as soon as
practicable after the Payment Date. The Trustee shall act as the Paying Agent
for an Offer to Purchase. The Obligors will comply with Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable, in the event that the
Obligors are required to repurchase Notes pursuant to an Offer to Purchase.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with
or into or transfer or convey all or substantially all its assets to, the
Company or a Restricted Subsidiary; provided that such person's primary
business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such Investment; (ii)
Temporary Cash Investments; (iii) payroll, travel and similar advances to
cover matters that are expected at the time of such advances ultimately to be
treated as expenses in accordance with GAAP; (iv) stock, obligations or
securities received in satisfaction of judgments; (v) loans or advances to
employees of the Company or any Restricted Subsidiary evidenced by
unsubordinated promissory notes that do not in the aggregate exceed at any one
time outstanding $1 million; (vi) Investments in any Person the primary
business of which is related, ancillary or complementary to the business of
the Company and its Restricted Subsidiaries on the date of such Investments;
provided the aggregate amount of Investments made pursuant to this clause (vi)
does not exceed $2 million plus the net reductions in Investments made
pursuant to this clause (vi) resulting from distributions on or repayments of
such Investments or the Net Cash Proceeds from the sale of any such
Investments, provided that the net reduction in any Investment shall not
exceed the amount of such Investment; (vii) deposits of proceeds with a
"qualified intermediary," "qualified trustee" or similar person for purposes
of facilitating a like-kind exchange under applicable provisions of the
Internal Revenue Code of 1986, as amended; or (viii) Interest Rate Agreements
and Currency Agreements designed solely to protect the Company or its
Restricted Subsidiaries against fluctuations in interest rates or foreign
currency exchange rates.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are not yet delinquent or are being contested in good
faith by appropriate legal proceedings promptly instituted and diligently
conducted and for which a reserve or other appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made; (ii) statutory
and common law Liens of landlords and carriers, warehousemen, mechanics,
suppliers, materialmen, repairmen or other similar Liens arising in the
ordinary course of business and with respect to amounts not yet delinquent or
being contested in good faith by appropriate legal proceedings promptly
instituted and diligently conducted and for which a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or
regulatory obligations (including obligations under franchise agreements),
bankers' acceptances, surety and appeal bonds, government contracts,
performance and return-of-money bonds and other obligations of a similar
nature incurred in the ordinary course of business (exclusive of obligations
for the payment of borrowed money); (v) easements, rights-of-way, municipal
and zoning ordinances and similar charges, encumbrances, title defects or
other irregularities that do not materially interfere with the ordinary course
of business of the Company or any of its Restricted Subsidiaries; (vi) Liens
upon real or personal property acquired after the Closing Date; provided that
(a) such Lien is created solely for the purpose of securing Indebtedness
Incurred, in accordance with the "Limitation on Indebtedness" covenant
described below, to
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finance the cost (including the cost of design, development, acquisition,
installation, integration, improvement or construction) of the item of
property or assets subject thereto and such Lien is created prior to, at the
time of or within six months after the later of the acquisition, the
completion of construction or the commencement of full operation of such
property (b) the principal amount of the Indebtedness secured by such Lien
does not exceed 100% of such cost and (c) any such Lien shall not extend to or
cover any property or assets other than such item of property or assets and
any improvements on such item; (vii) leases or subleases granted to others
that do not materially interfere with the ordinary course of business of the
Company and its Restricted Subsidiaries, taken as a whole; (viii) Liens
encumbering property or assets under construction arising from progress or
partial payments by a customer of the Company or its Restricted Subsidiaries
relating to such property or assets; (ix) any interest or title of a lessor in
the property subject to any Capitalized Lease or operating lease; (x) Liens
arising from filing Uniform Commercial Code financing statements regarding
leases; (xi) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person becomes, or
becomes a part of, any Restricted Subsidiary; provided that such Liens do not
extend to or cover any property or assets of the Company or any Restricted
Subsidiary other than the property or assets acquired; (xii) Liens in favor of
the Company or any Restricted Subsidiary; (xiii) Liens arising from the
rendering of a final judgment or order against the Company or any Restricted
Subsidiary that does not give rise to an Event of Default; (xiv) Liens
securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and
the products and proceeds thereof; (xv) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (xvi) Liens encumbering customary
initial deposits and margin deposits, and other Liens that are within the
general parameters customary in the industry and incurred in the ordinary
course of business, in each case, securing Indebtedness under Interest Rate
Agreements and Currency Agreements and forward contracts, options, future
contracts, futures options or similar agreements or arrangements designed
solely to protect the Company or any of its Restricted Subsidiaries from
fluctuations in interest rates, currencies or the price of commodities; (xvii)
Liens arising out of conditional sale, title retention, consignment or similar
arrangements for the sale of goods entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business in accordance with
industry practice; (xviii) Liens resulting from deposits made in connection
with any proposed Asset Acquisition provided that such deposit does not exceed
10% of the estimated purchase price for such Asset Acquisition; (xix) Liens
upon real or personal property acquired after the Closing Date that secure
Indebtedness under clause (vi) above to secure any other Indebtedness secured
under clause (vi) above; provided that the aggregate principal amount of
Indebtedness secured by such Liens does not exceed 100% of the cost of all of
the property securing such Indebtedness under clause (vi) above; and (xx)
Liens on or sales of receivables, including related intangible assets and
proceeds thereof.
"Preferred Stock" means, with respect to any Person, such Person's preferred
or preference equity, whether outstanding on the Closing Date or issued
thereafter, including, without limitation, all series and classes of such
preferred or preference stock, including any and all shares, interests,
participations or other equivalents (however designated, whether voting or
non-voting) thereof.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company or an Obligor pursuant to an effective
registration statement under the Securities Act.
A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
Common Stock of the Company or an Obligor has been distributed by means of an
effective registration statement under the Securities Act or sales pursuant to
Rule 144 under the Securities Act.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Significant Subsidiary" means, at any date of determination, the Obligors
and any Restricted Subsidiary that, together with its Subsidiaries, (i) for
the most recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii)
as of the end of such
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fiscal year, was the owner of more than 10% of the consolidated assets of the
Company and its Restricted Subsidiaries, all as set forth on the most recently
available consolidated financial statements of the Company for such fiscal
year.
"Specified Date" means any Redemption Date, any Payment Date for an Offer to
Purchase or any date on which the Notes first become due and payable after an
Event of Default.
"S&P" means Standard & Poor's Ratings Services, a division of The McGraw-
Hill Companies, and its successors.
"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii)
with respect to any scheduled installment of principal of or interest on any
debt security, the date specified in such debt security as the fixed date on
which such installment is due and payable.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the voting power of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
"Tax Amount" means, with respect to any period, without duplication, the
increase in the cumulative United States federal, state and local tax
liability of holders of equity interests in the Company or a Restricted
Subsidiary, as applicable (or if such holder is a pass-through entity for
United States income tax purposes, holders of its equity interests) in respect
of their interests in the Company or such Restricted Subsidiary for such
period plus any additional amounts payable to such holders to cover taxes
arising from the ownership of such equity interests, but excluding any
increase in tax liability or additional amounts payable in respect of a gain
realized by a holder of an equity interest in the Company or a Restricted
Subsidiary upon the sale or disposition by such holder of an equity interest,
including without limitation, any redemption thereof by the Company, in the
Company or a Restricted Subsidiary.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or
obligations fully and unconditionally guaranteed by the United States of
America or any agency thereof, (ii) time deposit accounts, certificates of
deposit and money market deposits maturing within 180 days of the date of
acquisition thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States of America, and which bank or trust
company has capital, surplus and undivided profits aggregating in excess of
$50 million (or the foreign currency equivalent thereof) and has outstanding
debt which is rated "A" (or such similar equivalent rating) or higher by at
least one nationally recognized statistical rating organization (as defined in
Rule 436 under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor, (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) commercial paper, maturing
not more than 90 days after the date of acquisition, issued by a corporation
(other than an Affiliate of the Company) organized and in existence under the
laws of the United States of America, any state thereof or any foreign country
recognized by the United States of America with a rating at the time as of
which any investment therein is made of "P-1" (or higher) according to Moody's
or "A-1" (or higher) according to S&P, and (v) securities with maturities of
six months or less from the date of acquisition issued or fully and
unconditionally guaranteed by any state, commonwealth or territory of the
United States of America, or by any political subdivision or taxing authority
thereof, and rated at least "A" by S&P or Moody's.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
93
"Transaction Date" means, with respect to the Incurrence of any Indebtedness
by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment,
the date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below; and (ii) any Subsidiary
of an Unrestricted Subsidiary. The Board of Directors may designate any
Restricted Subsidiary (including any newly acquired or newly formed Subsidiary
of the Company), other than the Obligors, to be an Unrestricted Subsidiary
unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on
any property of, the Company or any Restricted Subsidiary; provided that (A)
any Guarantee by the Company or any Restricted Subsidiary of any Indebtedness
of the Subsidiary being so designated shall be deemed an "Incurrence" of such
Indebtedness and an "Investment" by the Company or such Restricted Subsidiary
(or both, if applicable) at the time of such designation; (B) either (I) the
Subsidiary to be so designated has total assets of $1,000 or less or (II) if
such Subsidiary has assets greater than $1,000, such designation would be
permitted under the "Limitation on Restricted Payments" covenant described
below and (C) if applicable, the Incurrence of Indebtedness and the Investment
referred to in clause (A) of this proviso would be permitted under the
"Limitation on Indebtedness" and "Limitation on Restricted Payments" covenants
described below. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided that (i) no Default or
Event of Default shall have occurred and be continuing at the time of or after
giving effect to such designation and (ii) all Liens and Indebtedness of such
Unrestricted Subsidiary outstanding immediately after such designation would,
if Incurred at such time, have been permitted to be Incurred (and shall be
deemed to have been Incurred) for all purposes of the Indenture. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) by such Person or one or more Wholly Owned
Subsidiaries of such Person.
COVENANTS
Limitation on Indebtedness
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes, the Guaranty
and Indebtedness existing on the Closing Date); provided that the Company or
any Obligor may Incur Indebtedness if, after giving effect to the Incurrence
of such Indebtedness and the receipt and application of the proceeds
therefrom, the Consolidated Leverage Ratio would be greater than zero and (x)
less than or equal to 7.25 to 1, for Indebtedness Incurred on or prior to
December 31, 1999, or (y) less than or equal to 6.75 to 1, for Indebtedness
Incurred thereafter.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness outstanding at any time in an aggregate principal amount not to
exceed the greater of (x) $200 million, less any amount of such Indebtedness
permanently repaid as provided under the "Limitation on Asset Sales" covenant
described below and (y) an amount equal to 4.5 times the Company's
Consolidated EBITDA for the then most recent fiscal quarter for which
financial statements of the Company have been filed with the Commission
(giving pro forma effect to any Asset Acquisitions and Asset Dispositions as
provided under the definition of "Consolidated Leverage Ratio") multiplied by
four; (ii) Indebtedness owed (A) to
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the Company or any Obligor evidenced by a promissory note or (B) to any other
Restricted Subsidiary; provided that any event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another Restricted
Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund,
then outstanding Indebtedness (other than Indebtedness Incurred under clause
(i), (ii), (iv), (vi), (vii) or (viii) of this paragraph) and any refinancings
thereof in an amount not to exceed the amount so refinanced or refunded (plus
premiums, accrued interest, fees and expenses); provided that Indebtedness the
proceeds of which are used to refinance or refund the Notes and the Guaranty
or Indebtedness that is pari passu with, or subordinated in right of payment
to, the Notes and the Guaranty shall only be permitted under this clause (iii)
if (A) in case the Notes and the Guaranty are refinanced in part or the
Indebtedness to be refinanced is pari passu with the Notes and the Guaranty,
such new Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such new Indebtedness is outstanding, is
expressly made pari passu with, or subordinate in right of payment to, the
remaining Notes and the Guaranty, (B) in case the Indebtedness to be
refinanced is subordinated in right of payment to the Notes and the Guaranty,
such new Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right of payment to the Notes
and the Guaranty at least to the extent that the Indebtedness to be refinanced
is subordinated to the Notes and the Guaranty and (C) such new Indebtedness,
determined as of the date of Incurrence of such new Indebtedness, does not
mature prior to the Stated Maturity of the Indebtedness to be refinanced or
refunded, and the Average Life of such new Indebtedness is at least equal to
the remaining Average Life of the Indebtedness to be refinanced or refunded;
and provided further that in no event may Indebtedness of the Company or the
Obligors be refinanced by means of any Indebtedness of any Restricted
Subsidiary other than the Obligors pursuant to this clause (iii); (iv)
Indebtedness (A) in respect of performance, surety or appeal bonds,
performance guarantees or similar obligations securing the Company's or any
Restricted Subsidiary's obligations under any cable television franchise, pole
attachment agreement or lease or other similar agreement incurred in the
ordinary course of business and entered into in connection with the day-to-day
operations of such business, (B) under Currency Agreements and Interest Rate
Agreements; provided that such agreements (a) are designed solely to protect
the Company or its Restricted Subsidiaries against fluctuations in foreign
currency exchange rates or interest rates and (b) do not increase the
Indebtedness of the obligor outstanding at any time other than as a result of
fluctuations in foreign currency exchange rates or interest rates or by reason
of fees, indemnities and compensation payable thereunder; and (C) arising from
agreements providing for indemnification, adjustment of purchase price or
similar obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in any case Incurred in
connection with the disposition of any business, assets or Restricted
Subsidiary (other than Guarantees of Indebtedness Incurred by any Person
acquiring all or any portion of such business, assets or Restricted Subsidiary
for the purpose of financing such acquisition), in a principal amount not to
exceed the gross proceeds actually received by the Company or any Restricted
Subsidiary in connection with such disposition; (v) Indebtedness of the
Company or the Obligors, to the extent the net proceeds thereof are promptly
(A) used to purchase Notes tendered in an Offer to Purchase made as a result
of a Change in Control or (B) deposited to defease the Notes as described
below under "Defeasance"; (vi) Guarantees of the Notes and Guarantees of
Indebtedness of the Company or the Obligors by any Restricted Subsidiary
provided the Guarantee of such Indebtedness is permitted by and made in
accordance with the "Limitation on Issuance of Guarantees by Restricted
Subsidiaries" covenant described below; (vii) Indebtedness Incurred to finance
the cost to acquire equipment, inventory or other assets used or useful in the
business of the Company and its Restricted Subsidiaries (including
acquisitions by way of a Capitalized Lease and the acquisition of the Capital
Stock of a Person that becomes a Restricted Subsidiary), in an aggregate
principal amount outstanding at any time not to exceed 5% of the Company's
total assets as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries
filed with the Commission; (viii) Indebtedness of the Company or any Obligor
not to exceed, at any one time outstanding, two times the sum of (A) the Net
Cash Proceeds received by the Company or an Obligor after the Closing Date as
a capital contribution (other than a capital contribution by the Company or
any Subsidiary of the Company) or from the sale of its Capital Stock (other
than Disqualified Stock) to a Person other than the Company or any
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Subsidiary of the Company, to the extent such capital contribution or sale of
Capital Stock has not been used pursuant to clause (C)(2) of the first
paragraph or clause (iii), or (iv) of the second paragraph of the "Limitation
on Restricted Payments" covenant described below to make a Restricted Payment
and (B) 80% of the fair market value of property (other than cash and cash
equivalents) received by the Company or an Obligor after the Closing Date as a
capital contribution (other than a capital contribution by the Company or any
Subsidiary of the Company) or from the sale of its Capital Stock (other than
Disqualified Stock) to a Person other than the Company or any Subsidiary of
the Company, to the extent such capital contribution or sale of Capital Stock
has not been used pursuant to clause (iii), (iv) or (vi) of the second
paragraph of the "Limitation on Restricted Payments" covenant described below
to make a Restricted Payment; provided that such Indebtedness does not mature
prior to the Stated Maturity of the Notes and has an Average Life longer than
the Notes; and (ix) Acquired Indebtedness; provided that after giving effect
to the Incurrence thereof, the Company could Incur at least $1.00 of
Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant.
(b) Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that the Company or a Restricted
Subsidiary may Incur pursuant to this "Limitation on Indebtedness" covenant
shall not be deemed to be exceeded, with respect to any outstanding
Indebtedness due solely to the result of fluctuations in the exchange rates of
currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Indebtedness Incurred under
the Credit Agreement on or prior to the Closing Date shall be treated as
Incurred pursuant to clause (i) of the second paragraph of this "Limitation on
Indebtedness" covenant, (2) Guarantees, Liens or obligations with respect to
letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (3) any
Liens granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses (other than Indebtedness referred to in clause (1) of the preceding
sentence), the Company, in its sole discretion, shall classify, and from time
to time may reclassify, such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of such clauses;
provided that any Indebtedness Incurred under any of clauses (i) through (ix)
of the second paragraph of this covenant shall be deemed to be no longer
outstanding under any such clauses and shall be deemed to have been Incurred
under the first paragraph of this covenant on the first date on which the
Company could have Incurred such Indebtedness under the first paragraph of
this covenant if no Default or Event of Default would be continuing after
giving effect to such Incurrence.
