1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 1999 REGISTRATION NO. 333-83887 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 5 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ CHARTER COMMUNICATIONS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 4841 43-1857213 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (FEDERAL EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER) ------------------------ 12444 POWERSCOURT DRIVE ST. LOUIS, MISSOURI 63131 (314) 965-0555 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE) ------------------------ CURTIS S. SHAW, ESQ. SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY CHARTER COMMUNICATIONS, INC. 12444 POWERSCOURT DRIVE ST. LOUIS, MISSOURI 63131 (314) 965-0555 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: DANIEL G. BERGSTEIN, ESQ. ALVIN G. SEGEL, ESQ. RICHARD D. BOHM, ESQ. THOMAS R. POLLOCK, ESQ. IRELL & MANELLA LLP PETER J. LOUGHRAN, ESQ. PATRICIA M. CARROLL, ESQ. 1800 AVENUE OF THE STARS, SUITE 900 DEBEVOISE & PLIMPTON PAUL, HASTINGS, LOS ANGELES, CALIFORNIA 90067-4276 875 THIRD AVENUE JANOFSKY & WALKER LLP (310) 277-1010 NEW YORK, NEW YORK 10022 399 PARK AVENUE (212) 909-6000 NEW YORK, NEW YORK 10022 (212) 318-6000 ------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
2 THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION. DATED NOVEMBER 4, 1999. [CHARTER COMMUNICATIONS LOGO] 170,000,000 Shares CHARTER COMMUNICATIONS, INC. Class A Common Stock ---------------------- This is an initial public offering of shares of Class A common stock of Charter Communications, Inc. This prospectus relates to an offering of 144,500,000 shares in the United States and Canada. In addition, 25,500,000 shares are being offered outside the United States and Canada. All of the shares of Class A common stock are being sold by Charter Communications, Inc. Prior to the offering, there has been no public market for the Class A common stock. It is currently estimated that the initial public offering price per share will be between $17 and $19. The Class A common stock has been approved for quotation on the Nasdaq National Market under the symbol "CHTR". See "Risk Factors" beginning on page 15 to read about factors you should consider before buying shares of the Class A common stock. ---------------------- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------------------- Per Share Total --------- ----- Initial public offering price............................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to us............................ $ $ To the extent that the underwriters sell more than 170,000,000 shares of Class A common stock, the underwriters have the option to purchase up to an additional 25,500,000 shares from Charter Communications, Inc. at the initial public offering price less the underwriting discount. ---------------------- The underwriters expect to deliver shares in New York, New York on , 1999. GOLDMAN, SACHS & CO. BEAR, STEARNS & CO. INC. MORGAN STANLEY DEAN WITTER DONALDSON, LUFKIN & JENRETTE MERRILL LYNCH & CO. SALOMON SMITH BARNEY A.G. EDWARDS & SONS, INC. M.R. BEAL & COMPANY ---------------------- Prospectus dated , 1999.
3 [INSIDE FRONT COVER] [Text:] Cable Television High Speed Internet Access Internet TV Interactive TV [Map of the United States with locations of cable systems marked with dots] The map above shows the locations of Charter Communications' cable systems, after giving effect to our pending acquisitions. [Charter logo]
4 PROSPECTUS SUMMARY The following summary contains a general discussion of our business, the offering of Class A common stock and summary financial information. It likely does not contain all the information that is important to you in making a decision to purchase shares of the Class A common stock. For a more complete understanding of the offering, you should read this entire prospectus and other documents to which we refer. The discussion of our business in this prospectus includes Charter Communications, Inc., Charter Communications Holding Company, LLC and the direct and indirect subsidiaries of Charter Communications Holding Company, unless we indicate otherwise. Unless otherwise stated, the information in this prospectus assumes that the underwriters do not exercise their option to purchase additional shares in the offering. OUR BUSINESS We are a holding company whose principal asset after completion of the offering will be an approximate 31% equity interest and a 100% voting interest in Charter Communications Holding Company. The only business of Charter Communications, Inc. will be to act as the sole manager of Charter Communications Holding Company. Charter Communications Holding Company is also a holding company and is the indirect owner of all of our cable systems. To manage Charter Communications Holding Company and its subsidiaries, Charter Communications, Inc. will initially have only twelve executive officers, all of whom are also executive officers of Charter Investment, Inc., an affiliated company, and will receive other necessary personnel and services from Charter Investment, Inc. We are the fourth largest operator of cable television systems in the United States, serving approximately 6.2 million customers, after giving effect to our pending acquisitions. We currently serve approximately 3.7 million customers. We offer a full range of traditional cable television services and have begun to offer digital cable television services to customers in some of our systems. Digital cable television is cable television service provided through digital technology. Digital technology enables cable operators to increase the channel capacity of cable systems by permitting a significantly increased number of video signals to be transmitted over a cable system's existing bandwidth. Channel capacity is the number of channels that can be simultaneously carried on the cable system and is generally defined in terms of the number of analog channels. Analog channels refer to communication channels on which the information is transmitted in a non-digital format, which means data is transmitted in a manner similar to the original signals. Bandwidth is a measure of the information-carrying capacity of a communication channel. It is the range of usable frequencies that can be carried by a cable system. We have also started to introduce a number of other new products and services, including interactive video programming, which allows information to flow in both directions, and high-speed Internet access to the World Wide Web. We are also exploring opportunities in telephony, which will integrate telephone services with the Internet through the use of cable. The introduction of these new services represents an 1
5 important step toward the realization of our Wired World(TM) vision, where cable's ability to transmit voice, video and data at high speeds will enable it to serve as the primary platform for the delivery of new services to the home and workplace. We are accelerating the upgrade of our systems to more quickly provide these new services. We have grown rapidly over the past five years. During this period, our management team has successfully completed 28 acquisitions, including eight acquisitions closed in 1999. We have also expanded our customer base through significant internal growth. In 1998, our internal customer growth, without giving effect to the cable systems we acquired in that year, was 4.8%, more than twice the national industry average of 1.7%. Paul G. Allen, through his ownership of Charter Communications, Inc.'s high vote Class B common stock and his indirect ownership of Charter Communications Holding Company membership units, will control approximately 95% of the voting power of all of Charter Communications, Inc.'s capital stock immediately following the offering. As a result, Mr. Allen will control Charter Communications, Inc. and, accordingly, Charter Communications Holding Company and its direct and indirect subsidiaries. Our principal executive offices are located at 12444 Powerscourt Drive, St. Louis, Missouri 63131. Our telephone number is (314) 965-0555 and our web site is located at www.chartercom.com. The information on our web site is not part of this prospectus. 2
6 BUSINESS STRATEGY Our objective is to increase our operating cash flow by increasing our customer base and the amount of cash flow per customer. To achieve this objective, we are pursuing the following strategies: - rapidly integrate acquired cable systems and apply our core operating strategies to raise the financial and operating performance of these acquired systems; - expand the array of services we offer to our customers through the implementation of our Wired World vision; - upgrade the bandwidth capacity of our systems to 550 megahertz or greater to enable greater channel capacity and add two-way capability to facilitate interactive communication. Two-way capability is the ability to have bandwidth available for upstream or two-way communication; - maximize customer satisfaction by providing reliable, high-quality service offerings, superior customer service and attractive programming choices at reasonable rates; - employ innovative marketing programs tailored to local customer preferences to generate additional revenues; - emphasize local management autonomy to better serve our customers while providing support from regional and corporate offices and maintaining centralized financial controls; and - improve the geographic clustering of our cable systems by selectively trading or acquiring systems to increase operating efficiencies and improve operating margins. Clusters refer to cable systems under common ownership which are located within geographic proximity to each other. 3
7 ORGANIZATION The chart on the following page sets forth our corporate structure as of the date of the completion of the offering and assumes that: - Mr. Allen, through Vulcan Cable III Inc., has purchased a total of 43,402,778 membership units from Charter Communications Holding Company for $750 million at a price per membership unit equal to the net initial public offering price per share; - Mr. Allen has purchased a total of 50,000 shares of high vote Class B common stock of Charter Communications, Inc. at a price per share equal to the initial public offering price per share; - all of our pending acquisitions have been completed; - specified sellers in our pending Falcon and Bresnan acquisitions have received $425 million and $1.0 billion, respectively, of their purchase price in Charter Communications Holding Company membership units rather than in cash and these membership units have not been exchanged for shares of Class A common stock of Charter Communications, Inc. For the unaudited pro forma financial statements, however, these amounts are reflected as short-term debt; - the preferred membership units of Charter Communications Holding Company issued to a number of the sellers in our recent Rifkin acquisition remain outstanding, have not been exchanged for shares of Class A common stock of Charter Communications, Inc. and have not been reflected as equity; - none of the options to purchase membership units that have been granted under the Charter Communications Holding Company option plan or granted to our chief executive officer have been exercised; and - the initial public offering price per share is $18.00, which is the mid-point of the range appearing on the cover page of this prospectus. 4
8 ORGANIZATIONAL STRUCTURE [CHARTER COMMUNICATIONS HOLDING COMPANY FLOW CHART] For a more detailed description of each entity and how it relates to us, see "Business -- Organizational Structure". 5
9 RECENT EVENTS RECENT ACQUISITIONS In the second, third and fourth quarters of 1999, we completed eight acquisitions of cable systems. One of these acquisitions included the exchange of certain of our cable systems and a commitment to transfer an additional cable system. The combined fair market value of these systems is $0.4 billion. For the year ended December 31, 1998, the systems we acquired had revenues of approximately $527.7 million. The following table is a breakdown of our recent acquisitions: AS OF AND FOR THE SIX MONTHS ENDED PURCHASE PRICE JUNE 30, 1999 (INCLUDING -------------------------- ACQUISITION ASSUMED DEBT) REVENUE RECENT ACQUISITIONS CLOSING DATE (IN MILLIONS) CUSTOMERS (IN THOUSANDS) ------------------- ------------ ------------------ --------- -------------- Renaissance Media Group LLC............. 4/99 $ 459 129,000 $ 30,807 American Cable Entertainment, LLC....... 5/99 240 69,000 17,958 Cable systems of Greater Media Cablevision, Inc. .................... 6/99 500 175,000 42,348 Helicon Partners I, L.P. and affiliates............................ 7/99 550 173,000 42,956 Vista Broadband Communications, L.L.C................................. 7/99 126 28,000 7,101 Cable system of Cable Satellite of South Miami, Inc............................ 8/99 22 9,000 2,056 Rifkin Acquisition Partners, L.L.L.P. and InterLink Communications Partners, LLLP.................................. 9/99 1,460 461,000 105,592 Cable systems of InterMedia Capital Partners IV, L.P., 904+ 412,000 InterMedia Partners system swap (144,000)(a) --------- and affiliates........................ 10/99 268,000 100,644 ----------- --------- -------- Total................................. $4,261 1,312,000 $349,462 =========== ========= ======== - --------------- (a) Represents the number of customers served by cable systems that we agreed to transfer to InterMedia in connection with the InterMedia acquisition. This number includes 30,000 customers served by an Indiana cable system that we did not transfer at the time of the InterMedia closing because some of the necessary regulatory approvals were still pending. We are obligated to transfer this system to InterMedia upon receipt of regulatory approvals. See "Business -- Acquisitions". PENDING ACQUISITIONS In addition to the recent acquisitions described above, since the beginning of 1999, we have entered into agreements to acquire additional cable systems. For the year ended 6
10 December 31, 1998, these systems had revenues of approximately $728.8 million. The following table is a breakdown of our pending acquisitions: PURCHASE AS OF AND FOR THE SIX PRICE MONTHS ENDED JUNE 30, 1999 (INCLUDING -------------------------- ANTICIPATED ASSUMED DEBT) REVENUES PENDING ACQUISITIONS ACQUISITION CLOSING DATE (IN MILLIONS) CUSTOMERS (IN THOUSANDS) - -------------------- ------------------------ ------------------- --------- -------------- Avalon Cable LLC................... 4th Quarter 1999 $ 845 260,000 $ 51,769 Cable systems of Fanch Cablevision L.P. and affiliates.............. 4th Quarter 1999 2,400 537,000 98,931 Falcon Communications, L.P. ....... 4th Quarter 1999 3,550 1,008,000 212,205 Bresnan Communications Company Limited Partnership.............. 1st Quarter 2000 3,100 656,000 137,291 ------------- --------- -------- Total......................... $9,895 2,461,000 $500,196 ------------- --------- ------------ ------------- --------- ------------ We expect to finance these pending acquisitions with the proceeds of this offering, Mr. Allen's equity contribution through Vulcan Cable III Inc. to Charter Communications Holding Company, borrowings under credit facilities and equity issued to specified sellers in our pending Falcon and Bresnan acquisitions. These available and committed sources of funds will not be sufficient to consummate our pending acquisitions and fund related obligations. In connection with our acquisitions, we may need to raise additional amounts up to a total of approximately $5.41 billion. We will need to raise approximately $1.72 billion by borrowing under credit facilities at Bresnan that have not yet been arranged and/or by issuing debt or equity securities of Charter Communications, Inc. or Charter Communications Holding Company, to fund: - approximately $0.87 billion of the Bresnan purchase price; - approximately $0.50 billion in outstanding Bresnan credit facility borrowings that we would have to repay if we are unable to assume and amend the existing Bresnan credit facilities; and - approximately $0.35 billion in Bresnan notes that we expect to be put to us in connection with required change of control offers for these notes. In addition, we will have to raise approximately $3.69 billion of additional financing if we are required to pay: - approximately $0.71 billion to repurchase outstanding notes of Falcon if committed bridge loan financing does not close; - approximately $0.17 billion if the Avalon credit facilities do not close; - approximately $0.88 billion if the Fanch credit facilities do not close; - approximately $0.27 billion to repurchase outstanding notes of Avalon; - approximately $1.57 billion to repurchase equity interests issued or to be issued to specified sellers in connection with a number of our acquisitions because of possible violations of Section 5 of the Securities Act of 1933; and 7
11 - approximately $0.09 billion to InterMedia if we do not obtain timely regulatory approvals for our transfer to InterMedia of an Indiana cable system and we are unable to transfer replacement systems. We cannot assure you that we will be able to raise the financing necessary to consummate our pending acquisitions and to satisfy the obligations described above. If we are unable to raise the financing necessary to satisfy any or all of these obligations, we may be unable to close our pending acquisitions and could be in default under one or more other obligations. In any such case, the relevant sellers or creditors could initiate legal proceedings against us, including under bankruptcy and reorganization laws, for any damages they suffer as a result of our non-performance. Any such action could trigger defaults under our obligations, including our credit facilities and debt instruments. MERGER WITH MARCUS HOLDINGS On April 23, 1998, Mr. Allen acquired approximately 99% of the non-voting economic interests in Marcus Cable Company, L.L.C., and agreed to acquire the remaining interests in Marcus Cable. The aggregate purchase price was approximately $1.4 billion, excluding $1.8 billion in assumed debt. On February 22, 1999, Marcus Holdings was formed, and all of Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings on March 15, 1999. On March 31, 1999, Mr. Allen completed the acquisition of all remaining interests of Marcus Cable. On April 7, 1999, Mr. Allen merged Marcus Holdings into Charter Communications Holdings, L.L.C. Charter Holdings survived the merger. The operating subsidiaries of Marcus Holdings became subsidiaries of Charter Operating. 8
12 THE OFFERING Total Class A common stock offered: U.S. offering............................................ 144,500,000 International offering................................... 25,500,000 ----------- Total................................................. 170,000,000 =========== Shares of common stock to be outstanding after the offering: Class A common stock..................................... 170,000,000 Class B common stock..................................... 50,000 If the underwriters exercise their over-allotment option in full, the total number of shares of Class A common stock offered and the total number of shares of Class A common stock outstanding after the offering will be 195,500,000. In this prospectus, in calculating the number of shares of each class of Charter Communications, Inc. common stock and the membership units in Charter Communications Holding Company that will be outstanding after the offering and ownership and voting percentages, we have made the same assumptions described on page 4 with respect to our organizational chart, unless we otherwise indicate. After the offering and excluding 53,476,326 membership units to be issued in connection with the Falcon and Bresnan acquisitions, there will be 324,905,052 outstanding Charter Communications Holding Company common membership units owned by persons or entities other than Charter Communications, Inc. Membership units are exchangeable for shares of Class A common stock on a one-for-one basis, except that Mr. Allen and his affiliates may exchange membership units for shares of Class B common stock on a one-for-one basis. Class B common stock is convertible into shares of Class A common stock at any time on a one-for-one basis. If Mr. Allen and his affiliates converted and exchanged all Class B common stock and membership units held by them for Class A common stock, they together would own approximately 65.7% of our Class A common stock or 62.4% if the underwriters exercise their over-allotment option in full. 9
13 Use of Proceeds............... By Charter Communications, Inc.: To acquire 170,000,000 common membership units in Charter Communications Holding Company at a price per membership unit equal to the net initial public offering price per share of Class A common stock. By Charter Communications Holding Company: To partially fund, together with the proceeds from the $750 million equity contribution from Vulcan Cable III Inc., a number of our pending acquisitions. See "Use of Proceeds". Voting Rights................. Each holder of Class A common stock is entitled to one vote per share. Each holder of Class B common stock is entitled to a number of votes determined by a formula based on the number of outstanding shares of Class B common stock and outstanding membership units exchangeable for Class B common stock. The result of this formula is that Mr. Allen is entitled to ten votes for each share of Class B common stock and each membership unit held by him or his affiliates. Mr. Allen will control approximately 95% of the voting power of all of Charter Communications, Inc.'s capital stock following the offering or 94.3% if the underwriters exercise their over-allotment option in full. Control by Paul G. Allen...... Mr. Allen will own all of the outstanding shares of Charter Communications, Inc.'s Class B common stock following the offering. By virtue of Mr. Allen's ownership of all of Charter Communications, Inc.'s Class B common stock and the ownership by Mr. Allen's affiliates of Charter Communications Holding Company membership units, Mr. Allen will be able to control the corporate actions of Charter Communications, Inc., such as electing its board of directors, amending its certificate of incorporation and controlling all fundamental corporate decisions. Nasdaq National Market Symbol..................... "CHTR". 10
14 RISK FACTORS You should carefully consider all of the information in this prospectus. In particular, you should evaluate the specific risk factors under "Risk Factors" for a discussion of risks associated with purchasing the Class A common stock offered in this prospectus. 11
15 UNAUDITED SUMMARY PRO FORMA FINANCIAL DATA You should read the following unaudited summary pro forma financial data of Charter Communications, Inc. in conjunction with the historical financial statements and other financial information appearing elsewhere in this prospectus, including "Capitalization", "Unaudited Pro Forma Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations". UNAUDITED SUMMARY PRO FORMA STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1999 ----------------------------------------------------------------------------------------------------- CHARTER COMMUNICATIONS RECENT PENDING REFINANCING OFFERING HOLDING COMPANY ACQUISITIONS SUBTOTAL ACQUISITIONS ADJUSTMENTS ADJUSTMENTS TOTAL --------------- ------------ ----------- ------------ ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues.................. $ 594,173 $ 315,541 $ 909,714 $ 522,334 $ -- $ -- $ 1,432,048 ---------- ---------- ----------- ---------- -------- ----------- ----------- Operating expenses: Operating, general and administrative......... 310,325 160,519 470,844 267,170 -- -- 738,014 Depreciation and amortization........... 313,621 161,876 475,497 361,952 -- -- 837,449 Stock option compensation expense................ 38,194 -- 38,194 -- 38,194 Corporate expense charges(a)............. 11,073 20,059 31,132 16,595 -- -- 47,727 Management fees.......... -- 5,572 5,572 3,168 -- -- 8,740 ---------- ---------- ----------- ---------- -------- ----------- ----------- Total operating expenses............. 673,213 348,026 1,021,239 648,885 -- -- 1,670,124 ---------- ---------- ----------- ---------- -------- ----------- ----------- Loss from operations...... (79,040) (32,485) (111,525) (126,551) -- -- (238,076) Interest expense.......... (183,869) (114,588) (298,457) (255,682) 4,300 -- (549,839) Interest income........... 10,189 456 10,645 788 -- -- 11,433 Other income (expense).... 2,682 (905) 1,777 (15) -- -- 1,762 ---------- ---------- ----------- ---------- -------- ----------- ----------- Loss before minority interest................. (250,038) (147,522) (397,560) (381,460) 4,300 -- (774,720) Minority interest......... -- -- -- -- -- 508,552 508,552 ---------- ---------- ----------- ---------- -------- ----------- ----------- Loss before extraordinary item..................... $ (250,038) $ (147,522) $ (397,560) $ (381,460) $ 4,300 $ 508,552 $ (266,168) ========== ========== =========== ========== ======== =========== =========== Basic loss per share(b)... $ (1.57) =========== Diluted loss per share(b)................. $ (1.57) =========== Weighted average shares outstanding: Basic.................... 170,050,000 Diluted.................. 170,050,000 OTHER FINANCIAL DATA: EBITDA(c)................. $ 237,263 $ 128,486 $ 365,749 $ 235,386 $ 601,135 EBITDA margin(d).......... 39.9% 40.7% 40.2% 45.1% 42.0% Adjusted EBITDA(e)........ $ 283,848 $ 155,022 $ 438,870 $ 255,164 $ 694,034 Cash flows from operating activities............... 172,770 89,238 262,008 189,042 451,050 Cash flows used in investing activities..... (271,191) (111,785) (382,976) (67,411) (450,387) Cash flows from financing activities............... 207,131 188,571 395,702 455,277 850,979 Cash interest expense..... 401,319 Capital expenditures...... 262,507 101,127 363,634 116,268 479,902 BALANCE SHEET DATA (AT END OF PERIOD): Total assets.............. $8,687,474 $3,231,280 $11,918,754 $9,994,753 $ -- $ -- $21,913,507 Total debt................ 5,134,310 1,824,852 6,959,162 6,117,195 -- -- 13,076,357 Minority interest......... -- -- -- -- -- 5,368,064 5,368,064 Members' equity........... 3,204,122 1,325,000 4,529,122 750,000 -- (5,279,122) -- Stockholders' equity...... -- -- -- -- -- 2,809,558 2,809,558 OPERATING DATA (AT END OF PERIOD, EXCEPT FOR AVERAGES): Homes passed(f)........... 4,509,000 1,446,000 5,955,000 3,793,000 9,748,000 Basic customers(g)........ 2,734,000 969,000 3,703,000 2,463,000 6,166,000 Basic penetration(h)...... 60.6% 67.0% 62.2% 64.9% 63.3% Premium units(i).......... 1,676,000 543,000 2,219,000 856,000 3,075,000 Premium penetration(j).... 61.3% 56.0% 59.9% 34.8% 49.9% Average monthly revenue per basic customer(k).... $ 38.71 12
