1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------------------------- FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to . ------------ ------------ COMMISSION FILE NUMBERS: RENAISSANCE MEDIA GROUP LLC*--333-56679 RENAISSANCE MEDIA (LOUISIANA) LLC*--333-56679-02 RENAISSANCE MEDIA (TENNESSEE) LLC*--333-56679-01 RENAISSANCE MEDIA CAPITAL CORPORATION*--333-56679-03 (Exact names of Registrants as specified in their charters) Delaware 14-1803051 Delaware 14-1801165 Delaware 14-1801164 Delaware 14-1803049 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Numbers) 12444 Powerscourt Drive -- Suite 100 St. Louis, Missouri 63131 (Address of principal executive offices) (Zip code) (314) 965-0555 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
2 State the aggregate market value of the voting equity securities held by non-affiliates of the Registrants: All of the limited liability company membership interests of Renaissance Media (Louisiana) LLC and Renaissance Media (Tennessee) LLC are held by Renaissance Media Group LLC. All of the issued and outstanding shares of capital stock of Renaissance Media Capital Corporation are held by Renaissance Media Group LLC. All of the limited liability company membership interests of Renaissance Media Group LLC are held by Charter Communications, LLC (and indirectly by Charter Communications Holdings, LLC, a reporting company under the Exchange Act). There is no public trading market for any of the aforementioned limited liability company membership interests or shares of capital stock. DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated into this Report by reference: None * Renaissance Media Group LLC, Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and Renaissance Media Capital Corporation meet the conditions set forth in General Instruction I(1)(a) and (b) to the Form 10-K and are therefore filing with the reduced disclosure format.
3 RENAISSANCE MEDIA GROUP LLC RENAISSANCE MEDIA (LOUISIANA) LLC RENAISSANCE MEDIA (TENNESSEE) LLC RENAISSANCE MEDIA CAPITAL CORPORATION 2000 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I Page ---------- Item 1 Business....................................................................... 1 Item 2 Properties..................................................................... 2 Item 3 Legal Proceedings.............................................................. 2 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters.......... 2 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................................... 3 Item 7a Quantitative and Qualitative Disclosures about Market Risk..................... 6 Item 8 Financial Statements and Supplementary Data.................................... 6 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................. 6 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 6 Signatures............................................................................... 9 This Annual Report on Form 10-K is for the year ended December 31, 2000. This Annual Report modifies and supersedes documents filed prior to this Annual Report. In addition, information that we file with the Securities and Exchange Commission in the future will automatically update and supersede information contained in this Annual Report. In this Annual Report, we, us, and our refers to Renaissance Media Group LLC, Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and Renaissance Media Capital Corporation.
4 PART I ITEM 1--BUSINESS Ownership Structure Renaissance Media Group LLC ("Group") was formed to own and operate cable systems that provide programming and related services to subscribers. Renaissance Media Capital Corporation ("Capital") was formed as a wholly owned subsidiary of Group for the sole purpose of being a co-issuer on debt instruments to be offered and sold to the public, including the senior discount notes. Renaissance Media (Louisiana) LLC ("Louisiana") and Renaissance Media (Tennessee) LLC ("Tennessee") are both wholly-owned subsidiaries of Group, and hold a 76% interest and 24% interest, respectively, in Renaissance Media LLC ("Media"). Media owns and operates cable systems and commenced active operations in April 1998 when it acquired six cable television systems from TWI Cable, Inc., a subsidiary of Time Warner Inc. Group, Capital, Louisiana and Tennessee do not, and will not, conduct any operations, and their only assets are the equity interests in one another as described above. On April 30, 1999, Charter Communications, LLC, a wholly-owned indirect subsidiary of Charter Communications Holdings, LLC ("CC LLC") acquired all of the outstanding limited liability company membership interests in Group (the "Charter Transaction"). CC LLC is a subsidiary of Charter Communications Holding Company, LLC, which is a subsidiary of Charter Communications, Inc. (CCI). The purchase price was $459 million, consisting of $348 million in cash and $111 million in accreted value of debt assumed. As a result, we are now indirectly held by CC LLC, which is a reporting company under the Securities Exchange Act of 1934, as amended. We are managed by CCI. We pay management fees to CCI, and to the extent CCI has secured certain management services from its affiliate, Charter Investment, Inc., the management fees we pay are paid directly to Charter Investment. See also Item 5. Market for Registrants Common Equity and Related Stockholder Matters. Our principal executive offices are located at 12444 Powerscourt Drive - Suite 100, St. Louis, Missouri, 63131. Our telephone number is (314) 965-0555. General At December 31, 2000, our systems passed approximately 189,800 homes and served approximately 135,800 customers. The Louisiana Systems consist of five cable television systems serving approximately 101,400 basic subscribers as of December 31, 2000, 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. The Tennessee System served approximately 34,400 basic subscribers located in Jackson, Tennessee and surrounding counties as of December 31, 2000. Our ultimate objective is to increase operating cash flow by increasing the customer base and the amount of cash flow per customer. We intend to achieve this objective by offering an array of advanced products and services, focusing on the customer, employing innovative marketing techniques and operating a technologically advanced broadband network. At December 31, 2000, nearly 100% of our customers were served by systems with at least 550 megahertz bandwidth capacity. In addition, we expect to spend approximately $17 million from 2001 to 2003 to increase bandwidth to 750 megahertz or greater for approximately 50% of our customers. A minimum bandwidth of 550 megahertz or greater allows us to: - offer advanced products and services (such as digital television, high-speed Internet access and other interactive services); - increase channel capacity up to 82 analog channels, and add even more channels and services when our bandwidth is used for digital signal transmissions - in many systems, permit two-way communication, so that Internet access does not require a separate telephone line; - improve picture quality and service reliability; and - realize operating efficiencies from a reduced number of headends. Buiding out systems to a minimum bandwidth of 750 megahertz or more will permit two-way communication in all cases. 1
5 Cautionary Statement Regarding Forward-Looking Statements This Annual Report includes forward-looking statements regarding, among other things, our plans, strategies and prospects, both business and financial. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Many of the forward-looking statements contained in this Annual Report may be identified by the use of forward-looking words such as believe, expect, anticipate, should, planned, will, may, intend, estimate, and potential, among others. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this Annual Report are set forth in this Annual Report and in other reports or documents that we file from time to time with the SEC and include, but are not limited to: - Our plans to offer advanced products and services, - Our anticipated capital expenditures for our upgrades and new equipment and facilities, - Our beliefs regarding the effects of governmental regulation on our business, - Our ability to effectively compete in a highly competitive and changing environment, - Our ability to fund anticipated capital expenditures and any future acquisitions, - Our ability to obtain equipment, inventory and programming as needed and at a reasonable price. All forward-looking statements attributable to us, or a person acting on our behalf, are expressly qualified in their entirety by this cautionary statement. ITEM 2--PROPERTIES Our principal physical assets consist of a cable television distribution plant and equipment, including signal receiving, encoding and decoding devices, headend reception facilities, distribution systems and customer drop equipment for each of our cable television systems. Our cable television plant and related equipment are generally attached to utility poles under pole rental agreements with local public utilities and telephone companies, and in certain locations are buried in underground ducts or trenches. We believe that our properties are in good operating condition and are suitable for our business operations. ITEM 3--LEGAL PROCEEDINGS We are involved from time to time in routine legal matters and other claims incidental to our business. We believe that the resolutions of such matters will not have a material adverse impact on our consolidated financial position or results of operations. PART II ITEM 5--MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established trading market for the equity interests in any of Group, Capital, Louisiana or Tennessee. CC LLC (and indirectly Charter Communications Holdings, LLC) owns all of the limited liability company membership interests of Group, as each of these entities are wholly-owned subsidiaries of another entity. Effective with the Charter Transaction, we record distributions when management fees charged to us exceed expenses incurred on our behalf. For the year ended December 31, 2000 and the eight months ended December 31, 1999, distributions totaled $0 and $0.4 million respectively. Our ability to pay distributions is limited under the terms of covenants in the indenture governing Group's outstanding Senior Discount Notes. 2
6 ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following table summarizes amounts and the percentage of total revenues for certain items for the periods indicated (dollars in thousands): PERIOD FROM APRIL 9, YEAR ENDED EIGHT MONTHS ENDED | FOUR MONTHS ENDED 1998 TO DECEMBER 31, 2000 DECEMBER 31, 1999 | APRIL 30, 1999 DECEMBER 31, 1998(a) ------------------ ------------------ | ------------------ -------------------- Amount % Amount % | Amount % Amount % -------- - -------- - | -------- - -------- - | | Revenues(b) $ 70,313 100.0 $ 42,032 100.0 | $ 21,110 100.0 $ 42,977 100.0 | Cost and expenses: | | Operating, general and administrative 33,313 47.4 20,566 48.9 | 10,096 47.8 22,490 52.3 | Depreciation and amortization 56,873 80.9 23,150 55.1 | 8,912 42.2 19,107 44.5 | Corporate expense charges-related parties 1,246 1.8 1,625 3.9 | -- -- -- -- -------- ------ -------- ----- | -------- ------ -------- ------ | Operating income (loss) (21,119) (30.0) (3,309) (7.9) | 2,102 10.0 1,380 3.2 | Interest income 228 0.3 61 0.1 | 122 0.6 158 0.4 | Interest expense (8,093) (11.5) (5,527) (13.1) | (6,321) (30.3) (14,358) (33.4) | Other expense (659) (0.9) -- -- | -- -- -- -- -------- ------ -------- ----- | -------- ------ -------- ------ | Loss before income taxes (29,643) (42.2) (8,775) (20.9) | (4,097) (19.4) (12,820) (29.8) | Provision (benefit) for income taxes -- -- -- -- | (65) (.3) 135 .3 -------- ------ -------- ----- | -------- ------ -------- ------ | Net loss $(29,643) (42.2) $ (8,775) (20.9) | $ (4,032) (19.1) $(12,955) (30.1) ======== ====== ======== ===== | ======== ====== ======== ====== Other financial and operational data is as follows for the periods indicated (dollars in thousands, except Average Monthly Revenue per Basic Customer): AS OF AND FOR THE AS OF AND FOR THE AS OF AND FOR THE YEAR ENDED EIGHT MONTHS ENDED PERIOD FROM APRIL 9, 1998 DECEMBER 31, 2000 DECEMBER 31, 1999 TO DECEMBER 31, 1998(a) ----------------- ------------------ ------------------------- EBITDA (c)......................................... $ 35,095 $ 19,841 $ 20,487 Adjusted EBITDA (d)................................ 37,000 21,466 20,487 Homes Passed (e)(at period end).................... 189,800 189,500 185,600 Basic Customers (f)................................ 135,800 133,600 129,600 Basic Penetration (g).............................. 71.5% 70.5% 69.8% Average Monthly Revenue per Basic Customer (h)..................................... $ 43.15 $ 39.33 $ 36.97 3
7 (a) The results of operations for the period ended December 31, 1998, only include operating results for the period April 9, 1998 to December 31, 1998. Prior to April 9, 1998, we had no operations. (b) Local governmental authorities impose franchise fees on us ranging up to a federally mandated maximum of 5.0% of gross revenues. On a monthly basis, such fees are collected from the Company's customers and are periodically remitted to local franchises. Revenues and operating, general and administrative expenses presented here have been restated for the periods prior to the Charter Transaction to include the franchise fees collected from customers and then remitted to local franchises as revenues. (c) EBITDA represents earnings (loss) before interest, income taxes, depreciation and amortization. EBITDA is presented because it is a widely accepted financial indicator of a cable company's ability to service indebtedness. However, EBITDA should not be considered as an alternative to income from operations or to cash flows from operating, investing or financing activities, as determined in accordance with generally accepted accounting principles. EBITDA should also not be construed as an indication of a company's operating performance or as a measure of liquidity. In addition, because adjusted EBITDA is not calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies. Managements discretionary use of funds depicted by EBITDA may be limited by working capital, debt service and capital expenditure requirements and by restrictions related to legal requirements, commitments and uncertainties. (d) Adjusted EBITDA means EBITDA before corporate expense charges and other expense. Adjusted EBITDA is presented because it is a widely accepted financial indicator of a cable company's ability to service indebtedness. However, adjusted EBITDA should not be considered as an alternative to income from operations or to cash flows from operating, investing or financing activities, as determined in accordance with generally accepted accounting principles. Adjusted EBITDA should also not be construed as an indication of a company's operating performance or as a measure of liquidity. In addition, because adjusted EBITDA is not calculated identically by all companies, the presentation here may not be comparable to other similarly titled measures of other companies. Management's discretionary use of funds depicted by adjusted EBITDA may be limited by working capital, debt service and capital expenditure requirements and by restrictions related to legal requirements, commitments and uncertainties. (e) Homes passed are the number of living units, such as single residence homes, apartments and condominium units, passed by the cable distribution network in a given cable system service area. (f) Basic customers are customers who receive basic cable service. (g) Basic penetration represents basic customers as a percentage of homes passed. (h) Average monthly revenue per basic customer represents revenues divided by the number of months in the period divided by the number of basic customers at period end. Comparison of Results As a result of the acquisition by Charter Communications, LLC of us (the Charter Transaction) and the application of purchase accounting, the financial results for the periods presented above are not comparable. For purposes of the following discussion, the results for the predecessor period (January 1, 1999 to April 30, 1999) have been combined with those for the successor period (May 1, 1999 to December 31, 1999). REVENUES. Revenues increased $7.2 million, or 11.4% to $70.3 million for year ended December 31, 2000 from $63.1 million for the year ended December 31, 1999. The increase in revenues resulted primarily from net gains in basic subscribers and retail rate increases implemented. In addition, digital subscriptions and premium penetration increased compared to prior year. 4