Limitation on Restricted Payments
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any
distribution on or with respect to its Capital Stock held by Persons other
than the Company or any of its Restricted Subsidiaries (other than (x)
dividends or distributions payable solely in shares of its Capital Stock
(other than Disqualified Stock) or in options, warrants or other rights to
acquire shares of such Capital Stock and (y) pro rata dividends or
distributions on Common Stock of Restricted Subsidiaries other than the
Obligors held by minority stockholders), (ii) purchase, redeem, retire or
otherwise acquire for value any shares of Capital Stock of (A) the Company, an
Obligor or an Unrestricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Person (other than
the Company or a Wholly Owned Restricted Subsidiary) or (B) any Restricted
Subsidiary other than the Obligors (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Affiliate of the
Company or any Obligor (other than a Wholly Owned Restricted Subsidiary) or
any holder (or any Affiliate of such holder) of 5% or more of the Capital
Stock of the Company or any Obligor, (iii) make any voluntary or optional
principal payment, or voluntary or optional redemption, repurchase,
defeasance, or other acquisition or retirement for value, of Indebtedness of
the Company that is subordinated in right of payment to the Guaranty or
Indebtedness of an Obligor that is subordinated in right of payment to the
Notes or (iv) make any Investment, other than a Permitted Investment, in any
Person (such payments or any other actions described in clauses (i) through
(iv)
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above being collectively "Restricted Payments") if, at the time of, and after
giving effect to, the proposed Restricted Payment: (A) a Default or Event of
Default shall have occurred and be continuing, (B) the Company could not Incur
at least $1.00 of Indebtedness under the first paragraph of the "Limitation on
Indebtedness" covenant or (C) the aggregate amount of all Restricted Payments
(the amount, if other than in cash, to be determined in good faith by the
Board of Directors, whose determination shall be conclusive and evidenced by a
Board Resolution) made after the Closing Date shall exceed the sum of (1) the
amount by which Consolidated EBITDA exceeds 130% of Consolidated Interest
Expense, in each case, determined on a cumulative basis during the period
(taken as one accounting period) beginning on the first day of the fiscal
quarter immediately following the Closing Date and ending on the last day of
the last fiscal quarter preceding the Transaction Date for which reports have
been filed with the Commission or provided to the Trustee pursuant to the
"Commission Reports and Reports to Holders" covenant plus (2) the aggregate
Net Cash Proceeds received by the Company or an Obligor after the Closing Date
as a capital contribution (other than a capital contribution by the Company or
any Subsidiary of the Company) or from the issuance and sale permitted by the
Indenture of its Capital Stock (other than Disqualified Stock) to a Person
other than the Company or any Subsidiary of the Company, including an issuance
or sale permitted by the Indenture of Indebtedness of the Company or an
Obligor for cash subsequent to the Closing Date upon the conversion of such
Indebtedness into Capital Stock (other than Disqualified Stock) of the Company
or such Obligor, or from the issuance to a Person other than the Company or
any Subsidiary of the Company of any options, warrants or other rights to
acquire Capital Stock of the Company or an Obligor (in each case, exclusive of
any Disqualified Stock or any options, warrants or other rights that are
redeemable at the option of the holder, or are required to be redeemed, prior
to the Stated Maturity of the Notes), in each case except to the extent such
Net Cash Proceeds are used to Incur Indebtedness outstanding under clause
(viii) of the second paragraph under the "Limitation on Indebtedness"
covenant, plus (3) an amount equal to the net reduction in Investments (other
than reductions in Permitted Investments) in any Person resulting from
payments of interest on Indebtedness, dividends, repayments of loans or
advances, or other transfers of assets, in each case to the Company or any
Restricted Subsidiary or from the Net Cash Proceeds from the sale of any such
Investment (except, in each case, to the extent any such payment or proceeds
are included in the calculation of Adjusted Consolidated Net Income), or from
redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries (valued
in each case as provided in the definition of "Investments"), not to exceed,
in each case, the amount of Investments previously made by the Company or any
Restricted Subsidiary in such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the
payment of any dividend within 60 days after the date of declaration thereof
if, at said date of declaration, such payment would comply with the foregoing
paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of payment
to the Guaranty or the Notes including premium, if any, and accrued and unpaid
interest, with the proceeds of, or in exchange for, Indebtedness Incurred
under clause (iii) of the second paragraph of part (a) of the "Limitation on
Indebtedness" covenant; (iii) the repurchase, redemption or other acquisition
of Capital Stock of the Company, an Obligor or an Unrestricted Subsidiary (or
options, warrants or other rights to acquire such Capital Stock) in exchange
for, or out of the proceeds of a substantially concurrent offering of, shares
of Capital Stock (other than Disqualified Stock) of the Company or an Obligor
(or options, warrants or other rights to acquire such Capital Stock); (iv) the
making of any principal payment or the repurchase, redemption, retirement,
defeasance or other acquisition for value of Indebtedness of the Company which
is subordinated in right of payment to the Guaranty or Indebtedness of an
Obligor which is subordinated in right of payment to the Notes in exchange
for, or out of the proceeds of, a substantially concurrent offering of, shares
of the Capital Stock (other than Disqualified Stock) of the Company or an
Obligor (or options, warrants or other rights to acquire such Capital Stock);
(v) payments or distributions, to dissenting stockholders pursuant to
applicable law, pursuant to or in connection with a consolidation, merger or
transfer of assets that complies with the provisions of the Indenture
applicable to mergers, consolidations and transfers of all or substantially
all of the property and assets of the Company; (vi) Investments acquired as a
capital contribution or in exchange for Capital Stock (other than Disqualified
Stock) of the Company or an Obligor; (vii) the purchase, redemption,
acquisition, cancellation or other retirement for value of shares of Capital
Stock of the Company or an Obligor, options for any such shares or related
stock appreciation rights or similar
97
securities held by officers or employees or former officers or employees (or
their estates or beneficiaries under their estates), upon death, disability,
retirement or termination of employment or pursuant to any agreement under
which such shares of stock or related rights were issued; provided that the
aggregate consideration paid for such purchase, redemption, acquisition,
cancellation or other retirement of such shares or related rights after the
Closing Date does not exceed $2 million; (viii) the declaration or payment of
dividends on the Common Stock of the Company or an Obligor following a Public
Equity Offering of such Common Stock, of up to 6% per annum of the Net Cash
Proceeds received by the Company or such Obligor in such Public Equity
Offering; (ix) for so long as the Company or any Restricted Subsidiary is
treated as a pass-through entity for United States federal income tax
purposes, distributions to equity holders of the Company or any Restricted
Subsidiary in an amount not to exceed the Tax Amount for such period; or (x)
other Restricted Payments in an aggregate amount not to exceed $10 million;
provided that, except in the case of clauses (i) and (iii), no Default or
Event of Default shall have occurred and be continuing or occur as a
consequence of the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) thereof, an exchange of
Capital Stock for Capital Stock or Indebtedness referred to in clause (iii) or
(iv) thereof and an Investment referred to in clause (vi) thereof), and the
Net Cash Proceeds from any issuance of Capital Stock referred to in clauses
(iii) and (iv), shall be included in calculating whether the conditions of
clause (C) of the first paragraph of this "Limitation on Restricted Payments"
covenant have been met with respect to any subsequent Restricted Payments. In
the event the proceeds of an issuance of Capital Stock of the Company or an
Obligor are used for the redemption, repurchase or other acquisition of the
Notes, or Indebtedness that is pari passu with the Notes or the Guaranty, then
the Net Cash Proceeds of such issuance shall be included in clause (C) of the
first paragraph of this "Limitation on Restricted Payments" covenant only to
the extent such proceeds are not used for such redemption, repurchase or other
acquisition of Indebtedness.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any
consensual encumbrance or restriction of any kind on the ability of any
Restricted Subsidiary to (i) pay dividends or make any other distributions
permitted by applicable law on any Capital Stock of such Restricted Subsidiary
owned by the Company or any other Restricted Subsidiary, (ii) pay any
Indebtedness owed to the Company or any other Restricted Subsidiary, (iii)
make loans or advances to the Company or any other Restricted Subsidiary or
(iv) transfer any of its property or assets to the Company or any other
Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Credit Agreement, the
Indenture or any other agreements in effect on the Closing Date, and any
extensions, refinancings, renewals or replacements of such agreements;
provided that (x) the encumbrances and restrictions in any such extensions,
refinancings, renewals or replacements are no less favorable in any material
respect to the Holders than those encumbrances or restrictions that are then
in effect and that are being extended, refinanced, renewed or replaced or (y)
the encumbrances and restrictions in any such modifications, extensions,
refinancings, renewals, restructurings, substitutions or replacements (A) do
not prevent the Company or any of its Restricted Subsidiaries from paying
interest on the Notes and (B) will be no more restrictive in any material
respect than encumbrances and restrictions which could be obtained by a Person
comparable to the Company or such Restricted Subsidiary under then prevailing
market conditions; (ii) existing under or by reason of applicable law; (iii)
existing with respect to any Person or the property or assets of such Person
acquired by the Company or any Restricted Subsidiary, existing at the time of
such acquisition and not incurred in contemplation thereof, which encumbrances
or restrictions are not applicable to any Person or the property or assets of
any Person other than such Person or the property or assets of such Person so
acquired; (iv) in the case of clause (iv) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant, (A) that restrict in a customary manner the
subletting, assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset, (B) existing by
virtue of any transfer of, agreement to transfer, option or right with respect
to, or Lien on, any property or assets of the Company or
98
any Restricted Subsidiary not otherwise prohibited by the Indenture or (C)
arising or agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract from
the value of property or assets of the Company or any Restricted Subsidiary in
any manner material to the Company or any Restricted Subsidiary; (v) with
respect to a Restricted Subsidiary and imposed pursuant to an agreement that
has been entered into for the sale or disposition of all or substantially all
of the Capital Stock of, or property and assets of, such Restricted
Subsidiary; or (vi) contained in the terms of any Indebtedness or any
agreement pursuant to which such Indebtedness was issued if (A) the
encumbrance or restriction applies only in the event of a payment default or a
default with respect to a financial covenant contained in such Indebtedness or
agreement, (B) the encumbrance or restriction is not materially more
disadvantageous to the Holders of the Notes than is customary in comparable
financings (as determined by the Company) and (C) the Company determines, at
the time of entering into such encumbrance or restriction, that any such
encumbrance or restriction will not materially affect the Company's ability to
make principal or interest payments on the Notes. Nothing contained in this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant shall prevent the Company or any Restricted Subsidiary
from (1) creating, incurring, assuming or suffering to exist any Liens
otherwise permitted in the "Limitation on Liens" covenant or (2) restricting
the sale or other disposition of property or assets of the Company or any of
its Restricted Subsidiaries that secure Indebtedness of the Company or any of
its Restricted Subsidiaries.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary other than an Obligor (including options, warrants or
other rights to purchase shares of such Capital Stock) except (i) to the
Company or a Wholly Owned Restricted Subsidiary; (ii) issuances of director's
qualifying shares or sales to foreign nationals of shares of Capital Stock of
foreign Restricted Subsidiaries, to the extent required by applicable law;
(iii) if, immediately after giving effect to such issuance or sale, such
Restricted Subsidiary would no longer constitute a Restricted Subsidiary and
any Investment in such Person remaining after giving effect to such issuance
or sale would have been permitted to be made under the "Limitation on
Restricted Payments" covenant if made on the date of such issuance or sale; or
(iv) issuances or sales of Common Stock of a Restricted Subsidiary provided
that the Company or such Restricted Subsidiary applies the Net Cash Proceeds,
if any, of any such sale in accordance with clause (A) or (B) of the
"Limitation on Asset Sales" covenant described below.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary other than an Obligor,
directly or indirectly, to Guarantee any Indebtedness of the Company or any
Obligor which is pari passu with or subordinate in right of payment to the
Notes or the Guaranty ("Guaranteed Indebtedness"), unless (i) such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture to
the Indenture providing for a Guarantee (a "Subsidiary Guarantee") of payment
of the Notes by such Restricted Subsidiary and (ii) such Restricted Subsidiary
waives and will not in any manner whatsoever claim or take the benefit or
advantage of, any rights of reimbursement, indemnity or subrogation or any
other rights against the Company or any other Restricted Subsidiary as a
result of any payment by such Restricted Subsidiary under its Subsidiary
Guarantee; provided that this paragraph shall not be applicable to (x) any
Guarantee of any Restricted Subsidiary that existed at the time such Person
became a Restricted Subsidiary and was not Incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary or (y) any
Guarantee of Indebtedness, including Indebtedness under the Credit Agreement,
Incurred under clause (i) of the second paragraph under the "Limitation on
Indebtedness" covenant. If the Guaranteed Indebtedness is (A) pari passu with
the Notes or the Guaranty, then the Guarantee of such Guaranteed Indebtedness
shall be pari passu with, or subordinated to, the Subsidiary Guarantee or (B)
subordinated to the Notes or the Guaranty, then the Guarantee of such
Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee at
least to the extent that the Guaranteed Indebtedness is subordinated to the
Notes or the Guaranty.
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Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of the Company, of all of the
Company's and each Restricted Subsidiary's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the Indenture) or (ii) the release
or discharge of the Guarantee which resulted in the creation of such
Subsidiary Guarantee, except a discharge or release by or as a result of
payment under such Guarantee.
Limitation on Transactions with Shareholders and Affiliates
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction
(including, without limitation, the purchase, sale, lease or exchange of
property or assets, or the rendering of any service) with any holder (or any
Affiliate of such holder) of 5% or more of any class of Capital Stock of the
Company or with any Affiliate of the Company or any Restricted Subsidiary,
except upon fair and reasonable terms no less favorable to the Company or such
Restricted Subsidiary than could be obtained, at the time of such transaction
or, if such transaction is pursuant to a written agreement, at the time of the
execution of the agreement providing therefor, in a comparable arm's-length
transaction with a Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized
investment banking firm (including, without limitation, Morgan Stanley & Co.
Incorporated and its Affiliates) stating that the transaction is fair to the
Company or such Restricted Subsidiary from a financial point of view; (ii) any
transaction solely between the Company and any of its Wholly Owned Restricted
Subsidiaries or solely between Wholly Owned Restricted Subsidiaries; (iii) the
payment of reasonable and customary regular fees to directors of the Company
who are not employees of the Company; (iv) any payments or other transactions
pursuant to any tax-sharing agreement between the Company and any other Person
with which the Company files a consolidated tax return or with which the
Company is part of a consolidated group for tax purposes; (v) programming
agreements, marketing and promotional agreements, equipment agreements and
agreements for other goods or services related to the business of the Company
and its Restricted Subsidiaries entered into in the ordinary course of
business by the Company or any Restricted Subsidiary and Time Warner or its
Affiliates; (vi) the payment of fees to Morgan Stanley & Co. Incorporated or
its Affiliates for financial, advisory, consulting or investment banking
services that the Board of Directors deems to be advisable or appropriate
(including, without limitation, the payment of any underwriting discounts or
commissions or placement agency fees in connection with the issuance and sale
of securities); (vii) the Transactions; or (viii) any Restricted Payments not
prohibited by the "Limitation on Restricted Payments" covenant.
Notwithstanding the foregoing, any transaction or series of related
transactions covered by the first paragraph of this "Limitation on
Transactions with Shareholders and Affiliates" covenant and not covered by
clauses (ii) through (viii) of this paragraph, (a) the aggregate amount of
which exceeds $2 million in value, must be approved or determined to be fair
in the manner provided for in clause (i)(A) or (B) above and (b) the aggregate
amount of which exceeds $4 million in value, must be determined to be fair in
the manner provided for in clause (i)(B) above.
Limitation on Liens
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character, or any shares of Capital Stock or Indebtedness of
any Restricted Subsidiary, without making effective provision for all of the
Notes and the Guaranty and all other amounts due under the Indenture to be
directly secured equally and ratably with (or, if the obligation or liability
to be secured by such Lien is subordinated in right of payment to the Notes
and the Guaranty, prior to) the obligation or liability secured by such Lien.
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The foregoing limitation does not apply to (i) Liens existing on the Closing
Date, including Liens securing obligations under the Credit Agreement; (ii)
Liens granted after the Closing Date on any assets or Capital Stock of the
Company or its Restricted Subsidiaries created in favor of the Holders; (iii)
Liens with respect to the assets of a Restricted Subsidiary granted by such
Restricted Subsidiary to the Company or a Wholly Owned Restricted Subsidiary
to secure Indebtedness owing to the Company or such other Restricted
Subsidiary; (iv) Liens securing Indebtedness which is Incurred to refinance
secured Indebtedness which is permitted to be Incurred under clause (iii) of
the second paragraph of the "Limitation on Indebtedness" covenant; provided
that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets
securing the Indebtedness being refinanced; (v) Liens on the Capital Stock of
or any property or assets of a Restricted Subsidiary securing Indebtedness of
such Restricted Subsidiary permitted under the "Limitation on Indebtedness"
covenant; (vi) Liens securing Indebtedness outstanding under clause (i) of the
second paragraph under the "Limitation on Indebtedness" covenant; or (vii)
Permitted Liens.
Limitation on Sale-Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess
of three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company
and any Wholly Owned Restricted Subsidiary or solely between Wholly Owned
Restricted Subsidiaries; or (iv) the Company or such Restricted Subsidiary,
within 12 months after the sale or transfer of any assets or properties is
completed, applies an amount not less than the net proceeds received from such
sale in accordance with clause (A) or (B) of the first paragraph of the
"Limitation on Asset Sales" covenant described below.
Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the
Company or such Restricted Subsidiary is at least equal to the fair market
value of the assets sold or disposed of and (ii) at least 75% of the
consideration received consists of cash or Temporary Cash Investments or the
assumption of Indebtedness of the Company or any Restricted Subsidiary,
provided that the Company or such Restricted Subsidiary is irrevocably and
unconditionally released from all liability under such Indebtedness. In the
event and to the extent that the Net Cash Proceeds received by the Company or
any of its Restricted Subsidiaries from one or more Asset Sales occurring on
or after the Closing Date in any period of 12 consecutive months exceed 10% of
Adjusted Consolidated Net Tangible Assets (determined as of the date closest
to the commencement of such 12-month period for which a consolidated balance
sheet of the Company and its Subsidiaries has been filed with the Commission
pursuant to the "Commission Reports and Reports to Holders" covenant), then
the Company shall or shall cause the relevant Restricted Subsidiary to (i)
within twelve months after the date Net Cash Proceeds so received exceed 10%
of Adjusted Consolidated Net Tangible Assets (A) apply an amount equal to such
excess Net Cash Proceeds to permanently repay unsubordinated Indebtedness of
the Company, the Obligors or any Restricted Subsidiary providing a Subsidiary
Guarantee pursuant to the "Limitation on Issuances of Guarantees by Restricted
Subsidiaries" covenant described above or Indebtedness of any other Restricted
Subsidiary, in each case owing to a Person other than the Company or any of
its Restricted Subsidiaries or (B) invest an equal amount, or the amount not
so applied pursuant to clause (A) (or enter into a definitive agreement
committing to so invest within 12 months after the date of such agreement), in
property or assets (other than current assets) of a nature or type or that are
used in a business (or in a company having property and assets of a nature or
type, or engaged in a
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business) similar or related to the nature or type of the property and assets
of, or the business of, the Company and its Restricted Subsidiaries existing
on the date of such investment and (ii) apply (no later than the end of the
12-month period referred to in clause (i)) such excess Net Cash Proceeds (to
the extent not applied pursuant to clause (i)) as provided in the following
paragraph of this "Limitation on Asset Sales" covenant. Without in any way
limiting the Company's discretion under the preceding sentence, pending the
final application of any such Net Cash Proceeds, the Company or such
Restricted Subsidiary may temporarily reduce Indebtedness under a revolving
credit facility, if any, or otherwise invest such Net Cash Proceeds. The
amount of such excess Net Cash Proceeds required to be applied (or to be
committed to be applied) during such 12-month period as set forth in clause
(i) of the preceding sentence and not applied as so required by the end of
such period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to
this "Limitation on Asset Sales" covenant totals at least $10 million, the
Obligors must commence, not later than the fifteenth Business Day of such
month, and consummate an Offer to Purchase from the Holders (and if required
by the terms of any Indebtedness that is pari passu with the Notes or the
Guaranty ("Pari Passu Indebtedness"), from the holders of such Pari Passu
Indebtedness) on a pro rata basis an aggregate Accreted Value of Notes (and
Pari Passu Indebtedness) equal to the Excess Proceeds on such date, at a
purchase price equal to 100% of the Accreted Value of the Notes on the
relevant Payment Date (and principal amount of Pari Passu Indebtedness), plus,
in each case, accrued interest (if any) to the Payment Date.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Obligors must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding,
at a purchase price equal to 101% of the Accreted Value thereof on the
relevant Payment Date, plus accrued interest (if any) to the Payment Date.
There can be no assurance that the Obligors will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well
as may be contained in other securities of the Company and the Obligors which
might be outstanding at the time). The above covenant requiring the Obligors
to repurchase the Notes will, unless consents are obtained, require the
Obligors to repay all indebtedness then outstanding which by its terms would
prohibit such Note repurchase, either prior to or concurrently with such Note
repurchase.
The Obligors will not be required to make an Offer to Purchase pursuant to
this covenant if a third party makes an Offer to Purchase in compliance with
this covenant and repurchases all Notes validly tendered and not withdrawn
under such Offer to Purchase.
COMMISSION REPORTS AND REPORTS TO HOLDERS
At all times from and after the earlier of (i) the date of the commencement
of an Exchange Offer or the effectiveness of the Shelf Registration Statement
(the "Registration") and (ii) the date that is six months after the Closing
Date, in either case, whether or not the Company and the Obligors are then
required to file reports with the Commission, the Company and the Obligors
shall file with the Commission all such reports and other information as they
would be required to file with the Commission by Sections 13(a) or 15(d) under
the Securities Exchange Act of 1934 if they were subject thereto. The Company
and the Obligors shall supply the Trustee and each Holder or shall supply to
the Trustee for forwarding to each such Holder, without cost to such Holder,
copies of such reports and other information. In addition, at all times prior
to the earlier of the date of the Registration and the date that is six months
after the Closing Date, the Company and the Obligors shall, at their cost,
deliver to each Holder of the Notes quarterly and annual reports substantially
equivalent to those which would be required by the Exchange Act. In addition,
at all times prior to the Registration, upon the request of any Holder or any
prospective purchaser of the Notes designated by a Holder, the Company and the
Obligors shall supply to such Holder or such prospective purchaser the
information required under Rule 144A under the Securities Act.
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EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
Indenture: (a) default in the payment of principal of (or premium, if any, on)
any Note when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise; (b) default in the payment of interest on any Note
when the same becomes due and payable, and such default continues for a period
of 30 days; (c) default in the performance or breach of the provisions of the
Indenture described under "Consolidation, Merger and Sale of Assets" or the
failure to make or consummate an Offer to Purchase in accordance with the
"Limitation on Asset Sales" or "Repurchase of Notes upon a Change of Control"
covenant; (d) the Company or the Obligors default in the performance of or
breaches any other covenant or agreement of the Company or the Obligors in the
Indenture or under the Notes (other than a default specified in clause (a),
(b) or (c) above) and such default or breach continues for a period of 30
consecutive days after written notice by the Trustee or the Holders of 25% or
more in aggregate principal amount of the Notes; (e) there occurs with respect
to any issue or issues of Indebtedness of the Company or any Significant
Subsidiary having an outstanding principal amount of $10 million or more in
the aggregate for all such issues of all such Persons, whether such
Indebtedness now exists or shall hereafter be created, (I) an event of default
that has caused the holder thereof to declare such Indebtedness to be due and
payable prior to its Stated Maturity and such Indebtedness has not been
discharged in full or such acceleration has not been rescinded or annulled
within 30 days of such acceleration and/or (II) the failure to make a
principal payment at the final (but not any interim) fixed maturity and such
defaulted payment shall not have been made, waived or extended within 30 days
of such payment default; (f) any final judgment or order (not covered by
insurance) for the payment of money in excess of $10 million in the aggregate
for all such final judgments or orders against all such Persons (treating any
deductibles, self-insurance or retention as not so covered) shall be rendered
against the Company or any Significant Subsidiary and shall not be paid or
discharged, and there shall be any period of 30 consecutive days following
entry of the final judgment or order that causes the aggregate amount for all
such final judgments or orders outstanding and not paid or discharged against
all such Persons to exceed $10 million during which a stay of enforcement of
such final judgment or order, by reason of a pending appeal or otherwise,
shall not be in effect; (g) a court having jurisdiction in the premises enters
a decree or order for (A) relief in respect of the Company or any Significant
Subsidiary in an involuntary case under any applicable bankruptcy, insolvency
or other similar law now or hereafter in effect, (B) appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator or similar
official of the Company or any Significant Subsidiary or for all or
substantially all of the property and assets of the Company or any Significant
Subsidiary or (C) the winding up or liquidation of the affairs of the Company
or any Significant Subsidiary and, in each case, such decree or order shall
remain unstayed and in effect for a period of 30 consecutive days; (h) the
Company or any Significant Subsidiary (A) commences a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or consents to the entry of an order for relief in an involuntary case
under any such law, (B) consents to the appointment of or taking possession by
a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar
official of the Company or any Significant Subsidiary or for all or
substantially all of the property and assets of the Company or any Significant
Subsidiary or (C) effects any general assignment for the benefit of creditors;
or (i) the Guaranty or any Subsidiary Guarantee ceases to be in full force and
effect (except as contemplated by the terms thereof) or the Company or any
Subsidiary Guarantor denies or disaffirms its obligations under the Indenture,
the Guaranty or any Subsidiary Guarantee.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company or an Obligor) occurs
and is continuing under the Indenture, the Trustee or the Holders of at least
25% in aggregate principal amount of the Notes, then outstanding, by written
notice to the Obligors (and to the Trustee if such notice is given by the
Holders), may, and the Trustee at the request of such Holders shall, declare
the Accreted Value of, premium, if any, and accrued interest on the Notes to
be immediately due and payable. Upon a declaration of acceleration, such
Accreted Value, premium, if any, and accrued interest shall be immediately due
and payable. In the event of a declaration of acceleration because an Event of
Default set forth in clause (e) above has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if
the event of default triggering such Event of Default pursuant to clause (e)
shall be remedied or cured by the Company or the relevant Significant
Subsidiary or waived by the holders of the relevant
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Indebtedness within 60 days after the declaration of acceleration with respect
thereto. If an Event of Default specified in clause (g) or (h) above occurs
with respect to the Company or an Obligor, the Accreted Value of, premium, if
any, and accrued interest on the Notes then outstanding shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder. The Holders of at least a majority
in principal amount of the outstanding Notes by written notice to the Obligors
and to the Trustee, may waive all past defaults and rescind and annul a
declaration of acceleration and its consequences if (i) all existing Events of
Default, other than the nonpayment of the Accreted Value of, premium, if any,
and interest on the Notes that have become due solely by such declaration of
acceleration, have been cured or waived and (ii) the rescission would not
conflict with any judgment or decree of a court of competent jurisdiction. For
information as to the waiver of defaults, see "--Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the
Trustee in personal liability, or that the Trustee determines in good faith
may be unduly prejudicial to the rights of Holders of Notes not joining in the
giving of such direction and may take any other action it deems proper that is
not inconsistent with any such direction received from Holders of Notes. A
Holder may not pursue any remedy with respect to the Indenture or the Notes
unless: (i) the Holder gives the Trustee written notice of a continuing Event
of Default; (ii) the Holders of at least 25% in aggregate principal amount of
outstanding Notes make a written request to the Trustee to pursue the remedy;
(iii) such Holder or Holders offer the Trustee indemnity satisfactory to the
Trustee against any costs, liability or expense; (iv) the Trustee does not
comply with the request within 60 days after receipt of the request and the
offer of indemnity; and (v) during such 60-day period, the Holders of a
majority in aggregate principal amount of the outstanding Notes do not give
the Trustee a direction that is inconsistent with the request. However, such
limitations do not apply to the right of any Holder of a Note to receive
payment of the Accreted Value of, premium, if any, or interest on, such Note
or to bring suit for the enforcement of any such payment, on or after the due
date expressed in the Notes, which right shall not be impaired or affected
without the consent of the Holder.
The Indenture will require certain officers of the Company and the Obligors
to certify, on or before a date not more than 90 days after the end of each
fiscal year, that a review has been conducted of the activities of the Company
and its Restricted Subsidiaries and the Company's and its Restricted
Subsidiaries' performance under the Indenture and that the Company and the
Obligors have fulfilled all obligations thereunder, or, if there has been a
default in the fulfillment of any such obligation, specifying each such
default and the nature and status thereof. The Company and the Obligors will
also be obligated to notify the Trustee of any default or defaults in the
performance of any covenants or agreements under the Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Neither the Company nor any Obligor that constitutes all or substantially
all of the property and assets of the Company will consolidate with, merge
with or into, or sell, convey, transfer, lease or otherwise dispose of all or
substantially all of its property and assets (as an entirety or substantially
an entirety in one transaction or a series of related transactions) to, any
Person or permit any Person to merge with or into it unless: (i) the Company
or such Obligor shall be the continuing Person, or the Person (if other than
the Company or such Obligor) formed by such consolidation or into which the
Company or such Obligor is merged or that acquired or leased such property and
assets of the Company or such Obligor shall be a corporation organized and
validly existing under the laws of the United States of America or any
jurisdiction thereof and shall expressly assume, by a supplemental indenture,
executed and delivered to the Trustee, all of the obligations of the Company
or the Obligor, as the case may be, on all of the Notes and under the
Indenture; (ii) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing; (iii)
immediately after giving effect to such transaction on a pro forma basis, the
Company or the Obligor or any Person becoming the successor obligor of the
Notes or the Guaranty, as the case may be, shall have a Consolidated Net Worth
equal
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to or greater than the Consolidated Net Worth of the Company or the Obligor
immediately prior to such transaction; provided that this clause (iii) shall
only apply to a sale of substantially all, but less than all, of the assets of
the Company or an Obligor; (iv) immediately after giving effect to such
transaction on a pro forma basis the Company or such Obligor, or any Person
becoming the successor obligor on the Guaranty or the Notes, as the case may
be, could Incur at least $1.00 of Indebtedness under the first paragraph of
the "Limitation on Indebtedness" covenant; provided that this clause (iv)
shall not apply to a consolidation, merger or sale of all (but not less than
all) of the assets of the Company or an Obligor if all Liens and Indebtedness
of the Company or any Person becoming the successor obligor on the Guaranty,
as the case may be, and its Restricted Subsidiaries, including the Obligors or
any Person becoming a successor Obligor on the Notes, outstanding immediately
after such transaction would, if Incurred at such time, have been permitted to
be Incurred (and all such Liens and Indebtedness, other than Liens and
Indebtedness of the Company and its Restricted Subsidiaries outstanding
immediately prior to the transaction, shall be deemed to have been Incurred)
for all purposes of the Indenture; and (v) the Company or such Obligor
delivers to the Trustee an Officers' Certificate (attaching the arithmetic
computations to demonstrate compliance with clauses (iii) and (iv), if either
is applicable) and Opinion of Counsel, in each case stating that such
consolidation, merger or transfer and such supplemental indenture complies
with this provision and that all conditions precedent provided for herein
relating to such transaction have been complied with; provided, however, that
clauses (iii) and (iv) above do not apply if, in the good faith determination
of the Board of Directors of the Company, whose determination shall be
evidenced by a Board Resolution, the principal purpose of such transaction is
to change the state of incorporation of the Company and such transaction shall
not have as one of its purposes the evasion of the foregoing limitations.
RELEASE OF OBLIGORS UPON SALE
The Indenture will provide that Renaissance Louisiana and/or Renaissance
Tennessee will be automatically, completely and unconditionally released and
discharged from its obligations in respect of the Notes upon the sale or other
disposition (in compliance with the first sentence of the "Limitation on
Assets Sales" covenant) of all of the Company's and each of its Restricted
Subsidiary's Capital Stock in such Obligor to any Person that is not an
Affiliate of the Company; provided that such sale is not governed by the
provisions of the Indenture described under "Consolidation, Merger and Sale of
Assets" and after any such release and discharge at least one Obligor shall
remain an obligor on the Notes.
For U.S. federal income tax purposes, a Holder will be treated as having
exchanged the Notes for new notes if there is "significant modification" of
the debt instrument within the meaning of the Treasury regulations and in such
case the Holder will be faxed on any gain or loss determined in accordance
with the discussion contained in "--Sale, Exchange or Redemption of the Notes"
above. The deletion of a co-obligor on the Notes will result in a "significant
modification" if, (i) as a result of the deletion, there is a substantial
impairment of the Company's capacity to meet the payment obligations under the
Notes, and (ii) the Company's capacity to meet the payment obligations under
the Notes was adequate prior to the deletion and is primarily speculative
after the deletion. The Company's capacity to meet the payment obligations
under the Notes includes any source for payment, including collateral,
guarantees, or other credit enhancement. There are limitations placed on the
ability of the Company to dispose of the Capital Stock in Renaissance
Louisiana or Renaissance Tennessee (see "Limitation on Assets Sales" covenant
described above). If such a disposition occurs, resulting in the release of
one of the Obligors, the Company does not believe that there will be a
substantial impairment of its capacity to meet the payment obligations under
the Notes or that such capacity will be primarily speculative, and thus such
deletion of an Obligor should not be a "significant modification" of the
Notes.
DEFEASANCE
Defeasance and Discharge. The Indenture will provide that the Obligors will
be deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to
the Notes (except for, among other matters, certain obligations to register
the transfer or exchange of the Notes, to replace stolen, lost or mutilated
Notes, to maintain paying agencies and to hold monies for payment in trust)
if, among other things,
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(A) the Obligors have deposited with the Trustee, in trust, money and/or U.S.
Government Obligations that through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on
the Notes on the Stated Maturity of such payments in accordance with the terms
of the Indenture and the Notes, (B) the Obligors have delivered to the Trustee
(i) either (x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
the Obligors' exercise of their option under this "Defeasance" provision and
will be subject to federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred, which Opinion of Counsel must be
based upon (and accompanied by a copy of) a ruling of the Internal Revenue
Service to the same effect unless there has been a change in applicable
federal income tax law after the Closing Date such that a ruling is no longer
required or (y) a ruling directed to the Trustee received from the Internal
Revenue Service to the same effect as the aforementioned Opinion of Counsel
and (ii) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and after
the passage of 123 days following the deposit, the trust fund will not be
subject to the effect of Section 547 of the United States Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law, (C) immediately after
giving effect to such deposit on a pro forma basis, no Event of Default, or
event that after the giving of notice or lapse of time or both would become an
Event of Default, shall have occurred and be continuing on the date of such
deposit or during the period ending on the 123rd day after the date of such
deposit, and such deposit shall not result in a breach or violation of, or
constitute a default under, any other agreement or instrument to which the
Company, the Obligors or any of their Subsidiaries is a party or by which the
Company, the Obligors or any of their Subsidiaries is bound and (D) if at such
time the Notes are listed on a national securities exchange, the Obligors have
delivered to the Trustee an Opinion of Counsel to the effect that the Notes
will not be delisted as a result of such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The Indenture
further will provide that the provisions of the Indenture will no longer be in
effect with respect to clauses (iii) and (iv) under "Consolidation, Merger and
Sale of Assets" and all the covenants described herein under "Covenants,"
clause (c) under "Events of Default" with respect to such clauses (iii) and
(iv) under "Consolidation, Merger and Sale of Assets," clause (d) under
"Events of Default" with respect to such other covenants and clauses (e) and
(f) under "Events of Default" shall be deemed not to be Events of Default
upon, among other things, the deposit with the Trustee, in trust, of money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance
with the terms of the Indenture and the Notes, the satisfaction of the
provisions described in clauses (B)(ii), (C) and (D) of the preceding
paragraph and the delivery by the Obligors to the Trustee of an Opinion of
Counsel to the effect that, among other things, the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such
deposit and defeasance of certain covenants and Events of Default and will be
subject to federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit and defeasance had
not occurred.