16 UNAUDITED SUMMARY PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 -------------------------------------------------------- CHARTER COMMUNICATIONS HOLDING RECENT COMPANY MARCUS ACQUISITIONS SUBTOTAL -------------- ---------- ------------ ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues................................ $ 601,953 $ 457,929 $ 608,953 $ 1,668,835 ---------- ---------- ---------- ----------- Operating expenses: Operating, general and administrative....................... 304,555 236,595 307,447 848,597 Depreciation and amortization.......... 370,406 258,348 335,799 964,553 Stock option compensation expense...... 845 -- -- 845 Corporate expense charges(a)........... 16,493 17,042 10,991 44,526 Management fees........................ -- -- 14,668 14,668 ---------- ---------- ---------- ----------- Total operating expenses............. 692,299 511,985 668,905 1,873,189 ---------- ---------- ---------- ----------- Loss from operations.................... (90,346) (54,056) (59,952) (204,354) Interest expense........................ (204,770) (140,651) (271,450) (616,871) Other income (expense).................. 518 -- (5,825) (5,307) ---------- ---------- ---------- ----------- Loss before minority interest........... (294,598) (194,707) (337,227) (826,532) Minority interest....................... -- -- -- -- ---------- ---------- ---------- ----------- Loss before extraordinary item.......... $ (294,598) $ (194,707) $ (337,227) $ (826,532) ========== ========== ========== =========== Basic loss per share(b)................. Diluted loss per share(b)............... Weighted average shares outstanding: Basic.................................. Diluted................................ OTHER FINANCIAL DATA: EBITDA(c)............................... $ 280,578 $ 204,292 $ 270,022 $ 754,892 EBITDA margin(d)........................ 46.6% 44.6% 44.3% 45.2% Adjusted EBITDA(e)...................... $ 297,398 $ 221,334 $ 301,506 $ 820,238 Cash flows from operating activities.... 141,602 135,466 194,041 471,109 Cash flows used in investing activities............................. (206,607) (217,729) (233,161) (657,497) Cash flows from financing activities.... 210,306 109,924 23,252 343,482 Cash interest expense................... Capital expenditures.................... 213,353 224,723 96,025 534,101 BALANCE SHEET DATA (AT END OF PERIOD): Total assets............................ $4,335,527 $2,900,129 $4,375,267 $11,610,923 Total debt.............................. 2,002,206 1,520,995 2,932,342 6,455,543 Minority interest....................... -- -- -- -- Members' equity......................... 2,147,379 1,281,912 1,325,000 4,764,291 Stockholders' equity.................... -- -- -- -- OPERATING DATA (AT END OF PERIOD, EXCEPT FOR AVERAGES): Homes passed(f)......................... 2,149,000 1,743,000 1,922,000 5,814,000 Basic customers(g)...................... 1,255,000 1,061,000 1,325,000 3,641,000 Basic penetration(h).................... 58.4% 60.9% 68.9% 62.6% Premium units(i)........................ 845,000 411,000 777,000 2,033,000 Premium penetration(j).................. 67.3% 38.7% 58.6% 55.8% Average monthly revenue per basic customer(k)............................ UNAUDITED SUMMARY PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------ PENDING REFINANCING OFFERING ACQUISITIONS ADJUSTMENTS ADJUSTMENTS TOTAL ------------ ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues................................ $ 1,022,669 $ -- $ -- $ 2,691,504 ----------- -------- ---------- ----------- Operating expenses: Operating, general and administrative....................... 511,118 -- -- 1,359,715 Depreciation and amortization.......... 743,845 -- -- 1,708,398 Stock option compensation expense...... -- -- -- 845 Corporate expense charges(a)........... 37,090 -- -- 81,616 Management fees........................ 6,135 -- -- 20,803 ----------- -------- ---------- ----------- Total operating expenses............. 1,298,188 -- -- 3,171,377 ----------- -------- ---------- ----------- Loss from operations.................... (275,519) -- -- (479,873) Interest expense........................ (457,586) 7,000 -- (1,067,457) Other income (expense).................. (5,637) -- -- (10,944) ----------- -------- ---------- ----------- Loss before minority interest........... (738,742) 7,000 -- (1,558,274) Minority interest....................... -- -- 1,022,903 1,022,903 ----------- -------- ---------- ----------- Loss before extraordinary item.......... $ (738,742) $ 7,000 $1,022,903 $ (535,371) =========== ======== ========== =========== Basic loss per share(b)................. $(3.15) ----- ----- Diluted loss per share(b)............... $(3.15) ----- ----- Weighted average shares outstanding: Basic.................................. 170,050,000 Diluted................................ 170,050,000 OTHER FINANCIAL DATA: EBITDA(c)............................... $ 462,689 $ 1,217,581 EBITDA margin(d)........................ 45.2% 45.2% Adjusted EBITDA(e)...................... $ 511,551 $ 1,331,789 Cash flows from operating activities.... 254,086 725,195 Cash flows used in investing activities............................. (274,405) (931,902) Cash flows from financing activities.... 115,779 459,261 Cash interest expense................... 772,124 Capital expenditures.................... 219,045 753,146 BALANCE SHEET DATA (AT END OF PERIOD): Total assets............................ $10,091,809 $125,000 $ -- $21,827,732 Total debt.............................. 6,279,764 128,604 -- 12,863,911 Minority interest....................... -- -- 5,513,507 5,513,507 Members' equity......................... 750,000 (3,604) (5,500,687) -- Stockholders' equity.................... -- -- 2,885,680 2,885,680 OPERATING DATA (AT END OF PERIOD, EXCEPT FOR AVERAGES): Homes passed(f)......................... 3,787,000 9,601,000 Basic customers(g)...................... 2,453,000 6,094,000 Basic penetration(h).................... 64.8% 63.5% Premium units(i)........................ 862,000 2,895,000 Premium penetration(j).................. 35.1% 47.5% Average monthly revenue per basic customer(k)............................ $ 36.81 - ------------------------- (a) Charter Investment, Inc. provided corporate management and consulting services to subsidiaries of Charter Operating during 1998 and 1999 and to subsidiaries of Marcus Holdings beginning in October 1998. See "Certain Relationships and Related Transactions". (b) Basic loss per share assumes none of the membership units of Charter Communications Holding Company are exchanged for Charter Communications, Inc. common stock and none of the outstanding options to purchase membership units of Charter Communications Holding Company that are automatically exchanged for Charter Communications, Inc. common stock are exercised. Basic loss per share equals loss applicable to equity holders divided by weighted average shares outstanding. If the membership units were exchanged or options exercised, the effects would be antidilutive. (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 television 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. Management's discretionary use 13
17 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) EBITDA margin represents EBITDA as a percentage of revenues. (e) Adjusted EBITDA means EBITDA before stock option compensation expense, corporate expenses, management fees and other income (expense). Adjusted EBITDA is presented because it is a widely accepted financial indicator of a cable company's ability to service its 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. (f) Homes passed are the number of living units, such as single residence homes, apartments and condominium units, passed by the cable television distribution network in a given cable system service area. (g) Basic customers are customers who receive basic cable service. (h) Basic penetration represents basic customers as a percentage of homes passed. (i) Premium units represent the total number of subscriptions to premium channels. (j) Premium penetration represents premium units as a percentage of basic customers. (k) 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. 14
18 RISK FACTORS An investment in our Class A common stock entails the following risks. You should carefully consider these risk factors, as well as the other information in this prospectus. OUR STRUCTURE MR. ALLEN HAS THE ABILITY TO CONTROL MATTERS ON WHICH ALL OF CHARTER COMMUNICATIONS, INC.'S STOCKHOLDERS MAY VOTE AND HAS THE EXCLUSIVE RIGHT TO VOTE ON SPECIFIC MATTERS. Following the offering, Mr. Allen will control approximately 95% of the voting power of Charter Communications, Inc.'s capital stock. Accordingly, Mr. Allen will control Charter Communications, Inc. which, in turn, will control Charter Communications Holding Company. As Class A common stockholders, you will have only a very limited voting interest in Charter Communications, Inc. and a limited indirect equity interest in Charter Communications Holding Company, although Class A common stockholders will have an equity interest in Charter Communications, Inc. of more than 99.9%. The purposes of our structure are, among other things, to enable Mr. Allen to take advantage for tax purposes of the losses expected to be generated by Charter Communications Holding Company and to enable him to maintain control of our business. Mr. Allen will have the ability to control fundamental corporate transactions requiring equity holder approval, including, but not limited to, the election of all of our directors, approval of merger transactions involving us and the sale of all or substantially all of our assets. Mr. Allen's control may continue in the future through the high vote Class B common stock even if Mr. Allen owns a minority economic interest in our business. As the owner of all of the Class B common stock, Mr. Allen will be entitled to elect all but one member of Charter Communications, Inc.'s board of directors. Because of the exclusive voting rights granted to holders of Class B common stock for specific matters, he will have the sole power to amend a number of important provisions of Charter Communications, Inc.'s certificate of incorporation, including provisions restricting the scope of our business activities. See "Description of Capital Stock and Membership Units". MR. ALLEN MAY HAVE INTERESTS THAT CONFLICT WITH YOUR INTERESTS. Mr. Allen's control over our management and affairs could create conflicts of interest if he is faced with decisions that could have implications both for him and for us and the holders of Class A common stock. Further, through his effective control, Mr. Allen could cause us to enter into contracts with another entity in which he owns an interest or cause us to decline a transaction that he or an entity in which he owns an interest ultimately enters into. Mr. Allen may engage in other businesses involving the operation of cable television systems, video programming, high-speed Internet access, telephony or electronic commerce, which is business and financial transactions conducted through broadband interactivity and Internet services. Mr. Allen may also engage in other businesses that 15
19 compete or may in the future compete with us. In addition, Mr. Allen currently engages and may engage in the future in businesses that are complementary to our cable television business. Accordingly, conflicts could arise with respect to the allocation of corporate opportunities between us and Mr. Allen. Current or future agreements between us and Mr. Allen or his affiliates may not be the result of arm's-length negotiations. Consequently, such agreements may be less favorable to us than agreements that we could otherwise have entered into with unaffiliated third parties. Further, many past and future transactions with Mr. Allen or his affiliates are informal in nature. As a result, there will be some discretion left to the parties, who are subject to the potentially conflicting interests described above. We have not instituted any formal plans to address conflicts of interest that may arise. WE ARE NOT PERMITTED TO ENGAGE IN ANY BUSINESS ACTIVITY OTHER THAN THE CABLE TRANSMISSION OF VIDEO, AUDIO AND DATA UNLESS MR. ALLEN AUTHORIZES US TO PURSUE THAT PARTICULAR BUSINESS ACTIVITY. THIS COULD ADVERSELY AFFECT OUR ABILITY TO OFFER NEW PRODUCTS AND SERVICES OUTSIDE OF THE CABLE TRANSMISSION BUSINESS AND ENTER INTO NEW BUSINESSES, WHICH COULD ADVERSELY AFFECT OUR GROWTH, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Charter Communications, Inc.'s certificate of incorporation and Charter Communications Holding Company's limited liability company agreement will provide that, until all of the shares of Class B common stock have converted into shares of Class A common stock, Charter Communications, Inc. and Charter Communications Holding Company, including their subsidiaries, cannot engage in any business activity outside the cable transmission business except for the joint venture with Broadband Partners, LLC and incidental businesses engaged in as of the closing of the offering. This will be the case unless the opportunity to pursue the particular business activity is first offered to Mr. Allen, he decides not to pursue it and he consents to our engaging in the business activity. The cable transmission business means the business of transmitting video, audio, including telephone services, and data over cable television systems owned, operated or managed by us from time to time. These provisions may limit our ability to take advantage of attractive business opportunities. Consequently, our ability to offer new products and services outside of the cable transmission business and enter into new businesses could be adversely affected, resulting in an adverse effect on our growth, financial condition and results of operations. See "Certain Relationships and Related Transactions -- Allocation of Business Opportunities with Mr. Allen". MR. ALLEN'S CONTROL AND CHARTER COMMUNICATIONS, INC.'S ORGANIZATIONAL DOCUMENTS MAY INHIBIT OR PREVENT A TAKEOVER OR A CHANGE IN MANAGEMENT THAT COULD RESULT IN A CHANGE OF CONTROL PREMIUM OR FAVORABLY IMPACT THE MARKET PRICE OF THE CLASS A COMMON STOCK. As a result of his controlling voting interest, Mr. Allen will have the ability to delay or prevent a change of control or changes in our management that our other stockholders, including the holders of our Class A common stock, may consider 16
20 favorable or beneficial. Provisions in our organizational documents may also have the effect of delaying or preventing these changes, including provisions: - authorizing the issuance of "blank check" preferred stock; - restricting the calling of special meetings of stockholders; and - requiring advanced notice for proposals for stockholder meetings. If a change of control or change in management is delayed or prevented, the market price of our Class A common stock could suffer or holders may not receive a change of control premium over the then-current market price of the Class A common stock. CHARTER COMMUNICATIONS, INC. IS A HOLDING COMPANY WHICH HAS NO OPERATIONS AND WILL DEPEND ON ITS OPERATING SUBSIDIARIES FOR CASH. OUR SUBSIDIARIES MAY BE LIMITED IN THEIR ABILITY TO MAKE FUNDS AVAILABLE FOR THE PAYMENT OF OUR DEBT AND OTHER OBLIGATIONS. As holding companies, Charter Communications, Inc. and Charter Communications Holding Company will depend entirely on cash from our operating subsidiaries to satisfy their obligations. These operating subsidiaries may not be able to make funds available to Charter Communications, Inc. and Charter Communications Holding Company. Charter Communications, Inc. is a holding company whose principal asset after the closing of the offering will be an approximate 31% equity interest and a 100% voting interest in Charter Communications Holding Company. Charter Communications Holding Company is also a holding company whose operations are conducted through its direct and indirect subsidiaries. Neither of them will hold any significant assets other than their direct and indirect interests in our subsidiaries which conduct all of our operations. Charter Communications, Inc.'s and Charter Communications Holding Company's cash flow will depend upon the cash flow of Charter Communications Holding Company's operating subsidiaries and the payment of funds by these operating subsidiaries to Charter Communications Holding Company and Charter Communications, Inc. This will affect the ability of Charter Communications, Inc and Charter Communications Holding Company to meet their obligations, including: - debt or preferred equity obligations that we may issue in the future; - obligations under employment and consulting agreements; - obligations under the mutual services agreement with Charter Investment, Inc. under which Charter Investment, Inc. provides Charter Communications, Inc. with personnel and services; and - dividends or other distributions to holders of Class A common stock. Our operating subsidiaries are not obligated to make funds available for payment of these obligations in the form of loans, distributions or otherwise. In addition, our operating subsidiaries' ability to make any such loans, distributions or other payments to Charter Communications Holding Company or to Charter Communications, Inc. will depend on their earnings, business and tax considerations and legal restrictions. Covenants in the indentures and credit agreements governing the indebtedness of Charter Communications Holding Company's operating subsidiaries restrict their ability to make 17
21 loans, distributions or other payments to Charter Communications Holding Company or to us. WE COULD BE DEEMED AN "INVESTMENT COMPANY" UNDER THE INVESTMENT COMPANY ACT OF 1940. THIS WOULD IMPOSE SIGNIFICANT RESTRICTIONS ON US AND WOULD BE LIKELY TO HAVE A MATERIAL ADVERSE IMPACT ON OUR GROWTH, FINANCIAL CONDITION AND RESULTS OF OPERATION. If anything were to happen which would cause us to be deemed an investment company, the Investment Company Act would impose significant restrictions on us, including severe limitations on our ability to borrow money, to issue additional capital stock and to transact business with affiliates. In addition, because our operations are very different from those of the typical registered investment company, regulation under the Investment Company Act could affect us in other ways that are extremely difficult to predict. In sum, if we were deemed to be an investment company it could become impractical for us to continue our business as currently conducted and our growth, our financial condition and our results of operations could suffer materially. Following the offering, our principal asset will be our equity interest in Charter Communications Holding Company. If our membership interest in Charter Communications Holding Company were to constitute less than 50% of the voting securities issued by Charter Communications Holding Company, then our interest in Charter Communications Holding Company could be deemed an "investment security" for purposes of the Investment Company Act. This may occur, for example, if a court determines that the Class B common stock is no longer entitled to special voting rights and, in accordance with the terms of the Charter Communications Holding Company limited liability company agreement, our membership units in this company were to lose their special voting privileges. A determination that such investment was an investment security could cause us to be deemed to be an investment company under the Investment Company Act, unless an exclusion from registration were available or we were to obtain an order of the Securities and Exchange Commission excluding or exempting us from registration under this Act. IF A COURT DETERMINES THAT THE CLASS B COMMON STOCK IS NO LONGER ENTITLED TO SPECIAL VOTING RIGHTS, CHARTER COMMUNICATIONS, INC. WOULD LOSE ITS RIGHTS TO MANAGE CHARTER COMMUNICATIONS HOLDING COMPANY. IN ADDITION TO THE INVESTMENT COMPANY RISKS DISCUSSED ABOVE, THIS COULD MATERIALLY IMPACT THE VALUE OF YOUR INVESTMENT IN THE CLASS A COMMON STOCK. If a court determines that the Class B common stock is no longer entitled to special voting rights, Charter Communications, Inc. would no longer have a controlling voting interest in, and would lose its right to manage, Charter Communications Holding Company. If this were to occur: - Charter Communications, Inc. would retain its proportional equity interest in Charter Communications Holding Company but would lose all of its powers to direct the management and affairs of Charter Communications Holding Company and its subsidiaries; 18
22 - Class A common stockholders would lose any right they had at that time or might have had in the future to direct, through equity ownership in Charter Communications, Inc., the management and affairs of Charter Communications Holding Company; and - Charter Communications, Inc. would become strictly a passive investment vehicle. This result, as well as the impact of being treated by investors as an investment company, could materially adversely impact: - the liquidity of the Class A common stock; - how it trades in the marketplace; - the price that purchasers would be willing to pay for the Class A common stock in a change of control transaction or otherwise; and - the market price of the Class A common stock which could experience a significant decline as a result. Uncertainties that may arise with respect to the nature of Charter Communications, Inc.'s management role and voting power and organizational documents, including legal actions or proceedings relating thereto, may also materially adversely impact the value of the Class A common stock. WE ARE DEPENDENT ON CHARTER INVESTMENT, INC. FOR NECESSARY PERSONNEL AND SERVICES. Charter Communications, Inc. will initially have only twelve executive officers, all of whom are also executive officers of Charter Investment, Inc. It will receive from Charter Investment, Inc. other personnel and services necessary to perform its obligations as Charter Communications Holding Company's sole manager, pursuant to a mutual services agreement. As Charter Communications, Inc. is restricted from holding any significant assets other than Charter Communications Holding Company membership units, Charter Communications, Inc. will be substantially dependent upon Charter Investment, Inc. for personnel and support services. The termination or breach by Charter Investment, Inc. of the mutual services agreement could adversely affect our ability to manage Charter Communications Holding Company and, in turn, our cable systems. THE SPECIAL TAX ALLOCATION PROVISIONS OF THE CHARTER COMMUNICATIONS HOLDING COMPANY LIMITED LIABILITY COMPANY AGREEMENT MAY CAUSE CHARTER COMMUNICATIONS, INC. IN SOME CIRCUMSTANCES TO PAY MORE TAXES THAN IF THE SPECIAL TAX ALLOCATION PROVISIONS WERE NOT IN EFFECT. Charter Communications Holding Company's limited liability company agreement provides that through the end of 2003, tax losses of Charter Communications Holding Company that would otherwise have been allocated to Charter Communications, Inc. based generally on its percentage of outstanding membership units of Charter Communications Holding Company will instead be allocated to the membership units held by Vulcan Cable III Inc. and Charter Investment, Inc. The purpose of these special 19