8 OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and administrative expenses increased $2.6 million, or 8.5% to $33.3 million year ended December 31, 2000 from $30.7 million for the year ended December 31, 1999. This increase was primarily due to increases in programming expenses due in part continued inflationary increases coupled with increased channel capacity. DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense increased $24.8 million, or 77.4% to $56.9 million from $32.1 million. This increase is primarily due to the Charter Transaction and the application of purchase accounting, which significantly increased the carrying value of franchises and related amortization. In addition, capital expenditures for system upgrades have increased, resulting in greater property, plant and equipment balances and a corresponding increase in depreciation. CORPORATE EXPENSE CHARGES -- RELATED PARTIES. These charges for the year ended December 31, 2000, and for the eight months ended December 31, 1999, represent costs incurred by Charter Investment, Inc. and Charter Communications Inc., both affiliates of ours, on our behalf. INTEREST EXPENSE. Interest expense decreased $3.8 million, or 31.7% to $8.1 million for the year ended December 31, 2000 from $11.8 million for the year ended December 31, 1999. This decrease is due to a decrease in debt outstanding. In connection with the closing of the Charter Transaction on April 30, 1999, all amounts outstanding under our then-existing credit agreement were paid in full, and the credit agreement was terminated. In June 1999, pursuant to a change of control offer, Charter Communications Operating, LLC, and our indirect parent, repurchased $48.8 million of our 10% Senior discount Notes due 2008. NET LOSS. Net loss increased by $16.8 million for the year ended December 31, 2000, compared to the year ended December 31, 1999, as a result of the combination of factors discussed above. 5
9 ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following summarizes the contract terms and fair value of our debt at December 31, 2000 (dollars in thousands): Expected Maturity Date -------------------------------------------------------------- Fair 2001 2002 2003 2004 2005 Thereafter Total Value at 12/31/00 ---------- -------- -------- --------- --------- ------------- ------------ ----------- DEBT Fixed Rate -- -- -- -- -- $114,413 $114,413 $73,224 Interest Rate -- -- 10.0% 10.0% 10.0% 10.0% 10.0% ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements, predecessor combined financial statements, the related notes thereto, and the reports of the independent auditors are included in this Form 10-K beginning on page F-1. Separate financial statements for Capital have not been presented as Capital had no operations and substantially no assets or equity. Accordingly, management has determined that such financial statements are not material. ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART IV ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Financial Statements. A listing of the financial statements, notes and reports of Independent public accountants required by Item 8 begins on page F-1 of this Annual Report on Form 10-K. (2) Financial Statement Schedules. No financial statement schedules are required to be filed by Items 8 and 14 (d) because they are not required or are not applicable, or the required information is set forth in the applicable financial statements on notes thereto. (3) Exhibits (listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K): Exhibit Number Description - ------ ----------- 3.1 Certificate of Incorporation of Renaissance Media Capital Corporation and all amendments thereto. (1) 3.2 By-laws of Renaissance Media Capital Corporation. (1) 3.3 Certificate of Formation of Renaissance Media (Louisiana) LLC. (1) 3.4 Certificate of Formation of Renaissance Media, LLC.(5) 3.5 Certificate of Formation of Renaissance Media (Tennessee) LLC. (1) 3.7 Certificate of Formation of Renaissance Media Group LLC. (1) 6
10 Exhibit Number Description - ------- ----------- 3.9 Amended and Restated Limited Liability Agreement of Renaissance Media Group LLC, dated April 29, 1999. (3) 3.10 Amended and Restated Limited Liability Agreement of Renaissance Media (Louisiana) LLC, dated April 29, 1999. (3) 3.11 Amended and Restated Limited Liability Agreement of Renaissance Media (Tennessee) LLC, dated April 29, 1999. (3) 3.12 Amended and Restated Limited Liability Agreement of Renaissance Media LLC, dated April 29, 1999. (3) 4.1 Indenture dated as of April 9, 1998, by and among Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC, Renaissance Media Capital Corporation, Renaissance Media Group LLC and United States Trust Company of New York, as Trustee. (1) 10.5 Social Contract approved by the Federal Communications Commission (the "FCC") on November 30, 1995, and entered into between the FCC and Time Warner Entertainment Company, L.P., TWI Cable Inc. and Time Warner Entertainment-Advance/Newhouse Partnership, or any subsidiary, division or affiliate thereof. (2) 10.27 Purchase Agreement dated as of February 23, 1999, by and among Charter Communications, Inc., Charter Communications, LLC, Renaissance Media Holdings LLC and Renaissance Media Group LLC. [Confidential material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.] (4) 7
11 (1) Incorporated by reference to the corresponding exhibit of the Registration Statement of Renaissance Media Group LLC, Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and Renaissance Media Capital Corporation on Form S-4 (Commission File No. 333-56679), filed on June 12, 1998. (2) Incorporated by reference to the corresponding exhibit of Amendment 1 to the Registration Statement of Renaissance Media Group LLC, Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and Renaissance Media Capital Corporation on Form S-4 (Commission File No. 333-56679), filed on August 6, 1998. (3) Incorporated by reference to the corresponding exhibit of the Quarterly Report on Form 10-Q of Renaissance Media Group LLC, Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and Renaissance Media Capital Corporation for the quarter ended March 31, 1999, filed on May 17, 1999 (Commission File No. 333-56679). (4) Incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K of Renaissance Media Group LLC, Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and Renaissance Media Capital Corporation dated February 23, 1999 (Commission File No. 333-56679). (5) Incorporated by reference to the corresponding exhibit of the Annual Report on Form 10-K of Renaissance Media Group LLC, Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) and Renaissance Media Capital Corporation, filed March 30, 2000 (Commission File Nos. 333-56679, 333-56679-02, 333-56679-01 and 333-56679-03, respectively). (b) Reports on Form 8-K: No reports on form 8-K were filed during the fourth quarter of 2000. SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. No annual reports or proxy materials were sent to the Registrants' security holders during fiscal year 2000. 8
12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunder duly authorized. RENAISSANCE MEDIA GROUP LLC RENAISSANCE MEDIA (LOUISIANA) LLC RENAISSANCE MEDIA (TENNESSEE) LLC Dated March 29, 2001 By: CHARTER COMMUNICATIONS, INC. ---------------------------- its Manager By: /s/ JERALD L. KENT ---------------------------- Name: Jerald L. Kent Title: President, Chief Executive Officer RENAISSANCE MEDIA CAPITAL CORPORATION Dated March 29, 2001 By: /s/ JERALD L. KENT ---------------------------- Name: Jerald L. Kent Title: President, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ JERALD L. KENT March 29, 2001 ------------------ Name: Jerald L. Kent Title: President and Chief Executive Officer of Charter Communications, Inc. (Manager); Renaissance Media Group LLC; Renaissance Media (Louisiana) LLC; Renaissance Media (Tennessee) LLC; and Renaissance Media Capital Corporation. By: /s/ KENT D. KALKWARF March 29, 2001 -------------------- Name: Kent D. Kalkwarf Title: Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) of Charter Communications, Inc. (Manager); Renaissance Media Group LLC; Renaissance Media (Louisiana) LLC; Renaissance Media (Tennessee) LLC; and Renaissance Media Capital Corporation. 9
13 RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Page ---- RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES Report of Independent Public Accountants............................................................................F-2 Consolidated Balance Sheet as of December 31, 2000 and 1999.........................................................F-3 Consolidated Statement of Operations for the year ended December 31, 2000 and the eight months ended December 31, 1999............................................. ..................................................................F-4 Consolidated Statement of Changes in Member's Equity for the year ended December 31, 2000 and the eight months ended December 31, 1999.............................................................................................F-5 Consolidated Statement of Cash Flows for the year ended December 31, 2000 and the eight months ended December 31, 1999.................................. .............................................................................F-6 Notes to Consolidated Financial Statements..........................................................................F-7 RENAISSANCE MEDIA GROUP LLC Report of Independent Auditors.....................................................................................F-16 Consolidated Balance Sheet as of April 30, 1999....................................................................F-17 Consolidated Statement of Operations for the four months ended April 30, 1999......................................F-18 Consolidated Statement of Changes in Members' Equity for the four months ended April 30, 1999......................F-19 Consolidated Statement of Cash Flows for the four months ended April 30, 1999......................................F-20 Notes to Consolidated Financial Statements.........................................................................F-21 RENAISSANCE MEDIA GROUP LLC Report of Independent Auditors.....................................................................................F-29 Consolidated Balance Sheet as of December 31, 1998.................................................................F-30 Consolidated Statement of Operations for the year ended December 31, 1998..........................................F-31 Consolidated Statement of Changes in Members' Equity for the year ended December 31, 1998..........................F-32 Consolidated Statement of Cash Flows for the year ended December 31, 1998..........................................F-33 Notes to Consolidated Financial Statements.........................................................................F-34 PREDECESSOR Report of Independent Auditors.....................................................................................F-44 Combined Balance Sheet as of April 8, 1998.........................................................................F-45 Combined Statement of Operations for the period from January 1, 1998 through April 8, 1998.........................F-46 Combined Statement of Changes in Net Assets for the period from January 1, 1998 through April 8, 1998.....................................................................................................F-47 Combined Statement of Cash Flows for the period January 1, 1998 through April 8, 1998..............................F-48 Notes to Combined Financial Statements.............................................................................F-49 F-1
14 Report of Independent Public Accountants To Renaissance Media Group LLC: We have audited the accompanying consolidated balance sheets of Renaissance Media Group LLC and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in member's equity and cash flows for the year ended December 31, 2000, and the eight months ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Renaissance Media Group LLC and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the year ended December 31, 2000, and the eight months ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri February 8, 2001 F-2
15 RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) December 31, ------------------------------------- 2000 1999 ------------------ -------------- ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 1,809 $ 3,521 Accounts receivable, less allowance for doubtful accounts of $212 and $80, respectively 1,172 1,084 Prepaid expenses and other assets 131 157 Receivable from related parties -- 10,211 ----------------- --------------- Total current assets 3,112 14,973 INVESTMENT IN CABLE SYSTEMS: Property, plant and equipment, net 134,497 67,396 Franchises, net 369,487 396,416 ---------------- --------------- 503,984 463,812 ---------------- --------------- $ 507,096 $ 478,785 ================ =============== LIABILITIES AND MEMBER'S EQUITY - ------------------------------- CURRENT LIABILITIES: Accounts payable and accrued expenses $ 35,117 $ 16,405 Payables to related parties 31,149 -- ---------------- --------------- Total current liabilities 66,266 16,405 LONG-TERM DEBT 94,600 86,507 ---------------- --------------- MEMBER'S EQUITY 346,230 375,873 ---------------- --------------- $ 507,096 $ 478,785 ================ =============== The accompanying notes are an integral part of these consolidated financial statements. F-3
16 RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Thousands) Eight months Year ended ended December 31, December 31, 2000 1999 ---- ---- REVENUES $ 70,313 $ 42,032 OPERATING EXPENSES: Operating, general and administrative 33,313 20,566 Depreciation and amortization 56,873 23,150 Corporate expense charges - related parties 1,246 1,625 ---------------- ---------------- Loss from operations (21,119) (3,309) OTHER INCOME (EXPENSE): Interest income 228 61 Interest expense (8,093) (5,527) Other expense (659) -- ----------------- ----------------- Net loss $ (29,643) $ (8,775) ================ ================= The accompanying notes are an integral part of these consolidated financial statements. F-4