Defeasance and Certain Other Events of Default. In the event the Obligors
exercise their option to omit compliance with certain covenants and provisions
of the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated
Maturity but may not be sufficient to pay amounts due on the Notes at the time
of the acceleration resulting from such Event of Default. However, the
Obligors will remain liable for such payments and the Guaranty with respect to
such payments will remain in effect.
MODIFICATION AND WAIVER
From time to time, the Company, the Obligors and the Trustee, together,
without the consent of the Holders, may amend or supplement the Indenture or
the Notes to cure any ambiguity, defect or inconsistency, to provide
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for uncertificated Notes in addition to or in place of certificated notes, to
provide for the assumption of the Company's or an Obligor's obligations to
Holders of Notes in the case of a merger or consolidation, to make any change
that would provide any additional rights or benefits to the Holders of Notes
or that does not, in the good faith determination of the Board of Directors,
adversely affect the legal rights under the Indenture of any such Holder in
any material respect, or to comply with requirements of the Commission in
order to effect or maintain the qualification of the Indenture under the Trust
Indenture Act. Other modifications and amendments of the Indenture may be made
by the Company, the Obligors and the Trustee with the consent of the Holders
of not less than a majority in aggregate principal amount of the outstanding
Notes; provided, however, that no such modification or amendment may, without
the consent of each Holder affected thereby, (i) change the Stated Maturity of
the principal of, or any installment of interest on, any Note, (ii) reduce the
Accreted Value or principal of, or premium, if any, or interest on, any Note,
(iii) change the place or currency of payment of principal of, or premium, if
any, or interest on, any Note, (iv) impair the right to institute suit for the
enforcement of any payment on or after the Stated Maturity (or, in the case of
a redemption, on or after the Redemption Date) of any Note, (v) reduce the
above-stated percentage of outstanding Notes the consent of whose Holders is
necessary to modify or amend the Indenture, (vi) waive a default in the
payment of principal of, premium, if any, or interest on the Notes (except a
rescission of acceleration of the Notes by the Holders as provided in the
Indenture and a waiver of the payment default that resulted from such
acceleration), (vii) modify the Guaranty in a manner adverse to the Holders or
(viii) reduce the percentage of aggregate principal amount of outstanding
Notes the consent of whose Holders is necessary for waiver of compliance with
certain provisions of the Indenture or for waiver of certain defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company or the Obligors in the
Indenture, or in any of the Notes or the Guaranty or because of the creation
of any Indebtedness represented thereby, shall be had against any
incorporator, stockholder, member, officer, director, member of the board of
representatives, employee or controlling person of the Company or any Obligor
or of any successor Person thereof. Each Holder, by accepting the Notes,
waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default, the
Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in
its exercise of the rights and powers vested in it under the Indenture as a
prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of the Company or any Obligor, to obtain payment of claims
in certain cases or to realize on certain property received by it in respect
of any such claims, as security or otherwise. The Trustee is permitted to
engage in other transactions; provided, however, that if it acquires any
conflicting interest (as defined in the Indenture or the Trust Indenture Act),
it must eliminate such conflict or resign.
107
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the material United States federal income,
estate and gift tax consequences of the purchase, ownership and disposition of
the Notes, but is not purported to be a complete analysis of all potential tax
effects. This summary is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), existing and proposed regulations promulgated
thereunder, published rulings and court decisions, all as in effect and
existing on the date hereof and all of which are subject to change at any
time, which change may be retroactive or prospective. Unless otherwise
specifically noted, this summary applies only to those persons that hold the
Notes as capital assets within the meaning of Section 1221 of the Code. This
discussion assumes that the Notes will be treated as indebtedness for United
States federal income tax purposes.
THIS SUMMARY IS FOR GENERAL INFORMATION ONLY AND DOES NOT ADDRESS THE TAX
CONSEQUENCES TO TAXPAYERS WHO ARE SUBJECT TO SPECIAL RULES (SUCH AS FINANCIAL
INSTITUTIONS, TAX-EXEMPT ORGANIZATIONS, INSURANCE COMPANIES, S CORPORATIONS,
REGULATED INVESTMENT COMPANIES, REAL ESTATE INVESTMENT TRUSTS, BROKER-DEALERS,
TAXPAYERS SUBJECT TO THE ALTERNATIVE MINIMUM TAX AND PERSONS THAT WILL HOLD
THE NOTES AS PART OF A POSITION IN A "STRADDLE" OR AS PART OF A "CONSTRUCTIVE
SALE" OR A "HEDGING" OR "CONVERSION" TRANSACTION) OR ADDRESS ASPECTS OF
FEDERAL TAXATION THAT MIGHT BE RELEVANT TO A PROSPECTIVE INVESTOR BASED UPON
SUCH INVESTOR'S PARTICULAR TAX SITUATION. THIS SUMMARY DOES NOT ADDRESS ANY
TAX CONSEQUENCES ARISING UNDER ANY STATE, MUNICIPALITY, FOREIGN COUNTRY OR
OTHER TAXING JURISDICTION. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR
TAX ADVISORS REGARDING THE UNITED STATES FEDERAL TAX CONSEQUENCES OF OWNING
AND DISPOSING OF THE NOTES (INCLUDING THE INVESTOR'S STATUS AS A UNITED STATES
HOLDER OR A NON-UNITED STATES HOLDER), AS WELL AS ANY TAX CONSEQUENCES THAT
MAY ARISE UNDER THE LAWS OF ANY STATE, MUNICIPALITY, FOREIGN COUNTRY OR OTHER
TAXING JURISDICTION.
EFFECT OF EXCHANGE OF OLD NOTES FOR NEW NOTES
The Obligors believe that the exchange of Old Notes for New Notes pursuant
to the Exchange Offer will not be treated as an "exchange" for federal income
tax purposes because the New Notes will not be considered to differ materially
in kind or extent from the Old Notes. Rather, the New Notes received by a
holder will be treated as a continuation of the Old Notes in the hands of such
holder. As a result, holders will not recognize any taxable gain or loss or
any interest income as a result of exchanging Old Notes for New Notes pursuant
to the Exchange Offer, the holding period of the New Notes will include the
holding period of the Old Notes, and the basis of the New Notes will equal the
basis of the Old Notes immediately before the exchange.
UNITED STATES HOLDERS
General. The following is a general discussion of certain United States
federal income tax consequences of the ownership and sale or other disposition
of the Notes by a beneficial owner that, for United States federal income tax
purposes, is a "United States person" (a "United States Holder"). For purposes
of this discussion, a "United States person" means a citizen or individual
resident (as defined in Section 7701(b) of the Code) of the United States; a
corporation or partnership (including any entity treated as a corporation or
partnership for United States federal income tax purposes) created or
organized under the laws of the United States, any state thereof or the
District of Columbia unless, in the case of a partnership, otherwise provided
by regulation; an estate the income of which is subject to United States
federal income tax without regard to its source; or a trust if a court within
the Untied States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. Notwithstanding
108
the preceding sentence, certain trusts in existence on August 20, 1996, and
treated as United States persons prior to such date that elect to continue to
be so treated shall also be considered to be United States persons.
Original Issue Discount. Because the Notes were issued at a discount from
their "stated redemption price at maturity," the Notes have original issue
discount ("OID") for federal income tax purposes. For federal income tax
purposes, the amount of OID on a Note generally equals the excess of the
"stated redemption price at maturity" of the Note over its "issue price." The
issue price of the Notes is the first price to the public (excluding bond
houses, brokers, or similar persons or organizations acting in the capacity of
underwriters or wholesalers) at which a substantial amount of the Notes is
sold. For purposes of this discussion, it is assumed that all initial Holders
purchased their Notes at the issue price. The stated redemption price at
maturity of a Note is the sum of all cash payments to be made on such Note
(whether denominated as principal or interest) other than payments of
"qualified stated interest." Qualified stated interest is stated interest that
is unconditionally payable at least annually at a single fixed rate that
appropriately takes into account the length of the interval between payments.
Because there will be no required payment of interest on the Notes prior to
October 15, 2003, none of the interest payments on the Notes will constitute
qualified stated interest; accordingly, each Note bears OID in an amount equal
to the excess of (i) the sum of its principal amount and all stated interest
payments, over (ii) its issue price.
A United States Holder is required to include OID in income periodically
over the term of a Note before receipt of the cash or other payment
attributable to such income, regardless of such Holder's method of tax
accounting. The amount of OID required to be included in a United States
Holder's gross income for any taxable year is the sum of the "daily portions"
of OID with respect to the Note for each day during the taxable year or
portion of a taxable year during which such Holder holds the Note. The daily
portion is determined by allocating to each day of any "accrual period" within
a taxable year a pro rata portion of an amount equal to the "adjusted issue
price" of the Note at the beginning of the accrual period multiplied by the
"yield to maturity" of the Note. For purposes of computing OID, the Obligors
will use six-month accrual periods that end on the days in the calendar year
corresponding to the maturity date of the Notes and the date six months prior
to such maturity date, with the exception of an initial short accrual period.
A United States Holder is permitted to use different accrual periods; provided
that each accrual period is no longer than one year, and each scheduled
payment of interest or principal occurs on either the first or last day of an
accrual period. The adjusted issue price of a Note at the beginning of any
accrual period is the issue price of the Note increased by the amount of OID
previously includible in the gross income of the Holder and decreased by any
payments previously made on the Note. The yield to maturity is the discount
rate that, when used in computing the present value of all payments of
principal and interest to be made on a Note, produces an amount equal to the
issue price of the Note. Under these rules, United States Holders of Notes are
required to include in gross income increasingly greater amounts of OID in
each successive accrual period. Payments of stated interest on a Note will not
be separately included in income, but rather will be treated first as payments
of previously accrued OID and then as payments of principal and consequently
will reduce the United States Holder's basis in a Note, as described below
under "Certain United States Federal Income Tax Consequences--United States
Holders--Sale, Exchange or Redemption of the Notes."
The Obligors intend to treat the possibility of (i) an optional redemption,
as described under "Description of the Notes--Optional Redemption," and (ii) a
repurchase pursuant to a Change in Control, as described under "Description of
the Notes--Repurchase of Notes upon a Change of Control" as remote under
applicable Treasury regulations. The Company does not intend to treat the
possibilities described in (i) or (ii) above as (x) affecting the
determination of the yield to maturity of the Notes or (y) giving rise to any
additional accrual of OID or recognition of ordinary income upon the
redemption, sale or exchange of a Note. In the unlikely event that the
interest rate on the Notes is increased, then such increased interest may be
treated as increasing the amount of OID on the Notes includable by a United
States Holder in income as such OID accrues, in advance of the receipt of any
cash payment therefor.
Acquisition Premium. A United States Holder that purchases a Note for an
amount that is greater than its adjusted issue price as of the purchase date
will be considered to have purchased such Note at an "acquisition
109
premium." The amount of OID that such Holder must include in its gross income
with respect to such Note for any taxable year is generally reduced by the
portion of such acquisition premium properly allocable to such year. The
information reported by the Obligors to the record Holders of the Notes on an
annual basis will not account for an offset against OID for any portion of the
acquisition premium. Accordingly, each United States Holder should consult its
own tax advisor as to the determination of the acquisition premium amount and
the resulting adjustments to the amount of reportable OID.
Amortizable Bond Premium. A United States Holder that purchases a Note for
an amount in excess of its principal amount will be considered to have
purchased the Note at a premium and may elect to amortize such premium, using
a constant yield method, over the remaining term of the Note (or, if a smaller
amortization allowance would result, by computing such allowance with
reference to the amount payable on an earlier call date and amortizing such
allowance over the shorter period to such call date). The amount amortized in
any year will be treated as a reduction of the United States Holder's interest
income from the Note. Bond premium on a Note held by a United States Holder
that does not make such an election will decrease the gain or increase the
loss otherwise recognized on disposition of the Note. The election to amortize
bond premium on a constant yield method, once made, applies to all debt
obligations held or subsequently acquired by the electing United States Holder
on or after the first day of the first taxable year to which the election
applies and may not be revoked without the consent of the Internal Revenue
Service (the "Service").
Market Discount. If a United States Holder purchases, subsequent to its
original issuance, a Note for an amount that is less than its "revised issue
price" as of the purchase date, the amount of the difference generally will be
treated as "market discount," unless such difference is less than a specified
de minimis amount. The Code provides that the revised issue price of a Note
equals its issue price plus the amount of OID includable in the income of all
holders for periods prior to the purchase date (disregarding any deduction for
acquisition premium) reduced by the amount of all prior cash payments on the
Note. Subject to a de minimis exception, a United States Holder will be
required to treat any gain recognized on the sale, exchange, redemption,
retirement or other disposition of the Note as ordinary income to the extent
of the accrued market discount that has not previously been included in
income. In addition, the United States Holder may be required to defer, until
the maturity date of the Note or its earlier disposition in a taxable
transaction, the deduction of all or a portion of the interest expense on any
indebtedness incurred or continued to purchase or carry such Note.
Any market discount will be considered to accrue ratably during the period
from the date of acquisition to the maturity date of the Note, unless the
United States Holder elects to accrue market discount on a constant interest
method. A United States Holder of a Note may elect to include market discount
in income currently as it accrues (under either the ratable or constant
interest method). This election to include currently, once made, applies to
all market discount obligations acquired in or after the first taxable year to
which the election applies and may not be revoked without the consent of the
Service. If the United States Holder of a Note makes such an election, the
foregoing rules with respect to the recognition of ordinary income on sales
and other dispositions of such instruments, and with respect to the deferral
of interest deductions on debt incurred or maintained to purchase or carry
such debt instruments, would not apply.
Election to Treat All Interest as OID. A United States Holder of a Note may
elect, subject to certain limitations, to include all interest that accrues on
a Note in gross income on a constant yield basis. For purposes of this
election, interest includes stated interest, OID, market discount, de minimus
OID, de minimis market discount and unstated interest, as adjusted by any
amortizable bond premium or acquisition premium. Special rules and limitations
apply to taxpayers who make this election; therefore, United States Holders
should consult their tax advisors as to whether they should make this
election.
Sale, Exchange or Redemption of the Notes. Generally, a sale, exchange or
redemption of the Notes will result in taxable gain or loss equal to the
difference between the amount of cash or other property received and the
United States Holder's adjusted tax basis in the Note. A United States
Holder's adjusted tax basis for determining gain or loss on the sale or other
disposition of a Note will initially equal the cost of the Note to such
110
Holder and will be increased by (i) any amounts included in income as OID, and
(ii) any market discount previously included in income by such Holder, and
decreased by (a) any principal and stated interest payments received by such
Holder, and (b) any amortized premium previously deducted from income by such
Holder. Except as described above with respect to market discount, such gain
or loss will be capital gain or loss. Capital gain or loss will be long-term
gain or loss if the Note is held by the United States Holder for more than one
year, otherwise such gain or loss will be short-term.
United States Holders that are corporations will generally be taxed on net
capital gains at a maximum rate of 35%. In contrast, United States Holders
that are individuals will generally be taxed on net capital gains at a maximum
rate of (i) 39.6% for property held for 12 months or less, and (ii) 20% for
property held more than 12 months. Special rules (and generally lower maximum
rates) apply for individuals in lower tax brackets. Any capital losses
realized by a United States Holder that is a corporation generally may be used
only to offset capital gains. Any capital losses realized by a United States
Holder that is an individual generally may be used only to offset capital
gains plus $3,000 of other income per year.
Release of Obligors Upon Sale. Under certain circumstances, Renaissance
Louisiana or Renaissance Tennessee will be released and discharged from its
obligations in respect of the Notes upon the sale or other disposition of
Capital Stock in such Obligor to any Person that is not an Affiliate of the
Company. See "Description of the Notes--Release of Obligors Upon Sale." For
United States federal income tax purposes, a United States Holder will be
treated as having exchanged the Notes for new Notes if there is "significant
modification" of the debt instrument within the meaning of the Treasury
regulations, and in such case the Holder will be taxed on any gain or loss
determined in accordance with the discussion contained in "United States
Holders--Sale, Exchange or Redemption of the Notes" above. The deletion of a
co-obligor on the Notes will result in a "significant modification" if (i) as
a result of the deletion, there is a substantial impairment of the Company's
capacity to meet the payment obligations under the Notes, and (ii) the
Company's capacity to meet the payment obligations under the Notes was
adequate prior to the deletion and is primarily speculative after the
deletion. The Company's capacity to meet the payment obligations under the
Notes includes any source for payment, including collateral, guarantees, or
other credit enhancement. There are substantial limitations placed on the
ability of the Company to dispose of the Capital Stock in Renaissance
Louisiana or Renaissance Tennessee (see "Description of the Notes--Limitation
on Assets Sales"). If such disposition occurs, resulting in the release of one
of the Obligors, the Company does not believe that there will be a substantial
impairment of its capacity to meet the payment obligations under the Notes or
that such capacity will be primarily speculative, and thus that there will not
be a "significant modification" of the Notes.