23 tax allocation provisions is to allow Mr. Allen to take advantage for tax purposes of the losses expected to be generated by Charter Communications Holding Company. The limited liability company agreement further provides that beginning at the time that Charter Communications Holding Company first becomes profitable (as determined under the applicable federal income tax rules for determining book profits), tax profits that would otherwise have been allocated to Charter Communications, Inc. based generally on its percentage of outstanding membership units of Charter Communications Holding Company will instead be allocated to membership units held by Vulcan Cable III Inc. and Charter Investment, Inc. In some situations, the special tax allocation provisions could result in Charter Communications, Inc. having to pay taxes in an amount that is more than if Charter Communications Holding Company had allocated losses and profits to Charter Communications, Inc. based generally on its percentage of outstanding membership units from the time of the completion of the offering. See "Description of Capital Stock and Membership Units -- Special Allocation of Losses". OUR ACQUISITIONS WE MAY BE UNABLE TO OBTAIN CAPITAL SUFFICIENT TO CONSUMMATE OUR PENDING ACQUISITIONS AND FUND RELATED OBLIGATIONS. IF THIS OCCURRED, WE COULD BE IN DEFAULT UNDER OUR ACQUISITION AGREEMENTS AND DEBT OBLIGATIONS WHICH COULD LEAD TO LEGAL PROCEEDINGS BEING INITIATED AGAINST US. THIS IN TURN COULD LEAD TO DEFAULTS UNDER OUR OTHER OBLIGATIONS. Available and committed sources of funds will not be sufficient to consummate our pending acquisitions. In connection with our acquisitions, we may need to raise a total of $5.41 billion. We will need to raise approximately $1.72 billion by borrowing under credit facilities at Bresnan that have not yet been arranged and/or by issuing debt or equity securities of Charter Communications, Inc. or Charter Communications Holding Company to fund: - approximately $0.87 billion of the Bresnan purchase price; - approximately $0.50 billion in outstanding Bresnan credit facility borrowings that we would have to repay if we are unable to assume and amend the existing Bresnan credit facilities; and - approximately $0.35 billion in Bresnan notes that we expect to be put to us in connection with required change of control offers for these notes. In addition, we will have to raise approximately $3.69 billion of additional financing if we are required to pay: - approximately $0.71 billion to repurchase outstanding notes of Falcon if committed bridge loan financing does not close; - approximately $0.17 billion if the Avalon credit facilities do not close; - approximately $0.88 billion if the Fanch credit facilities do not close; - approximately $0.27 billion to repurchase outstanding notes of Avalon; 20
24 - approximately $1.57 billion to repurchase equity interests issued or to be issued to specified sellers in connection with a number of our acquisitions because of possible violations of Section 5 of the Securities Act of 1933; and - approximately $0.09 billion to InterMedia if we do not obtain regulatory approvals to transfer an Indiana cable system that we are required to transfer to InterMedia and we are unable to transfer replacement systems. We cannot assure you that we will be able to raise the financing necessary to consummate our pending acquisitions and to satisfy the obligations described above. If we are unable to raise the financing necessary to satisfy any or all of these obligations, we may be unable to close our pending acquisitions and could be in default under one or more other obligations. The relevant sellers or creditors could initiate legal proceedings against us, including under bankruptcy and reorganization laws, for any damages they suffer as a result of our non-performance. Any such action could trigger defaults under our other obligations, including our credit facilities and debt instruments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and the following five risk factors for more information on our potential funding shortfall. THE PROSPECTIVE LENDERS' COMMITMENTS TO LEND TO US UNDER THE FALCON BRIDGE LOAN FACILITY AND THE FANCH AND AVALON CREDIT FACILITIES ARE SUBJECT TO A NUMBER OF CONDITIONS. IF THESE CONDITIONS ARE NOT MET, THESE SOURCES OF FUNDS WILL NOT BE AVAILABLE TO US. AS A RESULT, WE MAY BE UNABLE TO CONSUMMATE THESE PENDING ACQUISITIONS OR FUND REQUIRED DEBT REPURCHASES WHICH COULD TRIGGER DEFAULTS UNDER OUR ACQUISITION AGREEMENTS AND OUR DEBT OBLIGATIONS. THE RELEVANT SELLERS OR CREDITORS COULD INITIATE LEGAL PROCEEDINGS AGAINST US. The Falcon bridge loan facility and the Fanch and Avalon credit facilities, for which we have received commitments, will not close unless specified closing conditions are satisfied. Some of these closing conditions are not under our control, and we cannot assure you that all closing conditions will be satisfied. For example, the closing conditions for these facilities include: - the absence of various types of material adverse changes, including material adverse changes in the financial and capital markets; and - receipt of required approvals from third parties. See "Description of Certain Indebtedness" for a description of the material closing conditions for each of these facilities. If we are not able to obtain financing under these facilities, we will need to arrange other sources of financing to meet our obligations, including our obligations to consummate our pending acquisitions. We would need to raise approximately $1.8 billion to replace these facilities, and we cannot assure you that alternate financing sources will be available to us. We may as a result be unable to consummate our pending Fanch and Avalon acquisitions and may be in default under the related acquisition agreements. If we do not obtain funding under the Falcon bridge loan facility, we may be in default 21
25 under the Falcon debentures and notes that we may be required to repurchase. The relevant sellers or creditors could initiate legal proceedings against us, including under bankruptcy and reorganization laws, for any damages they suffer as a result of our non-performance. Any such action could trigger defaults under our other obligations, including our credit facilities and debt instruments. WE MAY BE UNABLE TO OBTAIN SUFFICIENT CAPITAL TO REPURCHASE THE EXISTING PUBLIC DEBT OF THE CABLE OPERATORS THAT WE ARE ACQUIRING. WE MAY AS A RESULT BE IN DEFAULT ON THIS DEBT WHICH COULD LEAD TO LEGAL PROCEEDINGS BEING INITIATED AGAINST US. THIS COULD IN TURN LEAD TO DEFAULTS UNDER OUR OTHER OBLIGATIONS. Following the closings of the Falcon, Avalon and Bresnan acquisitions, we will be required to make offers to repurchase public notes issued by Falcon, Avalon and Bresnan under the terms of the indentures governing these notes. Because the trading prices of the Falcon and Bresnan notes have increased considerably since the announcement of the respective acquisitions and these notes are currently trading near the change of control price that we would have to pay, we believe that it is likely that holders of all or substantially all of the Falcon and Bresnan notes will tender these notes in response to the change of control offers that we will have to make. As a result, we assume that we will be required to repurchase the public Falcon and Bresnan notes. The total principal amount and accreted value of these notes as of June 30, 1999 was $1.05 billion. In addition, we may also be required to repurchase the public Avalon notes. The total principal amount and accreted value of the Avalon notes as of June 30, 1999 was $268 million. We cannot assure you that we will be able to obtain capital sufficient to fulfill all of these repurchase obligations. If we fail to satisfy these repurchase obligations, the holders of these notes could initiate legal proceedings against us, including under bankruptcy and reorganization laws, for any damages they suffer as a result of our non- performance. This could trigger defaults under our other obligations, including our credit facilities and debt instruments. WE MAY BE UNABLE TO OBTAIN SUFFICIENT CAPITAL TO REPAY DEBT OUTSTANDING UNDER THE BRESNAN CREDIT FACILITIES. WE MAY AS A RESULT BE IN DEFAULT UNDER OUR BRESNAN ACQUISITION AGREEMENT AND THE BRESNAN CREDIT FACILITIES WHICH COULD LEAD TO LEGAL PROCEEDINGS BEING INITIATED AGAINST US. THIS COULD IN TURN LEAD TO DEFAULTS UNDER OUR OTHER OBLIGATIONS. Our acquisition of Bresnan will constitute an event of default under Bresnan's credit facilities, permitting the lenders to declare all amounts outstanding to be immediately due and payable. As of June 30, 1999, there were $500.0 million in borrowings outstanding under these facilities. We cannot assure you that we will able to obtain waivers of the events of default from the Bresnan lenders or assume and amend the existing Bresnan credit facilities or obtain capital sufficient to refinance the debt outstanding under these credit facilities. If we fail to so obtain waivers, assume and amend, or refinance, we may be unable to close the Bresnan acquisition and the Bresnan sellers and/or the lenders under the Bresnan credit facilities could initiate legal proceedings against us, including under bankruptcy and reorganization laws, for any 22
26 damages they suffer as a result of our non-performance. This could trigger defaults under our other obligations, including our credit facilities and debt instruments. SPECIFIED FORMER OWNERS OF RIFKIN ARE ENTITLED TO CAUSE US TO REDEEM THEIR PREFERRED MEMBERSHIP UNITS OF CHARTER COMMUNICATIONS HOLDING COMPANY. IF WE DO NOT HAVE SUFFICIENT CAPITAL TO FUND ANY OR ALL OF THESE REDEMPTIONS, THESE RIFKIN SELLERS COULD INITIATE LEGAL PROCEEDINGS AGAINST US. THIS COULD IN TURN LEAD TO DEFAULTS UNDER OUR OTHER OBLIGATIONS. The Rifkin sellers who hold preferred membership units of Charter Communications Holding Company issued in connection with the Rifkin acquisition have the right to cause Charter Communications Holding Company to redeem these preferred membership units at any time prior to September 15, 2004. If Charter Communications Holding Company becomes obligated to redeem all of these preferred membership units under the terms of these securities, Charter Communications Holding Company would be obligated to redeem these preferred membership units for $133.3 million plus 8% accretion from September 14, 1999, the date of the Rifkin acquisition, through the date of redemption. We cannot guarantee that any or all of these holders of preferred membership units will not exercise their redemption rights, or that we will have sufficient capital to fund any or all of these redemptions. If we fail to satisfy any redemption demand, we would be in breach of the terms of these securities and the relevant holders could initiate legal proceedings against us, including under bankruptcy and reorganization laws, for any damages they suffer as a result of our non-performance. Any such action could trigger defaults under other obligations, including our credit facilities and debt instruments. SPECIFIED FORMER OWNERS OF RIFKIN AND SPECIFIED OWNERS OF FALCON, BRESNAN AND HELICON WHO ACQUIRE EQUITY INTERESTS MAY BE ENTITLED TO CAUSE US TO REPURCHASE THEIR EQUITY INTERESTS BECAUSE OF POSSIBLE VIOLATIONS OF SECTION 5 OF THE SECURITIES ACT OF 1933. IF WE DO NOT HAVE SUFFICIENT CAPITAL TO FUND ANY OR ALL OF THESE REPURCHASES, ANY OF THE OWNERS OF THESE EQUITY INTERESTS COULD INITIATE LEGAL PROCEEDINGS AGAINST US. THIS COULD LEAD TO DEFAULTS UNDER OUR OTHER OBLIGATIONS. The Rifkin sellers who received preferred membership units in connection with the Rifkin acquisition, the Falcon and Bresnan sellers who acquire membership units in the Falcon and Bresnan acquisitions and the Helicon sellers acquiring shares of Class A common stock in our directed share program may have rescission rights against Charter Communications, Inc. and Charter Communications Holding Company arising out of possible violations of Section 5 of the Securities Act of 1933 in connection with the offers and sales of these equity interests. If all of these equity holders successfully exercised their possible rescission rights and Charter Communications, Inc. or Charter Communications Holding Company became obligated to repurchase all of their equity interests, the total repurchase obligations would be approximately $1.6 billion as follows: - up to a maximum of $133.3 million to repurchase all of the Rifkin sellers' equity interests; 23
27 - up to a maximum of $425 million to repurchase all of the Falcon sellers' equity interests. This amount would increase to $550 million if the Falcon sellers exercise their right to receive up to an additional $125 million of membership units in connection with the Falcon acquisition; - up to a maximum of $1.0 billion to repurchase all of the Bresnan sellers' equity interests; and - up to a maximum of $12 million to repurchase the shares of Class A common stock purchased by Helicon sellers in our directed share program. We cannot assure you that we would be able to obtain capital sufficient to fund any required repurchases. If we failed to satisfy these obligations, these acquisition-related equity holders, as general unsecured creditors, could initiate legal proceedings against us, including under bankruptcy and reorganization laws, for any damages they suffer as a result of our non-performance. Any such action could trigger defaults under our other obligations, including our credit facilities and debt instruments. WE MAY NOT HAVE THE ABILITY TO INTEGRATE THE NEW SYSTEMS THAT WE ACQUIRE AND THE CUSTOMERS THEY SERVE WITH OUR EXISTING SYSTEMS. THIS COULD ADVERSELY AFFECT OUR OPERATING RESULTS AND GROWTH STRATEGY. Upon the completion of our pending acquisitions, we will own and operate cable systems serving approximately 6.2 million customers, as compared to the cable systems we currently own which serve approximately 3.7 million customers. In addition, we may acquire more cable systems in the future, through direct acquisition, system swaps or otherwise. The integration of our new cable systems poses a number of significant risks, including: - our acquisitions may not have a positive impact on our cash flows from operations; - the integration of these new systems and customers will place significant demands on our management and our operations, information services, and financial, legal and marketing resources. Our current operating and financial systems and controls and information services may not be adequate, and any steps taken to improve these systems and controls may not be sufficient; - our current information systems may be incompatible with the information systems we have acquired or plan to acquire. We may be unable to integrate these information systems at a reasonable cost or in a timely manner; - acquired businesses sometimes result in unexpected liabilities and contingencies which could be significant; and - our continued growth will also increase our need for qualified personnel. We may not be able to hire such additional qualified personnel. We cannot assure you that we will successfully integrate any acquired systems into our operations. 24
28 THE FAILURE TO OBTAIN NECESSARY REGULATORY APPROVALS, OR TO SATISFY OTHER CLOSING CONDITIONS, COULD IMPEDE THE CONSUMMATION OF A PENDING ACQUISITION. THIS WOULD PREVENT OR DELAY OUR STRATEGY TO EXPAND OUR BUSINESS AND INCREASE REVENUES. Our pending acquisitions are subject to federal, state and local regulatory approvals. We cannot assure you that we will be able to obtain any necessary approvals. These pending acquisitions are also subject to a number of other closing conditions. We cannot assure you as to when, or if, each such acquisition will be consummated. Any delay, prohibition or modification could adversely affect the terms of a pending acquisition or could require us to abandon an otherwise attractive opportunity and possibly forfeit earnest money. OUR PENDING ACQUISITIONS MAY NOT BE CONSUMMATED AND IF NOT CONSUMMATED, OUR MANAGEMENT WILL HAVE BROAD DISCRETION WITH RESPECT TO THE USE OF THE PROCEEDS ALLOCATED TO SUCH ACQUISITIONS. The consummation of each of our pending acquisitions is subject to a number of conditions. If these conditions are not materially met, the relevant acquisition may not be consummated. We cannot assure you that any or all of these acquisitions will be consummated on the terms described in this prospectus, or at all. This offering is not contingent or in any way dependent on the consummation of any or all of these acquisitions. If any of these acquisitions is not consummated, a significant portion of the net proceeds from the offering will not be designated for a specific use. In these circumstances, our management will have broad discretion with respect to the use of the proceeds of the offering and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. OUR BUSINESS WE HAVE SUBSTANTIAL EXISTING DEBT AND WILL INCUR SUBSTANTIAL ADDITIONAL DEBT, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND AFFECT OUR ABILITY TO OBTAIN FINANCING IN THE FUTURE AND REACT TO CHANGES IN OUR BUSINESS. We have a significant amount of debt. As of June 30, 1999, pro forma for our pending acquisitions and acquisitions completed since that date, our total debt was approximately $13.1 billion and our total stockholders' equity was approximately $2.8 billion. Our significant amount of debt could have important consequences to you. For example, it could: - make it more difficult for us to satisfy our obligations under our credit facilities and to our noteholders; - increase our vulnerability to general adverse economic and cable industry conditions, including interest rate fluctuations, because much of our borrowings are and will continue to be at variable rates of interest; - require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which will reduce our funds available for working capital, 25
29 capital expenditures, acquisitions of additional systems and other general corporate expenses; - limit our flexibility in planning for, or reacting to, changes in our business and the cable industry generally; - place us at a disadvantage compared to our competitors that have proportionately less debt; and - limit our ability to borrow additional funds in the future, if we need them, due to applicable financial and restrictive covenants in such debt. We anticipate incurring significant additional debt in the future to fund the expansion, maintenance and upgrade of our systems. We will also incur debt to finance pending acquisitions and related debt repayments, and may incur debt to finance additional acquisitions. If new debt is added to our current debt levels, the related risks that we and you now face could intensify. THE AGREEMENTS AND INSTRUMENTS GOVERNING OUR DEBT CONTAIN RESTRICTIONS AND LIMITATIONS WHICH COULD SIGNIFICANTLY IMPACT OUR ABILITY TO OPERATE OUR BUSINESS. Our credit facilities and the indentures governing our notes contain a number of significant covenants that could adversely impact our business. These covenants, among other things, restrict the ability of our subsidiaries to: - pay dividends; - pledge assets; - dispose of assets or merge; - incur additional debt; - issue equity; - repurchase or redeem equity interests and debt; - create liens; and - make certain investments or acquisitions. Furthermore, in accordance with our credit facilities, we are required to maintain specified financial ratios and meet financial tests. The ability to comply with these provisions may be affected by events beyond our control. The breach of any of these covenants will result in a default under the applicable debt agreement or instrument. OUR ABILITY TO GENERATE THE SIGNIFICANT AMOUNT OF CASH NEEDED TO SERVICE OUR DEBT AND GROW OUR BUSINESS DEPENDS ON MANY FACTORS BEYOND OUR CONTROL. Our ability to make payments on our debt and to fund our planned capital expenditures for upgrading our cable systems and for other purposes will depend on our ability to generate cash and secure financing in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond our control. If our business does not generate sufficient cash flow from 26
30 operations, and sufficient future borrowings are not available to us under our credit facilities or from other sources of financing, we may not be able to repay our debt, to grow our business or to fund our other liquidity needs. WE HAVE GROWN RAPIDLY AND HAVE A LIMITED HISTORY OF OPERATING OUR CURRENT SYSTEMS. THIS MAKES IT DIFFICULT FOR YOU TO COMPLETELY EVALUATE OUR PERFORMANCE. We commenced active operations in 1994 and have grown rapidly since then through acquisitions of cable systems. As of June 30, 1999, giving effect to pending acquisitions and recent acquisitions closed since June 30, 1999, our systems served approximately 392% more customers than were served as of December 31, 1998. As a result, historical financial information about us may not be indicative of the future or of results that we can achieve with the cable systems which will be under our control. Our recent growth in revenue over our short operating history is not necessarily indicative of future performance. WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO EXPERIENCE NET LOSSES. CONSEQUENTLY, WE MAY NOT HAVE THE ABILITY TO FINANCE FUTURE OPERATIONS. We have had a history of net losses and expect to continue to report net losses for the foreseeable future. We expect our net losses to increase as a result of the merger of Charter Holdings with Marcus Holdings and our recent and pending acquisitions. We reported net losses from continuing operations before extraordinary items of $5 million for 1997, $23 million for 1998 and $216 million for the six months ended June 30, 1999. On a pro forma basis, giving effect to the merger of Charter Holdings and Marcus Holdings and our recent and pending acquisitions, we had net losses from continuing operations before extraordinary item and minority interest of $1.6 billion for 1998. For the six months ended June 30, 1999, on the same pro forma basis, we had net losses from continuing operations before extraordinary item and minority interest of $775 million. We cannot predict what impact, if any, continued losses will have on our ability to finance our operations in the future. IF WE ARE UNSUCCESSFUL IN IMPLEMENTING OUR GROWTH STRATEGY, OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED. If we are unable to grow our cash flow sufficiently, we may be unable to repay our debt, to grow our business or to fund our other liquidity needs. We expect that a substantial portion of our future growth will be achieved through revenues from new products and services and the acquisition of additional cable systems. We may not be able to offer these new products and services successfully to our customers and these new products and services may not generate adequate revenues. In addition, we cannot predict the success of our acquisition strategy. In the past year, the cable television industry has undergone dramatic consolidation which has reduced the number of future acquisition prospects. This consolidation may increase the purchase price of future acquisitions, and we may not be successful in identifying attractive acquisition targets in the future. Additionally, those acquisitions we do 27
31 complete are not likely to have a positive net impact on our operating results in the near future. OUR PROGRAMMING COSTS ARE INCREASING. WE MAY NOT HAVE THE ABILITY TO PASS THESE INCREASES ON TO OUR CUSTOMERS, WHICH WOULD ADVERSELY AFFECT OUR CASH FLOW AND OPERATING MARGINS. Programming has been, and is expected to continue to be, our largest single expense item. In recent years, the cable industry has experienced a rapid escalation in the cost of programming, particularly sports programming. This escalation may continue, and we may not be able to pass programming cost increases on to our customers. The inability to pass these programming cost increases on to our customers would have an adverse impact on our cash flow and operating margins. In addition, as we upgrade the channel capacity of our systems, add programming to our basic and expanded basic programming tiers and reposition premium services to the basic tier, we may face additional market constraints on our ability to pass programming costs on to our customers. Basic programming includes a variety of entertainment and local programming. Expanded basic programming offers more services than basic programming. Premium service includes unedited, commercial-free movies, sports and other special event entertainment programming. WE MAY NOT BE ABLE TO OBTAIN CAPITAL SUFFICIENT TO FUND OUR PLANNED UPGRADES AND OTHER CAPITAL EXPENDITURES. THIS COULD ADVERSELY AFFECT OUR ABILITY TO OFFER NEW PRODUCTS AND SERVICES, WHICH COULD ADVERSELY AFFECT OUR GROWTH, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. We intend to upgrade a significant portion of our cable systems over the coming years and make other capital investments. For the three years ending December 31, 2002, we plan to spend approximately $5.5 billion for capital expenditures, approximately $2.9 billion of which will be used to upgrade and rebuild our systems to bandwidth capacity of 550 megahertz or greater and add two-way capability so that we may offer advanced services. The remaining $2.6 billion will be used for extensions of systems, development of new products and services, purchases of converters and system maintenance. We cannot assure you that these amounts will be sufficient to accomplish our planned system upgrades, maintenance and expansion. If we cannot obtain the necessary funds from increases in our operating cash flow, additional borrowings or other sources, we may not be able to fund our planned upgrades and expansion and offer new products and services on a timely basis. Consequently, our growth, our financial condition and the results of our operations could suffer materially. WE MAY NOT BE ABLE TO FUND THE CAPITAL EXPENDITURES NECESSARY TO KEEP PACE WITH TECHNOLOGICAL DEVELOPMENTS OR OUR CUSTOMERS' DEMAND FOR NEW PRODUCTS AND SERVICES. THIS COULD LIMIT OUR ABILITY TO COMPETE EFFECTIVELY. The cable business is characterized by rapid technological change and the introduction of new products and services. We cannot assure you that we will be able to 28