17 RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S EQUITY (Dollars in Thousands) BALANCE, May 1, 1999 $ 350,444 Contributions 34,610 Distributions (406) Net loss (8,775) --------- BALANCE, December 31, 1999 375,873 Net loss (29,643) --------- BALANCE, December 31, 2000 $ 346,230 ========= The accompanying notes are an integral part of these consolidated financial statements. F-5
18 RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) Eight months Year ended ended December 31, December 31, 2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (29,643) $ (8,775) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 56,873 23,150 Accretion on senior discount notes and non-cash interest expense 8,093 5,451 Changes in operating assets and liabilities: Accounts receivable (88) (13,107) Prepaid expenses and other assets 26 245 Accounts payable and accrued expenses 18,712 10,928 Receivables from and payables to related parties, including deferred management fees 41,360 2,289 ----------------- ------------------ Net cash provided by operating activities 95,333 20,181 ----------------- ------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (95,584) (21,419) Other investing activities (1,461) (622) ------------------ ------------------ Net cash used in investing activities (97,045) (22,041) ------------------ ------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Capital contributions -- 387 Distributions to parent -- (406) ------------------ ------------------ Net cash used in financing activities -- (19) ------------------ ------------------ NET DECREASE IN CASH AND CASH EQUIVALENTS (1,712) (1,879) CASH AND CASH EQUIVALENTS, beginning of period 3,521 5,400 ------------------ ------------------ CASH AND CASH EQUIVALENTS, end of period $ 1,809 $ 3,521 ================== ================== NON-CASH TRANSACTION-Capital Contribution (see Note 7) $ -- $ 34,223 ================== ================== The accompanying notes are an integral part of these consolidated financial statements. F-6
19 RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except where indicated) 1. ORGANIZATION AND BASIS OF PRESENTATION The accompanying consolidated financial statements of the Renaissance Media Group LLC (the "Company") include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated. As of December 31, 2000, the Company owns and operates cable systems serving approximately 135,800 (unaudited) customers. The Company currently offers a full array of traditional analog cable services and advanced bandwidth services such as digital television, interactive video programming, Internet access through television-based service, dial-up telephone modems and high speed cable modems, and video-on-demand. The Company operates primarily in the states of Tennessee and Louisiana. On April 30, 1999, Charter Communications, LLC (CC LLC) acquired all of the outstanding membership interests in the Company (the "Charter Transaction"). The purchase price was $459 million, consisting of $348 million in cash and $111 million in accreted value of debt assumed. As a result of the Charter Transaction and the application purchase accounting, the financial information of the Company in the accompanying consolidated financial statements as of December 31, 1999, and for the period from May 1, 1999, through December 31, 1999, is presented on a different cost basis than the financial information of the Company for the period prior to and through April 30, 1999. Therefore, such information is not comparable. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. These investments are carried at cost, which approximates market value. Property, Plant and Equipment Property, plant and equipment is recorded at cost, including all direct and certain indirect costs associated with the construction of cable transmission and distribution facilities, and the cost of new customer installations. The costs of disconnecting a customer are charged to expense in the period incurred. Expenditures for repairs and maintenance are charged to expense as incurred, while equipment replacement and betterments are capitalized. Depreciation is provided on the straight-line basis over the following estimated useful lives of the related assets as follows: Cable distribution systems 3-15 years F-7
20 Buildings and leasehold improvements 5-15 years Vehicles and equipment 3-5 years Franchises Costs incurred in obtaining and renewing cable franchises are deferred and amortized over the lives of the franchises. Costs relating to unsuccessful franchise applications are charged to expense when it is determined that the efforts to obtain the franchise will not be successful. Franchise rights acquired through the purchase of cable systems represent management's estimate of fair value and are generally amortized using the straight-line method over a period of 15 years. Accumulated amortization related to franchises was $46.2 million and $18.4 million, as of December 31, 2000 and 1999, respectively. The period of 15 years is management's best estimate of the useful lives of the franchises and assumes substantially all of those franchises that expire during the period will be renewed by the Company. Amortization expense for franchises was $28.4 million and $18.4 million for the year ended December 31, 2000 and for the eight months ended December 31, 1999, respectively. Impairment of Assets If facts and circumstances indicate that a long-lived asset may be impaired, the carrying value is reviewed. If a review indicates that the carrying value of such asset is not recoverable based on projected undiscounted cash flows related to the asset over its remaining life, the carrying value of such asset is reduced to its estimated fair value. Revenues Revenues from basic, premium, pay-per-view, digital and data services are recognized when the related services are provided. Installation revenues are recognized to the extent of direct selling costs incurred. The remainder, if any, is deferred and amortized to income over the estimated average period that customers are expected to remain connected to the cable system. As of December 31, 2000 and 1999, no installation revenue has been deferred, as direct selling costs have exceeded installation revenue. Advertising sales are recognized in the period that the advertisements are exhibited. Local governmental authorities impose franchise fees on the Company ranging up to a federally mandated maximum of 5.0% of gross revenues. Such fees are collected on a monthly basis, from the Company's customers and are periodically remitted to local franchise authorities. Franchise fees collected and paid are reported as revenues and expenses. Segments In accordance with SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, segments have been identified based upon management responsibility. The individual segments have been aggregated into one reportable segment, cable services. F-8
21 Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. ACQUISITIONS As a result of the Charter Transaction discussed in Note 1, the Company has applied push-down accounting in the preparation of the accompanying consolidated financial statements. Accordingly, on May 1, 1999, the Company changed its member's equity to $350.4 million to reflect the amounts paid by CC LLC. The purchase price was allocated to assets acquired and liabilities assumed based on their relative fair values, including amounts assigned to franchises of $414.9 million. Unaudited pro forma operating results as though the Charter Transaction had been consummated on January 1, 1999, with pro forma adjustments to give effect to amortization of franchises, interest expense and certain other adjustments, are as follows for the year ended December 31, 1999: Revenues $ 62,507 Loss from operations (3,947) Net loss (42,838) The unaudited pro forma information has been presented for comparative purposes and does not purport to be indicative of the results of operations had this transaction been completed as of the assumed date or which may be obtained in the future. 4. ALLOWANCE FOR DOUBTFUL ACCOUNTS: Activity in the allowance for doubtful accounts is summarized as follows for the year ended December 31: 2000 ------------- Balance, beginning of year...................................... $ 80 Charged to expense.............................................. 733 Uncollected balances written off, net of recoveries (601) ------------- Balance, end of year............................................ $ 212 ============= 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following at December 31: 2000 1999 ------------------ ----------------- Cable distribution systems $ 136,793 $ 67,176 F-9
22 Land, buildings and leasehold improvements 12,465 2,057 Vehicles and equipment 5,784 2,836 ----------------- ----------------- 155,042 72,069 Less: accumulated depreciation (20,545) (4,673) ----------------- ----------------- $ 134,497 $ 67,396 ================= ================= Depreciation expense for assets owned by the Company was $28.5 million and $4.7 million for the year ended December 31, 2000, and the eight months ended December 31, 1999, respectively. During the year ended December 31, 2000, the Company reduced the estimated useful lives of certain depreciable assets expected to have reduced lives as a result of the rebuild and upgrade of the Company's cable distribution systems. As a result, the above depreciation expense balance for 2000 includes an additional $13.5 million of depreciation. 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following at December 31: 2000 1999 ----------------- ----------------- Accounts payable $ 12,828 $ 5,929 Capital expenditures 10,858 5,118 Programming expenses 2,457 1,525 Franchises fees 1,250 1,140 Other accrued liabilities 7,724 2,693 ----------------- ----------------- $ 35,117 $ 16,405 ================= ================= 7. LONG-TERM DEBT Long-term debt consists of the following at December 31: 2000 1999 ---------------- ---------------- 10% Senior Discount Notes $ 114,413 $ 114,413 Unamortized net discount (19,813) (27,906) ---------------- ---------------- $ 94,600 $ 86,507 ================ ================ In 1998, the Company issued $163,175 principal amount at maturity of 10% senior discount notes due 2008 (the "Notes") for proceeds of $100,012. The Notes pay no cash interest until April 15, 2003. From and after April 15, 2003, the Notes 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. F-10
23 On May 28, 1999, as a result of the Charter Transaction (i.e., the change of control) and in accordance with the terms and conditions of the indenture governing the Notes, the Company made an offer (the "Tender Offer") to purchase any and all of the Notes at 101% of their accreted value, plus accrued and unpaid interest, if any, through June 28, 1999. The Tender Offer expired on June 23, 1999, at which time 48,762 Notes were validly tendered and accepted for purchase. On June 28, 1999, Charter Communications Operating, LLC ("CCO"), the indirect parent of the Company, paid a sum of $34,223 for all of the Notes validly tendered. Accordingly, the Company recorded this payment for the extinguishment of debt as a capital contribution. The indenture governing the Notes limits cash payments by the Company to the sum of: (i) the amount by which consolidated EBITDA (as defined) exceeds 130% of consolidated interest expense (as defined) determined on a cumulative basis, (ii) capital contributions, and (iii) an amount equal to the net reduction in investments (as defined). Excess cash will be made available to CCO, parent entity of CC LLC, as permitted by the indenture, including the funding of CCO's credit facility (the "CCO Credit Agreement"). The Company and all subsidiaries of CCO have guaranteed payment and performance by CCO of its obligations inherent in the CCO Credit Agreement. In addition, the Company and its wholly owned subsidiaries and all subsidiaries of CCO have pledged their ownership interests as collateral to the CCO Credit Agreement. The fair market value of the Notes was $73,224 and $79,517 as of December 31, 2000 and 1999, respectively. 8. INCOME TAXES Prior to June 20, 1999, certain subsidiaries of the Company elected to be treated as corporations for federal income tax purposes. Through this date, the Company established a valuation allowance to offset the entire potential future tax benefit of the net operating loss (NOL) carryforward and, therefore, recognized no deferred tax benefit with respect to the NOL. Effective June 20, 1999, these subsidiaries of the Company have elected to be treated as disregarded entities for income tax purposes. As a result, the taxable income (loss) of these entities is the responsibility of the Company's ultimate owners, and income taxes are not provided for in the accompanying consolidated financial statements. In addition, a certain subsidiary of the Company is a corporation subject to income taxes but has had no operations and, therefore, no taxable income since inception. 9. REVENUES Revenues consist of the following: Eight months Year ended ended December 31, December 31, 2000 1999 ---- ---- Basic............................................ $ 51,058 $ 32,450 Premium.......................................... 5,989 3,774 Pay-per-view..................................... 668 805 Digital.......................................... 2,413 -- Advertising sales................................ 3,556 1,396 Data services 58 -- F-11
24 Other............................................ 6,571 3,607 ---------------- --------------- $ 70,313 $ 42,032 =============== =============== 10. OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES Operating, general and administrative expenses consist of the following: Eight months Year ended ended December 31, December 31, 2000 1999 ---- ---- Programming....................................... $ 16,332 $ 9,692 General and administrative........................ 11,505 7,103 Service........................................... 3,629 2,962 Marketing......................................... 1,292 734 Advertising sales................................. 1 -- Other............................................. 554 75 ---------------- --------------- $ 33,313 $ 20,566 ================ =============== 11. RELATED PARTY TRANSACTIONS Charter Communications Investment, Inc. (Charter Investment) and Charter Communications, Inc. (Charter), an entity controlled by Paul G. Allen, provide management services to the Company including centralized customer billing services, data processing and related support, benefits administration and coordination of insurance coverage and self-insurance programs for medical, dental and workers' compensation claims. Certain costs for these services are billed and charged directly to the Company's operating subsidiaries and are included in operating costs. These costs are allocated based on the number of basic customers. Such costs totaled $1.8 million and $245 for the year ended December 31, 2000 and the eight months ended December 31, 1999, respectively. All other costs incurred by Charter Investment and Charter on behalf of the Company are recorded as expenses in the accompanying consolidated financial statements and are included in corporate expense charges-related parties. Management fees are stipulated in the management agreements between Charter Investment, Charter and the Company. To the extent management fees charged to the Company are greater (less) than the corporate expenses incurred by Charter Investment and Charter, the Company records distributions to (capital contributions from) Charter Investment and Charter. For the eight months ended December 31, 1999, the Company recorded distributions of $406. For the year ended December 31, 2000, the management fee charged to the Company approximated the corporate expenses incurred by Charter Investment and Charter on behalf of the Company. The CCO Credit Agreement prohibits payments of management fees in excess of 3.5% of revenues until repayment of the outstanding indebtedness. Any amount in excess of 3.5% of revenue owed to Charter Investment or Charter based on the management agreement would be recorded as deferred management fees - related party. Management believes that costs incurred by Charter Investment and Charter on the Company's behalf and included in the accompanying consolidated financial statements are not materially different than costs the Company would have incurred as a stand- alone entity. F-12