FOREIGN HOLDERS
The following is a general discussion of certain United States federal
income, estate and gift tax consequences of the ownership and sale or other
disposition of the Notes by any beneficial owner of a Note that is not a
United States Holder (a "Non-United States Holder"). Resident alien
individuals are subject to United States federal income tax with respect to
the Notes as if they were United States Holders.
Interest. Under current United States federal income tax law, and subject to
the discussion of backup withholding below, interest (including OID) paid on
the Notes to a Non-United States Holder will not be subject to the normal 30%
United States federal withholding tax; provided that (i) the interest is
"effectively connected with the conduct of a trade or business in the United
States" by the Non-United States Holder and the Non-United States Holder
timely furnishes the Obligors with two duly executed copies of Internal
Revenue Service Form 4224 (or any successor form), or (ii) all of the
following conditions of the "portfolio interest" exception (the "Portfolio
Interest Exception") are met: (A) the Non-United States Holder does not,
actually or constructively, own 10% or more of the total combined voting power
of all classes of stock of a corporate issuer entitled to vote and does not,
actually or constructively, own 10% or more of the capital or profits interest
in a partnership issuer, (B) the Non-United States Holder is not a controlled
foreign corporation that is related, directly or indirectly, to the Obligors
through stock ownership, (C) the Non-United States Holder is not a bank
111
receiving interest (including OID) pursuant to a loan agreement entered into
in the ordinary course of its trade or business, and (D) either (1) the Non-
United States Holder certifies to the Obligors or their agent, under penalties
of perjury, that it is a Non-United States Holder and provides its name and
address, or (2) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business (a "Financial Institution"), and holds the Notes in such
capacity, certifies to the Obligors or their agent, under penalties of
perjury, that such statement has been received from the beneficial owner of
the Notes by it or by a Financial Institution between it and the beneficial
owner and furnishes the Obligors or their agent with a copy thereof. The
foregoing certification may be provided by the Non-United States Holder on
Internal Revenue Service Form W-8 (or any successor form). Such certificate is
effective with respect to payments of interest (including OID) made after the
issuance of the certificate in the calendar year of its issuance and the two
immediately succeeding calendar years.
On October 14, 1997, final regulations were published in the Federal
Register (the "1997 Final Regulations") that affect the United States federal
income taxation of Non-United States Holders. The 1997 Final Regulations are
effective for payments after December 31, 1999, regardless of the issue date
of the instrument with respect to which such payments are made, subject to
certain transition rules discussed below. The discussion under this heading
and under "Backup Withholding Tax and Information Reporting," below, is not
intended to be a complete discussion of the provisions of the 1997 Final
Regulations. Prospective Holders of the Notes are urged to consult their tax
advisors concerning the tax consequences of their investment in light of the
1997 Final Regulations.
The 1997 Final Regulations provide documentation procedures designed to
simplify compliance by withholding agents. The 1997 Final Regulations
generally do not affect the documentation rules described above, but add other
certification options. Under one such option, a withholding agent will be
allowed to rely on an intermediary withholding certificate furnished by a
"qualified intermediary" (as defined below) on behalf of one or more
beneficial owners (or other intermediaries) without having to obtain the
beneficial owner certificate described above. Qualified intermediaries
include: (i) foreign financial institutions or foreign clearing organizations
(other than a United States branch or United States office of such institution
or organization), or (ii) foreign branches or offices of United States
financial institutions or foreign branches or offices of United States
clearing organizations, which, as to both (i) and (ii), have entered into
withholding agreements with the Service. In addition to certain other
requirements, qualified intermediaries must obtain withholding certificates,
such as revised Internal Revenue Service Form W-8 (discussed below), from each
beneficial owner. Under another option, an authorized foreign agent of a
United States withholding agent will be permitted to act on behalf of the
United States withholding agent (including the receipt of withholding
certificates, the payment of amounts of income subject to withholding and the
deposit of tax withheld); provided that certain conditions are met.
For purposes of the certification requirements, the 1997 Final Regulations
generally treat as the beneficial owners of payments on a Note those persons
that, under United States federal income tax principles, are the taxpayers
with respect to such payments, rather than persons such as nominees or agents
legally entitled to such payments. In the case of payments to an entity
classified as a foreign partnership under United States tax principles, the
partners, rather than the partnership, generally must provide the required
certifications to qualify for the withholding tax exemption described above
(unless the partnership has entered into a special agreement with the
Service). A payment to a United States partnership, however, is treated for
these purposes as payment to a United States payee, even if the partnership
has one or more foreign partners. The 1997 Final Regulations provide certain
presumptions with respect to withholding for Holders not furnishing the
required certifications to qualify for the withholding tax exemption described
above. In addition, the 1997 Final Regulations will replace a number of
current tax certification forms (including Internal Revenue Service Form W-8)
with a single, revised Internal Revenue Service Form W-8 (which, in certain
circumstances, requires information in addition to that previously required).
Under the 1997 Final Regulations, this revised Form W-8 will remain valid
until the last day of the third calendar year following the year in which the
certificate is signed.
The 1997 Final Regulations provide transition rules concerning existing
certificates, such as Internal Revenue Service Form W-8. Valid withholding
certificates that are held on December 31, 1999 will generally
112
remain valid until the earlier of December 31, 2000 or the date of their
expiration. Existing certificates that expire in 1999 will not be effective
after their expiration. Certificates dated prior to January 1, 1998 will
generally remain valid until the end of 1998, irrespective of the fact that
their validity expires during 1998.
In the event that the interest (including OID) paid on the Notes is
effectively connected with the conduct of a trade or business within the
United States of the Non-United States Holder, the Non-United States Holder
will generally be taxed on a net income basis (that is, after allowance for
applicable deductions) at the graduated rates that are applicable to United
States Holders in essentially the same manner as if the Notes were held by a
United States Holder, as discussed above. In the case of a Non-United States
Holder that is a corporation, such income may also be subject to the United
States federal branch profits tax (which is generally imposed on a foreign
corporation upon the deemed repatriation from the United States of effectively
connected earnings and profits) at a 30% rate, unless the rate is reduced or
eliminated by an applicable income tax treaty and the Non-United States Holder
is a qualified resident of the treaty country.
If the interest on the Notes is not "effectively connected" and does not
qualify for the Portfolio Interest Exception, then the interest will be
subject to United States federal withholding tax at a flat rate of 30% (or a
lower applicable income tax treaty rate upon delivery of the appropriate
certification of eligibility for treaty benefits).
Gain on Sale or Other Disposition. Subject to special rules applicable to
individuals as described below, a Non-United States Holder will generally not
be subject to regular United States federal income or withholding tax on gain
recognized on a sale or other disposition of the Notes (including a deemed
exchange upon a release of Obligors, as discussed above in "Certain United
States Federal Income Tax Consequences--United States Holders--Release of
Obligors Upon Sale"), unless the gain is effectively connected with the
conduct of a trade or business within the United States of the Non-United
States Holder or of a partnership, trust or estate in which such Non-United
States Holder is a partner or beneficiary.
Gains realized by a Non-United States Holder that are effectively connected
with the conduct of a trade or business within the United States of the Non-
United States Holder will generally be taxed on a net income basis (that is,
after allowance for applicable deductions) at the graduated rates that are
applicable to United States Holders, as discussed above, unless exempt by an
applicable income tax treaty. In the case of a Non-United States Holder that
is a corporation, such income may also be subject to the United States federal
branch profits tax (which is generally imposed on a foreign corporation upon
the deemed repatriation from the United States of effectively connected
earnings and profits) at a 30% rate, unless the rate is reduced or eliminated
by an applicable income tax treaty and the Non-United States Holder is a
qualified resident of the treaty country.
In addition to being subject to the rules described above, an individual
Non-United States Holder who holds the Notes as a capital asset will generally
be subject to tax at a 30% rate on any gain recognized on the sale or other
disposition of such Notes if (i) such gain is not effectively connected with
the conduct of a trade or business within the United States of the Non-United
States Holder, and (ii) such individual is present in the United States for
183 days or more in the taxable year of the sale or other disposition and
either (A) has a "tax home" in the United States (as specially defined for
purposes of the United States federal income tax), or (B) maintains an office
or other fixed place of business in the United States and the gain from the
sale or other disposition of the Notes is attributable to such office or other
fixed place of business. Individual Non-United States Holders may also be
subject to tax pursuant to provisions of United States federal income tax law
applicable to certain United States expatriates (including certain former
long-term residents of the United States).
Under the 1997 Final Regulations, withholding of United States federal
income tax may apply to payments on a taxable sale or other disposition of the
Notes by a Non-United States Holder who does not provide appropriate
certification to the withholding agent with respect to such transaction.
Federal Estate Taxes. A Note beneficially owned by an individual who is
neither a United States citizen nor a domiciliary of the United States at the
time of death will not be subject to United States federal estate tax
113
as a result of such individual's death; provided that any interest thereon
would have been eligible for the Portfolio Interest Exception described above
in "Certain United States Federal Income Tax Consequences--Foreign Holders--
Interest," if such interest had been received by the individual at the time of
death.
Federal Gift Taxes. An individual who is not a United States citizen will
not be subject to United States federal gift tax on a transfer of Notes,
unless such person is a domiciliary of the United States or such person is
subject to provisions of United States federal gift tax law applicable to
certain United States expatriates (including certain former long-term
residents of the United States).
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
Under current United States federal income tax law, information reporting
requirements apply to interest (including OID) paid to, and to the proceeds of
sales or other dispositions before maturity by, certain non-corporate persons.
In addition, a 31% backup withholding tax applies if a non-corporate person
(i) fails to furnish such person's Taxpayer Identification Number ("TIN")
(which, for an individual, is his or her Social Security Number) to the payor
in the manner required, (ii) furnishes an incorrect TIN and the payor is so
notified by the Service, (iii) is notified by the Service that such person has
failed properly to report payments of interest and dividends, or (iv) in
certain circumstances, fails to certify, under penalties of perjury, that such
person has not been notified by the Service that such person is subject to
backup withholding for failure properly to report interest and dividend
payments. Backup withholding does not apply to payments made to certain exempt
recipients, such as corporations and tax-exempt organizations.
In the case of a Non-United States Holder, under current United States
federal income tax law, backup withholding and information reporting do not
apply to payments of interest (including OID) with respect to the Note, or to
payments on the sale or other disposition of a Note, if such Holder has
provided to the Obligors or their paying agent the certification described in
clause (ii)(D) of "Certain United States Federal Income Tax Consequences--
Foreign Holders--Interest" or has otherwise established an exemption.
Under current United States federal income tax law, (i) interest payments
(including OID) with respect to a Note collected outside the United States by
a foreign office of a custodian, nominee or broker acting on behalf of a
beneficial owner of a Note, and (ii) payments on the sale or other disposition
of a Note to or through a foreign office of a broker are not generally subject
to backup withholding or information reporting. However, if such custodian,
nominee or broker is a "United States person" (as defined in Section
7701(a)(30) of the Code), a controlled foreign corporation for United States
tax purposes or a foreign person 50% of more of whose gross income is
effectively connected with the conduct of a United States trade or business
for a specified three-year period (a "U.S. Related Person"), such custodian,
nominee or broker may be subject to certain information reporting (but not
backup withholding) requirements with respect to such payments, unless such
custodian, nominee or broker has in its records documentary evidence that the
beneficial owner is not a United States Holder and certain conditions are met
or the beneficial owner otherwise establishes an exemption. Backup withholding
may apply to any payment that such custodian, nominee or broker is required to
report if such person has actual knowledge that the payee is a United States
Holder. Payments to or through the United States office of a broker will be
subject to backup withholding and information reporting unless the Holder
certifies, under penalties of perjury, that it is not a United States Holder
or otherwise establishes an exemption.
The 1997 Final Regulations modify certain of the certification requirements
for backup withholding and expand the group of U.S. Related Persons. It is
possible that the Obligors or their paying agent may request new withholding
exemption forms from Holders in order to qualify for continued exemption from
backup withholding when the 1997 Final Regulations become effective.
Backup withholding tax is not an additional tax. Rather, any amounts
withheld from a payment to a Holder under the backup withholding rules are
allowed as a refund or a credit against such Holder's United States federal
income tax; provided that the required information is furnished to the
Service.
114
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer (other than an affiliate of the Company) in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Obligors and the Guarantor have agreed that for a
period starting on the Expiration Date and ending on the close of business on
the 180th day following the Expiration Date, they will make this Prospectus,
as amended or supplemented, available to any Participating Broker-Dealer for
use in connection with any such resale.
The Obligors will not receive any proceeds from any sales of the New Notes
by Participating Broker-Dealers. New Notes received by Participating Broker-
Dealers for their own account pursuant to the Exchange Offer may be sold from
time to time in one or more transactions in the over- the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating Broker-Dealer and/or the purchasers of
any such New Notes. Any Participating Broker-Dealer that resells the New Notes
that were received by it for its own account pursuant to the Exchange Offer
and any broker or dealer that participates in a distribution of such New Notes
may be deemed to be an "underwriter" within the meaning of the Securities Act
and any profit on any such resale of New Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that
by acknowledging that it will deliver and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Obligors will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal. The Obligors and the Guarantor
have agreed to pay expenses incident to the Exchange Offer other than
commissions or concessions of any broker-dealers and will indemnify the
holders of Old Notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act. Morgan Stanley
has indicated to the Company that it intends to effect offers and sales of the
New Notes in market-making transactions at negotiated prices related to
prevailing market prices at the time of sale, but is not obligated to do so
and such market-making activities may be discontinued at any time. Morgan
Stanley may act as principal or agent in such transactions. There can be no
assurance that an active market for the New Notes will develop. If Morgan
Stanley conducts any market making activities, it may be required to deliver a
"market-making prospectus" when effecting offers and sales in the New Notes
because of the equity ownership of Holdings by the Morgan Stanley Entities,
all of which are affiliates of Morgan Stanley and own in the aggregate
approximately 87.6% of the outstanding equity of Holdings. For so long as a
market-making prospectus is required to be delivered, the ability of Morgan
Stanley to make a market in the New Notes may, in part, be dependent on the
ability of the Company to maintain a current market-making prospectus.
The Company has not entered into an arrangements or understanding with any
person to distribute the New Notes to be received in the Exchange Offer.
115
LEGAL MATTERS
The validity of the New Notes and the New Guaranty offered hereby will be
passed upon on behalf of the Obligors and the Guarantor by Dow, Lohnes &
Albertson, PLLC, Washington, D.C.
EXPERTS
The audited combined financial statements of the Systems as of December 31,
1996 and 1997, and for each of the three years ended December 31, 1997, and
the audited combined financial statements of Holdings and Renaissance Media as
of December 31, 1997 and for the period from November 5, 1997 (date of
inception) to December 31, 1997 appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere herein, and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
116
INDEX TO FINANCIAL STATEMENTS
RENAISSANCE MEDIA HOLDINGS LLC AND RENAISSANCE MEDIA LLC PAGE
----
Report of Independent Auditors............................................ F-2
Combined Balance Sheet as of December 31, 1997............................ F-3
Combined Income Statement and Retained Earnings for the Period from
November 5, 1997 (Date of Inception) to December 31, 1997................ F-4
Combined Statement of Cash Flows for the Period from November 5, 1997
(Date of Inception) to December 31, 1997................................. F-5
Notes to Financial Statements............................................. F-6
RENAISSANCE MEDIA GROUP LLC
Consolidated Balance Sheet as of June 30, 1998 (unaudited)................ F-9
Consolidated Statement of Operations for the six months ended June 30,
1998 (unaudited)......................................................... F-10
Consolidated Statement of Member's Equity for the six months ended June
30, 1998 (unaudited)..................................................... F-11
Consolidated Statement of Cash Flows for the six months ended June 30,
1998 (unaudited)......................................................... F-12
Notes to Financial Statements............................................. F-13
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE
LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
Report of Independent Auditors............................................ F-18
Combined Balance Sheets as of December 31, 1996 and 1997 and April 8, 1998
(unaudited).............................................................. F-19
Combined Statements of Operations for the Years Ended December 31, 1995,
1996 and 1997 and the three months ended March 31, 1997 and the period
January 1, to April 8, 1998 (unaudited).................................. F-20
Combined Statements of Changes in Net Assets for the Years Ended December
31, 1996 and 1997 and the period January 1, to April 8, 1998
(unaudited).............................................................. F-21
Combined Statements of Cash Flows for the Years Ended December 31, 1995,
1996 and 1997, the three months ended March 31, 1997 and the period
January 1, to April 8, 1998 (unaudited).................................. F-22
Notes to Combined Financial Statements.................................... F-23
Note: Financial statements of Renaissance Media (Louisiana) LLC
("Louisiana"), Renaissance Media (Tennessee) LLC ("Tennessee"), and
Renaissance Media Capital Corporation ("Capital") (collectively, the
"Co-obligors"), each a wholly-owned subsidiary of Renaissance Media
Group LLC (the "Company"), have not been presented as (i) the Company
and Co-obligors have no operations or assets independent of Renaissance
Media, a wholly-owned subsidiary of Louisiana and Tennessee, (ii) the
Co-obligors were formed solely for the purpose of serving as co-
obligors of the Notes as Tennessee's and Louisiana's only significant
assets are their respective equity ownership interests in Renaissance
Media, and Capital has no significant assets and is nominally
capitalized, and (iii) as co-obligors, the Company and these wholly-
owned subsidiaries are effectively jointly and severally liable for the
obligations under the Notes on a full and unconditional basis.
Accordingly, management has determined that such financial statements
would not be material to investors.