32 fund the capital expenditures necessary to keep pace with technological developments, or that we will successfully anticipate the demand of our customers for products and services requiring new technology. This type of rapid technological change could adversely affect our plans to upgrade or expand our systems and respond to competitive pressures. Our inability to upgrade, maintain and expand our systems and provide enhanced services in a timely manner, or to anticipate the demands of the market place, could adversely affect our ability to compete. Consequently, our growth, results of operations and financial condition could suffer materially. WE MAY BE UNABLE TO NEGOTIATE CONSTRUCTION CONTRACTS ON FAVORABLE TERMS AND OUR CONSTRUCTION COSTS MAY INCREASE SIGNIFICANTLY. THIS COULD ADVERSELY AFFECT OUR GROWTH, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The expansion and upgrade of our existing systems and the systems we plan to acquire in our pending acquisitions will require us to hire contractors and enter into a number of construction agreements. We may have difficulty hiring civil contractors, and the contractors we hire may encounter cost overruns or delays in construction. Our construction costs may increase significantly over the next few years as existing contracts expire and as demand for cable construction services continues to grow. We cannot assure you that we will be able to construct new systems or expand or upgrade existing or acquired systems in a timely manner or at a reasonable cost. This may adversely affect our growth, financial condition and results of operations. THERE SHOULD BE NO EXPECTATION THAT MR. ALLEN WILL FUND OUR OPERATIONS OR OBLIGATIONS IN THE FUTURE. Other than as described in this prospectus, there should be no expectation that Mr. Allen or his affiliates will contribute funds to us or to our subsidiaries in the future. In the past, Mr. Allen and/or his affiliates have contributed equity to Charter Investment, Inc. and Charter Communications Holding Company. Pursuant to a membership interests purchase agreement, Mr. Allen, through Vulcan Cable III Inc., contributed to Charter Communications Holding Company $500 million in cash in August 1999 and an additional $825 million in cash and equity interests acquired in the Rifkin acquisition in September 1999. In addition, Mr. Allen, through Vulcan Cable III Inc., has agreed to purchase an additional $750 million of membership units of Charter Communications Holding Company at the closing of the offering. A SALE BY MR. ALLEN OF HIS DIRECT OR INDIRECT EQUITY INTERESTS COULD ADVERSELY AFFECT OUR ABILITY TO MANAGE OUR BUSINESS. Mr. Allen is not prohibited by any agreement from selling his shares of Class B common stock of Charter Communications, Inc. or causing Charter Investment, Inc. or Vulcan Cable III Inc. to sell their membership units in Charter Communications Holding Company after the lapse of a 180-day lock-up period following completion of this offering. We cannot assure you that Mr. Allen will maintain all or any portion of his direct or indirect ownership interest in us. In the event he sells all or any portion of his direct or indirect ownership interest in Charter Communications, Inc. or Charter 29
33 Communications Holding Company, we cannot assure you that he would continue as Chairman of Charter Communications, Inc.'s board of directors or otherwise participate in our management. The disposition by Mr. Allen or any of his affiliates of their equity interests or the loss of his services could adversely affect our growth, financial condition and results of operations, or adversely impact the market price of the Class A common stock. WE OPERATE IN A VERY COMPETITIVE BUSINESS ENVIRONMENT WHICH CAN ADVERSELY AFFECT OUR BUSINESS AND OPERATIONS. The industry in which we operate is highly competitive. In some instances, we compete against companies with fewer regulatory burdens, easier access to financing, greater personnel resources, greater brand name recognition and long-standing relationships with regulatory authorities. Mergers, joint ventures and alliances among any of the following businesses could result in providers capable of offering cable television, Internet and other telecommunications services in direct competition with us: - cable television operators; - regional telephone companies; - long distance telephone service providers; - electric utilities; - local exchange carriers, which are local phone companies that provide local area telephone services and access to long distance services to customers; - providers of cellular and other wireless communications services; and - Internet service providers. We face competition within the subscription television industry, which includes providers of paid television service employing technologies other than cable and excludes broadcast companies that transmit their signal to customers without assessing a subscription fee. We also face competition from broadcast companies distributing television broadcast signals without assessing a subscription fee and from other communications and entertainment media, including the following: - conventional off-air television and radio broadcasting services; - newspapers; - movie theaters; - the Internet; - live sports events; and - home video products. We cannot assure you that upgrading our cable systems will allow us to compete effectively. Additionally, as we expand and introduce new and enhanced services, including Internet and telecommunications services, we will be subject to competition 30
34 from telecommunications providers and Internet service providers. We cannot predict the extent to which this competition may affect our business and operations in the future. DATA PROCESSING FAILURES AFTER DECEMBER 31, 1999 COULD SIGNIFICANTLY DISRUPT OUR OPERATIONS, CAUSING A DECLINE IN CASH FLOW AND REVENUES AND OTHER DIFFICULTIES. The year 2000 problem affects our owned and licensed computer systems and equipment used in connection with internal operations. It also affects our non- information technology systems, including embedded systems in our buildings and other infrastructure. Additionally, since we rely directly and indirectly, in the regular course of business, on the proper operation and compatibility of third-party systems, the year 2000 problem could cause these systems to fail, err or become incompatible with our systems. Much of our assessment efforts regarding the year 2000 problem have involved, and depend on, inquiries to third party service providers. Some of these third parties that have certified the readiness of their products will not certify that such products have operating compatibility with our systems. If we, or significant third parties with whom we communicate and do business through computers, fail to become year 2000 ready, or if the year 2000 problem causes our systems to become internally incompatible or incompatible with key third party systems, our business could suffer material disruptions. We could also face disruptions if the year 2000 problem causes general widespread problems or an economic crisis. We cannot now estimate the extent of these potential disruptions. We cannot assure you that our efforts to date and our ongoing efforts to prepare for the year 2000 problem will be sufficient to prevent a material disruption of our operations, particularly with respect to systems we may acquire prior to December 31, 1999. As a result of any such disruption, our growth, financial condition and results of operations could suffer materially. THE LOSS OF KEY EXECUTIVES COULD ADVERSELY AFFECT OUR ABILITY TO MANAGE OUR BUSINESS. Our success is substantially dependent upon the retention, and the continued performance of the Chairman of our board of directors, Mr. Allen, and our Chief Executive Officer, Jerald L. Kent. The loss of the services of Mr. Allen or Mr. Kent could adversely affect our financial condition and results of operations. REGULATORY AND LEGISLATIVE MATTERS OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENTAL LEGISLATION AND REGULATION. THE APPLICABLE LEGISLATION AND REGULATIONS, AND CHANGES TO THEM, COULD ADVERSELY AFFECT OUR BUSINESS BY INCREASING OUR EXPENSES. Regulation of the cable industry has increased the administrative and operational expenses and limited the revenues of cable systems. Cable operators are subject to, among other things: - limited rate regulation; - requirements that, under specified circumstances, a cable system carry a local broadcast station or obtain consent to carry a local or distant broadcast station; 31
35 - rules for franchise renewals and transfers; and - other requirements covering a variety of operational areas such as equal employment opportunity, technical standards and customer service requirements. Additionally, many aspects of these regulations are currently the subject of judicial proceedings and administrative or legislative proposals. There are also ongoing efforts to amend or expand the state and local regulation of some of our cable systems, which may compound the regulatory risks we already face. We cannot predict whether in response to these efforts any of the states or localities in which we now operate will expand regulation of our cable systems in the future or how they will do so. WE MAY BE REQUIRED TO PROVIDE ACCESS TO OUR NETWORKS TO OTHER INTERNET SERVICE PROVIDERS. THIS COULD SIGNIFICANTLY INCREASE OUR COMPETITION AND ADVERSELY AFFECT THE UPGRADE OF OUR SYSTEMS OR OUR ABILITY TO PROVIDE NEW PRODUCTS AND SERVICES. There are proposals before the United States Congress and the Federal Communications Commission to require all cable operators to make a portion of their cable systems' bandwidth available to other Internet service providers, such as telephone companies. Certain local franchising authorities are considering or have already approved such "open access" requirements. Recently, a number of companies, including telephone companies and Internet service providers, have requested local authorities and the Federal Communications Commission to require cable operators to provide access to cable's broadband infrastructure, which allows cable to deliver a multitude of channels and/or services, so that these companies may deliver Internet services directly to customers over cable facilities. For example, Broward County, Florida granted open access to an Internet service provider as a condition to a cable operator's transfer of its franchise for cable service. The cable operator has commenced legal action at the federal district court level. A federal district court in Portland, Oregon has also upheld the legality of an open access requirement. We believe that allocating a portion of our bandwidth capacity to other Internet service providers: - would impair our ability to use our bandwidth in ways that would generate maximum revenues; - would strengthen our Internet service provider competitors; and - may cause us to decide not to upgrade our systems which would prevent us from introducing our planned new products and services. In addition, we cannot assure you that if we were required to provide access in this manner, it would not have a significant adverse impact on our profitability. This could impact us in many ways, including by: - increasing competition; - increasing the expenses we incur to maintain our systems; and/or - increasing the expense of upgrading and/or expanding our systems. 32
36 OUR CABLE SYSTEMS ARE OPERATED UNDER FRANCHISES WHICH ARE SUBJECT TO NON-RENEWAL OR TERMINATION. THE FAILURE TO RENEW A FRANCHISE COULD ADVERSELY AFFECT OUR BUSINESS IN A KEY MARKET. Our cable systems generally operate pursuant to franchises, permits or licenses typically granted by a municipality or other state or local government controlling the public rights-of-way. Many franchises establish comprehensive facilities and service requirements, as well as specific customer service standards and establish monetary penalties for non-compliance. In many cases, franchises are terminable if the franchisee fails to comply with material provisions set forth in the franchise agreement governing system operations. Franchises are generally granted for fixed terms and must be periodically renewed. Local franchising authorities may resist granting a renewal if either past performance or the prospective operating proposal is considered inadequate. Franchise authorities often demand concessions or other commitments as a condition to renewal, which have been and may continue to be costly to us. In some instances, franchises have not been renewed at expiration, and we have operated under either temporary operating agreements or without a license while negotiating renewal terms with the local franchising authorities. We cannot assure you that we will be able to comply with all material provisions of our franchise agreements or that we will be able to renew our franchises in the future. A termination of and/or a sustained failure to renew a franchise could adversely affect our business in the affected geographic area. WE OPERATE OUR CABLE SYSTEMS UNDER FRANCHISES WHICH ARE NON-EXCLUSIVE. LOCAL FRANCHISING AUTHORITIES CAN GRANT ADDITIONAL FRANCHISES AND CREATE COMPETITION IN MARKET AREAS WHERE NONE EXISTED PREVIOUSLY. Our cable systems are operated under franchises granted by local franchising authorities. These franchises are non-exclusive. Consequently, such local franchising authorities can grant additional franchises to competitors in the same geographic area. As a result, competing operators may build systems in areas in which we hold franchises. In some cases municipal utilities may legally compete with us without obtaining a franchise from the local franchising authority. The existence of more than one cable system operating in the same territory is referred to as an overbuild. These overbuilds could adversely affect our growth, financial condition and results of operations by increasing competition or creating competition where none existed previously. LOCAL FRANCHISE AUTHORITIES HAVE THE ABILITY TO IMPOSE ADDITIONAL REGULATORY CONSTRAINTS ON OUR BUSINESS. THIS CAN FURTHER INCREASE OUR EXPENSES. In addition to the franchise document, cable authorities have also adopted in some jurisdictions cable regulatory ordinances that further regulate the operation of cable systems. This additional regulation increases our expenses in operating our business. We cannot assure you that the local franchising authorities will not impose new and more restrictive requirements. 33
37 Local franchising authorities also have the power to reduce rates and order refunds of basic service tier rates paid in the previous twelve-month period determined to be in excess of the maximum permitted rates. Basic service tier rates are the prices charged for basic programming services. As of June 30, 1999, we have refunded a total of approximately $50,000 since our inception. We may be required to refund additional amounts in the future. DESPITE RECENT DEREGULATION OF EXPANDED BASIC CABLE PROGRAMMING PACKAGES, WE ARE CONCERNED THAT CABLE RATE INCREASES COULD GIVE RISE TO FURTHER REGULATION. THIS COULD IMPAIR OUR ABILITY TO RAISE RATES TO COVER OUR INCREASING COSTS OR CAUSE US TO DELAY OR CANCEL SERVICE OR PROGRAMMING ENHANCEMENTS. On March 31, 1999, the pricing guidelines of expanded basic cable programming packages were deregulated, permitting cable operators to set their own rates. This deregulation was not applicable to basic services. However, the Federal Communications Commission and the United States Congress continue to be concerned that cable rate increases are exceeding inflation. It is possible that either the Federal Communications Commission or the United States Congress will again restrict the ability of cable television operators to implement rate increases. Should this occur, it would impede our ability to raise our rates. If we are unable to raise our rates in response to increasing costs, our financial condition and results of operations could be materially adversely affected. IF WE OFFER TELECOMMUNICATIONS SERVICES, WE MAY BE SUBJECT TO ADDITIONAL REGULATORY BURDENS CAUSING US TO INCUR ADDITIONAL COSTS. If we enter the business of offering telecommunications services, we may be required to obtain federal, state and local licenses or other authorizations to offer these services. We may not be able to obtain such authorizations in a timely manner, or at all, and conditions could be imposed upon such licenses or authorizations that may not be favorable to us. Furthermore, telecommunications companies, including Internet protocol telephony companies, generally are subject to significant regulation as well as higher fees for pole attachments. Internet protocol telephony companies are companies that have the ability to offer telephone services over the Internet, and pole attachments are cable wires that are attached to poles. In particular, cable operators who provide telecommunications services and cannot reach agreement with local utilities over pole attachment rates in states that do not regulate pole attachment rates will be subject to a methodology prescribed by the Federal Communications Commission for determining the rates. These rates may be higher than those paid by cable operators who do not provide telecommunications services. The rate increases are to be phased in over a five-year period beginning on February 8, 2001. If we become subject to telecommunications regulation or higher pole attachment rates, we may incur additional costs which may be material to our business. 34
38 THE OFFERING RISKS OF EXTREME VOLATILITY OF MARKET PRICE OF CLASS A COMMON STOCK. The initial public offering price that we determine, with the assistance of the underwriters, may have no relation to the price at which the Class A common stock trades after completion of the offering. We and the underwriters will consider many factors in determining the initial public offering price of the shares of Class A common stock, including: - our historical performance; - estimates of our business potential and our earnings prospects; - an assessment of our management; and - the consideration of the above factors in relation to market valuation of companies in related businesses. The market price of the Class A common stock may be extremely volatile for many reasons, including: - actual or anticipated variations in our revenues and operating results; - a public market for the Class A common stock may not develop; - announcements of the development of improved or competitive technologies; - the use of new products or promotions by us or our competitors; - the offer and sale by us in the future of additional shares of Class A common stock or other equity securities; - changes in financial forecasts by securities analysts; - new conditions or trends in the cable industry; and - market conditions. A SALE OF CONVERTIBLE DEBT, CONVERTIBLE PREFERRED STOCK OR OTHER EQUITY SECURITIES BY US OR THE PERCEPTION THAT ANY SUCH SALE COULD OCCUR COULD ADVERSELY AFFECT THE MARKET PRICE OF THE CLASS A COMMON STOCK BECAUSE THESE SALES COULD CAUSE THE AMOUNT OF OUR STOCK AVAILABLE FOR SALE IN THE MARKET TO EXCEED THE AMOUNT OF DEMAND FOR OUR CLASS A COMMON STOCK. Charter Communications, Inc. and Charter Communications Holding Company each have the right to sell convertible debt, convertible preferred stock or other equity securities even though they have agreed not to sell shares of Class A common stock for 180 days following this offering. Any such sale, for example, a sale by us to fund a portion of the Bresnan acquisition purchase price, could cause the market price for our Class A common stock to decline if we sold more equity-related securities than demand existed in the market for the Class A common stock. 35
39 THE MARKET PRICE FOR OUR CLASS A COMMON STOCK COULD BE ADVERSELY AFFECTED BY THE LARGE NUMBER OF ADDITIONAL SHARES ELIGIBLE FOR ISSUANCE IN THE FUTURE. Immediately following the offering, 170,000,000 shares of Class A common stock will be issued and outstanding. An additional 407,023,486 shares of Class A common stock will be issuable under the circumstances described in the section "Shares Eligible for Future Sale". Substantially all of the shares of Class A common stock issuable upon exchange of Charter Communications Holding Company membership units and all shares of Class A common stock issuable upon conversion of shares of our Class B common stock will have "demand" and/or "piggyback" registration rights attached to them, including those issuable to Mr. Allen through Charter Investment, Inc. and Vulcan Cable III Inc. The sale of a substantial number of shares of Class A common stock or the perception that such sales could occur could adversely affect the market price for shares of our Class A common stock because these sales could cause the amount of our stock available for sale in the market to exceed the amount of demand for our stock and could also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that we deem appropriate. This could adversely affect our ability to fund our current and future obligations. See "Shares Eligible For Future Sale". "Demand" rights enable the holders to demand that their shares be registered and may require us to file a registration statement under the Securities Act at our expense. "Piggyback" rights provide for notice to the relevant holders of our stock if we propose to register any of our securities under the Securities Act, and grant such holders the right to include their shares in the registration statement. Shares of Class A common stock not held by our affiliates will be freely saleable at the end of the relevant restricted period pursuant to Rule 144 of the Securities Act. YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION RESULTING IN YOUR STOCK BEING WORTH LESS ON A NET TANGIBLE BOOK VALUE BASIS THAN THE AMOUNT YOU INVESTED. Purchasers of the Class A common stock offered hereby will experience an immediate dilution in net tangible book value of $75.50 per share of Class A common stock purchased. Accordingly, in the event we are liquidated, investors may not receive the full amount of their investment. See "Dilution". 36
40 FORWARD-LOOKING STATEMENTS This prospectus 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. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this prospectus are set forth under the caption "Risk Factors" and elsewhere in this prospectus and include, but are not limited to: - our plans to achieve growth by offering new products and services and through acquisitions; - our anticipated capital expenditures for our planned upgrades and the ability to fund these expenditures; - our failure to obtain financing sufficient to complete our pending acquisitions and related obligations; - our beliefs regarding the effects of governmental regulation on our business; - our ability to effectively compete in a highly competitive environment; and - our expectations to be ready for any year 2000 problem. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by those cautionary statements. 37
41 USE OF PROCEEDS We estimate that the net proceeds from our sale of 170,000,000 shares of Class A common stock will be $2.94 billion, after deducting underwriting discounts. This assumes an initial public offering price of $18.00 per share, which is the mid-point of the range appearing on the cover page of this prospectus. The estimated offering expenses of approximately $40 million will be paid by Charter Communications Holding Company. If the underwriters exercise their over-allotment option in full, we estimate that the net proceeds from our sale of 195,500,000 shares will be $3.38 billion. In addition, concurrently with the closing of the offering, Charter Communications Holding Company will receive proceeds of $750 million from an equity purchase by Mr. Allen, through Vulcan Cable III Inc., for membership units at a purchase price per membership unit equal to the net initial public offering price per share, which is the initial public offering price less the underwriting discount. Concurrently with the closing of the offering, Charter Communications, Inc. will contribute to Charter Communications Holding Company the net proceeds of the offering, except for a portion of the proceeds which will be retained by Charter Communications, Inc. to acquire a portion of the equity interests in the Avalon acquisition. Charter Communications, Inc. has committed to contribute these equity interests to Charter Communications Holding Company. In exchange for the contribution of the net proceeds of the offering by Charter Communications, Inc. and Charter Communications, Inc.'s obligation to contribute to Charter Communications Holding Company equity interests acquired in connection with the Avalon acquisition, Charter Communications Holding Company will issue to Charter Communications, Inc. 170,000,000 membership units concurrently with the closing of the offering. See "Description of Capital Stock and Membership Units -- Membership Units". The membership units of Charter Communications Holding Company acquired by Charter Communications, Inc. will represent an approximate 31% equity interest in Charter Communications Holding Company. If the underwriters exercise their over-allotment option in full, this percentage would be approximately 34%. The price per membership unit to be acquired by Charter Communications, Inc. will be equal to the net initial public offering price per share. Charter Communications Holding Company will use the cash proceeds from the sale of the membership units to Charter Communications, Inc., together with the proceeds from the $750 million equity purchase described above, to pay a portion of the cash purchase prices of the pending acquisitions. These sources, together with other currently available sources, will not be sufficient to consummate these acquisitions, and we will require additional financing. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Acquisitions" and the accompanying sources and uses table for more information. We expect, but cannot guarantee, that these acquisitions will be completed by the end of the first quarter of 2000. See "Business -- Acquisitions" for further information on these acquisitions. 38