25 The Company also pays costs on behalf of Charter Investment and Charter. These costs are reimbursed by Charter Investment and Charter and are recorded as receivables from related parties in the accompanying consolidated financial statements. Charter, Mr. Allen and certain affiliates of Mr. Allen own equity interests or warrants to purchase equity interest in various entities that provide services or programming to the Company, including High Speed Access Corp. (High Speed Access), WorldGate, Wink Communications, Inc.(Wink), ZDTV, LLC (ZDTV), USA Networks, Inc. (USA Networks) and Oxygen Media, Inc. (Oxygen Media). In addition, certain officers or directors of Charter also serve as directors of High Speed Access Corp. and USA Networks. Certain of the Company's cable subscribers receive cable modem-based Internet access through High Speed Access and TV-based Internet access through WorldGate. For the year ended December 31, 2000, and for the eight months ended December 31, 1999, revenues attributable to these services were less than 1% of total revenues. The Company receives or will receive programming and certain interactive features embedded into the programming for broadcast via its cable systems from Wink, ZDTV, USA Networks, and Oxygen Media. The Company pays a fee for the programming service generally based on the number of customers receiving the service. Such fees for the year ended December 31, 2000 and for the eight months ended December 31, 1999, were less than 1% of total operating expenses. In addition, the Company receives commissions from USA Networks for home shopping sales generated by its customers. Such revenues for the year ended December 31, 2000 and for the eight months ended December 31, 1999, were less than 1% of total revenues. 12. COMMITMENTS AND CONTINGENCIES Leases The Company had rental expense under various lease and rental agreements of approximately $44 and $65 for the year ended December 31, 2000 and the eight months ended December 31, 1999, respectively, primarily for offices, tower sites and warehouses. Future minimum lease payments are not significant. The Company also rents utility poles in its operations. Generally, pole rentals are cancelable on short notice, but the Company anticipates that such rentals will recur. Rent expense for pole rental attachments was approximately $877 and $564 for the year ended December 31, 2000 and the eight months ended December 31, 1999, respectively. Litigation The Company is a party to lawsuits and claims that arise in the ordinary course of conducting its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits and claims will not have a material adverse effect on the Company's consolidated financial position or results of operations. 13. REGULATION IN THE CABLE INDUSTRY F-13
26 The cable industry is subject to extensive regulation at the federal, local and, in some instances, state levels. The Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act" and together with the 1984 Cable Act, the "Cable Acts"), and the Telecommunications Act of 1996 (the "1996 Telecom Act"), establish a national policy to guide the development and regulation of cable systems. The Federal Communications Commission (FCC) has principal responsibility for implementing the policies of the Cable Acts. Many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Legislation and regulations continue to change, and the Company cannot predict the impact of future developments on the cable industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable 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 established rate regulations. The 1992 Cable Act permits certified local franchising authorities to order refunds of basic service tier rates paid in the previous twelve-month period determined to be in excess of the maximum permitted rates. During 2000 and 1999, the amount refunded by the Company has been insignificant. The Company may be required to refund additional amounts in the future. The Company believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including the rate setting provisions promulgated by the FCC. However, in jurisdictions that have chosen not to certify, refunds covering the previous twelve-month period may be ordered upon certification if the Company is unable to justify its basic rates. As of December 31, 2000, approximately 5.6% of the Company's local franchising authorities are certified to regulate basic tier rates. The Company is unable to estimate at this time the amount of refunds, if any, that may be payable by the Company in the event certain of its rates are successfully challenged by franchising authorities or found to be unreasonable by the FCC. The Company does not believe that the amount of any such refunds would have a material adverse effect on the consolidated financial position or results of operations of the Company. The 1996 Telecom Act, among other things, immediately deregulated the rates for certain small cable operators and in certain limited circumstances rates on the basic service tier, and as of March 31, 1999, deregulated rates on the cable programming service tier (CPST). The FCC has taken the position that it will still adjudicate pending CPST complaints but will strictly limit its review, and possible refund orders, to the time period predating the sunset date, March 31, 1999. The Company does not believe any adjudications regarding its pre-sunset complaints will have a material adverse effect on the Company's consolidated financial position or results of operations. 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. State governmental agencies are required to follow FCC rules when prescribing rate regulation, and thus, state regulation of cable rates is not allowed to be more restrictive than the federal or local regulation. 14. EMPLOYEE BENEFIT PLANS F-14
27 The Company sponsored a defined contribution plan that covered substantially all employees (the "Plan"). In connection with the Charter Transaction, the Plan's assets were frozen as of April 30, 1999, and employees became fully vested. Effective July 1, 1999, the Company's employees with two months of service are eligible to participate in the Charter Communications, Inc. 401(k) Plan (the "Charter Plan"). Participants in the Charter Plan can contribute up to 15% of their salary, on a before tax basis, subject to a maximum contribution limit as determined by the Internal Revenue Service. The Company made contributions to the Charter Plan totaling $117 and $54 for the year ended December 31, 2000 and the eight months ended December 31, 1999, respectively. Eligible employees of the Company participate in the Charter Communications Holding Company Option Plan. The option plan provides for grants of options to employees, officers and directors of the Company. Options are granted with an exercise price equal to the estimated fair value of the underlying membership units and vest over five years from the grant date, commencing 15 months after the date of the grant. Options not exercised accumulate and are exercisable, in whole or in part, in any subsequent period, but not later than ten years from the date of grant. The Company uses the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, to account for the option plans. Accordingly, no compensation expense was recorded for the year ended December 31, 2000 and the eight months ended December 31, 1999. 15. RECENTLY ISSUED ACCOUNTING STANDARDS Statement of Financial Accounting Standards Board (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, is effective for the Company as of January 1, 2001. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company has no derivative instruments. Adoption of these new accounting standards will not impact the consolidated financial statements of the Company. F-15
28 REPORT OF INDEPENDENT AUDITORS To the Board of Directors of Renaissance Media Group LLC We have audited the accompanying consolidated balance sheet of Renaissance Media Group LLC (the "Company") as of April 30, 1999 and the related consolidated statements of operations, changes in members' equity, and cash flows for the four months ended April 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at April 30, 1999, and the consolidated results of its operations and its cash flows for the four months then ended in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP New York, New York June 4, 1999 except for Note 11, as to which the date is June 29, 1999 F-16
29 RENAISSANCE MEDIA GROUP LLC CONSOLIDATED BALANCE SHEET (IN THOUSANDS) APRIL 30, 1999 -------------- ASSETS Cash and cash equivalents................................... $ 5,400 Accounts receivable -- trade (less allowance for doubtful accounts of $86).......................................... 520 Accounts receivable -- other................................ 492 Prepaid expenses and other assets........................... 416 Investment in cable television systems: Property, plant and equipment............................. 76,250 Less: accumulated depreciation............................ (10,706) -------- 65,544 -------- Cable television franchises............................... 238,429 Less: accumulated amortization............................ (16,754) -------- 221,675 -------- Intangible assets......................................... 17,544 Less: accumulated amortization............................ (1,525) -------- 16,019 -------- Net investment in cable television systems................ 303,238 -------- Total assets................................................ $310,066 ======== LIABILITIES AND MEMBERS' EQUITY Accounts payable............................................ $ 546 Accrued expenses............................................ 3,222 Subscriber advance payments and deposits.................... 657 Deferred marketing credits.................................. 650 Debt........................................................ 213,402 -------- Total liabilities........................................... 218,477 -------- Members' equity: Paid-in capital........................................... 108,600 Accumulated deficit....................................... (17,011) -------- Total members' equity....................................... 91,589 -------- Total liabilities and members' equity....................... $310,066 ======== See accompanying notes to consolidated financial statements. F-17
30 RENAISSANCE MEDIA GROUP LLC CONSOLIDATED STATEMENT OF OPERATIONS (IN THOUSANDS) FOUR MONTHS ENDED APRIL 30, 1999 -------------- Revenues.................................................... $20,396 Costs and expenses: Service costs............................................. 6,325 Selling, general and administrative....................... 3,057 Depreciation and amortization............................. 8,912 ------- Operating income............................................ 2,102 Interest income............................................. 122 Interest (expense).......................................... (6,321) ------- (Loss) before credit for taxes.............................. (4,097) Credit for taxes............................................ 65 ------- Net (loss).................................................. $(4,032) ======= See accompanying notes to consolidated financial statements. F-18
31 RENAISSANCE MEDIA GROUP LLC CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY (IN THOUSANDS) TOTAL PAID-IN ACCUMULATED MEMBERS' CAPITAL DEFICIT EQUITY -------- ----------- -------- Balance December 31, 1998............................... $108,600 $(12,979) $95,621 Net (loss).............................................. -- (4,032) (4,032) -------- -------- ------- Balance April 30, 1999.................................. $108,600 $(17,011) $91,589 ======== ======== ======= See accompanying notes to consolidated financial statements. F-19
32 RENAISSANCE MEDIA GROUP LLC CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) FOUR MONTHS ENDED APRIL 30, 1999 -------------- OPERATING ACTIVITIES Net (loss).................................................. $(4,032) Adjustments to non-cash and non-operating items: Depreciation and amortization............................. 8,912 Accretion on Senior Discount Notes........................ 3,528 Other non-cash charges.................................... 322 Changes in operating assets and liabilities: Accounts receivable -- trade, net...................... 206 Accounts receivable -- other........................... 92 Prepaid expenses and other assets...................... (75) Accounts payable....................................... (1,496) Accrued expenses....................................... (3,449) Subscriber advance payments and deposits............... 49 Deferred marketing support............................. (150) ------- Net cash provided by operating activities................... 3,907 ------- INVESTING ACTIVITIES Purchased cable television systems: Property, plant and equipment............................. (830) Cable television franchises............................... (1,940) Escrow deposit.............................................. 150 Capital expenditures........................................ (4,250) Other intangible assets..................................... 16 ------- Net cash used in investing activities....................... (6,854) ------- FINANCING ACTIVITIES Repayment of advances from Holdings......................... (135) ------- Net cash used in financing activities....................... (135) ------- Net decrease in cash and cash equivalents................... (3,082) Cash and cash equivalents at December 31, 1998.............. 8,482 ======= Cash and cash equivalents at April 30, 1999................. $ 5,400 ======= SUPPLEMENTAL DISCLOSURES Interest paid............................................... $ 4,210 ======= See accompanying notes to consolidated financial statements F-20