F-1
REPORT OF INDEPENDENT AUDITORS
To the Members of
Renaissance Media Holdings LLC
Renaissance Media LLC
We have audited the accompanying combined balance sheet of Renaissance Media
Holdings LLC and Renaissance Media LLC (as combined, the "Company") as of
December 31, 1997 and the related combined income statement and statement of
cash flows for the period from November 5, 1997 (date of inception) to
December 31, 1997. These combined financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
December 31, 1997 and the results of its operations and its cash flows for the
period from November 5, 1997 (date of inception) to December 31, 1997 in
conformity with generally accepted accounting principles.
Ernst & Young LLP
New York, New York
March 16, 1998
F-2
RENAISSANCE MEDIA HOLDINGS LLC AND RENAISSANCE MEDIA LLC
COMBINED BALANCE SHEET
DECEMBER 31, 1997
ASSETS
Cash and cash equivalents.......................................... $ 903,034
Accrued interest income............................................ 59,434
Accounts receivable................................................ 2,500
Prepaid expenses and other assets.................................. 2,041
Escrow deposit..................................................... 15,000,000
Deferred acquisition costs, net.................................... 347,500
Deferred financing costs........................................... 692,500
Less accumulated amortization...................................... (4,271)
-----------
688,229
-----------
Total assets................................................... $17,002,738
===========
LIABILITIES AND MEMBERS' EQUITY
Due to Management Investors........................................ $ 1,000,000
Accounts payable................................................... 11,313
Accrued expenses:
Legal............................................................ 880,000
Audit fees....................................................... 15,000
Other professional fees.......................................... 60,000
-----------
1,966,313
-----------
MEMBERS' EQUITY:
Morgan Stanley Capital Partners III, Inc........................... 1
Morgan Stanley Capital Partners III, L.P........................... 13,269,701
MSCP III 892 Investors, L.P........................................ 1,358,582
Morgan Stanley Capital Investors, L.P.............................. 371,717
Retained earnings.................................................. 36,424
-----------
Total members' equity.......................................... 15,036,425
-----------
Total liabilities and members' equity.......................... $17,002,738
===========
See accompanying notes to financial statements.
F-3
RENAISSANCE MEDIA HOLDINGS LLC AND RENAISSANCE MEDIA LLC
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
NOVEMBER 5, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
REVENUES:
Interest income........................................................ $64,968
-------
Total revenue...................................................... 64,968
-------
EXPENSES:
Employee............................................................... 9,196
General................................................................ 77
Professional........................................................... 15,000
Interest expense....................................................... 4,271
-------
Total expenses..................................................... 28,544
-------
Net income......................................................... $36,424
Retained earnings, beginning of period............................. --
-------
Retained earnings, end of period................................... $36,424
=======
See accompanying notes to financial statements.
F-4
RENAISSANCE MEDIA HOLDINGS LLC AND RENAISSANCE MEDIA LLC
COMBINED STATEMENT OF CASH FLOW
NOVEMBER 5, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997
OPERATING ACTIVITIES:
Net income........................................................ $ 36,424
Adjustments to non-cash and non-operating items:
Non-cash interest expense/(income).............................. 4,271
Changes in operating assets and liabilities:
Accrued interest income....................................... (59,434)
Accounts receivable........................................... (2,500)
Prepaid expenses and other assets............................. (2,041)
Purchase of interest rate cap agreement....................... (102,500)
Accrued expenses:
Other professional fees..................................... 2,500
Audit fees.................................................. 15,000
Accounts payable.............................................. 11,313
------------
Net cash (used in) operating activities........................... (96,967)
------------
INVESTING ACTIVITIES:
Escrow deposit.................................................... (15,000,000)
------------
Net cash (used in) investing activities........................... (15,000,000)
------------
FINANCING ACTIVITIES:
Due to Management Investors....................................... 1,000,000
Capital contributions:
Morgan Stanley Capital Partners III, Inc........................ 1
Morgan Stanley Capital Partners III, L.P........................ 13,269,701
MSCP III 892 Investors, L.P..................................... 1,358,582
Morgan Stanley Capital Investors, L.P........................... 371,717
------------
Net cash provided by (used in) financing activities............... 16,000,001
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................... 903,034
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD.......... --
------------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD................ $ 903,034
============
See accompanying notes to financial statements.
F-5
RENAISSANCE MEDIA HOLDINGS LLC AND RENAISSANCE MEDIA LLC
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
Renaissance Media Holdings LLC ("Holdings") was formed on November 5, 1997
to acquire certain cable television systems in Louisiana, Tennessee and
Mississippi. The initial investing stockholders of Holdings were Morgan
Stanley Capital Partners III, L.P. ("MSCP III L.P."), MSCP III 892 Investors,
L.P. ("MSCP III 892"), and Morgan Stanley Capital Investors, L.P. ("MSCI
L.P."). Renaissance Media LLC ("Media") was formed on November 24, 1997. The
initial investing stockholder of Media was Morgan Stanley Capital Partners
III, Inc. ("MSCP III Inc.).
The financial statements of Holdings and Media (as combined, the "Company")
have been combined as of December 31, 1997 and for the period from November 5,
1997 (date of inception) to December 31, 1997 as (i) it is management's belief
that the combined financial statements present the financial position and
results of operations of what will become the ultimate legal entity structure
upon the closing of the Asset Purchase Transaction (as defined in Note 3
below) and the offering of the Notes (as defined in Note 9 below), (ii) Media
and Holdings were the only legal operating entities in existence at December
31, 1997 with any assets, liabilities, revenue or expenses, (iii) Media was
nominally capitalized at $1 and had minimal operations, (iv) Media and
Holdings were under common control because (x) Holdings has been advised by
MSCP III L.P., MSCP III 892 and MSCI L.P. that MSCP III Inc. is the general
partner of the general partner of each of MSCP III L.P., MSCP III 892 and MSCI
L.P., which were the sole equity owners of Holdings and as general partner
controls all activities of MSCP III L.P., MSCP III 892 and MSCI L.P.
(including, without limitation, their major operating and financial policies)
and (y) MSCP III Inc. was the sole equity owner of Media, and (v) the
financial statements of Media are not material to the combined financial
statements. Subsequent to December 31, 1997, the following legal entity
structure changes were enacted: (a) Holdings formed two wholly-owned
subsidiaries, Renaissance Media (Louisiana) LLC ("Louisiana") and Renaissance
Media (Tennessee) LLC ("Tennessee"), on January 7, 1998; (b) Louisiana and
Tennessee acquired a 76% interest and 24% interest in Media, respectively,
from MSCP III Inc. on February 13, 1998 at the same nominal amount through an
acquisition of entities under common control accounted for as if it were a
pooling of interests, as a result of which Media became a subsidiary of
Holdings; (c) Holdings formed two wholly-owned subsidiaries, Renaissance Media
Group LLC ("Group") and Renaissance Media Capital Corporation, on March 13,
1998 and March 12, 1998, respectively; and (d) Holdings contributed its
membership interests in Louisiana and Tennessee to Group on March 20, 1998.
Significant intercompany transactions and accounts have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The presentation of the financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and footnotes thereto. Actual results
could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Deferred Acquisition and Financing Costs
Deferred acquisition and financing costs at December 31, 1997 consist
primarily of legal fees associated with the acquisition of certain assets of
TWI Cable Inc. ("TWI Cable") and financing costs relating to the contemplated
financing (see note 4). Subsequent to the closing of the acquisition, these
costs will be amortized over periods ranging from 8 to 15 years.
F-6
RENAISSANCE MEDIA HOLDINGS LLC AND RENAISSANCE MEDIA LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. ASSET PURCHASE AGREEMENT
On November 14, 1997, Holdings entered into an Asset Purchase Agreement (the
"Asset Purchase Agreement") with TWI Cable whereby Holdings agreed to purchase
from TWI Cable the assets of certain cable television systems in Louisiana,
Tennessee and Mississippi (the "Acquisition"). This transaction closed on
April 9, 1998 and was accounted for using the purchase method. The purchase
price for the assets acquired was $309.5 million, $300 million of which was
paid in cash and $9.5 million of which was paid by the issuance of an equity
interest (9,500 units) in Holdings to TWI Cable at the closing. The 9,500
units issued to TWI Cable as equity represent an 8.8% interest in Holdings,
determined by dividing the TWI Cable interest of 9,500 units by the total
units outstanding of Holdings of 108,500. TWI Cable's interest in Holdings is
as a minority member with one Board representative, and TWI Cable has economic
interests in Holdings equal to its ownership percentage on the same basis as
all other members of Holdings. Holdings was formed to consummate the
Acquisition and had no assets prior to this transaction. In accordance with
the Limited Liability Company Agreement of Holdings, TWI Cable is not required
to make any future equity contribution to Holdings and its ability to sell or
otherwise dispose of its interests in Holdings is limited. In accordance with
the Asset Purchase Agreement, Holdings made a deposit payment of $15 million
on December 5, 1997 which was held by an escrow agent until the closing date.
(See Note 9.)
4. CAPITALIZATION AND DEBT FINANCING
In accordance with a commitment letter dated November 14, 1997, Morgan
Stanley Senior Funding, Inc. has committed to provide up to $200 million of
acquisition debt financing to Media ("Acquisition Debt"), including $25
million available to Media, if necessary, to fund capital expansion and
upgrade programs as well as for general working capital requirements. (See
Note 9.)
5. INTEREST-RATE CAP AGREEMENT
On December 5, 1997, Media purchased an interest-rate cap agreement from
Morgan Stanley Capital Services Inc. At December 31, 1997, the interest-rate
cap agreement effectively fixed or set a maximum interest rate of 7.25% on
bank debt borrowings up to $100 million. The interest-rate cap agreement
expires on December 5, 1999. The cost of this agreement has been recorded as
deferred financing costs and is being amortized to interest expense ratably
over the life of the agreement.
6. DUE TO MANAGEMENT INVESTORS
Subsequent to the formation of the Company and the execution of the Asset
Purchase Agreement, the Management Investors advanced $1 million to Holdings.
At the closing of the Asset Purchase Agreement, (see Note 9), this advance
will be contributed by the Management Investors to Holdings as equity.
7. COMMITMENTS
Media entered into a lease agreement on January 5, 1998 for corporate office
headquarters. The lease agreement expires on January 4, 1999. Annual rental
expense for 1998 under the agreement will be $90,000.
8. INCOME TAXES
Holdings and Media are limited liability companies and are not subject to
Federal or State Income Tax. Any income earned by these entities will be taxed
to their respective members.
9. SUBSEQUENT EVENTS (UNAUDITED)
On April 9, 1998, the Acquisition described in Note 3 was completed. At that
time Holdings assigned its rights and obligations under the Asset Purchase
Agreement to Media.
The capitalization of Holdings was modified with respect to the financing
aspects of the transaction such that the Acquisition Debt described in Note 4
was reduced to $150 million of which $110 million was drawn
F-7
RENAISSANCE MEDIA HOLDINGS LLC AND RENAISSANCE MEDIA LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. SUBSEQUENT EVENTS (UNAUDITED)--(CONTINUED)
and $40 million is available under a revolving credit facility. In addition,
Renaissance Media Group LLC, Renaissance Media (Louisiana) LLC, Renaissance
(Tennessee) LLC and Renaissance Media Capital Corporation (collectively, the
"Obligors") issued $163 million senior discount notes due 2008 (the "Notes")
and received net cash proceeds of approximately $100 million. The Notes will
fully accrete to face value on April 15, 2003, and after such date will bear
interest, payable semi-annually in cash, at a rate of 10% per annum on April
15 and October 15 of each year commencing October 15, 2003. The Notes are
redeemable at the option of the Obligors at any time on or after April 15,
2003 at 105.0% of the principal amount thereof at maturity until April 15,
2004 and declining in accordance with a schedule to 100.0% of the principal
amount thereof at maturity in 2006 and thereafter. The payment of the Notes
will be guaranteed by Renaissance Media Group LLC and will be effectively
subordinated to all liabilities of Renaissance Media Group LLC's subsidiaries.
The indenture for the Notes contains certain restrictive covenants. Additional
equity contributions of $93.5 million, were made by MSCP III, L.P., MSCP III
892, MSCI L.P., TWI Cable and the Management Investors on April 9, 1998 to the
Company.
F-8
RENAISSANCE MEDIA GROUP, LLC
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1998
(UNAUDITED)
ASSETS
Cash............................................................ $ 3,287,209
Accounts Receivable--trade (less allowance for doubtful accounts
of $94,079).................................................... 1,021,854
Accounts Receivable--other...................................... 400,123
Prepaid expenses and other assets............................... 361,603
Investment in cable television systems:
Property, plant and equipment................................. 65,915,365
Less: Accumulated depreciation................................ (1,539,899)
------------
64,375,466
Cable television franchises................................... 236,959,791
Less: Accumulated amortization................................ (3,597,534)
------------
233,362,257
Intangible assets............................................. 17,485,840
Less: Accumulated amortization................................ (349,628)
------------
17,136,212
Total investment in cable television systems................ 314,873,935
------------
Total Assets.............................................. $319,944,724
============
LIABILITIES AND MEMBERS' EQUITY
Accounts payable.................................................. 650,900
Accrued expenses.................................................. 8,307,874
Subscriber advance payments and deposits.......................... 601,854
Deferred marketing support........................................ 508,467
Advances from affiliates.......................................... 206,873
Other liabilities................................................. 4,421
Debt.............................................................. $204,785,825
------------
Total Liabilities........................................... 215,066,214
MEMBERS' EQUITY:
Paid in Capital................................................... 108,500,000
Retained Earnings................................................. (3,621,490)
------------
Total Members' Equity......................................... 104,878,510
------------
Total Liabilities and Members' Equity......................... $319,944,724
============
See accompanying notes to financial statements.
F-9
RENAISSANCE MEDIA GROUP, LLC
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
REVENUES......................................................... $12,920,709
------------
COSTS & EXPENSES
Service Costs.................................................... 4,205,745
Selling, General & Administrative................................ 2,451,331
Depreciation & Amortization...................................... 5,457,165
------------
Operating Income............................................... 806,468
------------
Interest Income................................................ 59,775
Interest (Expense)............................................. (4,389,189)
------------
Income (Loss) Before Provision for Taxes....................... (3,522,946)
------------
Provision for Taxes............................................ 75,000
------------
Net Income (Loss).............................................. $(3,597,946)
============
See accompanying notes to financial statements.
F-10
RENAISSANCE MEDIA GROUP, LLC
CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
TOTAL
PAID IN RETAINED MEMBER'S
CAPITAL EARNINGS EQUITY
------------ ----------- ------------
Balance at December 31, 1997........... $ -- $ (23,544) $ (23,544)
Capital Contributions.................. 108,500,000 -- 108,500,000
Net Income (Loss)...................... -- (3,597,946) (3,597,946)
------------ ----------- ------------
Balance at June 30, 1998............... $108,500,000 $(3,621,490) $104,878,510
============ =========== ============
See accompanying notes to financial statements.
F-11
RENAISSANCE MEDIA GROUP, LLC
CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
OPERATING ACTIVITIES:
Net (loss)....................................................... $ (3,597,946)
Adjustments to non-cash and non-operating items:
Depreciation and amortization................................... 5,482,790
Accretion on Senior Discount Notes.............................. 2,274,236
Changes in operating assets and liabilities:
Accounts receivable--other..................................... (400,123)
Accounts receivable--trade, net................................ (1,021,853)
Prepaid expenses and other assets.............................. (359,562)
Accounts payable............................................... 639,586
Accrued expenses............................................... 8,297,874
Subscriber advance payments and deposits....................... 601,853
Other liabilities.............................................. 4,421
Advances from affiliates....................................... 104,373
Deferred marketing support..................................... 508,467
------------
Net cash provided by operating activities........................ 12,534,116
INVESTING ACTIVITIES:
Purchased cable television systems:
Property, plant and equipment.................................. (65,216,000)
Cable television franchises.................................... (235,676,000)
Cash paid in excess of identifiable assets..................... (8,608,000)
Escrow deposit.................................................. 15,000,000
Capital expenditures ........................................... (691,365)
Cable television franchises..................................... (1,234,756)
Other intangible assets......................................... (440,198)
Deferred acquisition costs...................................... (49,035)
------------
Net cash (used in) investing activities.......................... (296,915,354)
FINANCING ACTIVITIES:
Debt acquisition costs.......................................... (8,343,142)
Principal repayments on bank debt............................... (7,500,000)
Proceeds from bank debt......................................... 110,000,000
Proceeds from 10% Senior Discount Notes......................... 100,011,589
Capital contributions (includes cash previously held by
Renaissance Media Holdings LLC)................................ 93,500,000
------------
Net cash provided by financing activities........................ 287,668,447
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ....................... 3,287,209
CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1997................... --
------------
CASH AND CASH EQUIVALENTS AT JUNE 30, 1998....................... $ 3,287,209
============
See accompanying notes to financial statements.
F-12
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(ALL DOLLAR AMOUNTS IN 000'S EXCEPT WHERE INDICATED)
(UNAUDITED)
1. ORGANIZATION
Renaissance Media Group, LLC ("Group") was formed on March 13, 1998 by
Renaissance Media Holdings, LLC ("Holdings"). Holdings formed Renaissance
Media Capital Corporation on March 12, 1998. On March 20, 1998, Holdings
contributed to Group its membership interests in two wholly-owned
subsidiaries, Renaissance Media (Louisiana) LLC ("Louisiana") and Renaissance
Media (Tennessee) LLC ("Tennessee"), which were formed on January 7, 1998.