42 Pending Charter Communications Holding Company's use of the net proceeds of this offering as described above, we may invest the funds in appropriate short-term investments as determined by us or repay amounts outstanding under Charter Operating's revolving credit facilities. DIVIDEND POLICY We do not expect to pay any cash dividends on our Class A common stock in the foreseeable future. Charter Communications Holding Company is required under certain circumstances to pay distributions pro rata to all its common members to the extent necessary for any common member to pay taxes incurred with respect to its share of taxable income attributed to Charter Communications Holding Company. Covenants in the indentures and credit agreements governing the indebtedness of Charter Communications Holding Company's subsidiaries restrict their ability to make distributions to us and, accordingly, limit our ability to declare or pay cash dividends. We intend to cause Charter Communications Holding Company and its subsidiaries to retain future earnings, if any, to finance the expansion of the business of Charter Communications Holding Company and its subsidiaries. 39
43 CAPITALIZATION The following table sets forth as of June 30, 1999 on a consolidated basis: - the actual capitalization of Charter Communications Holding Company; - the pro forma capitalization of Charter Communications, Inc., assuming that as of June 30, 1999: (1) Mr. Allen, through Vulcan Cable III Inc., had made a total equity contribution of $1.325 billion to Charter Communications Holding Company for membership units at a price per membership unit of $20.73; (2) Mr. Allen, through Vulcan Cable III Inc., had purchased membership units from Charter Communications Holding Company for $750 million at a price per membership unit equal to the net initial public offering price per share; (3) all acquisitions closed since June 30, 1999 and all of our pending acquisitions, including the completion of the swap transaction agreed in the InterMedia acquisition, had been completed and the credit facilities committed for Falcon had closed; (4) all of the Helicon and Rifkin notes had been called or repurchased through tender offers; (5) the Avalon notes had not been put to us as permitted under the change of control provisions in the indentures for these notes. Because the Avalon notes are puttable to us, they have been classified as short-term debt. We assume that we will repurchase all of the Falcon and Bresnan notes and debentures at a price equal to 101% of their aggregate principal amounts, plus accrued interest, or their accreted value, as applicable. The repurchase of the Falcon notes is expected to be financed by a bridge loan facility for which we have received a commitment. However, due to the closing conditions of the Falcon bridge loan facility that are outside of our control, we have classified the debt as short-term; (6) $169 million of the Avalon purchase price and $875 million of the Fanch purchase price had been funded with new credit facilities at these entities. However, due to closing conditions of those credit facilities that are outside of our control, we have classified the debt as short-term; (7) no membership units in Charter Communications Holding Company had been exchanged for Class A or Class B common stock of Charter Communications, Inc.; (8) the Bresnan acquisition and related obligations had been funded with additional debt of $1.7 billion, consisting of borrowings under credit facilities at Bresnan that have not yet been arranged. Accordingly, this debt is classified as short-term; and 40
44 (9) none of the options to purchase membership units granted under the Charter Communications Holding Company option plan or granted to our chief executive officer had been exercised. - the pro forma as adjusted capitalization of Charter Communications, Inc. to reflect: (1) the issuance and sale by Charter Communications, Inc. of the shares of Class A common stock offered in this prospectus for net proceeds of $2.9 billion, after deducting underwriting discounts and estimated offering expenses totaling $162 million, of which approximately $40 million will be paid by Charter Communications Holding Company; (2) an initial public offering price per share of $18.00, which is the mid-point of the range appearing on the cover page of this prospectus; (3) the issuance and sale by Charter Communications, Inc. of 50,000 shares of high vote Class B common stock to Mr. Allen for proceeds of $0.9 million; and (4) the purchase by Charter Communications, Inc. of 170.05 million membership units in Charter Communications Holding Company resulting in the consolidation of Charter Communications Holding Company by Charter Communications, Inc. This table should be read in conjunction with the "Unaudited Pro Forma Financial Statements" and the accompanying notes included elsewhere in this prospectus. See also "Use of Proceeds". 41
45 AS OF JUNE 30, 1999 ---------------------------------------------- CHARTER COMMUNICATIONS CHARTER COMMUNICATIONS, INC. HOLDING ---------------------------- COMPANY PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------------- ------------ ------------ (DOLLARS IN THOUSANDS) Current liabilities: Notes -- Avalon(a).............................. -- 346,000 346,000 8% liability to Falcon sellers(b)............... -- 425,000 425,000 8% liability to Rifkin sellers(b)............... -- 133,312 133,312 8% liability to Bresnan sellers(b).............. -- 1,000,000 1,000,000 Bridge loan facility -- Falcon(c)............... -- 705,687 705,687 Pending acquisitions payable(d)................. -- 2,898,500 -- Credit facilities(e)............................ -- 1,044,000 1,044,000 Other(f)........................................ -- 1,715,267 1,715,267 ---------- ----------- ----------- -- 8,267,666 5,369,266 Net unamortized discount........................ -- (67,375) (67,375) ---------- ----------- ----------- Total current liabilities(g)................. -- 8,200,391 5,301,891 ---------- ----------- ----------- Long-term debt: Credit facilities(h)............................ 2,025,000 4,640,156 4,640,156 8.250% senior notes -- Charter Holdings......... 600,000 600,000 600,000 8.625% senior notes -- Charter Holdings......... 1,500,000 1,500,000 1,500,000 9.920% senior discount notes -- Charter Holdings..................................... 1,475,000 1,475,000 1,475,000 10% senior discount notes -- Renaissance........ 114,413 114,413 114,413 Other(i)........................................ 1,010 26,010 26,010 ---------- ----------- ----------- 5,715,423 8,355,579 8,355,579 Net unamortized discount..................... (581,113) (581,113) (581,113) ---------- ----------- ----------- Total long-term debt......................... 5,134,310 7,774,466 7,774,466 ---------- ----------- ----------- Members' equity(j)................................ 3,204,122 5,279,122 -- ---------- ----------- ----------- Minority interest(j)(k)........................... -- -- 5,368,064 ---------- ----------- ----------- Stockholders' equity: Class A common stock; $.001 par value; 1.5 billion shares authorized; 170 million shares issued and outstanding on a pro forma basis........................................ -- -- 170 Class B common stock; $.001 par value; 750 million shares authorized; 50,000 shares issued and outstanding on a pro forma basis........................................ -- -- -- Preferred stock; $.001 par value; 250 million shares authorized; no shares issued and outstanding.................................. -- -- -- Additional paid-in capital...................... -- 2,809,388 ---------- ----------- ----------- Total stockholders' equity(k)(l)............. -- -- 2,809,558 ---------- ----------- ----------- Total capitalization.................... $8,338,432 $21,253,979 $21,253,979 ========== =========== =========== - --------------- (a) Consists of 9.375% senior subordinated notes of $150 million and 11.875% senior discount notes of $196 million, which are puttable to us based on change of control provisions. (b) This represents the potential obligations to repurchase the equity interests issued to Rifkin, Falcon and Bresnan sellers arising from possible violations of Section 5 of the Securities Act. We have 42
46 classified these obligations as short-term debt because these obligations could be put to us as unsecured creditor claims. (c) The Falcon bridge loan facility has an average variable interest rate of 10.04% per year, with total borrowing capacity of $750 million. Proceeds will be used to repurchase the Falcon notes and debentures that are put to us under applicable change of control provisions. (d) Pending acquisitions payable represents a portion of the purchase prices of the pending acquisitions to be funded by the proceeds of the offering. (e) Credit facilities consist of $169.0 million of bank debt at Avalon and $875.0 million of bank debt at Fanch. (f) Pro forma as adjusted represents $1.7 billion of additional debt that we expect to raise prior to the closing of the Bresnan acquisition to fund a portion of the purchase price of this acquisition. (g) Pro forma as adjusted represents our $5.3 billion estimated shortfall. This shortfall could further increase by $0.1 billion if we were required to pay InterMedia such amount for a cable system that we did not transfer in our swap with InterMedia because the necessary regulatory approvals were still pending. If we are unable to arrange additional financing to fund the amounts described in this note (g) and in notes (a), (b), (c), (e) and (f) above, we may be unable to close our pending acquisitions and could be in default under one or more other obligations. If we are so in default, the relevant sellers or creditors could initiate legal proceedings against us, including under bankruptcy and reorganization laws, for any damages they suffer as a result of our non-performance. Any such action could trigger defaults under our other obligations, including our credit facilities and debt instruments. (h) Pro forma and pro forma as adjusted credit facilities consist of $3.6 billion of existing credit facilities at Charter Operating and $1.0 billion of committed credit facilities at Falcon. (i) Represents the notes of certain subsidiaries of Charter Communications Holding Company and preferred equity interests issued in the Helicon acquisition. (j) Minority interest represents total members' equity of Charter Communications Holding Company multiplied by 66% (pro forma as adjusted), the estimated ownership percentages of Charter Communications Holding Company not held by Charter Communications, Inc. See "Unaudited Pro Forma Financial Statements". Pro forma members' equity includes additional equity contributions to Charter Communications Holding Company by Mr. Allen, through Vulcan Cable III Inc., of $2.075 billion. Gains (losses) arising from issuances by Charter Communications Holding Company of its membership units will be recorded as capital transactions in our consolidated financial statements thereby increasing (decreasing) our total stockholders' equity. (k) Approximately 66% of the membership units of Charter Communications Holding Company are exchangeable for Class A and Class B common stock of Charter Communications, Inc. at the option of the equity holders. We assume in this table that none of these membership units are exchanged for Charter Communications, Inc. common stock. If all equity holders in Charter Communications Holding Company exchanged all of their membership units for common stock, total stockholders' equity would increase by $5.4 billion and minority interest would decrease by $5.4 billion. (l) Assuming the underwriters' option to purchase additional shares of Class A common stock is exercised and the net proceeds are used to purchase approximately an additional 3% of the membership units of Charter Communications Holding Company, total stockholders' equity would increase by $428.5 million. 43
47 DILUTION The following table illustrates the dilution in pro forma net tangible book value (total tangible assets less total liabilities) on a per share basis. In calculating the dilution, we have made the same assumptions that we made with respect to our unaudited pro forma financial statements. We have also assumed the issuance of 170 million shares of Class A common stock offered in this prospectus and the purchase of 50,000 shares of Class B common stock by Mr. Allen. Assumed initial public offering price per share...................... $ 18.00 Pro forma net tangible book value per share at June 30, 1999................................................... $(38.99) Decrease in pro forma net tangible book value per share attributable to new investors purchasing shares in the offering............................................... (18.51) ------- Pro forma net tangible book value per share after the offering(a).... (57.50) ------- Pro forma dilution per share to new investors(b)..................... $ 75.50 ======= - --------------- (a) Represents pro forma total stockholders' equity of $2.8 billion less intangible assets of $12.6 billion divided by pro forma shares outstanding of 170,050,000. (b) Assuming the exercise of the underwriters' over-allotment option, pro forma dilution per share to new investors would be $65.75. The table above and related discussion assumes no exercise of any options to purchase membership units exchangeable for common stock of Charter Communications, Inc. As of October 15, 1999, there were options outstanding to purchase 16,250,408 Charter Communications Holding Company membership units at exercise prices ranging from $20.00 to $20.73 per unit. Membership units received upon exercise of these options will be automatically exchanged for shares of Class A common stock on a one-for-one basis. To the extent that all of these options are exercised, no additional pro forma dilution per share to the new investors would occur. The following table summarizes the relative investment in Charter Communications, Inc. by the existing holders of Charter Communications, Inc. common stock and by the investors in the offering, giving pro forma effect to the offering and treating all exchangeable membership units of Charter Communications Holding Company as common stock of Charter Communications, Inc. SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ---------------------- --------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ----------- ------- ---------- ------- --------- (IN THOUSANDS) Existing holders...................... 324,955,052 66% $5,633,200 65% $17.34 New investors......................... 170,000,000 34% 3,060,000 35% 18.00 ----------- --- ---------- --- Total....................... 494,955,052 100% $8,693,200 100% =========== === ========== === 44
48 UNAUDITED PRO FORMA FINANCIAL STATEMENTS The following Unaudited Pro Forma Financial Statements of Charter Communications, Inc. are based on the pro forma financial statements of Charter Communications Holding Company. Prior to the issuance and sale by Charter Communications, Inc. of Class A common stock in the offering, Charter Communications, Inc. is a holding company with no material assets or operations. The net proceeds from the initial public offering will be used to purchase membership units in Charter Communications Holding Company, including a controlling voting interest. As a result, Charter Communications, Inc. will consolidate the financial statements of Charter Communications Holding Company. Our consolidated financial statements will include the assets and liabilities of Charter Communications Holding Company at their historical carrying values since both Charter Communications, Inc. and Charter Communications Holding Company are under the control of Mr. Allen before and after the offering. Since January 1, 1999, Charter Communications Holding Company has closed numerous acquisitions and has several pending acquisitions. In addition, a subsidiary of Charter Communications Holding Company merged with Marcus Holdings in April 1999. Our financial statements, on a consolidated basis with Charter Communication Holding Company, are adjusted on a pro forma basis to illustrate the estimated effects of pending acquisitions and acquisitions closed since June 30, 1999 as if such transactions had occurred on June 30, 1999 for the Unaudited Pro Forma Balance Sheet and to illustrate the estimated effects of the following transactions as if they had occurred on January 1, 1998 for the Unaudited Pro Forma Statements of Operations: (1) the acquisition of Charter Communications Holding Company on December 23, 1998 by Mr. Allen; (2) the acquisition of certain cable systems from Sonic Communications Inc. on May 20, 1998 by Charter Communications Holding Company for an aggregate purchase price net of cash acquired, of $228.4 million, comprised of $167.5 million in cash and $60.9 million in a note payable to the seller; (3) the acquisition of Marcus Cable by Mr. Allen and Marcus Holdings' merger with and into Charter Holdings effective March 31, 1999; (4) the acquisitions and dispositions during 1998 by Marcus Cable; (5) Charter Communications Holding Company's and its subsidiaries' acquisitions completed since January 1, 1999 and pending acquisitions; and (6) the refinancing of all the debt of our subsidiaries through the issuance of notes and funding under our credit facilities. The Unaudited Pro Forma Financial Statements also illustrate the estimated effects of the issuance and sale by us of 170 million shares of Class A common stock using an initial offering price of $18.00, after deducting underwriting discounts and estimated offering expenses, and the equity contribution of the net proceeds to Charter Communications Holding Company. We have assumed that the underwriters have not exercised their over-allotment option and none of the options to purchase membership units granted under the Charter Communications Holding Company option plan or granted to our chief executive officer have been exercised. We have assumed the net proceeds would purchase 45
49 170 million common membership units in Charter Communications Holding Company, representing a 44% economic interest and a 100% voting interest, prior to the equity contributions from Mr. Allen and the closing of any of the pending acquisitions. Prior to the initial public offering, Charter Investment, Inc. owned approximately 217.6 million common membership units of Charter Communications Holding Company. After considering additional membership units issued by Charter Communications Holding Company to Mr. Allen, through Vulcan Cable III Inc., and to the sellers of Falcon and Bresnan, the economic interest held by Charter Communications, Inc. in Charter Communications Holding Company is reduced to 31%. Based on the terms of the agreements with the sellers of Falcon and Bresnan, we estimate they will receive 16.4 million and 37.1 million membership units, respectively, at a price per membership unit of $25.90 and $26.98, respectively. The number of membership units could vary based on the value of Charter Communications Holding Company at the closing of the acquisitions; however, we believe the effects of any change in this number of membership units would not have a material impact on the Unaudited Pro Forma Financial Statements. Because of possible violations of Section 5 of the Securities Act, the holders of these equity interests may have unsecured creditor rights to require us to repurchase all of these equity interests in connection with the issuance of membership units to the Falcon and Bresnan sellers. We have classified these potential obligations as short-term debt in the Unaudited Pro Forma Financial Statements. Accordingly, we have increased Charter Communications, Inc.'s equity interest in Charter Communications Holding Company to 34%. Mr. Allen will receive 43.4 million membership units for the $750 million equity investment he is making at the time of the offering. Prior to the initial public offering Mr. Allen contributed $1.325 billion and received 63.9 million membership units. As such, the consolidated pro forma financial statements of Charter Communications, Inc. reflect a minority interest equal to 66% of the equity of Charter Communications Holding Company after the investment by Charter Communications, Inc. and depict 66% of the net losses applicable to the common members of Charter Communications Holding Company being allocated to the minority interest. The Unaudited Pro Forma Financial Statements reflect the application of the principles of purchase accounting to the transactions listed in items (1) through (5) above. The allocation of purchase price is based, in part, on preliminary information which is subject to adjustment upon obtaining complete valuation information of intangible assets. We believe that finalization of the purchase price will not have a material impact on the results of operations or financial position of Charter Communications, Inc. or Charter Communications Holding Company. The unaudited pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. In particular, the pro forma adjustments assume the following: - We will transfer to InterMedia the Indiana cable system that was retained at the time of the InterMedia closing pending receipt of necessary regulatory approvals. - The holders of the public notes and debentures of Avalon will not require us to repurchase these notes and debentures as required by change of control provisions in the indentures for these notes and debentures. We will repurchase the Falcon 46
50 and the Bresnan notes at a price equal to 101% of the aggregate principal amount, plus accrued interest. The repurchase of the Falcon notes is expected to be financed by a bridge loan for which we have received a commitment. However, due to closing conditions of the bridge loan facility that are outside of our control, we have classified the debt as short-term. - A portion of the Fanch and Avalon purchase prices had been funded with new credit facilities at these entities. However, due to closing conditions of these credit facilities that are outside our control, we have classified the debt as short-term. - We will pay $425 million of Falcon's purchase price in the form of membership units in Charter Communications Holding Company. A portion of the purchase price, ranging from a minimum with an estimated value of $425 million to a maximum with a fixed value of $550 million, will be payable in the form of membership units in Charter Communications Holding Company. The exact minimum amount of purchase price payable in membership units will be determined by reference to a formula in the Falcon acquisition purchase agreement. The Falcon sellers have the right to determine the amount of the purchase price payable in membership units within the minimum and maximum range. - As of the closing of the offering, approximately 66% of the membership units of Charter Communications Holding Company will be exchangeable for Class A and Class B common stock of Charter Communications, Inc. at the option of the holders. We assume none of these membership units are exchanged for Charter Communications, Inc.'s common stock. - We will fund the Bresnan acquisition and related obligations with additional debt of $1.7 billion with an assumed interest rate of 10%. The 10% rate is a current market rate approximating the rate on debt similar to our 9.92% senior discount notes issued in March 1999. These additional funds have not been arranged. We have classified this shortfall as short-term debt. The estimated impacts of alternative outcomes of the events described above are disclosed in the notes to the Unaudited Pro Forma Financial Statements. We plan to fund the Avalon, Fanch and Falcon acquisitions with the proceeds of the offering, Mr. Allen's equity contribution through Vulcan Cable III Inc., borrowings under committed credit facilities and equity issued to specified sellers in the Falcon acquisition. If the new Fanch and Avalon credit facilities do not close as anticipated, we will need to arrange other sources of financing to consummate these acquisitions. We can not assure you that alternate financing sources will be available. We may as a result be unable to consummate these acquisitions and may be in default under the related acquisition agreements. We plan to fund any repurchases of Falcon debentures and notes that are put to us with borrowings under the committed Falcon bridge loan facility, or other debt financing if available. If we do not obtain funding under the Falcon bridge loan facility or other debt financing, we may be in default under the Falcon debentures and notes that we may be required to repurchase. 47