33 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (ALL DOLLAR AMOUNTS IN THOUSANDS) 1. ORGANIZATION AND BASIS OF PRESENTATION Renaissance Media Group LLC ("Group") a wholly owned subsidiary of Renaissance Media Holdings LLC ("Holdings"), was formed in March 1998 to own and operate cable television systems in small and medium sized markets, which provide programming, and other related services, to subscribers through its hybrid coaxial and fiber optic distribution plant for a monthly fee. Group and its wholly owned subsidiaries, Renaissance Media (Louisiana) LLC ("Louisiana"), Renaissance Media (Tennessee) LLC ("Tennessee"), and Renaissance Media LLC ("Media") are collectively referred to as the "Company". On April 9, 1998, the Company acquired six cable television systems (the "Acquisition") from TWI Cable, Inc., a subsidiary of Time Warner Inc. ("Time Warner"). Prior to the Acquisition, the Company had no operations other than start-up related activities. On February 23, 1999, Holdings, Charter Communications, Inc. ("Charter"), now known as Charter Investment, Inc. and Charter Communications, LLC ("Buyer" or "CC LLC") executed a purchase agreement (the "Charter Purchase Agreement"), providing for Holdings to sell and Buyer to purchase, all of the outstanding limited liability company membership interests in Group held by Holdings (the "Charter Transaction") subject to certain covenants and restrictions pending satisfaction of certain conditions prior to closing. The purchase price was $459,000, consisting of $348,000 in cash and $111,000 in assumed debt. On April 30, 1999, the Charter Transaction was consummated. These financial statements have been prepared as of and for the four months ended April 30, 1999 immediately prior to the consummation of the Charter Transaction. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NEW ACCOUNTING STANDARDS During 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133 -- An Amendment of FASB Statement No. 133" has delayed the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 is not expected to have a material impact on the consolidated financial statements. PRINCIPLES OF CONSOLIDATION The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries. Significant inter-company accounts and transactions have been eliminated. F-21
34 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN THOUSANDS) 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 Company generally extends 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 Company's financial condition. 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, PLANT AND EQUIPMENT Property, plant and equipment is recorded at purchased and capitalized cost. Capitalized internal costs principally consist of employee costs and interest on funds borrowed during construction. Capitalized labor, materials and associated overhead amounted to approximately $721 for the four months ended April 30, 1999. Replacements, renewals and improvements to installed cable plant are capitalized. Maintenance and repairs are charged to expense as incurred. Depreciation expense for the four months ended April 30, 1999 amounted to $3,434. Property, plant and equipment is depreciated using the straight-line method over the following estimated service lives: Buildings and leasehold improvements........................ 5-30 years Cable systems, equipment and subscriber devices............. 5-30 years Transportation equipment.................................... 3-5 years Furniture, fixtures and office equipment.................... 5-10 years Property, plant and equipment at April 30, 1999 consisted of: Land........................................................ $ 436 Buildings and leasehold improvements........................ 1,445 Cable systems, equipment and subscriber devices............. 64,658 Transportation equipment.................................... 2,301 Furniture, fixtures and office equipment.................... 923 Construction in progress.................................... 6,487 ------- 76,250 Less: accumulated depreciation.............................. (10,706) ------- Total....................................................... $65,544 ======= F-22
35 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN THOUSANDS) CABLE TELEVISION FRANCHISES AND INTANGIBLE ASSETS Cable television franchise costs include the assigned fair value, at the date of acquisition, of the franchises from purchased cable television systems. Intangible assets include goodwill, deferred financing and other intangible assets. Cable television franchises and intangible assets are amortized using the straight-line method over the following estimated useful lives: Cable television franchises................................. 15 years Goodwill.................................................... 25 years Deferred financing and other intangible assets.............. 2-10 years Intangible assets at April 30, 1999 consisted of: Goodwill.................................................... $ 8,608 Deferred financing costs.................................... 8,307 Other intangible assets..................................... 629 ------- 17,544 Less: accumulated amortization.............................. (1,525) ------- Total....................................................... $16,019 ======= The Company reviews the carrying value of its long-lived assets, including property, plant and equipment, cable television franchises 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. REVENUES 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. ADVERTISING COSTS Advertising costs are expensed upon the first exhibition of the related advertisements and are recorded net of marketing credits earned from launch incentive and cooperative advertising programs. During the four months ended April 30, 1999 the company earned marketing credits in excess of advertising expense incurred. Advertising expense and marketing credits amounted to $263 and $306, respectively, for the four months ended April 30, 1999. 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. F-23
36 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN THOUSANDS) 3. ACQUISITIONS BAYOU VISION, INC. On February 3, 1999, Media acquired the cable television assets of Bayou Vision, Inc. and Gulf South Cable, Inc. serving approximately 1,950 subscribers in the Villages of Estherwood, Morse and Mermentau and Acadia and Livingston Parish, Louisiana. The cash purchase price was approximately $2,700 and was paid out of available Company funds. 4. DEBT As of April 30, 1999, debt consisted of: 10% Senior Discount Notes at accreted value (a)............. $110,902 Credit Agreement (b)........................................ 102,500 -------- $213,402 ======== - --------------- (a) On April 9, 1998, the Company issued $163,175 principal amount at maturity, $100,012 initial accreted value, of 10% senior discount notes due 2008 (the "Notes"). The Notes pay no cash 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. The fair market value of the Notes at April 30, 1999 was $116,262. See Note 11 regarding the offer to repurchase the Notes. (b) On April 9, 1998, Media entered into a credit agreement among Morgan Stanley & Co. Incorporated as Placement Agent, Morgan Stanley Senior Funding Inc., as Syndication Agent, the Lenders, CIBC Inc., as Documentation Agent and Bankers Trust Company as Administrative Agent (the "Credit Agreement"). The aggregate commitments under the Credit Agreement total $150,000, consisting of a $40,000 revolver (the "Revolver"), $60,000 Tranche A Term Loans and $50,000 Tranche B Term Loans (collectively the "Term Loans"). The Revolver and Term Loans are collateralized by a first lien position on all present and future assets and the member's interest of Media, Louisiana and Tennessee. The Credit Agreement provides for interest at varying rates based upon various borrowing options and the attainment of certain financial ratios and for commitment fees of 1/2% on the unused portion of the revolver. Management believes the terms are comparable to those that could be obtained from third parties. The effective interest rate, including commitment fees and amortization of related deferred financing costs and the interest-rate cap, for the four months ended April 30, 1999 was 7.58%. See Note 11 regarding the repayment of amounts outstanding under the Credit Agreement upon consummation of the Charter Transaction. The Credit Agreement and the indenture pursuant to which the Notes were issued contain restrictive covenants on the Company regarding additional indebtedness, investment guarantees, loans, acquisitions, dividends and merger or sale of the subsidiaries and require the maintenance of certain financial ratios. 5. INTEREST RATE CAP AGREEMENT The Company purchases interest rate cap agreements that are designed to limit its exposure to increasing interest rates and are designated to its floating rate debt. The strike price of these agreements exceeds the current market levels at the time they are entered into. The interest rate F-24
37 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN THOUSANDS) indices specified by the agreements have been and are expected to be highly correlated with the interest rates the Company incurs on its floating rate debt. Payments to be received as a result of the specified interest rate index exceeding the strike price are accrued in other assets and are recognized as a reduction of interest expense (the accrual accounting method). The cost of these agreements is included in other assets and amortized to interest expense ratably during the life of the agreement. Upon termination of interest rate cap agreements, any gain is deferred in other liabilities and amortized over the remaining term of the original contractual life of the agreement as a reduction of interest expense. The Company purchased an interest rate cap agreement from Morgan Stanley Capital Services Inc. The carrying value as of April 30, 1999 was $34. The fair value of the interest rate cap was $0 as of April 30, 1999. The following table summarizes the interest rate cap agreement: NOTIONAL INITIAL FIXED RATE PRINCIPAL EFFECTIVE TERMINATION CONTRACT (PAY AMOUNT TERM DATE DATE COST RATE) - --------- ------- --------- ----------- -------- ---------- $100,000 2 Years 12/1/97 12/1/99 $100 7.25% 6. TAXES For the four months ended April 30, 1999, the credit for taxes has been calculated on a separate company basis. The components of the credit for taxes are as follows: FOUR MONTHS ENDED APRIL 30, 1999 -------------- Federal: Current................................................... $ -- Deferred.................................................. -- State:...................................................... -- Current................................................... (65) Deferred.................................................. -- ---- (Credit) for taxes.......................................... $(65) ==== The Company's current state tax credit results from overpayment in 1998 of franchise tax in Tennessee and Mississippi and tax on capital in New York. The Company has a net operating loss ("NOL") carry-forward for income tax purposes which is available to offset future taxable income. This NOL totals approximately $22,324 and will expire in the year 2018 and 2019 at $14,900 and $7,424 respectively. The Company has established a valuation allowance to offset the entire potential future tax benefit of the NOL carry-forward and, therefore, has recognized no deferred tax asset with respect to the NOL. 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. F-25
38 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN THOUSANDS) 7. RELATED PARTY TRANSACTIONS (A) Transactions with Morgan Stanley entities In connection with the Acquisition, Media entered into the Credit Agreement with Morgan Stanley Senior Funding Inc. and Morgan Stanley & Co. Incorporated (collectively the "Morgan Stanley Entities") acted as the Placement Agent for the Notes. In connection with these services the Morgan Stanley Entities received customary fees and expense reimbursement comparable to that of a third party exchange. (B) Transactions with Time Warner and related parties In connection with the Acquisition, Media entered into an agreement with Time Warner (the "Time Warner Agreement"), pursuant to which Time Warner managed the Company's programming in exchange for providing the Company access to certain Time Warner programming arrangements (the "Programming Arrangements"). Management believes that programming rates made available to the Company through its relationship with Time Warner are lower than rates that the Company could obtain separately. Such volume rates will not continue to be available after the Charter Transaction. For the four months ended April 30, 1999, the Company incurred approximately $2,716 in costs under the Programming Arrangements. In addition, the Company has incurred programming costs of approximately $958 for programming services owned directly or indirectly by Time Warner entities for the four months ended April 30, 1999. (C) Transactions with board member The Company has utilized the law firm of one of its board members for legal services for the Acquisition, financing agreements and various ongoing legal matters. These fees totaled approximately $154 for the four months ended April 30, 1999. 8. ACCRUED EXPENSES Accrued expenses as of April 30, 1999 consist of the following: Accrued franchise fees...................................... $ 830 Accrued programming costs................................... 644 Accrued salaries, wages and benefits........................ 516 Accrued interest............................................ 340 Accrued property and sales tax.............................. 231 Accrued legal and professional fees......................... 43 Other accrued expenses...................................... 618 ------ $3,222 ====== 9. EMPLOYEE BENEFIT PLAN The Company sponsors 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 subject to Internal Revenue Code limitations. The Company's contribution to the Plan is limited to 50% of each eligible employee's contribution up to 10% of his or her F-26