Louisiana and Tennessee acquired a 76% interest and 24% interest,
respectively, in Renaissance Media LLC ("Media") from Morgan Stanley Capital
Partners III, Inc. on February 13, 1998 at the same nominal amount through an
acquisition of entities under common control accounted for as if it were a
pooling of interests, as a result of which Media became a subsidiary of
Holdings. Group and its aforementioned subsidiaries are collectively referred
to as the "Company". On April 9, 1998, the Company acquired six cable
television systems from TWI Cable, Inc. ("TWI Cable"). See Note 4. Prior to
this Acquisition, the Company had no operations other than start up related
activities.
2. BASIS OF PRESENTATION
Significant intercompany transactions and accounts have been eliminated. The
accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial statements and
with the instructions to Article 10 of Regulation S-X. The interim financial
statements are unaudited but include all adjustments, which are of normal
recurring nature that the Company considers necessary for a fair presentation
of the financial position and the results of operations and cash flows for
such period. Operating results of interim periods are not necessarily
indicative of results for a full year.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of
the Company and its wholly owned subsidiaries. Significant intercompany
accounts and transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents include cash and investments in short-term, highly
liquid securities, which have maturities when purchased of three months or
less.
Property and Equipment
Property and equipment are stated at cost. Replacements, renewals and
improvements are capitalized. Maintenance and repairs are charged to expense
as incurred. Depreciation of property and equipment is provided using the
straight-line method over the following estimated service lives:
Buildings..................................................... 40 years
Distribution plant............................................ 3-10 years
Other equipment and leasehold improvements.................... 3-20 years
The Company periodically reviews the carrying value of its long-lived
assets, including property, equipment and intangible assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. To the extent the estimated future cash inflows attributable to
the asset, less estimated future cash outflows, is less than the carrying
amount, an impairment loss is recognized to the extent that the carrying value
of such asset is greater than its fair value.
F-13
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998
(ALL DOLLAR AMOUNTS IN 000'S EXCEPT WHERE INDICATED)
(UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Intangible Asset
Costs assigned to franchise agreements, goodwill and organization costs and
other intangible assets are amortized using the straight-line method over the
following estimated useful lives:
Goodwill...................................................... 25 years
Franchise agreements.......................................... 15 years
Loan fees and other intangible assets......................... 2-10 years
Revenue Recognition
Cable television service revenue is recognized in the month service is
provided to customers. Advance payments on cable services to be rendered are
recorded as subscriber prepayments. Advertising revenue is recognized in the
period service is provided.
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
4. ACQUISITION
On April 9, 1998, the Company acquired six cable television systems from TWI
Cable. The systems are clustered in southern Louisiana, western Mississippi
and western Tennessee. This Acquisition represented the first Acquisition of
the Company. The purchase price for the systems was $309.5 million. TWI Cable
received $300 million in cash and a $9.5 million (9,500 units) equity interest
in Renaissance Media Holdings LLC, the parent company of Group, in
satisfaction of the purchase price. In addition to the purchase price, the
Company incurred approximately $1.3 million in transaction costs, exclusive of
financing costs.
The 9,500 units issued to TWI Cable as equity represent an 8.8% interest in
Holdings, determined by dividing the TWI Cable interests of 9,500 units by the
total units outstanding of Holdings of 108,500. TWI Cable's interest in
Holdings is as a minority member with one board representative, and TWI Cable
has economic interests in Holdings equal to its ownership percentage on the
same basis as the other members of Holdings. In accordance with the Limited
Liability Company Agreement of Holdings, TWI Cable is not required to make any
future equity contribution to Holdings and its ability to sell or otherwise
dispose of its interests in Holdings is limited. Holdings was formed to
consummate the Acquisition and had no assets prior to this transaction.
The Acquisition was accounted for using the purchase method of accounting
and accordingly, results of operation are reported from the date of the
Acquisition (April 9, 1998). The excess of the purchase price over the
estimated fair value of the tangible assets acquired ($244.3 million) has been
allocated to franchise cost and goodwill in the amount of $235.7 million and
$8.6 million, respectively. The appraisal of the acquired assets is not yet
complete, thus the allocation of the purchase price is subject to change,
although management currently does not believe that any material adjustment to
such allocation is expected.
Unaudited Pro Forma summarized results of operations for the Company for the
six months ended June 30, 1998 and 1997, assuming the Acquisition had been
consummated on January 1, 1998 and 1997 are as follows:
F-14
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998
(ALL DOLLAR AMOUNTS IN 000'S EXCEPT WHERE INDICATED)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-----------------
1997 1998
-------- -------
Revenues.............................................. $ 25,176 $28,142
Expenses.............................................. 26,727 28,007
-------- -------
Operating Income (Loss)............................... (1,551) 135
Interest Expense and Other Expenses................... 9,621 9,621
-------- -------
Net (Loss)............................................ $(11,172) $(9,486)
======== =======
5. DEBT
As of June 30, 1998, debt consisted of:
10.00% Senior Discount Notes at Accreted Value (a)............ $102.3
Bank Credit Facilities (b).................................... $102.5
------
$204.8
(a) On April 9, 1998, in connection with the Acquisition described in Note
4, Louisiana, Tennessee and Capital issued $163.2 million face amount,
$100 million (initial accreted value) of 10.00% senior discount notes due
2008 ("Notes"). The notes pay no interest until April 15, 2003. From and
after April 15, 2003 the notes will bear interest, payable semi-annually
in cash, at a rate of 10% per annum on April 15 and October 15 of each
year, commencing October 15, 2003. The notes are due on April 15, 2008.
(b) On April 9, 1998, Renaissance Media entered into a credit agreement
(The "Credit Agreement"). The aggregate commitments under the Credit
Agreement total $150 million, consisting of a $40 million revolver,
$60 million Tranche A Term Loans and $50 million Tranche B Term Loans.
The revolving credit and term loans are collateralized by a first lien
position on all present and future assets and stock of the Company. The
Credit Agreement provides for interest at varying rates based upon
various borrowing options and the attainment of certain financial rates
and for commitment fees of 1/2% on the unused portion of the revolver.
The effective interest rate for the period ended June 30, 1998 was 8.11%.
On April 9, 1998, $110 million was borrowed under the Credit
Agreement's A and B Term Loans. On June 22, 1998, $7.5 million was repaid
resulting in $102.5 million of outstanding A and B Term Loans as of June
30, 1998.
At June 30, 1998, the Company had unrestricted use of the $40 million
revolver, although no borrowings had been made by the Company through that
date.
F-15
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998
(ALL DOLLAR AMOUNTS IN 000'S EXCEPT WHERE INDICATED)
(UNAUDITED)
5. DEBT - (CONTINUED)
Annual maturities of borrowings under the Credit Agreement for the
years ending December 31, are as follows:
1998 (July 1 through December 31).............................. -0-
1999........................................................... 776
2000........................................................... 1,035
2001........................................................... 2,701
2002........................................................... 9,506
2003........................................................... 11,590
Thereafter..................................................... 76,892
--------
102,500
Less Current Portion........................................... (258)
--------
$102,242
========
As required by the Credit Agreement, Renaissance Media purchased an
Interest Rate Cap Agreement from Morgan Stanley Capital Services Inc. The
agreement effectively fixed or set a maximum LIBOR rate of 7.25% on bank
debt borrowing up to $100 million through December 1999.
The Credit Agreement and the Indenture contain restrictive covenants on
the Company and subsidiaries regarding additional indebtedness,
investment guarantees, loans, acquisitions, dividends and merger or sale
of the subsidiaries and require the maintenance of certain financial
ratios.
6. TAXES
Group and Media are limited liability companies and are not subject to
Federal or State income tax. Any income earned by these entities will be taxed
to their respective members.
Louisiana and Tennessee have elected to be treated as corporations for
Federal income tax purposes and have not recorded any tax benefit for their
losses as the realization of these losses by reducing future taxable income in
the carry forward period is uncertain at this time. The provision for Income
Taxes reflected in the consolidated statement of operations is for Tennessee
franchise taxes.
7. RELATED PARTY TRANSACTIONS
(a) Transactions with Morgan Stanley Entities
In connection with the Acquisition, Renaissance Media entered into the
Senior Credit Facility with Morgan Stanley Senior Funding and Morgan
Stanley & Co. Incorporated acted as the Placement Agent for the Senior
Discount Notes. In connection with these services the Morgan Stanley
Entities received customary fees and expense reimbursement.
F-16
RENAISSANCE MEDIA GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1998
(ALL DOLLAR AMOUNTS IN 000'S EXCEPT WHERE INDICATED)
(UNAUDITED)
(b) Transactions with Time Warner and Related Parties
In connection with the Acquisition, Renaissance Media entered into an
agreement with Time Warner, pursuant to which Time Warner manages the
Company's programming in exchange for providing the Company access to
certain Time Warner programming arrangements.
For the period from April 9, 1998 to June 30, 1998 the Company paid Time
Warner approximately $1.3 million (including service fees of
approximately six thousand dollars ($6,000)) for programming services
under this agreement. In addition, the Company has incurred programming
costs of approximately $1.0 million for programming services owned
directly or indirectly by Time Warner entities for the period from April
9, 1998 to June 30, 1998.
(c) Transactions with Management
Prior to the consummation of the Acquisition described in Note 4,
Renaissance Media paid fees to the six management Investors for services
rendered relating to the Acquisition and the Credit Agreement. These
fees totaled two hundred eighty seven-thousand dollars ($287,000) and
were allocated to transaction and financing costs.
8. ACCRUED EXPENSES
Accrued Expenses as of June 30, 1998 consist of the following:
Accrued Programming Costs............................................... $2,641
Accrued Interest........................................................ 1,777
Accrued Franchise Fee................................................... 1,199
Accrued Legal and Professional Fees..................................... 1,119
Accrued Salaries and Wages.............................................. 303
Other Accrued Expenses.................................................. 1,269
------
$8,308
======
9. EMPLOYEE BENEFIT PLAN
Effective April 9, 1998, the Company began sponsoring a defined contribution
plan which covers substantially all employees (the "Plan"). The Plan provides
for contributions from eligible employees up to 15% of their compensation. The
Company's contribution to the Plan is limited to 50% of each eligible
employee's contribution up to 10% of their compensation. The Company has the
right in any year to set the amount of the Company's contribution percentage.
Company matching contributions approximated $44 for the period from April 9,
to June 30, 1998.
F-17
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
TWI Cable Inc.
We have audited the accompanying combined balance sheets of the Picayune MS,
Lafourche LA, St. Tammany LA, St. Landry LA, Pointe Coupee LA, and Jackson TN
cable television systems, (collectively, the "Combined Systems") included in
TWI Cable, Inc. ("TWI Cable"), as of December 31, 1996 and 1997, the related
combined statements of operations, changes in net assets and cash flows for
the years then ended. In addition, we have audited the combined statement of
operations and cash flows for the year ended December 31, 1995 of the
Predecessor Combined Systems. These combined financial statements are the
responsibility of the Combined Systems' or the Predecessor's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Combined
Systems, included in TWI Cable or the Predecessor, at December 31, 1996 and
1997, and the combined results of their operations and their cash flows for
the years ended December 31, 1995, 1996 and 1997, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
New York, New York
March 16, 1998
F-18
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
COMBINED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, APRIL 8,
----------------- ---------------
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
ASSETS
Cash and cash equivalents.................... $ 570 $ 1,371 $ 7
Receivables, less allowance of $71 and $116
for the years ended December 31, 1996 and
1997, and $116 for the period ended April 8,
1998 (unaudited), respectively.............. 794 1,120 576
Prepaid expenses and other assets............ 45 183 438
Property, plant and equipment, net........... 36,966 36,944 35,992
Cable television franchises, net............. 209,952 198,913 195,907
Goodwill and other intangibles, net.......... 51,722 50,383 50,023
-------- -------- --------
Total assets............................. $300,049 $288,914 $282,943
======== ======== ========
LIABILITIES AND NET ASSETS
Accounts payable............................. $ 1,640 $ 652 $ 63
Accrued programming expenses................. 847 904 978
Accrued franchise fees....................... 736 835 616
Subscriber advance payments and deposits..... 66 407 593
Deferred income taxes........................ 58,340 60,601 61,792
Other liabilities............................ 945 969 747
-------- -------- --------
Total liabilities........................ 62,574 64,368 64,789
Total net assets......................... 237,475 224,546 218,154
-------- -------- --------
Total liabilities and net assets......... $300,049 $288,914 $282,943
======== ======== ========
See accompanying notes to combined financial statements.
F-19
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1996 1997
------------- -------------- --------------
(PREDECESSOR) (INCLUDED IN TWI CABLE INC.)
REVENUES..................................... $43,549 $47,327 $50,987
COSTS AND EXPENSES:
Operating and programming.................... 13,010 12,413 12,101
Selling, general and administrative.......... 9,977 12,946 13,823
Depreciation and amortization................ 17,610 18,360 18,697
(Gain) loss on disposal of fixed assets...... -- (244) 620
------- -------------- --------------
Total costs and expenses................... 40,597 43,475 45,241
------- -------------- --------------
Operating income............................. 2,952 3,852 5,746
Interest expense............................. 11,871 -- --
------- -------------- --------------
(Loss) income before income tax (benefit) ex-
pense....................................... (8,919) 3,852 5,746
Income tax (benefit) expense................. (3,567) 1,502 2,262
------- -------------- --------------
Net (loss) income............................ $(5,352) $ 2,350 $ 3,484
======= ============== ==============
PERIOD ENDED
-------------------------------
MARCH 31, APRIL 8,
1997 1998
--------------- ---------------
(INCLUDED IN TWI CABLE INC.)
(UNAUDITED)
REVENUES..................................... $12,446 $15,221
COSTS AND EXPENSES:
Operating and programming.................... 2,876 3,603
Selling, general and administrative.......... 3,597 4,134
Depreciation and amortization................ 4,667 5,031
(Gain) loss on disposal of fixed assets...... 5 (96)
--------------- ---------------
Total costs and expenses................... 11,145 12,672
--------------- ---------------
Operating income............................. 1,301 2,549
Interest expense............................. -- --
--------------- ---------------
(Loss) income before income tax (benefit) ex-
pense....................................... 1,301 2,549
Income tax (benefit) expense................. 659 1,191
--------------- ---------------
Net (loss) income............................ $ 642 $ 1,358
=============== ===============
See accompanying notes to combined financial statements.
F-20
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
COMBINED STATEMENTS OF CHANGES IN NET ASSETS
(IN THOUSANDS)
Contribution by Parent................................................ $250,039
Repayment of advances from Parent................................... (47,895)
Advances from Parent................................................ 32,981
Net income.......................................................... 2,350
--------
Balance at December 31, 1996.......................................... 237,475
Repayment of advances from Parent................................... (50,661)
Advances from Parent................................................ 34,248
Net income.......................................................... 3,484
--------
Balance at December 31, 1997.......................................... $224,546
Repayment of advances from Parent (Unaudited)....................... (17,408)
Advances from Parent (Unaudited).................................... 9,658
Net income (Unaudited).............................................. 1,358
--------
Balance at April 8, 1998 (Unaudited).................................. $218,154
========
See accompanying notes to combined financial statements.
F-21
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, PERIOD ENDED
-------------------------------------------- --------------------------------
APRIL 8,
1995 1996 1997 MARCH 31, 1997 1998
------------- -------------- -------------- ---------------- --------------
(PREDECESSOR) (INCLUDED IN TWI CABLE INC.) (INCLUDED IN TWI CABLE INC.)
(UNAUDITED)
OPERATING ACTIVITIES:
Net (loss) income....... $(5,352) $ 2,350 $ 3,484 $ 642 $ 1,358
Adjustments for noncash
and nonoperating items:
Income tax (benefit)
expense.............. (3,567) 1,502 2,262 659 1,191
Depreciation and
amortization......... 17,610 18,360 18,697 4,667 5,031
(Gain) loss on
disposal of fixed
assets............... -- (244) 620 5 (96)
Changes in operating
assets and
liabilities:
Receivables,
prepaids and other
assets............. (196) 944 (464) (149) 289
Accounts payable,
accrued expenses
and other
liabilities........ (972) 176 (466) (998) (770)
Other balance sheet
changes............ -- -- (529) (39) (4)
------- -------------- ------------- -------------- --------------
Net cash provided by
operations............. 7,523 23,088 23,604 4,787 6,999
INVESTING ACTIVITIES:
Purchase of Predecessor
cable systems, net of
cash acquired.......... -- (249,473) -- -- --
Capital expenditures.... (7,376) (8,170) (6,390) (1,561) (613)
------- -------------- ------------- -------------- --------------
Net cash used in
investing activities... (7,376) (257,643) (6,390) (1,561) (613)
FINANCING ACTIVITIES:
Advance from Parent for
purchase of
Predecessor............ -- 250,039 -- -- --
Net repayment of
advances from Parent... -- (14,914) (16,413) (1,281) (7,750)
------- -------------- ------------- -------------- --------------
Net cash provided by
(used in) financing
activities............. -- 235,125 (16,413) (1,281) (7,750)
INCREASE IN CASH AND
CASH EQUIVALENTS....... 147 570 801 1,945 (1,364)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD.... 419 0 570 570 1,371
------- -------------- ------------- -------------- --------------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD................. $ 566 $ 570 $ 1,371 $ 2,515 $ 7
======= ============== ============= ============== ==============
See accompanying notes to combined financial statements.
F-22
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The cable television systems operating in the metropolitan areas of
Picayune, Mississippi; Lafourche, Louisiana; St. Tammany, Louisiana; St.