51 Available and committed sources of funds will not be sufficient to consummate our pending acquisitions and fund related obligations. In connection with our acquisitions, we may need to raise additional amounts up to a total of approximately $5.41 billion. We will need to raise approximately $1.72 billion by borrowing under credit facilities at Bresnan that have not yet been arranged and/or by issuing debt or equity securities of Charter Communications, Inc. or Charter Communications Holding Company to fund: - approximately $0.87 billion of the Bresnan purchase price; - approximately $0.50 billion in outstanding Bresnan credit facility borrowings that we would have to repay if we are unable to assume and amend the existing Bresnan credit facilities; and - approximately $0.35 billion in Bresnan notes that we expect to be put to us in connection with required change of control offers for these notes. In addition, we will have to raise approximately $3.69 billion of additional financing if we are required to pay: - approximately $0.71 billion to repurchase outstanding notes of Falcon if committed bridge loan financing does not close; - approximately $0.17 billion if the Avalon credit facilities do not close; - approximately $0.88 billion if the Fanch credit facilities do not close; - approximately $0.27 billion to repurchase outstanding notes of Avalon; - approximately $1.57 billion to repurchase equity interests issued or to be issued to specified sellers in connection with a number of our acquisitions because of possible violations of Section 5 of the Securities Act of 1933; and - approximately $0.09 billion to InterMedia if we do not obtain timely regulatory approvals for our transfer to InterMedia of an Indiana cable system and we are unable to transfer replacement systems. We cannot assure you that we will be able to raise the financing necessary to consummate our pending acquisitions and to satisfy the obligations described above. If we are unable to raise the financing necessary to satisfy any or all of these obligations, we may be unable to close our pending acquisitions and could be in default under one or more other obligations. In any such case, the relevant sellers or creditors could initiate legal proceedings against us, including under bankruptcy and reorganization laws, for any damages they suffer as a result of our non-performance. Any such action could trigger defaults under our other obligations, including our credit facilities and debt instruments. The Unaudited Pro Forma Financial Statements of Charter Communications, Inc. do not purport to be indicative of what our financial position or results of operations would actually have been had the transactions described above been completed on the dates indicated or to project our results of operations for any future date. 48
52 UNAUDITED PRO FORMA STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1999 ------------------------------ CHARTER COMMUNICATIONS HOLDING RECENT PENDING COMPANY (NOTE ACQUISITIONS ACQUISITIONS A) ----------- (NOTE B) --- SUBTOTAL - (NOTE B) ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues..................... $ 594,173 $ 315,541 $ 909,714 $ 522,334 ---------- --------- ---------- ---------- Operating expenses: Operating, general and administrative........... 310,325 160,519 470,844 267,170 Depreciation and amortization............. 313,621 161,876 475,497 361,952 Stock option compensation expense.................. 38,194 -- 38,194 -- Corporate expense charges (Note E)................. 11,073 20,059 31,132 16,595 Management fees............ -- 5,572 5,572 3,168 ---------- --------- ---------- ---------- Total operating expenses............... 673,213 348,026 1,021,239 648,885 ---------- --------- ---------- ---------- Loss from operations......... (79,040) (32,485) (111,525) (126,551) Interest expense............. (183,869) (114,588) (298,457) (255,682) Interest income.............. 10,189 456 10,645 788 Other income (expense)....... 2,682 (905) 1,777 (15) ---------- --------- ---------- ---------- Income (loss) before minority interest................... (250,038) (147,522) (397,560) (381,460) Minority interest............ -- -- -- -- ---------- --------- ---------- ---------- Loss before extraordinary item....................... $ (250,038) $(147,522) $ (397,560) $ (381,460) ========== ========= ========== ========== Basic loss per share (Note F)......................... Diluted loss per share (Note F)......................... Weighted average shares outstanding: Basic...................... Diluted.................... OTHER FINANCIAL DATA: EBITDA (Note G).............. $ 237,263 $ 128,486 $ 365,749 $ 235,386 EBITDA margin (Note H)....... 39.9% 40.7% 40.2% 45.1% Adjusted EBITDA (Note I)..... $ 283,848 $ 155,022 $ 438,870 $ 255,164 Cash flows from operating activities................. 172,770 89,238 262,008 189,042 Cash flows used in investing activities................. (271,191) (111,785) (382,976) (67,411) Cash flows from (used in) financing activities....... 207,131 188,571 395,702 455,277 Cash interest expense........ Capital expenditures......... 262,507 101,127 363,634 116,268 OPERATING DATA (AT END OF PERIOD, EXCEPT FOR AVERAGES): Homes passed (Note J)........ 4,509,000 1,446,000 5,955,000 3,793,000 Basic customers (Note K)..... 2,734,000 969,000 3,703,000 2,463,000 Basic penetration (Note L)... 60.6% 67.0% 62.2% 64.9% Premium units (Note M)....... 1,676,000 543,000 2,219,000 856,000 Premium penetration (Note N)......................... 61.3% 56.0% 59.9% 34.8% Average monthly revenue per basic customer (Note O).... UNAUDITED PRO FORMA STATEMENT OF OPERATIONS ---------------------------------------- REFINANCING OFFERING ADJUSTMENTS ADJUSTMENTS (NOTE C) -- (NOTE D) -- TOTAL ------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues..................... $ -- $ -- $ 1,432,048 -------- -------- ------------ Operating expenses: Operating, general and administrative........... -- -- 738,014 Depreciation and amortization............. -- -- 837,449 Stock option compensation expense.................. -- -- 38,194 Corporate expense charges (Note E)................. -- -- 47,727 Management fees............ -- -- 8,740 -------- -------- ------------ Total operating expenses............... -- -- 1,670,124 -------- -------- ------------ Loss from operations......... -- -- (238,076) Interest expense............. 4,300 -- (549,839) Interest income.............. -- -- 11,433 Other income (expense)....... -- -- 1,762 -------- -------- ------------ Income (loss) before minority interest................... 4,300 -- (774,720) Minority interest............ -- 508,552 508,552 -------- -------- ------------ Loss before extraordinary item....................... $ 4,300 $508,552 $ (266,168) ======== ======== ============ Basic loss per share (Note F)......................... $(1.57) ============ Diluted loss per share (Note F)......................... $(1.57) ============ Weighted average shares outstanding: Basic...................... 170,050,000 Diluted.................... 170,050,000 OTHER FINANCIAL DATA: EBITDA (Note G).............. $ 601,135 EBITDA margin (Note H)....... 42.0% Adjusted EBITDA (Note I)..... $ 694,034 Cash flows from operating activities................. 451,050 Cash flows used in investing activities................. (450,387) Cash flows from (used in) financing activities....... 850,979 Cash interest expense........ 401,319 Capital expenditures......... 479,902 OPERATING DATA (AT END OF PERIOD, EXCEPT FOR AVERAGES): Homes passed (Note J)........ 9,748,000 Basic customers (Note K)..... 6,166,000 Basic penetration (Note L)... 63.3% Premium units (Note M)....... 3,075,000 Premium penetration (Note N)......................... 49.9% Average monthly revenue per basic customer (Note O).... $ 38.71 49
53 NOTES TO UNAUDITED PRO FORMA STATEMENT OF OPERATIONS NOTE A: Pro forma operating results for Charter Communications Holding Company consist of the following (dollars in thousands): HISTORICAL ------------------------------ 1/1/99 THROUGH 1/1/99 6/30/99 THROUGH CHARTER 3/31/99 COMMUNICATIONS MARCUS PRO FORMA HOLDING COMPANY HOLDINGS(A) ADJUSTMENTS TOTAL --------------- ----------- ----------- --------- Revenues............................................... $ 468,993 $125,180 $ -- $ 594,173 --------- -------- ------- --------- Operating expenses: Operating, general and administrative................ 241,341 68,984 -- 310,325 Depreciation and amortization........................ 249,952 51,688 11,981(b) 313,621 Stock option compensation expense.................... 38,194 -- -- 38,194 Corporate expense charges............................ 11,073 -- -- 11,073 Management fees...................................... -- 4,381 (4,381)(c) -- --------- -------- ------- --------- Total operating expenses........................... 540,560 125,053 7,600 673,213 --------- -------- ------- --------- Income (loss) from operations.......................... (71,567) 127 (7,600) (79,040) Interest expense....................................... (157,669) (27,067) 867(d) (183,869) Interest income........................................ 10,085 104 -- 10,189 Other income (expense)................................. 2,840 (158) -- 2,682 --------- -------- ------- --------- Loss before extraordinary item......................... $(216,311) $(26,994) $(6,733) $(250,038) ========= ======== ======= ========= - --------------- (a) Marcus Holdings represents the results of operations of Marcus Holdings through March 31, 1999, the date of its merger with Charter Holdings. (b) As a result of Mr. Allen acquiring a controlling interest in Marcus Cable, a large portion of the purchase price was recorded as franchises ($2.5 billion) that are amortized over 15 years. This resulted in additional amortization for the period from January 1, 1999 through March 31, 1999. The adjustment to depreciation and amortization expense consists of the following (dollars in millions): WEIGHTED AVERAGE USEFUL LIFE DEPRECIATION/ FAIR VALUE (IN YEARS) AMORTIZATION ---------- ---------------- ------------- Franchises.................................................. $2,500.0 15 $ 40.8 Cable distribution systems.................................. 720.0 8 21.2 Land, buildings and improvements............................ 28.3 10 0.7 Vehicles and equipment...................................... 13.6 3 1.0 ------ Total depreciation and amortization....................... 63.7 Less -- historical depreciation and amortization of Marcus Cable................................................... (51.7) ------ Adjustment.............................................. $ 12.0 ====== (c) Reflects the elimination of management fees. (d) As a result of the acquisition of Marcus Cable by Mr. Allen, the carrying value of outstanding debt was recorded at estimated fair value, resulting in a debt premium that is to be amortized as an offset to interest expense over the term of the debt. This resulted in a reduction of interest expense. 50
54 NOTE B: Pro forma operating results for our recent acquisitions and pending acquisitions consist of the following (dollars in thousands): SIX MONTHS ENDED JUNE 30, 1999 RECENT ACQUISITIONS -- HISTORICAL -------------------------------------------------------------------------------------------- GREATER AMERICAN MEDIA INTERMEDIA TOTAL RENAISSANCE(A) CABLE(A) SYSTEMS HELICON RIFKIN(A) SYSTEMS OTHER RECENT -------------- -------- ------- -------- --------- ---------- ------- -------- Revenues............................ $20,396 $12,311 $42,348 $ 42,956 $105,592 $100,644 $ 9,157 $333,404 ------- ------- ------- -------- -------- -------- ------- -------- Operating expenses: Operating, general and administrative.................. 9,382 6,465 26,067 26,927 60,458 55,248 4,921 189,468 Depreciation and amortization..... 8,912 5,537 5,195 13,584 54,250 52,309 2,919 142,706 Management fees................... -- 369 -- 2,148 1,701 1,566 298 6,082 ------- ------- ------- -------- -------- -------- ------- -------- Total operating expenses........ 18,294 12,371 31,262 42,659 116,409 109,123 8,138 338,256 ------- ------- ------- -------- -------- -------- ------- -------- Income (loss) from operations....... 2,102 (60) 11,086 297 (10,817) (8,479) 1,019 (4,852) Interest expense.................... (6,321) (3,218) (565) (15,831) (23,781) (11,757) (1,653) (63,126) Interest income..................... 122 32 -- 105 -- 163 -- 422 Other income (expense).............. -- 2 (398) -- -- (6) (30) (432) ------- ------- ------- -------- -------- -------- ------- -------- Income (loss) before income tax expense........................... (4,097) (3,244) 10,123 (15,429) (34,598) (20,079) (664) (67,988) Income tax expense.................. (65) 5 4,535 -- (1,239) (2,690) -- 546 ------- ------- ------- -------- -------- -------- ------- -------- Income (loss) before extraordinary item.............................. $(4,032) $(3,249) $5,588 $(15,429) $(33,359) $(17,389) $ (664) $(68,534) ======= ======= ======= ======== ======== ======== ======= ======== SIX MONTHS ENDED JUNE 30, 1999 PENDING ACQUISITIONS -- HISTORICAL ------------------------------------------------------ TOTAL AVALON FALCON FANCH(B) BRESNAN PENDING -------- --------- -------- -------- --------- Revenues.................................................... $ 51,769 $ 212,205 $98,931 $137,291 $ 500,196 -------- --------- ------- -------- --------- Operating expenses: Operating, general and administrative..................... 29,442 112,557 44,758 84,256 271,013 Depreciation and amortization............................. 22,096 110,048 32,303 26,035 190,482 Equity-based deferred compensation........................ -- 44,600 -- -- 44,600 Management fees........................................... -- -- 2,644 -- 2,644 -------- --------- ------- -------- --------- Total operating expenses................................ 51,538 267,205 79,705 110,291 508,739 -------- --------- ------- -------- --------- Income (loss) from operations............................... 231 (55,000) 19,226 27,000 (8,543) Interest expense............................................ (23,246) (64,852) (666) (31,941) (120,705) Interest income............................................. 708 -- 6 -- 714 Other income (expense)...................................... -- 9,970 89 (607) 9,452 -------- --------- ------- -------- --------- Income (loss) before income tax expense (benefit)........... (22,307) (109,882) 18,655 (5,548) (119,082) Income tax expense (benefit)................................ (1,362) (2,459) 118 -- (3,703) -------- --------- ------- -------- --------- Income (loss) before extraordinary item..................... $(20,945) $(107,423) $18,537 $ (5,548) $(115,379) ======== ========= ======= ======== ========= 51
55 SIX MONTHS ENDED JUNE 30, 1999 ------------------------------------------------------------------------ RECENT ACQUISITIONS ------------------------------------------------------------------------ PRO FORMA ----------------------------------------------------------- HISTORICAL ACQUISITIONS(C) DISPOSITIONS(D) ADJUSTMENTS TOTAL ---------- --------------- --------------- ----------- --------- Revenues........................ $333,404 $ 7,881 $(25,744) $ -- $ 315,541 -------- ------- -------- -------- --------- Operating expenses: Operating, general and administrative............... 189,468 4,147 (12,566) (20,530)(f) 160,519 Depreciation and amortization................. 142,706 1,075 (10,135) 28,230(g) 161,876 Equity-based deferred compensation................. -- -- -- -- -- Corporate expense charges...... -- -- -- 20,059(f) 20,059 Management fees................ 6,082 375 (885) -- 5,572 -------- ------- -------- -------- --------- Total operating expenses....... 338,256 5,597 (23,586) 27,759 348,026 -------- ------- -------- -------- --------- Income (loss) from operations... (4,852) 2,284 (2,158) (27,759) (32,485) Interest expense................ (63,126) (1,361) 4 (50,105)(i) (114,588) Interest income................. 422 34 -- -- 456 Other income (expense).......... (432) 5 (5) (473)(j) (905) -------- ------- -------- -------- --------- Income (loss) before income tax expense (benefit).............. (67,988) 962 (2,159) (78,337) (147,522) Income tax (benefit) expense.... 546 (114) -- (432)(k) -- -------- ------- -------- -------- --------- Income (loss) before extraordinary item............. $(68,534) $ 1,076 $ (2,159) $(77,905) $(147,522) ======== ======= ======== ======== ========= SIX MONTHS ENDED JUNE 30, 1999 ------------------------------------------------------------------------- PENDING ACQUISITIONS ------------------------------------------------------------------------- PRO FORMA ------------------------------------------------------------ HISTORICAL ACQUISITIONS(C) DISPOSITIONS(E) ADJUSTMENTS TOTAL ---------- --------------- --------------- ----------- --------- Revenues........................ $ 500,196 $29,378 $(7,240) $ -- $ 522,334 --------- ------- ------- --------- --------- Operating expenses: Operating, general and administrative............... 271,013 16,317 (3,565) (16,595)(f) 267,170 Depreciation and amortization................. 190,482 6,444 (3,524) 168,550(g) 361,952 Equity-based deferred compensation................. 44,600 -- -- (44,600)(h) -- Corporate expense charges...... -- -- -- 16,595(f) 16,595 Management fees................ 2,644 757 (233) -- 3,168 --------- ------- ------- --------- --------- Total operating expenses....... 508,739 23,518 (7,322) 123,950 648,885 --------- ------- ------- --------- --------- Income (loss) from operations... (8,543) 5,860 82 (123,950) (126,551) Interest expense................ (120,705) (567) 27 (134,437)(i) (255,682) Interest income................. 714 74 -- -- 788 Other income (expense).......... 9,452 48,844 (2,555) (55,756)(j) (15) --------- ------- ------- --------- --------- Income (loss) before income tax expense (benefit).............. (119,082) 54,211 (2,446) (314,143) (381,460) Income tax (benefit) expense.... (3,703) 97 -- 3,606(k) -- --------- ------- ------- --------- --------- Income (loss) before extraordinary item............. $(115,379) $54,114 $(2,446) $(317,749) $(381,460) ========= ======= ======= ========= ========= - --------------- (a) Renaissance represents the results of operations of Renaissance through April 30, 1999, the date of acquisition by Charter Communications Holding Company. American Cable represents the results of operations of American Cable through May 7, 1999, the date of acquisition by Charter Communications Holding Company. Rifkin includes the results of operations for the six months ended June 30, 1999 of Rifkin Acquisition Partners, L.L.L.P., Rifkin Cable Income Partners L.P., Indiana Cable Associates, Ltd. and R/N South Florida Cable Management Limited Partnership, all under common ownership as follows (dollars in thousands): RIFKIN RIFKIN INDIANA SOUTH ACQUISITION CABLE INCOME CABLE FLORIDA OTHER TOTAL ----------- ------------ ------- -------- ------- -------- Revenues........................... $ 48,584 $2,708 $ 4,251 $ 12,274 $37,775 $105,592 Income (loss) from operations...... (2,602) 166 (668) (9,214) 1,501 (10,817) Income (loss) before extraordinary item............................. (13,197) 69 (1,072) (10,449) (8,710) (33,359) (b) Fanch includes the results of operations for the six months ended June 30, 1999, of Fanch cable systems as follows (dollars in thousands): FANCH CABLE SYSTEMS OTHER TOTAL ----------- ------ ------- Revenues.................................................... $90,357 $8,574 $98,931 Income from operations...................................... 17,825 1,401 19,226 Income before extraordinary item............................ 17,929 608 18,537 (c) Represents the historical results of operations for the period from January 1, 1999 through the date of purchase for acquisitions completed by Rifkin, Fanch and Bresnan. 52
56 These acquisitions were accounted for using the purchase method of accounting. The purchase price in millions and closing dates for significant acquisitions are as follows: RIFKIN FANCH BRESNAN ACQUISITIONS ACQUISITIONS ACQUISITIONS ------------- ------------- ------------ Purchase price............................... $165.0 $42.2 $40.0 Closing date................................. February 1999 February 1999 January 1999 Purchase price............................... $53.8 $248.0 $27.0 Closing date................................. July 1999 February 1999 March 1999 Purchase price............................... $70.5 Closing date................................. March 1999 Purchase price............................... $50.0 Closing date................................. June 1999 (d) Represents the elimination of the operating results related to the cable systems transferred to InterMedia as part of a swap of cable systems in October 1999. The fair value of our systems transferred to InterMedia was $331.8 million. No material gain or loss is anticipated on the disposition as these systems were recently acquired and recorded at fair value at that time. (e) Represents the elimination of the operating results related to the Indiana cable system that we are required to transfer to InterMedia as part of a swap and to the sale of several smaller cable systems. A definitive written agreement exists for the disposition of the Indiana system. The fair value of the Indiana system is $88.2 million. No material gain or loss is anticipated on the disposition as this system was recently acquired and recorded at fair value at that time. (f) Reflects a reclassification of expenses representing corporate expenses that would have occurred at Charter Investment, Inc. (g) Represents additional amortization of franchises as a result of our recent and pending acquisitions. A large portion of the purchase price was allocated to franchises ($12.4 billion) that are amortized over 15 years. The adjustment to depreciation and amortization expense consists of the following (dollars in millions): WEIGHTED AVERAGE DEPRECIATION/ FAIR VALUE USEFUL LIFE AMORTIZATION ---------- ---------------- ------------- Franchises.......................................... $12,356.5 15 $400.2 Cable distribution systems.......................... 1,729.1 8 108.3 Land, buildings and improvements.................... 53.9 10 2.6 Vehicles and equipment.............................. 89.1 3 12.7 ------ Total depreciation and amortization............................................ 523.8 Less-historical depreciation and amortization.................................. (327.0) ------ Adjustment................................................................ $196.8 ====== (h) Reflects the elimination of an estimated $44.6 million of change in control payments under the terms of Falcon's equity-based compensation plans that are triggered by the acquisition of Falcon. These plans will be terminated by us and the employees will participate in our stock option plan. As such, these costs will not recur. (i) Reflects additional interest expense on borrowings, which will be used to finance the acquisitions as follows (dollars in millions): $1.6 billion credit facilities (at composite current rate of 7.4%)..................................................... $ 59.3 $114.4 million 10.0% senior discount notes ($82.6 million carrying value) -- Renaissance............................ 4.1 $150.0 million 9.375% senior subordinated notes -- Avalon... 7.0 $196.0 million 11.875% senior discount notes ($128.6 million carrying value) -- Avalon................................. 6.6 $1.0 billion credit facilities for Falcon acquisition (at composite current rate of 7.4%)........................... 37.4 $0.9 billion senior credit facilities for Fanch acquisition (at composite rate of 7.4%)............................... 32.4 $0.2 billion senior credit facilities for Avalon acquisition (at composite rate of 7.4%)............................... 6.2 $1.7 billion anticipated financing (at 10.0%)............... 85.7 $705.7 million 10.04% bridge loan facility -- Falcon........ 35.4 53