39 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN THOUSANDS) compensation. The Company has the right in any year to set the amount of the Company's contribution percentage. Company matching contributions to the Plan for the four months ended April 30, 1999 were approximately $54. All participant contributions and earnings are fully vested upon contribution and Company contributions and earnings vest 20% per year of employment with the Company, becoming fully vested after five years. In connection with the Charter Transaction, the Plan's assets were frozen as of April 30, 1999, and employees became fully vested. Effective July 1, 1999, the Company's employees with two months of service are eligible to participate in the Charter Communications, Inc. 401(k) Plan. 10. COMMITMENTS AND CONTINGENCIES (A) Leases The Company had rental expense under various lease and rental agreements primarily for offices, tower sites and warehouses of approximately $59 for the four months ended April 30, 1999. In addition, the Company rents utility poles in its operations generally under short term arrangements, but the Company expects these arrangements to recur. Total rent expense for utility poles was approximately $272 for the four months ended April 30, 1999. Future minimum annual rental payments under noncancellable leases are as follows: 1999........................................................ $ 29 2000........................................................ 38 2001........................................................ 24 2002........................................................ 21 2003 and thereafter......................................... 70 ---- Total....................................................... $182 ==== (B) Employment Agreements Media entered into employment agreements with six senior executives, who are also investors in Holdings, for the payment of salaries and bonuses. In connection with the Charter Transaction, the employment agreements with the six senior executives were terminated with no liability to the Company. (C) Other Agreements In exchange for certain flexibility in establishing cable rate pricing structures for regulated services that went into effect on January 1, 1996, Time Warner 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) by November 30, 2000. This agreement with the FCC (the "FCC Agreement") has been assumed by the Company as part of the Acquisition and did not terminate as a result of the Charter Transaction. The Company has agreed to invest approximately $25,100 in upgrades to its cable infrastructure in accordance with the FCC Agreement. The Company has spent approximately $3,650 on such upgrades as of April 30, 1999. 11. SUBSEQUENT EVENTS The Charter Transaction was consummated at the close of business on April 30, 1999. In connection with the closing of the Charter Transaction, all amounts outstanding under the Credit F-27
40 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (ALL DOLLAR AMOUNTS IN THOUSANDS) Agreement, including accrued interest and unpaid fees, were paid in full and the Credit Agreement was terminated. The effects of the debt repayment and the CC LLC capital contribution will be reflected in the consolidated financial statements of the Company for periods subsequent to April 30, 1999. In connection with the closing of the Charter Transaction, the Time Warner Agreement was terminated on April 30, 1999 and Media paid Time Warner $650 for deferred marketing credits owed to program providers under the Programming Arrangements. See Note 7 (Transactions with Time Warner and related parties). On May 28, 1999, as a result of the Charter Transaction (i.e., change of control) and in accordance with the terms and conditions of the indenture governing the Notes, the Company made an offer (the "Tender Offer") to purchase any and all of the Notes at 101% of their accreted value, plus accrued and unpaid interest, if any, through June 28, 1999. The Tender Offer expired on June 23, 1999, whereby 48,762 notes ($1,000 face amount at maturity) were validly tendered and accepted for purchase. On June 28, 1999, Charter Communications Operating, LLC, the indirect parent of Group, paid a sum of $34,223 for all of the Notes validly tendered. Accordingly, the Company recorded this payment for the extinguishment of debt as a capital contribution. 12. MANAGEMENT AGREEMENT (UNAUDITED) Effective May 1, 1999, the Company is charged a management fee equal to 3.5% of revenues, as stipulated in the previous management agreement between Charter and Charter Communications Operating, LLC ("CCO"), the indirect parent of Group. To the extent that management fees charged to the Company are greater/(less) than the proportionate share (based on basic subscribers) of corporate expenses incurred by Charter on behalf of the Company, Group will record distributions to/(capital contributions from) Charter. On November 12, 1999, Charter and CCO entered into a revised management agreement eliminating the 3.5% management fee and entitling Charter to reimbursement from CCO of all of its costs incurred in connection with the performance of its services under the revised management agreement. F-28
41 REPORT OF INDEPENDENT AUDITORS To the Board of Directors of Renaissance Media Group LLC We have audited the accompanying consolidated balance sheet of Renaissance Media Group LLC as of December 31, 1998 and the related consolidated statements of operations, changes in members' equity, and cash flows for the year ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Renaissance Media Group LLC at December 31, 1998, and the consolidated results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP New York, New York February 22, 1999 except for Note 11, as to which the date is February 24, 1999 F-29
42 RENAISSANCE MEDIA GROUP LLC CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 (IN THOUSANDS) ASSETS Cash and cash equivalents................................... $ 8,482 Accounts receivable -- trade (less allowance for doubtful accounts of $92).......................................... 726 Accounts receivable -- other................................ 584 Prepaid expenses and other assets........................... 340 Escrow deposit.............................................. 150 Investment in cable television systems: Property, plant and equipment............................. 71,246 Less: Accumulated depreciation............................ (7,294) -------- 63,952 -------- Cable television franchises............................... 236,489 Less: Accumulated amortization............................ (11,473) -------- 225,016 -------- Intangible assets......................................... 17,559 Less: Accumulated amortization............................ (1,059) -------- 16,500 -------- Total investment in cable television systems......... 305,468 -------- Total assets...................................... $315,750 ======== LIABILITIES AND MEMBERS' EQUITY Accounts payable............................................ $ 2,042 Accrued expenses(a)......................................... 6,670 Subscriber advance payments and deposits.................... 608 Deferred marketing support.................................. 800 Advances from Holdings...................................... 135 Debt........................................................ 209,874 -------- Total Liabilities................................. 220,129 -------- Members' Equity: Paid in capital............................................. 108,600 Accumulated deficit......................................... (12,979) -------- Total members' equity................................ 95,621 -------- Total liabilities and members' equity............. $315,750 ======== - --------------- (a) includes accrued costs from transactions with affiliated companies of $921. See accompanying notes to financial statements. F-30
43 RENAISSANCE MEDIA GROUP LLC CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS) REVENUES.................................................... $ 41,524 -------- COSTS & EXPENSES Service Costs(a).......................................... 13,326 Selling, General & Administrative......................... 7,711 Depreciation & Amortization............................... 19,107 -------- Operating Income....................................... 1,380 Interest Income........................................ 158 Interest (Expense) (b)................................. (14,358) -------- (Loss) Before Provision for Taxes...................... (12,820) Provision for Taxes.................................... 135 -------- Net (Loss)............................................. $(12,955) ======== - --------------- (a) includes costs from transactions with affiliated companies of $7,523. (b) includes $676 of amortization of deferred financing costs. See accompanying notes to financial statements. F-31
44 RENAISSANCE MEDIA GROUP LLC CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS) PAID TOTAL IN ACCUMULATED MEMBER'S CAPITAL (DEFICIT) EQUITY ------- ----------- -------- Contributed Members' Equity -- Renaissance Media Holdings LLC and Renaissance Media LLC................ $ 15,000 $ (24) $14,976 Additional capital contributions........................ 93,600 -- 93,600 Net (Loss).............................................. -- (12,955) (12,955) -------- -------- ------- Balance December 31, 1998............................... $108,600 $(12,979) $95,621 ======== ======== ======= See accompanying notes to financial statements. F-32
45 RENAISSANCE MEDIA GROUP LLC CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS) OPERATING ACTIVITIES: Net (loss).................................................. $(12,955) Adjustments to non-cash and non-operating items: Depreciation and amortization............................. 19,107 Accretion on Senior Discount Notes........................ 7,363 Other non-cash charges.................................... 730 Changes in operating assets and liabilities: Accounts receivable -- trade, net...................... (726) Accounts receivable -- other........................... (584) Prepaid expenses and other assets...................... (338) Accounts payable....................................... 2,031 Accrued expenses....................................... 6,660 Subscriber advance payments and deposits............... 608 Deferred marketing support............................. 800 -------- Net cash provided by operating activities................... 22,696 -------- INVESTING ACTIVITIES: Purchased cable television systems: Property, plant and equipment.......................... (65,580) Cable television franchises............................ (235,412) Cash paid in excess of identifiable assets............. (8,608) Escrow deposit............................................ (150) Capital expenditures...................................... (5,683) Cable television franchises............................... (1,077) Other intangible assets................................... (526) -------- Net cash (used in) investing activities..................... (317,036) -------- FINANCING ACTIVITIES: Debt acquisition costs.................................... (8,323) Principal repayments on bank debt......................... (7,500) Advances from Holdings.................................... 33 Proceeds from bank debt................................... 110,000 Proceeds from 10% Senior Discount Notes................... 100,012 Capital contributions..................................... 108,600 -------- Net cash provided by financing activities................... 302,822 -------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 8,482 CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1997.............. -- -------- CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1998.............. $ 8,482 ======== SUPPLEMENTAL DISCLOSURES: INTEREST PAID............................................. $ 4,639 ======== See accompanying notes to financial statements. F-33
46 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) 1. ORGANIZATION AND BASIS OF PRESENTATION Renaissance Media Group LLC ("Group") was formed on March 13, 1998 by Renaissance Media Holdings LLC ("Holdings"). Holdings is owned by Morgan Stanley Capital Partners III, L.P. ("MSCP III"), Morgan Stanley Capital Investors, L.P. ("MSCI"), MSCP III 892 Investors, L.P. ("MSCP Investors" and, collectively, with its affiliates, MSCP III and MSCI and their respective affiliates, the "Morgan Stanley Entities"), Time Warner and the Management Investors. 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. ("MSCP"), on February 13, 1998 through an acquisition of entities under common control accounted for as if it were a pooling of interests. As a result, Media became a subsidiary of Group and Holdings. Group and its aforementioned subsidiaries are collectively referred to as the "Company". On April 9, 1998, the Company acquired (the "Acquisition") six cable television systems (the "Systems") from TWI Cable, Inc. ("TWI Cable"), a subsidiary of Time Warner Inc. ("Time Warner"). See Note 3. Prior to this Acquisition, the Company had no operations other than start-up related activities. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NEW ACCOUNTING STANDARDS During fiscal 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). 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 on the Company's consolidated financial statements is not expected to be material. 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. 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 Company generally extends 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 Company's financial condition. 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. F-34
47 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) 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. ADVERTISING COSTS Advertising costs are expensed upon the first exhibition of the related advertisements. Advertising expense amounted to $491 in 1998. 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, PLANT AND EQUIPMENT Property, plant and equipment is recorded at purchased and capitalized cost. Capitalized internal costs principally, consist of employee costs and interest on funds borrowed during construction. Capitalized labor, materials and associated overhead amounted to approximately $1,429 in 1998. Replacements, renewals and improvements to installed cable plant are capitalized. Maintenance and repairs are charged to expense as incurred. Depreciation expense for the year ended December 31, 1998 amounted to $7,314. Property, plant and equipment is depreciated using the straight-line method over the following estimated service lives: Buildings and leasehold improvements........................ 5 - 30 years Cable systems, equipment and subscriber devices............. 5 - 30 years Transportation equipment.................................... 3 - 5 years Furniture, fixtures and office equipment.................... 5 - 10 years Property, plant and equipment at December 31, 1998 consisted of: Land...................................................... $ 432 Buildings and leasehold improvements...................... 1,347 Cable systems, equipment and subscriber devices........... 62,740 Transportation equipment.................................. 2,181 Furniture, Fixtures and office equipment.................. 904 Construction in progress.................................. 3,642 ------- 71,246 Less: accumulated depreciation.............................. (7,294) ------- Total............................................. $63,952 ======= F-35
48 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) CABLE TELEVISION FRANCHISES AND INTANGIBLE ASSETS Cable television franchise costs include the assigned fair value, at the date of acquisition, of the franchises from purchased cable television systems. Intangible assets include goodwill, deferred financing and other intangible assets. Cable television franchises and intangible assets are amortized using the straight-line method over the following estimated useful lives: Cable television franchises................................. 15 years Goodwill.................................................... 25 years Deferred financing and other intangible assets.............. 2 - 10 years Intangible assets at December 31, 1998 consisted of: Goodwill.................................................... $ 8,608 Deferred Financing Costs.................................... 8,323 Other intangible assets..................................... 628 ------- 17,559 Less: accumulated amortization.............................. (1,059) ------- Total............................................. $16,500 ======= The Company periodically reviews the carrying value of its long-lived assets, including property, plant and equipment, cable television franchises 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. 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. 3. ACQUISITIONS TWI CABLE 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 by the Company. The purchase price for the systems was $309,500 which was paid as follows: TWI Cable received $300,000 in cash, inclusive of an escrow deposit of $15,000, and a $9,500 (9,500 units) equity interest in Renaissance Media Holdings LLC, the parent company of Group. In addition to the purchase price, the Company incurred approximately $1,385 in transaction costs, exclusive of financing costs. The Acquisition was accounted for using the purchase method and, accordingly, results of operations 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 has been allocated to cable television franchises and goodwill in the amount of $235,387 and $8,608, respectively. F-36