Landry, Louisiana; Pointe Coupee, Louisiana; and Jackson, Tennessee (the
"Combined Systems") are principally engaged in the cable television business
under non-exclusive franchise agreements, which expire at various times
beginning in 1999. The Combined Systems' operations consist primarily of
selling video programming which is distributed to subscribers for a monthly
fee through a network of coaxial and fiber-optic cables.
Prior to January 4, 1996, the Combined Systems were included in certain
subsidiaries of Cablevision Industries Corporation ("CVI"). On January 4,
1996, CVI merged into a wholly owned subsidiary of Time Warner Inc. (the "CVI
Merger"). On October 1, 1996, Time Warner Inc. ("Time Warner") completed a
reorganization amongst certain of its wholly owned cable television
subsidiaries whereby CVI was renamed TWI Cable Inc. ("TWI Cable").
Basis of Presentation
TWI Cable has committed to sell the Combined Systems to Renaissance Media
Holdings LLC ("Renaissance") pursuant to an Asset Purchase Agreement with
Renaissance, dated November 14, 1997. Accordingly, the accompanying combined
financial statements of the Combined Systems reflect the "carved out"
historical financial position, results of operations, cash flows and changes
in net assets of the operations of the Combined Systems as if they had been
operating as a separate company. Effective as of January 1, 1996, the Combined
Systems' financial statements reflect the new basis of accounting arising from
Time Warner's merger with CVI. Based on Time Warner's allocation of the
purchase price, the assets and liabilities of the Combined Systems were
revalued resulting in goodwill allocated to the Combined Systems of
approximately $52,971,000, which is being amortized over its estimated life of
40 years. In addition, approximately $220,981,000 was allocated to cable
television franchises and other intangible assets, which is being amortized
over periods up to 20 years. The Combined Systems' financial statements
through December 31, 1995 reflect the historical cost of their assets and
liabilities and results of their operations.
The combined statements have been adjusted to include the allocation of
certain corporate expenses incurred by Time Warner Cable and/or TWI Cable on
the Combined Systems' behalf, based upon the number of Combined System
subscribers managed by Time Warner Cable and the ratio of Combined System
subscribers to total TWI Cable subscribers, respectively. These allocations
reflect all costs of doing business that the Combined Systems would have
incurred on a stand alone basis as disclosed in Note 3. Management believes
that these allocations are reasonable.
The combined financial statements as of and for the period from January 1,
1998 through April 8, 1998 and the three months ended March 31, 1997 (denoted
as "periods ended April 8, 1998 and March 31, 1997") included herein are
unaudited and have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of management
of the Combined Systems, the combined financial statements as of and for the
periods ended April 8, 1998 and March 31, 1997 include all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial information.
Basis of Combination
The combined financial statements include the assets, liabilities, revenues,
expenses, income, loss and cash flows of the Combined Systems, as if the
Combined Systems were a single company. Significant intercompany accounts and
transactions between the Combined Systems have been eliminated. Significant
accounts and transactions with Time Warner and its affiliates are disclosed as
related party transactions (see Note 3).
F-23
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Use of Estimates
The preparation of combined financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the combined financial
statements and footnotes thereto. Actual results could differ from those
estimates.
Concentration of Credit Risk
A significant portion of the customer base is concentrated within the local
geographical area of each of the individual cable television systems. The
Combined Systems generally extend credit to customers and the
ultimate collection of accounts receivable could be affected by the local
economy. Management performs continuous credit evaluations of its customers
and may require cash in advance or other special arrangements from certain
customers. Management does not believe that there is any significant credit
risk which could have a material effect on the financial condition of the
Combined Systems.
Revenue and Costs
Subscriber fees are recorded as revenue in the period the related services
are provided and advertising revenues are recognized in the period the related
advertisements are exhibited. Rights to exhibit programming are purchased from
various cable networks. The costs of such rights are generally expensed as the
related services are made available to subscribers.
Franchise Fees
Local governmental authorities impose franchise fees on the cable television
systems owned by the Combined Systems ranging up to a federally mandated
maximum of 5.0% of gross revenues. On a monthly basis, such fees are collected
from the Combined Systems' customers. Prior to January 1997, franchise fees
were not separately itemized on customers' bills. Such fees were considered
part of the monthly charge for basic services and equipment, and therefore
were reported as revenue and expense in the Combined Systems' financial
results. Management began the process of itemizing such fees on all customers'
bills beginning in January 1997. In conjunction with itemizing these charges,
the Combined Systems began separately collecting the franchise fee on all
revenues subject to franchise fees. As a result, such fees are no longer
included as revenue or as franchise fee expense. The net effect of this change
is a reduction in 1997 revenue and franchise fee expense of approximately
$1,500,000 versus the comparable period in 1996.
Advertising Costs
Advertising costs are expensed upon the first exhibition of the related
advertisements. Advertising expense amounted to $308,000, $632,000 and
$510,000 for the years ended 1995, 1996 and 1997, respectively and $147,000
and $105,000 for the periods ended March 31, 1997 and April 8, 1998,
respectively.
Statement of Cash Flows
The Combined Systems participate in a cash management system with affiliates
whereby cash receipts are transferred to a centralized bank account from which
centralized payments to various suppliers and creditors are made on behalf of
the Combined Systems. The excess of such cash receipts over payments is
included in net assets. Amounts shown as cash represent the Combined Systems'
net cash receipts not transferred to the centralized account as of December
31, 1996 and 1997. The average net intercompany payable balances were
$173,348,000 and $170,438,000 for the years ended December 31, 1996 and 1997,
respectively, and $171,296,000 (unaudited) and $166,522,000 (unaudited) for
periods ended March 31, 1997 and April 8, 1998, respectively.
F-24
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
For purposes of this statement, cash and cash equivalents includes all
highly liquid investments purchased with original maturities of three months
or less.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Additions to property,
plant and equipment generally include material, labor, overhead and interest.
Depreciation is provided on the straight-line method over estimated useful
lives as follows:
Buildings and improvements...................................... 5-20 years
Cable television equipment...................................... 5-15 years
Furniture, fixtures and other equipment......................... 3-10 years
Property, plant and equipment consist of:
DECEMBER 31,
---------------- APRIL 8,
1996 1997 1998
------- ------- --------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
Land and buildings..................... $ 2,003 $ 2,265 $ 2,255
Cable television equipment............. 32,324 39,589 40,276
Furniture, fixtures and other equip-
ment.................................. 1,455 2,341 2,308
Construction in progress............... 5,657 1,028 1,183
------- ------- -------
41,439 45,223 46,022
Less accumulated depreciation.......... (4,473) (8,279) (10,030)
------- ------- -------
Total................................ $36,966 $36,944 $35,992
======= ======= =======
Intangible Assets
During 1996 and 1997, the Combined Systems amortized goodwill over periods
up to 40 years and cable television franchises over periods up to 20 years,
both using the straight-line method. Prior to the CVI Merger, goodwill and
cable television franchises were amortized over 15 years using the straight-
line method. For the years ended 1995, 1996, and 1997, amortization of
goodwill amounted to $8,199,000, $1,325,000, and $1,325,000, respectively, and
amortization of cable television franchises amounted to $1,284,000,
$11,048,000, and $11,048,000, respectively. For the periods ended April 8,
1998 (unaudited), amortization of goodwill amounted to $360,000, and
amortization of cable television franchises amounted to $3,008,000.
Accumulated amortization of intangible assets at December 31, 1996 and 1997
amounted to $12,373,000 and $24,746,000, respectively, and $28,114,000 at
April 8, 1998 (unaudited).
Impairment
Management separately reviews the carrying value of acquired long-lived
assets for each acquired entity on a quarterly basis to determine whether an
impairment may exist. Management considers relevant cash flow and
profitability information, including estimated future operating results,
trends and other available information, in assessing whether the carrying
value of long-lived assets can be recovered. Upon a determination that the
carrying value of long-lived assets will not be recovered from the
undiscounted future cash flows of the acquired business, the carrying value of
such long-lived assets would be considered impaired and would be reduced by a
F-25
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
charge to operations in the amount of the impairment. An impairment charge is
measured as a deficiency in estimated discounted future cash flows of the
acquired business to recover the carrying value related to the long-lived
assets.
Income Taxes
Income taxes have been provided using the liability method prescribed by
FASB Statement No. 109, "Accounting for Income Taxes." Under the liability
method, deferred income taxes reflect tax carryforwards and the net tax
effects of temporary differences between the carrying amount of assets and
liabilities for financial statements and income tax purposes, as determined
under enacted tax laws and rates.
2. EMPLOYEE BENEFIT PLANS
Following the CVI Merger, the Combined Systems began participation in the
Time Warner Cable Pension Plan (the "Pension Plan"), a non-contributory
defined benefit pension plan, and the Time Warner Cable Employee Savings Plan
(the "Savings Plan") which are administered by a committee appointed by the
Board of Representatives of Time Warner Entertainment Company, L.P. ("TWE"),
an affiliate of Time Warner, and which cover substantially all employees.
Benefits under the Pension Plan are determined based on formulas which
reflect an employee's years of service and compensation levels during the
employment period. Pension expense for the years ended December 31, 1996 and
1997 totaled $184,000 and $192,000, respectively, and $61,000 and $61,000 for
the periods ended March 31, 1997 and April 8, 1998 (unaudited), respectively.
The Combined Systems' contributions to the Savings Plan are limited to 6.67%
of an employee's eligible compensation during the plan year. The Board of
Representatives of TWE has the right in any year to set the maximum amount of
the Combined Systems' contribution. Defined contribution plan expense for the
years ended December 31, 1996 and 1997 totaled $107,000 and $117,000,
respectively, and $30,000 and $38,000 for the periods ended March 31, 1997 and
April 8, 1998 (unaudited), respectively.
Prior to the CVI Merger, substantially all employees were eligible to
participate in a profit sharing plan or a defined contribution plan. The
profit sharing plan provided that the Combined Systems may contribute, at the
discretion of their board of directors, an amount up to 15% of compensation
for all eligible participants out of its accumulated earnings and profits, as
defined. Profit sharing expense amounted to approximately $31,000 for the year
ended December 31, 1995.
The defined contribution plan contained a qualified cash or deferred
arrangement pursuant to Internal Revenue Code Section 401(k). This plan
provided that eligible employees may contribute from 2% to 10% of their
compensation to the plan. The Combined Systems matched contributions of up to
4% of the employees' compensation. The expense for this plan amounted to
approximately $96,000 for the year ended December 31, 1995.
The Combined Systems have no material obligations for other post retirement
benefits.
3. RELATED PARTIES
In the normal course of conducting business, the Combined Systems had
various transactions with Time Warner and its affiliates, generally on terms
resulting from a negotiation between the affected units that in management's
view resulted in reasonable allocations.
F-26
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. RELATED PARTIES--(CONTINUED)
Programming
Included in the Combined Systems' 1996 and 1997 operating expenses are
charges for programming and promotional services provided by Home Box Office,
Turner Broadcasting System, Inc. and other affiliates of Time Warner. These
charges are based on customary rates and are in the ordinary course of
business. For the year ended December 31, 1996 and 1997, these charges totaled
$3,260,000 and $3,458,000, respectively, and $860,000 and $1,164,000 for the
periods ended March 31, 1997 and April 8, 1998 (unaudited), respectively.
Accrued related party expenses for these programming and promotional services
included in accrued programming expenses approximated $327,000 and $291,000
for the years ended December 31, 1996 and 1997, respectively, and $423,000 and
$409,000 for the periods ended March 31, 1997 and April 8, 1998 (unaudited),
respectively. There were no such programming and promotional service related
party transactions in 1995.
Management Fees
TWI Cable entered into a management service arrangement with Time Warner
Cable ("TWC"), pursuant to which TWC is responsible for the management and
operation of TWI Cable, which includes the Combined Systems. The management
fees paid to TWC by TWI Cable are based on an allocation of the corporate
expenses of TWC's cable division in proportion to the respective number of
subscribers of all cable systems managed by TWC's cable division. The
allocation of the TWI Cable management fee to the Combined Systems
approximated $1,432,000 and $1,715,000 for the years ended December 31, 1996
and 1997, respectively, and $429,000 and $486,000 for the periods ended March
31, 1997 and April 8, 1998 (unaudited), respectively.
Other divisional expenses allocated to the Combined Systems approximated
$1,301,000 and $1,067,000 for the years ended December 31, 1996 and 1997,
respectively, and $267,000 and $299,000 for the periods ended March 31, 1997
and April 8, 1998 (unaudited), respectively.
4. INTEREST EXPENSE
Prior to the CVI Merger, the Jackson, Tennessee system was included in
Cablevision Industries Limited Partnership and Combined Entities ("CILP"). The
Jackson system was charged interest expense in connection with CILP's (a)
senior and subordinated bank credit agreements; and (b) senior unsecured
subordinated Series A and Series B notes payable to CVI. The remaining five
systems comprising the Combined Systems were included in Cablevision
Industries of the Southeast, Inc. and Combined Entities ("CIOS"). These
systems were charged interest expense in connection with CIOS's (a) bank
revolving credit agreement; and (b) junior and senior subordinated debt to
CVI.
F-27
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES
Effective January 4, 1996, the Combined Systems are included in the
consolidated federal income tax return of Time Warner. Prior to January 4,
1996, the Combined Systems were included in the consolidated federal income
tax return of CVI. The provision (benefit) for income taxes has been
calculated on a separate company basis. The components of the provision
(benefit) for income taxes are as follows:
YEAR ENDED DECEMBER 31, PERIOD ENDED
------------------------- ------------------
MARCH 31, APRIL 8,
1995 1996 1997 1997 1998
-------- ------- ------- --------- --------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
Federal:
Current................ $ -- $ -- $ -- $-- $ --
Deferred............... (2,881) 1,213 1,826 532 962
State:
Current................ -- -- -- -- --
Deferred............... (686) 289 436 127 229
-------- ------- ------- ---- ------
Net provision (bene-
fit) for income tax-
es.................. $(3,567) $ 1,502 $ 2,262 $659 $1,191
======== ======= ======= ==== ======
The Combined Systems did not, and will not, have a tax sharing agreement
with either Time Warner, TWI Cable or CVI. Therefore, the Combined Systems
have not and will not be compensated for the utilization of the Combined
Systems' tax losses, by Time Warner, TWI Cable or CVI. In addition, the
Combined Systems have not and will not be required to make payments to either
Time Warner or TWI Cable for the current tax provision of the Combined
Systems.
The differences between the income tax provision (benefit) expected at the
U.S. federal statutory income tax rate and the total income tax provision
(benefit) are due to nondeductible goodwill amortization and state taxes.
Significant components of the Combined Systems' deferred tax assets and
liabilities, as calculated on a separate company basis, are as follows:
PERIOD ENDED
YEAR ENDED DECEMBER 31, APRIL 8,
----------------------- ------------
1996 1997 1998
----------- ----------- ------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
Deferred tax liabilities:
Amortization.................. $ 61,266 $ 58,507 $57,817
Depreciation.................. 3,576 4,060 4,181
----------- ----------- -------
Total gross deferred tax
liabilities................ 64,842 62,567 61,998
----------- ----------- -------
Deferred tax assets:
Tax loss carryforwards........ 6,474 1,920 160
Allowance for doubtful
accounts..................... 28 46 46
----------- ----------- -------
Total deferred tax assets... 6,502 1,966 206
----------- ----------- -------
Net deferred tax liability.. $ 58,340 $ 60,601 $61,792
=========== =========== =======
F-28
PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA,
POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS
(INCLUDED IN TWI CABLE INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES--(CONTINUED)
On a separate company basis, the Combined Systems have tax loss
carryforwards of approximately $4.8 million at December 31, 1997 and tax loss
carryforwards of approximately $400,000 at April 8, 1998 (unaudited). However,
if the Combined Systems are acquired in an asset purchase, the tax loss
carryforwards, and net deferred tax liabilities relating to temporary
differences will not carry over to Renaissance (see Note 8).
6. COMMITMENTS AND CONTINGENCIES
The Combined Systems had rental expense of approximately $642,000, $824,000,
and $843,000 for the years ended December 31, 1995, 1996 and 1997,
respectively, and $209,000 and $244,000 for the periods ended March 31, 1997
and April 8, 1998 (unaudited), respectively, under various lease and rental
agreements for offices, utility poles, warehouses and computer equipment.
Future minimum annual rental payments under noncancellable leases will
approximate $1,000,000 annually over the next five years.
In exchange for certain flexibility in establishing cable rate pricing
structures for regulated services that went into effect on January 1, 1996,
TWC has agreed with the Federal Communications Commission ("FCC") to invest in
certain upgrades to its cable infrastructure (consisting primarily of
materials and labor in connection with the plant upgrades up to 750 MHz) over
the next three years (approximately $22 million). This agreement with the FCC,
which extends to the Combined Systems, will be assumed by Renaissance as it
relates to the Combined Systems in accordance with the Asset Purchase
Agreement.
7. OTHER LIABILITIES
Other liabilities consist of:
DECEMBER 31,
--------------- APRIL 8,
1996 1997 1998
------- ------- --------------
(IN THOUSANDS) (IN THOUSANDS)
(UNAUDITED)
Compensation............................... $ 217 $ 250 $279
Data Processing Costs...................... 100 90 161
Sales and other taxes...................... 101 90 146
Copyright Fees............................. 85 83 35
Pole Rent.................................. 66 63 93
Other...................................... 376 393 33
------- ------- ----
Total.................................... $ 945 $ 969 $747
======= ======= ====
8. SUBSEQUENT EVENT (UNAUDITED)
The sale of the Combined Systems, in connection with the Asset Purchase
Agreement with Renaissance, closed on April 9, 1998 at the purchase price of
$309,500,000.
F-29