57 $1.0 billion 8% liability to sellers -- Bresnan............. 40.0 $425.0 million 8% liability to sellers -- Falcon............ 17.0 $133.3 million 8% liability to sellers -- Rifkin............ 5.3 Interest expense prior to acquisition: $381.1 million of credit facilities for Renaissance acquisition (acquired April 30, 1999) at composite current rate of 7.4%................................... 9.4 $240.0 million of credit facilities for American Cable acquisition (acquired May 7, 1999) at composite current rate of 7.4%........................................... 5.9 $500.0 million of credit facilities for Greater Media acquisition (acquired June 30, 1999) at composite current rate of 7.4%................................... 18.5 ------- Total pro forma interest expense....................... 370.2 Less-historical interest expense from acquired companies............................................. (185.7) ------- Adjustment........................................ $ 184.5 ======= The amounts shown above as liabilities to the Rifkin, Falcon and Bresnan sellers represent the possible obligations that we may owe to these sellers based on the possible violations of Section 5 of the Securities Act in connection with the issuance of equity interests to these sellers. The possible liability to the Falcon sellers would increase to $550 million if the Falcon sellers exercise their right to receive up to an additional $125 million of equity interests. We have assumed we will fund certain pending acquisitions prior to closing with additional financing of $1.7 billion. An interest rate of 10% reflects the anticipated borrowing rate available to Charter Communications Holding Company. An increase in the interest rate of 0.125% on this assumed debt would result in an increase in interest expense of $1.1 million. Should the Avalon notes be put to us based on change of control provisions and should we become obligated to purchase Rifkin, Falcon and Bresnan sellers' equity interests, the estimated shortfall would increase to $3.6 billion and interest expense will increase by $14.9 million. If we do not close on the Avalon credit facilities, the estimated shortfall would increase to $3.7 billion and interest expense will increase by $2.2 million. If we do not close on the Fanch credit facilities, the estimated shortfall would increase to $4.6 billion and interest expense will increase by $11.4 million. If we do not close on the Falcon bridge loan facility, the estimated shortfall would increase to $5.3 billion and interest expense would not change. Should we be required to pay InterMedia $0.1 billion for a system that we did not transfer in our swap with InterMedia because necessary regulatory approvals were still pending, interest expense would increase by $4.4 million. Principal approximates carrying value for all undiscounted debt. (j) Represents the elimination of gain (loss) on sale of cable television systems whose results of operations have been eliminated in (d) above. (k) Reflects the elimination of income tax expense (benefit) as a result of expected recurring future losses. The losses will not be tax benefited and no net deferred tax assets will be recorded. NOTE C: In March 1999, we extinguished substantially all of our long-term debt, excluding borrowings of our previous credit facilities, and refinanced all previous credit facilities. See "Capitalization". The refinancing adjustment of lower interest expense consists of the following (dollars in millions): INTEREST DESCRIPTION EXPENSE ----------- -------- $600 million 8.25% senior notes............................. $ 24.8 $1.5 billion 8.625% senior notes............................ 64.7 $1.475 billion ($932 million carrying value) 9.92% senior discount notes............................................ 45.4 Credit facilities ($652 million at composite current rate of 7.4%)..................................................... 24.9 Amortization of debt issuance costs......................... 7.8 Commitment fee on unused portion of our credit facilities ($1.6 billion at 0.375%).................................. 3.0 ------- Total pro forma interest expense.......................... 170.6 Less -- historical interest expense (net of Renaissance and American Cable interest expense consolidated in Charter Communications Holding Company)................ (174.9) ------- Adjustment............................................. $ (4.3) ======= 54
58 An increase in the interest rate of 0.125% on all variable rate debt would result in an increase in interest expense of $6.1 million. NOTE D: Represents the allocation of 66% of the net loss applicable to common members of Charter Communications Holding Company to the minority interest. NOTE E: Charter Investment, Inc. has provided corporate management and consulting services to Charter Operating. In connection with the offering, the existing management agreement will be assigned to Charter Communications, Inc. and Charter Communications, Inc. will enter into a new management agreement with Charter Communications Holding Company. See "Certain Relationships and Related Transactions". NOTE F: Basic loss per share assumes none of the membership units of Charter Communications Holding Company are exchanged for Charter Communications, Inc. common stock and none of the outstanding options to purchase membership units of Charter Communications Holding Company that will be automatically exchanged for Charter Communications, Inc. common stock are exercised. Basic loss per share equals the loss applicable to common equity holders divided by weighted average shares outstanding. If all of the membership units were exchanged or options exercised, the effects would be antidilutive. NOTE G: 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 television 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 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 EBITDA may be limited by working capital, debt service and capital expenditure requirements and by restrictions related to legal requirements, commitments and uncertainties. NOTE H: EBITDA margin represents EBITDA as a percentage of revenues. NOTE I: Adjusted EBITDA means EBITDA before stock option compensation expense, corporate expenses, management fees and other income (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. NOTE J: Homes passed are the number of living units, such as single residence homes, apartments and condominium units, passed by the cable television distribution network in a given cable system service area. NOTE K: Basic customers are customers who receive basic cable service. NOTE L: Basic penetration represents basic customers as a percentage of homes passed. NOTE M: Premium units represent the total number of subscriptions to premium channels. NOTE N: Premium penetration represents premium units as a percentage of basic customers. NOTE O: 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 June 30, 1999. 55
59 UNAUDITED PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 ----------------------------------------------------- CHARTER COMMUNI- CATIONS HOLDING RECENT COMPANY MARCUS ACQUISITIONS (NOTE A) (NOTE B) (NOTE C) SUBTOTAL ----------- ----------- ------------ ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE) Revenues.................................. $ 601,953 $ 457,929 $ 608,953 $1,668,835 ----------- ----------- --------- ---------- Operating expenses: Operating, general and administrative.... 304,555 236,595 307,447 848,597 Depreciation and amortization............ 370,406 258,348 335,799 964,553 Stock option compensation expense........ 845 -- -- 845 Corporate expense charges (Note F)....... 16,493 17,042 10,991 44,526 Management fees.......................... -- -- 14,668 14,668 ----------- ----------- --------- ---------- Total operating expenses.............. 692,299 511,985 668,905 1,873,189 ----------- ----------- --------- ---------- Loss from operations...................... (90,346) (54,056) (59,952) (204,354) Interest expense.......................... (204,770) (140,651) (271,450) (616,871) Other income (expense).................... 518 -- (5,825) (5,307) ----------- ----------- --------- ---------- Income (loss) before minority interest.... (294,598) (194,707) (337,227) (826,532) Minority interest......................... -- -- -- -- ----------- ----------- --------- ---------- Loss before extraordinary item............ $ (294,598) $ (194,707) $(337,227) $ (826,532) =========== =========== ========= ========== Basic loss per share (Note G)............. Diluted loss per share (Note G)........... Weighted average shares outstanding: Basic................................... Diluted................................. OTHER FINANCIAL DATA: EBITDA (Note H)........................... $ 280,578 $ 204,292 $ 270,022 $ 754,892 EBITDA margin (Note I).................... 46.6% 44.6% 44.3% 45.2% Adjusted EBITDA (Note J).................. $ 297,398 $ 221,334 $ 301.506 $ 820,238 Cash flows from operating activities...... 141,602 135,466 194,041 471,109 Cash flows used in investing activities... (206,607) (217,729) (233,161) (657,497) Cash flows from (used in) financing activities.............................. 210,306 109,924 23,252 343,482 Cash interest expense..................... Capital expenditures...................... 213,353 224,723 96,025 534,101 OPERATING DATA (AT END OF PERIOD, EXCEPT FOR AVERAGES): Homes passed (Note K)..................... 2,149,000 1,743,000 1,922,000 5,814,000 Basic customers (Note L).................. 1,255,000 1,061,000 1,325,000 3,641,000 Basic penetration (Note M)................ 58.4% 60.9% 68.9% 62.6% Premium units (Note N).................... 845,000 411,000 777,000 2,033,000 Premium penetration (Note O).............. 67.3% 38.7% 58.6% 55.8% Average monthly revenue per basic customer (Note P)................................ UNAUDITED PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------- PENDING REFINANCING OFFERING ACQUISITIONS ADJUSTMENTS ADJUSTMENTS (NOTE C) (NOTE D) (NOTE E) TOTAL ------------ ----------- ----------- ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE) Revenues.................................. $1,022,669 $ -- $ -- $ 2,691,504 ---------- ------ ---------- ------------ Operating expenses: Operating, general and administrative.... 511,118 -- -- 1,359,715 Depreciation and amortization............ 743,845 -- -- 1,708,398 Stock option compensation expense........ -- -- -- 845 Corporate expense charges (Note F)....... 37,090 -- -- 81,616 Management fees.......................... 6,135 -- -- 20,803 ---------- ------ ---------- ------------ Total operating expenses.............. 1,298,188 -- -- 3,171,377 ---------- ------ ---------- ------------ Loss from operations...................... (275,519) -- -- (479,873) Interest expense.......................... (457,586) 7,000 -- (1,067,457) Other income (expense).................... (5,637) -- -- (10,944) ---------- ------ ---------- ------------ Income (loss) before minority interest.... (738,742) 7,000 -- (1,558,274) Minority interest......................... -- 1,022,903 1,022,903 ---------- ------ ---------- ------------ Loss before extraordinary item............ $ (738,742) $7,000 $1,022,903 $ (535,371) ========== ====== ========== ============ Basic loss per share (Note G)............. $ (3.15) ============ Diluted loss per share (Note G)........... $ (3.15) ============ Weighted average shares outstanding: Basic................................... 170,050,000 Diluted................................. 170,050,000 OTHER FINANCIAL DATA: EBITDA (Note H)........................... 462,689 $ 1,217,581 EBITDA margin (Note I).................... 45.2% 45.2% Adjusted EBITDA (Note J).................. $ 511,551 $ 1,331,789 Cash flows from operating activities...... 254,086 725,195 Cash flows used in investing activities... (274,405) (931,902) Cash flows from (used in) financing activities.............................. 115,779 459,261 Cash interest expense..................... 772,124 Capital expenditures...................... 219,045 753,146 OPERATING DATA (AT END OF PERIOD, EXCEPT FOR AVERAGES): Homes passed (Note K)..................... 3,787,000 9,601,000 Basic customers (Note L).................. 2,453,000 6,094,000 Basic penetration (Note M)................ 64.8% 63.5% Premium units (Note N).................... 862,000 2,895,000 Premium penetration (Note O).............. 35.1% 47.5% Average monthly revenue per basic customer (Note P)................................ $ 36.81 56
60 NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS NOTE A: Pro forma operating results for Charter Communications Holding Company, including the acquisition of us on December 23, 1998 by Mr. Allen and the acquisition of Sonic Communications, Inc., consist of the following (dollars in thousands): 12/24/98 1/1/98 THROUGH THROUGH 1/1/98 THROUGH 12/23/98 12/31/98 5/20/98 ---------------------------------- -------- ------- CHARTER CCA CHARTERCOMM COMMUNICATIONS GROUP HOLDINGS HOLDING COMPANY SONIC ELIMINATIONS SUBTOTAL --------- ----------- ------------------- ------- ------------ --------- Revenues...................... $ 324,432 $196,801 $ 49,731 $13,713 $17,276 $ -- $ 601,953 --------- -------- -------- ------- ------- ------- --------- Operating expenses: Operating, general and administrative............ 164,145 98,331 25,952 7,134 8,993 -- 304,555 Depreciation and amortization.............. 136,689 86,741 16,864 8,318 2,279 -- 250,891 Stock option compensation expense................... -- -- -- 845 -- -- 845 Management fees/corporate expense charges........... 17,392 14,780 6,176 473 -- -- 38,821 --------- -------- -------- ------- ------- ------- --------- Total operating expenses................ 318,226 199,852 48,992 16,770 11,272 -- 595,112 --------- -------- -------- ------- ------- ------- --------- Income (loss) from operations.................. 6,206 (3,051) 739 (3,057) 6,004 -- 6,841 Interest expense.............. (113,824) (66,121) (17,277) (2,353) (2,624) 1,900(c) (200,299) Other income (expense)........ 4,668 (1,684) (684) 133 (15) (1,900)(c) 518 --------- -------- -------- ------- ------- ------- --------- Income (loss) before income taxes....................... (102,950) (70,856) (17,222) (5,277) 3,365 -- (192,940) Provision for income taxes.... -- -- -- -- 1,346 -- 1,346 --------- -------- -------- ------- ------- ------- --------- Income (loss) before extraordinary item.......... $(102,950) $(70,856) $(17,222) $(5,277) $ 2,019 $ -- $(194,286) ========= ======== ======== ======= ======= ======= ========= PRO FORMA -------------------------- ADJUSTMENTS TOTAL ----------- --------- Revenues...................... $ -- $ 601,953 --------- --------- Operating expenses: Operating, general and administrative............ -- 304,555 Depreciation and amortization.............. 119,515(a) 370,406 Stock option compensation expense................... -- 845 Management fees/corporate expense charges........... (22,328)(b) 16,493 --------- --------- Total operating expenses................ 97,187 692,299 --------- --------- Income (loss) from operations.................. (97,187) (90,346) Interest expense.............. (4,471)(d) (204,770) Other income (expense)........ -- 518 --------- --------- Income (loss) before income taxes....................... (101,658) (294,598) Provision for income taxes.... (1,346)(e) -- --------- --------- Income (loss) before extraordinary item.......... $(100,312) $(294,598) ========= ========= - ------------------------- (a) Represents additional amortization of franchises as a result of the acquisition of us by Mr. Allen. A large portion of the purchase price was allocated to franchises ($3.6 billion) that are amortized over 15 years. The adjustment to depreciation and amortization expense consists of the following (dollars in millions): WEIGHTED AVERAGE DEPRECIATION/ FAIR VALUE USEFUL LIFE (IN YEARS) AMORTIZATION ---------- ---------------------- ------------- Franchises......................................... $3,600.0 15 $240.0 Cable distribution systems......................... 1,439.2 12 115.3 Land, buildings and improvements................... 41.3 11 3.5 Vehicles and equipment............................. 61.2 5 11.6 ------ Total depreciation and amortization.............. 370.4 Less-historical depreciation and amortization.... (250.9) ------ Adjustment.................................... $119.5 ====== (b) Reflects the reduction in corporate expense charges of approximately $8.2 million to reflect the actual costs incurred. Management fees charged to CCA Group and CharterComm Holdings, companies not controlled by Charter Investment, Inc. at that time, exceeded the allocated costs incurred by Charter Investment, Inc. on behalf of those companies by $8.2 million. Also reflects the elimination of approximately $14.4 million of change of control payments under the terms of then-existing equity appreciation rights plans. Such payments were triggered by the acquisition of us by Mr. Allen. Such payments were made by Charter Investment, Inc. and were not subject to reimbursement by us, but were allocated to us for financial reporting purposes. The equity appreciation rights plans were terminated in connection with the acquisition of us by Mr. Allen, and these costs will not recur. (c) Represents the elimination of intercompany interest on a note payable from Charter Communications Holding Company to CCA Group. 57
61 (d) Reflects additional interest expense on $228.4 million of borrowings under our previous credit facilities used to finance the Sonic acquisition by us using a composite current rate of 7.4% as follows (dollars in millions): $228.4 million under previous credit facilities............. $ 7.1 Less-historical Sonic interest expense...................... (2.6) ----- Adjustment................................................ $ 4.5 ===== (e) Reflects the elimination of provision for income taxes, as a result of expected recurring future losses. The losses will not be tax benefited and no net deferred tax assets will be recorded. NOTE B: Pro forma operating results for Marcus Holdings consist of the following (dollars in thousands): YEAR ENDED PRO FORMA DECEMBER 31, ------------------------------------------------------------- 1998 ACQUISITIONS(a) DISPOSITIONS(b) ADJUSTMENTS TOTAL ------------ --------------- --------------- ----------- --------- Revenues........................................... $ 499,820 $2,620 $ (44,511) $ -- $ 457,929 --------- ------ --------- --------- --------- Operating expenses: Operating, general and administrative............ 271,638 1,225 (20,971) (15,297)(c) 236,595 Depreciation and amortization.................... 215,789 -- -- 42,559(d) 258,348 Corporate expense charges........................ -- -- -- 17,042(c) 17,042 Management fees.................................. 3,341 -- -- (3,341)(c) -- Transaction and severance costs.................. 135,379 -- -- (135,379)(e) -- --------- ------ --------- --------- --------- Total operating expenses....................... 626,147 1,225 (20,971) (94,416) 511,985 --------- ------ --------- --------- --------- Income (loss) from operations...................... (126,327) 1,395 (23,540) 94,416 (54,056) Interest expense................................... (159,985) -- -- 19,334(d) (140,651) Other income (expense)............................. 201,278 -- (201,278) -- -- --------- ------ --------- --------- --------- Income (loss) before extraordinary item............ $ (85,034) $1,395 $(224,818) $ 113,750 $(194,707) ========= ====== ========= ========= ========= - ------------------------- (a) Represents the results of operations of acquired cable systems prior to their acquisition in 1998 by Marcus Holdings. (b) Represents the elimination of the operating results and corresponding gain on sale of cable systems sold by Marcus Holdings during 1998. (c) Represents a reclassification to reflect the expenses totaling $15.3 million from operating, general and administrative to corporate expenses. Also reflects the elimination of management fees and the addition of corporate expense charges of $1.7 million for actual costs incurred by Charter Investment, Inc. on behalf of Marcus Holdings. Management fees charged to Marcus Holdings exceeded the costs incurred by Charter Investment, Inc. by $1.3 million. (d) As a result of the acquisition of Marcus Holdings by Mr. Allen, a large portion of the purchase price was recorded as franchises ($2.5 billion) that are amortized over 15 years. This resulted in additional amortization for year ended December 31, 1998. The adjustment to depreciation and amortization expense consists of the following (dollars in millions): WEIGHTED AVERAGE USEFUL LIFE DEPRECIATION/ FAIR VALUE (IN YEARS) AMORTIZATION ---------- ---------------- ------------- Franchises.................................... $2,500.0 15 $ 167.2 Cable distribution systems.................... 720.0 8 84.5 Land, buildings and improvements.............. 28.3 10 2.7 Vehicles and equipment........................ 13.6 3 4.0 ------- Total depreciation and amortization...... 258.4 Less-historical depreciation and amortization........................... (215.8) ------- Adjustment............................. $ 42.6 ======= Additionally, the carrying value of outstanding debt was recorded at estimated fair value, resulting in a debt premium that is to be amortized as an offset to interest expense over the term of the debt. This resulted in a reduction in interest expense for the year ended December 31, 1998. 58
62 (e) As a result of the acquisition of Marcus Holdings by Mr. Allen, Marcus Holdings recorded transaction costs of approximately $135.4 million. These costs were primarily comprised of approximately $90.2 million in compensation paid to employees of Marcus Holdings in settlement of specially designated Class B membership units approximately $24.0 million of transaction fees paid to certain equity partners for investment banking services and $5.2 million of transaction fees paid primarily for professional fees. In addition, Marcus Holdings recorded costs related to employee and officer stay-bonus and severance arrangements of approximately $16.0 million. NOTE C: Pro forma operating results for our recently completed and pending acquisitions consist of the following (dollars in thousands): RECENT ACQUISITIONS -- HISTORICAL ----------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1998 ----------------------------------------------------------------------------------------- GREATER AMERICAN MEDIA INTERMEDIA TOTAL RENAISSANCE CABLE SYSTEMS HELICON RIFKIN(a) SYSTEMS OTHER RECENT ----------- -------- ------- -------- --------- ---------- ------- -------- Revenues.............................. $ 41,524 $15,685 $78,635 $ 75,577 $124,382 $176,062 $15,812 $527,677 -------- ------- ------- -------- -------- -------- ------- -------- Operating expenses: Operating, general and administrative.................... 21,037 7,441 48,852 40,179 63,815 86,753 7,821 275,898 Depreciation and amortization....... 19,107 6,784 8,612 24,290 47,657 85,982 4,732 197,164 Corporate expense charges........... -- -- -- -- -- -- -- -- Management fees..................... -- 471 -- 3,496 4,106 3,147 -- 11,220 -------- ------- ------- -------- -------- -------- ------- -------- Total operating expenses.......... 40,144 14,696 57,464 67,965 115,578 175,882 12,553 484,282 -------- ------- ------- -------- -------- -------- ------- -------- Income from operations................ 1,380 989 21,171 7,612 8,804 180 3,259 43,395 Interest expense...................... (14,358) (4,501) (535) (27,634) (30,482) (25,449) (4,023) (106,982) Interest income....................... 158 122 -- 93 -- 341 -- 714 Other income (expense)................ -- -- (493) -- 36,279 23,030 5 58,821 -------- ------- ------- -------- -------- -------- ------- -------- Income (loss) before income tax expense............................. (12,820) (3,390) 20,143 (19,929) 14,601 (1,898) (759) (4,052) Income tax expense.................... 135 -- 7,956 -- (4,178) 1,623 5,536 -------- ------- ------- -------- -------- -------- ------- -------- Income (loss) before extraordinary item................................ $(12,955) $(3,390) $12,187 $(19,929) $ 18,779 $ (3,521) $ (759) $ (9,588) ======== ======= ======= ======== ======== ======== ======= ======== YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------ PENDING ACQUISITIONS -- HISTORICAL ------------------------------------------------------ TOTAL AVALON FALCON FANCH(b) BRESNAN PENDING -------- --------- -------- -------- --------- Revenues.................................................... $ 18,187 $ 307,558 $141,104 $261,964 $ 728,813 -------- --------- -------- -------- --------- Operating expenses:......................................... Operating, general and administrative..................... 10,067 161,233 62,977 150,750 385,027 Depreciation and amortization............................. 8,183 152,585 45,886 54,308 260,962 Corporate expense charges................................. 655 -- 105 -- 760 Management fees........................................... -- -- 3,998 -- 3,998 -------- --------- -------- -------- --------- Total operating expenses............................ 18,905 313,818 112,966 205,058 650,747 -------- --------- -------- -------- --------- Income (loss) from operations............................... (718) (6,260) 28,138 56,906 78,066 Interest expense............................................ (8,223) (102,591) (1,873) (18,296) (130,983) Interest income............................................. 173 -- 17 -- 190 Other income (expense)...................................... (463) (3,093) (6,628) 26,754 16,570 -------- --------- -------- -------- --------- Income (loss) before income tax expense (benefit)........... (9,231) (111,944) 19,654 65,364 (36,157) Income tax expense (benefit)................................ 186 1,897 286 -- 2,369 -------- --------- -------- -------- --------- Income (loss) before extraordinary item..................... $ (9,417) $(113,841) $ 19,368 $ 65,364 $ (38,526) ======== ========= ======== ======== ========= 59