49 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) DEFFNER CABLE On August 31, 1998, the Company acquired the assets of Deffner Cable, a cable television company located in Gadsden, Tennessee. The purchase price was $100 and was accounted for using the purchase method. The allocation of the purchase price is subject to change, although management does not believe that any material adjustment to such allocation is expected. BAYOU VISION, INC. On February 3, 1999, Media acquired the cable television assets of Bayou Vision, Inc. and Gulf South Cable, Inc. serving approximately 1,950 subscribers in the Villages of Estherwood, Morse and Mermentau and Acadia and Livingston Parish, Louisiana. The cash purchase price was approximately $2,700 and was paid out of available Company funds. Unaudited Pro Forma summarized results of operations for the Company for the year ended December 31, 1998 and 1997, assuming the Acquisition, Notes (as hereinafter defined) offering and Credit Agreement (as hereinafter defined) had been consummated on January 1, 1998 and 1997, are as follows: YEAR ENDED DECEMBER 31 ---------------------- 1997 1998 ---- ---- Revenues.................................................... $ 50,987 $ 56,745 Expenses.................................................... 53,022 55,210 -------- -------- Operating (loss) income..................................... (2,035) 1,535 Interest expense and other expenses......................... (19,740) (19,699) -------- -------- Net (Loss).................................................. $(21,775) $(18,164) ======== ======== 4. DEBT As of December 31, 1998, debt consisted of: 10.00% Senior Discount Notes at Accreted Value(a)........... $107,374 Credit Agreement(b)......................................... 102,500 -------- $209,874 ======== (a) On April 9, 1998, in connection with the Acquisition described in Note 3, the Company issued $163,175 principal amount at maturity, $100,012 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 among Morgan Stanley & Co. Incorporated as Placement Agent, Morgan Stanley Senior Funding Inc., as Syndication Agent, the Lenders, CIBC Inc., as Documentation Agent and Bankers Trust Company as Administrative Agent (the "Credit Agreement"). The aggregate commitments under the Credit Agreement total $150,000, consisting of a $40,000 revolver, $60,000 Tranche A Term Loans and $50,000 Tranche B Term Loans (collectively the "Term Loans"). The revolving credit and term loans are collateralized by a first lien position on all present and future assets and the member's F-37
50 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) interest of Media, Louisiana and Tennessee. The Credit Agreement provides for interest at varying rates based upon various borrowing options and the attainment of certain financial ratios and for commitment fees of 1/2% on the unused portion of the revolver. The effective interest rate, including commitment fees and amortization of related deferred financing costs and the interest-rate cap, for the year ended December 31, 1998 was 8.82%. On April 9, 1998, $110,000 was borrowed under the Credit Agreement's Tranche A and B Term Loans. On June 23, 1998, $7,500 was repaid resulting in $102,500 of outstanding Tranche A and B Term Loans as of December 31, 1998. As of December 31, 1998, the Company had unrestricted use of the $40,000 revolver. No borrowings had been made by the Company under the revolver through that date. Annual maturities of borrowings under the Credit Agreement for the years ending December 31 are as follows: 1999........................................................ $ 776 2000........................................................ 1,035 2001........................................................ 2,701 2002........................................................ 9,506 2003........................................................ 11,590 2004........................................................ 11,590 Thereafter.................................................. 65,302 -------- 102,500 Less: Current portion....................................... (776) -------- $101,724 ======== The Credit Agreement and the Indenture pursuant to which the Notes were issued 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. Total interest cost incurred for the year ended December 31, 1998, including commitment fees and amortization of deferred financing and interest-rate cap costs was $14,358, net of capitalized interest of $42. 5. INTEREST RATE-CAP AGREEMENT The Company purchases interest-rate cap agreements that are designed to limit its exposure to increasing interest rates and are designated to its floating rate debt. The strike price of these agreements exceeds the current market levels at the time they are entered into. The interest rate indices specified by the agreements have been and are expected to be highly correlated with the interest rates the Company incurs on its floating rate debt. Payments to be received as a result of the specified interest rate index exceeding the strike price are accrued in other assets and are recognized as a reduction of interest expense (the accrual accounting method). The cost of these agreements is included in other assets and amortized to interest expense ratably during the life of the agreement. Upon termination of an interest-rate cap agreement, any gain is deferred in other liabilities and amortized over the remaining term of the original contractual life of the agreement as a reduction of interest expense. F-38
51 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) On December 1, 1997, the Company purchased an interest-rate cap agreement from Morgan Stanley Capital Services Inc. The carrying value as of December 31, 1998 was $47. The fair value of the interest-rate cap, which is based upon the estimated amount that the Company would receive or pay to terminate the cap agreement as of December 31, 1998, taking into consideration current interest rates and the credit worthiness of the counterparties, approximates its carrying value. The following table summarizes the interest-rate cap agreement: NOTIONAL INITIAL PRINCIPAL EFFECTIVE TERMINATION CONTRACT FIXED RATE AMOUNT TERM DATE DATE COST (PAY RATE) - --------- ---- --------- ----------- -------- ---------- $100,000 2 years 12/1/97 12/1/99 $100 7.25% 6. TAXES For the year ended December 31, 1998, the provision for income taxes has been calculated on a separate company basis. The components of the provision for income taxes are as follows: YEAR ENDED DECEMBER 31, 1998 ----------------- Federal: Current................................................... $ -- Deferred.................................................. -- State: Current................................................... 135 Deferred.................................................. -- ---- Provision for income taxes............................. $135 ==== The Company's current state tax liability results from its obligation to pay franchise tax in Tennessee and Mississippi and tax on capital in New York. The Company has a net operating loss ("NOL") carryforward for income tax purposes which is available to offset future taxable income. This NOL totals approximately $14,900 and expires in the year 2018. The Company has established a valuation allowance to offset the entire potential future tax benefit of the NOL carryforward and, therefore, has recognized no deferred tax asset with respect to the NOL. 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 theses losses by reducing future taxable income in the carry forward period is uncertain at this time. 7. RELATED PARTY TRANSACTIONS (a) TRANSACTIONS WITH MORGAN STANLEY ENTITIES In connection with the Acquisition, Media entered into the Credit Agreement with Morgan Stanley Senior Funding Inc. and Morgan Stanley & Co. Incorporated acted as the Placement Agent for the Notes. In connection with these services the Morgan Stanley Entities received customary fees and expense reimbursement. F-39
52 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) (b) TRANSACTIONS WITH TIME WARNER AND RELATED PARTIES In connection with the Acquisition, 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. (c) Transactions with Management Prior to the consummation of the Acquisition described in Note 3, Media paid fees in 1998 to six senior executives of the Company who are investors in the Company (the "Management Investors") for services rendered prior to their employment by Media relating to the Acquisition and the Credit Agreement. These fees totaled $287 and were recorded as transaction and financing costs. (d) DUE TO MANAGEMENT INVESTORS Prior to the formation of the Company, the Management Investors advanced $1,000 to Holdings, which was used primarily for working capital purposes. Upon formation of the Company, Holdings contributed certain assets and liabilities to Group and the $1,000 advance from the Management Investors was recorded as paid in capital. (e) TRANSACTIONS WITH BOARD MEMBER The Company has utilized the law firm of one of its board members for legal services for the Acquisition, financing agreements and various ongoing legal matters. These fees totaled approximately $1,348 for the year ended December 31, 1998. 8. ACCRUED EXPENSES Accrued expenses as of December 31, 1998 consist of the following: Accrued programming costs................................... $1,986 Accrued interest............................................ 1,671 Accrued franchise fees...................................... 1,022 Accrued legal and professional fees,........................ 254 Accrued salaries, wages and benefits........................ 570 Accrued property and sales tax.............................. 637 Other accrued expenses...................................... 530 ------ $6,670 ====== 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 his or her compensation. The Company has the right in any year to set the amount of the Company's contribution percentage. Company matching contributions to the Plan for the year ended December 31, 1998 were approximately $97. All participant contributions and earnings are fully vested upon contribution F-40
53 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) and company contributions and earnings vest 20% per year of employment with the Company, becoming fully vested after five years. 10. COMMITMENTS AND CONTINGENCIES (a) LEASES The Company had rental expense under various lease and rental agreements primarily for offices, tower sites and warehouses of approximately $125 in 1998. In addition, the Company rents utility poles in its operations generally under short term arrangements, but the Company expects these arrangements to recur. Total rent expense for utility poles was approximately $620 in 1998. Future minimum annual rental payments under noncancellable leases are as follows: 1999............................................... $162 2000............................................... 38 2001............................................... 24 2002............................................... 20 2003 and thereafter................................ 66 ---- Total......................................... $310 ==== (b) EMPLOYMENT AGREEMENTS Media has entered into employment agreements with six senior executives who are also investors in Holdings. Under the conditions of five of the agreements the employment term is five years, expiring in April 2003 and requires Media to continue salary payments (including any bonus) through the term if the executive's employment is terminated by Media without cause, as defined in the employment agreement. Media's obligations under the employment agreements may be reduced in certain situations based on actual operating performance relative to the business plan, death or disability or by actions of the other senior executives. The employment agreement for one senior executive has a term of one year and may be renewed annually. This agreement has been renewed through April 8, 2000. (c) OTHER AGREEMENTS In exchange for certain flexibility in establishing cable rate pricing structures for regulated services that went into effect on January 1, 1996, Time Warner 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 megahertz) by 1999 (approximately $23 million). This agreement with the FCC has been assumed by the Company as part of the Acquisition. 11. SUBSEQUENT EVENT On February 23, 1999, Holdings entered into an agreement with Charter Communications, LLC and Charter Communications, Inc., to sell 100% of its members' equity in the Company for approximately $459,000, subject to certain closing conditions. This transaction is expected to close during the third quarter of 1999. F-41
54 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) 12. YEAR 2000 ISSUES (UNAUDITED) 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, payroll and fixed asset 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 data. 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 billing and subscriber information systems, general ledger software, payroll systems, accounting software, phone switches and certain headend applications, all of which are third party supported. The Company believes it has identified all systems that may be affected by Year 2000 Issues. Concurrent with the identification phase, the Company is securing compliance determinations relative to all identified systems. For those systems that the Company believes are material, compliance programs have been received or such systems have been certified by independent parities as Year 2000 compliant. For those material systems that are subject to compliance programs, the Company expects to receive Year 2000 certifications from independent parties by the second quarter 1999. Determinations of Year 2000 compliance requirements for less mission critical systems are in progress and are expected to be completed in the second quarter of 1999. With respect to third parties with which the Company has a material relationship, the Company believes its most significant relationships are with financial institutions, who receive subscriber monthly payments and maintain Company bank accounts, and subscriber billing and management systems providers. We have received compliance programs which if executed as planned should provide a high degree of assurance that all Year 2000 issues will be addressed by mid 1999. 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 its applications are maintained by third parties who have borne 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. Failure to resolve Year 2000 issues could result in improper billing to the Company's subscribers which could have a major impact on the recording of revenue and the collection of cash as well as create significant customer dissatisfaction. In addition, failure on the part of the financial institutions with which the Company relies on for its cash collection and management services could also have a significant impact on collections, results of operations and the liquidity of the Company. F-42
55 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) The Company has not yet finalized contingency plans necessary to handle the most likely worst case scenarios. Before concluding as to possible contingency plans, the Company must determine whether the material service providers contemplate having such plans in place. In the event that contingency plans from material service providers are not in place or are deemed inadequate, management expects to have such plans in place by the third quarter of 1999. F-43
56 REPORT OF INDEPENDENT AUDITORS To the Board of Directors of TWI Cable, Inc. We have audited the accompanying combined balance sheet 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 April 8, 1998, and the related combined statements of operations, changes in net assets and cash flows for the period from January 1, 1998 through April 8, 1998. These combined financial statements are the responsibility of the Combined Systems' 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 combined financial position of the Combined Systems, included in TWI Cable, at April 8, 1998, and the combined results of their operations and their cash flows for the period from January 1, 1998 through April 8, 1998, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP New York, New York February 22, 1999 F-44
57 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 SHEET (IN THOUSANDS) APRIL 8, 1998 ------------- ASSETS Cash and cash equivalents................................... $ 7 Receivables, less allowance of $116......................... 576 Prepaid expenses and other assets........................... 438 Property, plant and equipment, net.......................... 35,992 Cable television franchises, net............................ 195,907 Goodwill and other intangibles, net......................... 50,023 -------- Total assets...................................... $282,943 ======== LIABILITIES AND NET ASSETS Accounts payable............................................ $ 63 Accrued programming expenses................................ 978 Accrued franchise fees...................................... 616 Subscriber advance payments and deposits.................... 593 Deferred income taxes....................................... 61,792 Other liabilities........................................... 747 -------- Total liabilities................................. 64,789 Total net assets.................................. 218,154 -------- Total liabilities and net assets.................. $282,943 ======== See accompanying notes to combined financial statements. F-45
58 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 STATEMENT OF OPERATIONS (IN THOUSANDS) FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH APRIL 8, 1998 --------------- REVENUES.................................................... $15,221 COSTS AND EXPENSES: Operating and programming................................... 3,603 Selling, general and administrative......................... 4,134 Depreciation and amortization............................... 5,031 (Gain) on disposal of fixed assets.......................... (96) ------- Total costs and expenses.......................... 12,672 ------- Operating income............................................ 2,549 Provision for income taxes.................................. 1,191 ------- Net income.................................................. $ 1,358 ======= See accompanying notes to combined financial statements. F-46
59 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 STATEMENT OF CHANGES IN NET ASSETS (IN THOUSANDS) Balance at December 31, 1997................................ $224,546 Repayment of advances from Parent......................... (17,408) Advances from Parent...................................... 9,658 Net income................................................ 1,358 -------- Balance at April 8, 1998.................................... $218,154 ======== See accompanying notes to combined financial statements. F-47
60 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 STATEMENT OF CASH FLOWS (IN THOUSANDS) FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH APRIL 8, 1998 --------------- OPERATING ACTIVITIES: Net income.................................................. $ 1,358 Adjustments for noncash and nonoperating items: Income tax expense........................................ 1,191 Depreciation and amortization............................. 5,031 (Gain) on disposal of fixed assets........................ (96) Changes in operating assets and liabilities: Receivables, prepaids and other assets................. 289 Accounts payable, accrued expenses and other liabilities........................................... (770) Other balance sheet changes............................ (4) ------- Net cash provided by operations............................. 6,999 ------- INVESTING ACTIVITIES: Capital expenditures........................................ (613) ------- Net cash used in investing activities....................... (613) ------- FINANCING ACTIVITIES: Net repayment of advances from Parent....................... (7,750) ------- Net cash (used in) financing activities..................... (7,750) INCREASE IN CASH AND CASH EQUIVALENTS....................... (1,364) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 1,371 ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 7 ======= See accompanying notes to combined financial statements. F-48
61 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 sold the Combined Systems to Renaissance Media Holdings LLC ("Renaissance") pursuant to an Asset Purchase Agreement with Renaissance, dated November 14, 1997 (see Note 8). 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 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. 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-49
62 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) 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 and such fees are not included as revenue or as a franchise fee expense. ADVERTISING COSTS Advertising costs are expensed upon the first exhibition of the related advertisements. Advertising expense amounted to $105,000 for the period from January 1, 1998 through April 8, 1998. 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 was $166,522,000 for the period from January 1, 1998 through April 8, 1998. For purposes of this statement, cash and cash equivalents includes all highly liquid investments purchased with original maturities of three months or less. F-50
63 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) 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: APRIL 8, 1998 ------------- (IN THOUSANDS) Land and buildings.......................................... $ 2,255 Cable television equipment.................................. 40,276 Furniture, fixtures and other equipment..................... 2,308 Construction in progress.................................... 1,183 -------- 46,022 Less accumulated depreciation............................... (10,030) -------- Total............................................. $ 35,992 ======== INTANGIBLE ASSETS 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. For the period from January 1, 1998 through April 8, 1998 amortization of goodwill amounted to $360,000 and amortization of cable television franchises amounted to $3,008,000. Accumulated amortization of intangible assets amounted to $28,114,000 at April 8, 1998. 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 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. F-51
64 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) 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 period from January 1, 1998 through April 8, 1998 totaled $61,000. 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 period from January 1, 1998 through April 8, 1998 totaled $38,000. 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. PROGRAMMING Included in the Combined Systems' 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. These charges totaled $1,164,000 for the period from January 1, 1998 through April 8, 1998. Accrued related party expenses for these programming and promotional services included in accrued programming expenses approximated $409,000 for the period from January 1, 1998 through April 8, 1998. 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 $486,000 for the period from January 1, 1998 through April 8, 1998. Other divisional expenses allocated to the Combined Systems approximated $299,000 for the period from January 1, 1998 through April 8, 1998. F-52
65 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) 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. 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 for income taxes has been calculated on a separate company basis. The components of the provision for income taxes are as follows: FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH APRIL 8, 1998 -------------------- (IN THOUSANDS) Federal: Current................................................. $ -- Deferred................................................ 962 State: Current................................................. -- Deferred................................................ 229 ------ Net provision for income taxes....................... $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 expected at the U.S. federal statutory income tax rate and the total income tax provision are due to nondeductible goodwill amortization and state taxes. F-53
66 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) Significant components of the Combined Systems' deferred tax assets and liabilities, as calculated on a separate company basis, are as follows: APRIL 8, 1998 ------------- (IN THOUSANDS) Deferred tax liabilities: Amortization.............................................. $57,817 Depreciation.............................................. 4,181 ------- Total gross deferred tax liabilities.............. 61,998 ------- Deferred tax assets: Tax loss carryforwards.................................... 160 Allowance for doubtful accounts........................... 46 ------- Total deferred tax assets......................... 206 ------- Net deferred tax liability........................ $61,792 ======= On a separate company basis, the Combined Systems have tax loss carryforwards of approximately $400,000 at April 8, 1998. 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 $244,000 for the period from January 1, 1998 through April 8, 1998 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 megahertz) over the next three years (approximately $25 million at December 31, 1997). 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. F-54
67 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) 7. OTHER LIABILITIES Other liabilities consist of: APRIL 8, 1998 ------------- (IN THOUSANDS) Compensation................................................ $279 Data Processing Costs....................................... 161 Sales and other taxes....................................... 146 Copyright Fees.............................................. 35 Pole Rent................................................... 93 Other....................................................... 33 ---- Total............................................. $747 ==== 8. SUBSEQUENT EVENT 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-55
68 EXHIBIT INDEX Exhibit Number Description Page - ------- ----------- ---- 3.1 Certificate of Incorporation of Renaissance Media Capital Corporation and all amendments thereto. (1) 3.2 By-laws of Renaissance Media Capital Corporation. (1) 3.3 Certificate of Formation of Renaissance Media (Louisiana) LLC. (1) 3.4 Certificate of Formation of Renaissance Media, LLC.(5) 3.5 Certificate of Formation of Renaissance Media (Tennessee) LLC. (1) 3.7 Certificate of Formation of Renaissance Media Group LLC. (1) 3.9 Amended and Restated Limited Liability Agreement of Renaissance Media Group LLC, dated April 29, 1999. (3) 3.10 Amended and Restated Limited Liability Agreement of Renaissance Media (Louisiana) LLC, dated April 29, 1999. (3) 3.11 Amended and Restated Limited Liability Agreement of Renaissance Media (Tennessee) LLC, dated April 29, 1999. (3) 3.12 Amended and Restated Limited Liability Agreement of Renaissance Media LLC, dated April 29, 1999. (3) 4.1 Indenture dated as of April 9, 1998, by and among Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC, Renaissance Media Capital Corporation, Renaissance Media Group LLC and United States Trust Company of New York, as Trustee. (1) 10.5 Social Contract approved by the Federal Communications Commission (the "FCC") on November 30, 1995, and entered into between the FCC and Time Warner Entertainment Company, L.P., TWI Cable Inc. and Time Warner Entertainment-Advance/Newhouse Partnership, or any subsidiary, division or affiliate thereof. (2) 10.27 Purchase Agreement dated as of February 23, 1999, by and among Charter Communications, Inc., Charter Communications, LLC, Renaissance Media Holdings LLC and Renaissance Media Group LLC. [Confidential material omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.] (4) E-1
69 Exhibit Number Description Page - ------- ----------- ---- (1) Incorporated by reference to the corresponding exhibit of the Registration Statement of Renaissance Media Group LLC, Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and Renaissance Media Capital Corporation on Form S-4 (Commission File No. 333-56679), filed on June 12, 1998. (3) Incorporated by reference to the corresponding exhibit of Amendment 1 to the Registration Statement of Renaissance Media Group LLC, Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and Renaissance Media Capital Corporation on Form S-4 (Commission File No. 333-56679), filed on August 6, 1998. (3) Incorporated by reference to the corresponding exhibit of the Quarterly Report on Form 10-Q of Renaissance Media Group LLC, Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and Renaissance Media Capital Corporation for the quarter ended March 31, 1999, filed on May 17, 1999 (Commission File No. 333-56679). (4) Incorporated by reference to Exhibit 99.1 of the Current Report on Form 8-K of Renaissance Media Group LLC, Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and Renaissance Media Capital Corporation dated February 23, 1999 (Commission File No. 333-56679). (5) Incorporated by reference to the corresponding exhibit of the Annual Report on Form 10-K of Renaissance Media Group LLC, Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) and Renaissance Media Capital Corporation, filed March 30, 2000 (Commission File Nos. 333-56679, 333-56679-02, 333-56679-01 and 333-56679-03, respectively). E-2