63 YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------------------------- RECENT ACQUISITIONS ------------------------------------------------------------------------- PRO FORMA ------------------------------------------------------------ TOTAL HISTORICAL ACQUISITIONS(c) DISPOSITIONS(d) ADJUSTMENTS RECENT ---------- --------------- --------------- ----------- --------- Revenues.................... $ 527,677 $127,429 $(46,153) $ -- $ 608,953 --------- -------- -------- --------- --------- Operating expenses: Operating, general and administrative........... 275,898 66,641 (24,101) (10,991)(f) 307,447 Depreciation and amortization............. 197,164 31,262 (29,773) 137,146(g) 335,799 Corporate expense charges.................. -- -- -- 10,991(f) 10,991 Management fees............ 11,220 4,042 (594) -- 14,668 --------- -------- -------- --------- --------- Total operating expenses............... 484,282 101,945 (54,468) 137,146 668,905 --------- -------- -------- --------- --------- Income (loss) from operations................. 43,395 25,484 8,315 (137,146) (59,952) Interest expense............ (106,982) (30,354) 16,923 (151,037)(h) (271,450) Interest income............. 714 323 -- -- 1,037 Other income (expense)...... 58,821 (178) 235 (65,740)(i) (6,862) --------- -------- -------- --------- --------- Income (loss) before income tax expense (benefit)...... (4,052) (4,725) 25,473 (353,923) (337,227) Income tax expense (benefit).................. 5,536 2,431 10 (7,977)(j) -- --------- -------- -------- --------- --------- Income (loss) before extraordinary item......... $ (9,588) $ (7,156) $ 25,463 $(345,946) $(337,227) ========= ======== ======== ========= ========= YEAR ENDED DECEMBER 31, 1998 -------------------------------------------------------------------------- PENDING ACQUISITIONS -------------------------------------------------------------------------- PRO FORMA ------------------------------------------------------------- TOTAL HISTORICAL ACQUISITIONS(c) DISPOSITIONS(e) ADJUSTMENTS PENDING ---------- --------------- --------------- ----------- ---------- Revenues.................... $ 728,813 $319,072 $ (25,216) $ -- $1,022,669 ---------- -------- --------- --------- ---------- Operating expenses: Operating, general and administrative........... 385,027 160,438 (12,979) (21,368)(f) 511,118 Depreciation and amortization............. 260,962 88,436 (9,355) 403,802(g) 743,845 Corporate expense charges.................. 760 14,962 -- 21,368(f) 37,090 Management fees............ 3,998 2,175 (38) -- 6,135 ---------- -------- --------- --------- ---------- Total operating expenses............... 650,747 266,011 (22,372) 403,802 1,298,188 ---------- -------- --------- --------- ---------- Income (loss) from operations................. 78,066 53,061 (2,844) (403,802) (275,519) Interest expense............ (130,983) (23,667) 742 (303,678)(h) (457,586) Interest income............. 190 801 -- -- 991 Other income (expense)...... 16,570 4,446 (1,080) (26,564)(i) (6,628) ---------- -------- --------- --------- ---------- Income (loss) before income tax expense (benefit)...... (36,157) 34,641 (3,182) (734,044) (738,742) Income tax expense (benefit).................. 2,369 (1,762) -- (607)(j) -- ---------- -------- --------- --------- ---------- Income (loss) before extraordinary item......... $ (38,526) $ 36,403 $ (3,182) $(733,437) $ (738,742) ========== ======== ========= ========= ========== - ------------------------- (a) Rifkin includes the results of operations of Rifkin Acquisition Partners, L.L.L.P., as follows (dollars in thousands): RIFKIN ACQUISITION OTHER TOTAL ----------- ------- -------- Revenues.............................................. $89,921 $34,461 $124,382 Income from operations................................ 1,040 7,764 8,804 Income before extraordinary item...................... 24,419 (5,640) 18,779 (b) Fanch includes the results of operations of Fanch cable systems as follows (dollars in thousands): FANCH CABLE SYSTEMS OTHERS TOTAL ----------- ------- -------- Revenues............................................. $124,555 $16,549 $141,104 Income from operations............................... 25,241 2,897 28,138 Income before extraordinary item..................... 18,814 554 19,368 (c) Represents the historical results of operations for the period from January 1, 1998 through the date of purchase for acquisitions completed by Renaissance, the InterMedia systems, Helicon, Rifkin, Avalon, Falcon, Fanch and Bresnan and for the period from January 1, 1998 through December 31, 1998 for acquisitions to be completed in 1999. 60
64 These acquisitions were accounted for using the purchase method of accounting. Purchase prices and the closing dates or anticipated closing dates for significant acquisitions are as follows (dollars in millions): RENAISSANCE INTERMEDIA HELICON RIFKIN AVALON ------------- ------------- ------------- ------------- ------------- Purchase price......................... $309.5 $29.1 $26.1 $165.0 $30.5 Closing date........................... April 1998 December 1998 December 1998 February 1999 July 1998 Purchase price......................... $53.8 $431.6 Closing date........................... July 1999 November 1998 Purchase price......................... Closing date........................... Purchase price......................... Closing date........................... FALCON FANCH BRESNAN -------------- -------------- ------------- Purchase price......................... $86.2 $42.2 $17.0 Closing date........................... July 1998 February 1999 February 1998 Purchase price......................... $158.6 $248.0 $11.8 Closing date........................... September 1998 February 1999 October 1998 Purchase price......................... $513.3 $70.5 $40.0 Closing date........................... September 1998 March 1999 January 1999 Purchase price......................... $50.0 $27.0 Closing date........................... June 1999 March 1999 The InterMedia acquisition above was part of a "swap". (d) Represents the elimination of the operating results primarily related to the cable systems transferred to InterMedia as part of a swap of cable systems in October 1999. The fair value of the systems transferred to InterMedia was $331.8 million. No material gain or loss is anticipated on the disposition as these systems were recently acquired and recorded at fair value at that time. (e) Represents the elimination of the operating results related to the Indiana cable system that we are required to transfer to InterMedia as part of a swap and to the sale of several smaller cable systems. A definitive written agreement exists for the disposition of the Indiana system. The fair value of the system is $88.2 million. No material gain or loss is anticipated on the disposition as this system was recently acquired and recorded at fair value at that time. (f) Reflects a reclassification of expenses representing corporate expenses that would have occurred at Charter Investment, Inc. (g) Represents additional amortization of franchises as a result of our recently completed and pending acquisitions. A large portion of the purchase price was allocated to franchises ($12.4 billion) that are amortized over 15 years. The adjustments to depreciation and amortization expense consists of the following (dollars in millions): FAIR WEIGHTED AVERAGE DEPRECIATION/ VALUE USEFUL LIFE AMORTIZATION --------- ---------------- ------------- Franchises...................................... $12,356.5 15 $ 823.8 Cable distribution systems...................... 1,729.1 8 223.7 Land, building and improvements................. 53.9 10 5.2 Vehicles and equipment.......................... 89.1 3 26.9 -------- Total depreciation and amortization........... 1,079.6 Less-historical depreciation and amortization............................... (538.7) -------- Adjustment................................. $ 540.9 ======== 61
65 (h) Reflects additional interest expense on borrowings which will be used to finance the acquisitions as follows (dollars in millions): $1.2 billion of credit facilities at composite current rate of 7.4% drawn down in March 1999 included in Charter Communications Holding Company's historical cash.......... $ 85.9 $1.6 billion of credit facilities at composite current rate of 7.4%................................................... 118.4 $114.4 million 10% senior discount notes ($78.1 million carrying value) -- Renaissance............................ 8.0 $150.0 million 9.375% senior subordinated notes -- Avalon... 14.1 $196.0 million 11.875% senior discount notes ($123.5 million carrying value) -- Avalon................................. 13.6 $1.0 billion credit facilities for Falcon acquisition (at composite current rate of 7.4%)........................... 60.0 $0.9 billion credit facilities for Fanch acquisition (at composite current rate of 7.4%)........................... 51.9 $0.2 billion credit facilities for Avalon acquisition (at composite current rate of 7.4%)........................... 10.0 $1.7 billion anticipated financing (at 10%)................. 171.5 $705.7 million 10.04% bridge loan facility -- Falcon........ 70.9 $1.0 billion 8% liability to sellers -- Bresnan............. 80.0 $425.0 million 8% liability to sellers -- Falcon............ 34.0 $133.3 million 8% liability to sellers -- Rifkin............ 10.7 ------- Total pro forma interest expenses......................... 729.0 Less-historical interest expense from acquired companies.............................................. (274.3) ------- Adjustment............................................. $ 454.7 ======= The liabilities to the Bresnan, Falcon and Rifkin sellers represents the potential obligations to repurchase equity interests issued to the sellers arising from possible violations of the Securities Act in connection with the issuance of equity interests to these sellers. The possible liability to the Falcon sellers would increase to $550 million if the Falcon sellers exercise their right to receive up to an additional $125 million of equity interests. We have assumed we will fund certain pending acquisitions prior to closing with additional financing of $1.7 billion. An interest rate of 10% reflects the anticipated borrowing rate available to Charter Communications Holding Company. An increase in the interest rate of 0.125% on this assumed debt would result in an increase in interest expense of $2.1 million. Should the Avalon notes be put to us based on change of control provisions and should we become obligated to purchase Rifkin, Falcon and Bresnan seller's equity interests, the estimated shortfall would increase to $3.6 billion and interest expense would increase by an additional $29.7 million. If we do not close on the Avalon credit facilities, the estimated shortfall would increase to $3.7 billion and interest expense will increase by $4.4 million. If we do not close on the Fanch credit facilities, the estimated shortfall would increase to $4.6 billion and interest expense will increase by $22.8 million. If we do not close on the Falcon bridge loan facility, the estimated shortfall would increase to $5.3 billion and interest expense would not change. Should we be required to pay InterMedia $0.1 billion for a system that did not transfer in our swap with InterMedia because necessary regulatory approvals were still pending, interest expense would increase by $8.8 million. Principal approximates carrying value for all undiscounted debt. (i) Represents the elimination of gain (loss) on the sale of cable television systems whose results of operations have been eliminated in (c) above. (j) Reflects the elimination of income tax expense (benefit) as a result of expected recurring future losses. The losses will not be tax benefited and no net deferred tax assets will be recorded. 62
66 NOTE D: In March 1999, we extinguished substantially all of our long-term debt, excluding borrowings of our previous credit facilities, and refinanced all previous credit facilities. In addition, we incurred and plan to incur additional debt in connection with our pending and recently completed acquisitions. See "Capitalization". The refinancing adjustment to interest expense consists of the following (dollars in millions): INTEREST DESCRIPTION EXPENSE - ----------- --------- $600 million 8.25% senior notes............................. $ 49.6 $1.5 billion 8.625% senior notes............................ 129.4 $1.475 billion ($906 carrying value) 9.92% senior discount notes..................................................... 90.0 Credit facilities ($652 at composite current rate of 7.4%)..................................................... 48.2 Amortization of debt issuance costs......................... 16.0 Commitment fee on unused portion of credit facilities ($1.4 billion at 0.375%)........................................ 5.2 --------- Total pro forma interest expense.......................... 338.4 Less -- interest expense (including Marcus Cable)......... (345.4) --------- Adjustment............................................. $ (7.0) ========= An increase in the interest rate on all variable rate debt of 0.125% would result in an increase in interest expense of $12.1 million. NOTE E: Represents the allocation of 66% of the net loss of Charter Communications Holding Company to the minority interest. NOTE F: Charter Investment, Inc. provided corporate management and consulting services to Charter Operating in 1998 and to Marcus Holdings beginning in October 1998. See "Certain Relationships and Related Transactions". NOTE G: Basic loss per share assumes none of the membership units of Charter Communications Holding Company are exchanged for Charter Communications, Inc. common stock and none of the outstanding options to purchase membership units of Charter Communications Holding Company that are automatically exchanged for Charter Communications, Inc. common stock are exercised. Basic loss per share equals the loss applicable to common equity holders divided by weighted average shares outstanding. If all of the membership units were exchanged or options exercised, the effects would be antidilutive. NOTE H: 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 television 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 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 EBITDA may be limited by working capital, debt service and capital expenditure requirements and by restrictions related to legal requirements, commitments and uncertainties. NOTE I: EBITDA margin represents EBITDA as a percentage of revenues. NOTE J: Adjusted EBITDA means EBITDA before stock option compensation expense, corporate expenses, management fees and other income (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 63
67 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. NOTE K: Homes passed are the number of living units, such as single residence homes, apartments and condominium units, passed by the cable television distribution network in a given cable system service area. NOTE L: Basic customers are customers who receive basic cable service. NOTE M: Basic penetration represents basic customers as a percentage of homes passed. NOTE N: Premium units represent the total number of subscriptions to premium channels. NOTE O: Premium penetration represents premium units as a percentage of basic customers. NOTE P: 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 December 31, 1998. 64
68 UNAUDITED PRO FORMA BALANCE SHEET AS OF JUNE 30, 1999 ------------------------------------------------------------------------- CHARTER RECENT PENDING OFFERING COMMUNICATIONS ACQUISITIONS ACQUISITIONS ADJUSTMENTS PRO FORMA HOLDING COMPANY (NOTE A) SUBTOTAL (NOTE A) (NOTE B) TOTAL --------------- ------------ ----------- ------------ ----------- ----------- (DOLLARS IN THOUSANDS) ASSETS Cash and cash equivalents... $ 109,626 $ 9,289 $ 118,915 $ 15,756 $ -- $ 134,671 Accounts receivable, net.... 32,487 22,520 55,007 36,660 -- 91,667 Prepaid expenses and other..................... 10,181 5,507 15,688 36,828 -- 52,516 ---------- ---------- ----------- ----------- ----------- ----------- Total current assets... 152,294 37,316 189,610 89,244 -- 278,854 Property, plant and equipment................. 1,764,499 580,311 2,344,810 1,198,047 -- 3,542,857 Franchises.................. 6,591,972 2,614,034 9,206,006 8,749,216 -- 17,955,222 Other assets................ 178,709 (381) 178,328 (41,754) -- 136,574 ---------- ---------- ----------- ----------- ----------- ----------- Total assets........... $8,687,474 $3,231,280 $11,918,754 $ 9,994,753 $ -- $21,913,507 ========== ========== =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt............. $ -- $ 133,312 $ 133,312 $ 5,168,579 $ -- $ 5,301,891 Accounts payable and accrued expenses.................. 273,987 79,072 353,059 229,058 -- 582,117 Current deferred revenue.... -- 2,356 2,356 -- -- 2,356 Payables to manager of cable television systems........ 21,745 -- 21,745 -- -- 21,745 Pending acquisitions payable................... -- -- -- 2,898,500 (2,898,500) -- ---------- ---------- ----------- ----------- ----------- ----------- Total current liabilities.......... 295,732 214,740 510,472 8,296,137 (2,898,500) 5,908,109 Long-term debt.............. 5,134,310 1,691,540 6,825,850 948,616 -- 7,774,466 Other long-term liabilities............... 53,310 -- 53,310 -- -- 53,310 Minority interest........... -- -- -- -- 5,368,064 5,368,064 Members' equity............. 3,204,122 1,325,000 4,529,122 750,000 (5,279,122) -- ---------- ---------- ----------- ----------- ----------- ----------- Common stock................ -- -- -- -- 170 170 Additional paid-in capital................... -- -- -- -- 2,809,388 2,809,388 ---------- ---------- ----------- ----------- ----------- ----------- Total stockholders' equity............... -- -- -- -- 2,809,558 2,809,558 ---------- ---------- ----------- ----------- ----------- ----------- Total liabilities and stockholders' equity............... $8,687,474 $3,231,280 $11,918,754 $ 9,994,753 $ -- $21,913,507 ========== ========== =========== =========== =========== =========== 65
69 NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET NOTE A: Pro forma balance sheet for our recently completed acquisitions and pending acquisitions consists of the following (dollars in thousands): AS OF JUNE 30, 1999 -------------------------------------------------------- RECENT ACQUISITIONS -- HISTORICAL -------------------------------------------------------- INTERMEDIA TOTAL HELICON RIFKIN SYSTEMS OTHER RECENT --------- -------- ---------- ------- ---------- Cash and cash equivalents................................... $ 6,894 $ 7,156 -- $ 73 $ 14,123 Accounts receivable, net.................................... 1,859 13,118 16,009 1,619 32,605 Receivable from related party............................... 6 -- 5,250 -- 5,256 Prepaid expenses and other.................................. 2,172 2,271 719 155 5,317 --------- -------- -------- ------- ---------- Total current assets...................................... 10,931 22,545 21,978 1,847 57,301 Property, plant and equipment............................... 88,252 297,318 231,382 20,610 637,562 Franchises.................................................. 5,610 437,479 226,040 54,956 724,085 Deferred income taxes....................................... -- -- 15,288 -- 15,288 Other assets................................................ 87,165 -- 5,535 126 92,826 --------- -------- -------- ------- ---------- Total assets.............................................. $ 191,958 $757,342 $500,223 $77,539 $1,527,062 ========= ======== ======== ======= ========== Accounts payable and accrued expenses....................... $ 14,288 $ 46,777 $ 19,874 $ 1,699 $ 82,638 Current deferred revenue.................................... -- -- 11,778 1,076 12,854 Note payable to related party............................... -- -- 4,607 -- 4,607 --------- -------- -------- ------- ---------- Total current liabilities................................. 14,288 46,777 36,259 2,775 100,099 Deferred income taxes....................................... -- 6,703 -- -- 6,703 Long-term debt.............................................. 299,076 546,575 -- 40,687 886,338 Note payable to related party, including accrued interest... 5,000 -- 414,493 -- 419,493 Other long-term liabilities, including redeemable preferred shares.................................................... 21,162 -- 18,168 -- 39,330 Equity...................................................... (147,568) 157,287 31,303 34,077 75,099 --------- -------- -------- ------- ---------- Total liabilities and equity.............................. $ 191,958 $757,342 $500,223 $77,539 $1,527,062 ========= ======== ======== ======= ========== 66
70 AS OF JUNE 30, 1999 -------------------------------------------------------- PENDING ACQUISITIONS -- HISTORICAL -------------------------------------------------------- TOTAL AVALON FALCON FANCH(a) BRESNAN PENDING -------- ---------- -------- -------- ---------- Cash and cash equivalents................................... $ 3,457 $ 11,852 $ 785 $ 2,826 $ 18,920 Accounts receivable, net.................................... 6,158 19,102 2,814 8,917 36,991 Receivable from related party............................... -- 6,949 -- -- 6,949 Prepaid expenses and other.................................. 415 35,007 1,249 -- 36,671 -------- ---------- -------- -------- ---------- Total current assets...................................... 10,030 72,910 4,848 11,743 99,531 Property, plant and equipment............................... 116,587 522,587 241,169 330,876 1,211,219 Franchises.................................................. 470,041 384,197 4,602 324,990 1,183,830 Other assets................................................ 32 457,148 606,851 23,515 1,087,546 -------- ---------- -------- -------- ---------- Total assets.............................................. $596,690 $1,436,842 $857,470 $691,124 $3,582,126 ======== ========== ======== ======== ========== Current maturities of long-term debt........................ $ 25 $ -- $ 754 $ -- $ 779 Accounts payable and accrued expenses....................... 13,983 144,892 27,156 43,518 229,549 Current deferred revenue.................................... 3,136 2,630 -- -- 5,766 Other current liabilities................................... 3,160 -- -- 3,698 6,858 -------- ---------- -------- -------- ---------- Total current liabilities................................. 20,304 147,522 27,910 47,216 242,952 Deferred income taxes....................................... -- 2,287 -- -- 2,287 Long-term debt.............................................. 446,079 1,665,676 12,728 846,364 2,970,847 Note payable to related party, including accrued interest... -- -- 1,457 -- 1,457 Other long-term liabilities, including redeemable preferred shares.................................................... -- 400,471 197 6,015 406,683 Equity...................................................... 130,307 (779,114) 815,178 (208,471) (42,100) -------- ---------- -------- -------- ---------- Total liabilities and equity.............................. $596,690 $1,436,842 $857,470 $691,124 $3,582,126 ======== ========== ======== ======== ========== 67
71 AS OF JUNE 30, 1999 ------------------------------------------------------------------------- RECENT ACQUISITIONS ------------------------------------------------------------------------- PRO FORMA ------------------------------------------------------------ HISTORICAL ACQUISITIONS(B) DISPOSITIONS(C) ADJUSTMENTS TOTAL ---------- --------------- --------------- ----------- ---------- Cash and cash equivalents..... $ 14,123 $ 54 $ (4,888) $ -- $ 9,289 Accounts receivable, net...... 32,605 830 (1,493) (9,422)(d) 22,520 Receivable from related party........................ 5,256 3 -- (5,259)(e) -- Prepaid expenses and other.... 5,317 348 (158) -- 5,507 ---------- ------ --------- ---------- ---------- Total current assets......... 57,301 1,235 (6,539) (14,681) 37,316 Property, plant and equipment.................... 637,562 4,208 (61,459) -- 580,311 Franchises.................... 724,085 6 (267,781) 2,157,724(f) 2,614,034 Deferred income taxes......... 15,288 -- -- (15,288)(g) -- Other assets.................. 92,826 90 (381) (92,916)(h) (381) ---------- ------ --------- ---------- ---------- Total assets................. $1,527,062 $5,539 $(336,160) $2,034,839 $3,231,280 ========== ====== ========= ========== ========== Current maturities of long-term debt............... $ -- $ -- $ -- -- -- Short-term debt............... -- -- -- $ 133,312(j) $ 133,312 Accounts payable and accrued expenses..................... 82,638 796 (4,362) -- 79,072 Current deferred revenue...... 12,854 -- -- (10,498)(d) 2,356 Note payable to related party........................ 4,607 -- -- (4,607)(i) -- Pending acquisitions payable...................... -- -- -- -- -- Other current liabilities..... -- -- -- -- -- ---------- ------ --------- ---------- ---------- Total current liabilities.... 100,099 796 (4,362) 118,207 214,740 Deferred revenue.............. -- 170 -- (170)(d) -- Deferred income taxes......... 6,703 -- -- (6,703)(g) -- Long-term debt................ 886,338 1,063 (331,798) 1,135,937(j) 1,691,540 Note payable to related party, including accrued interest... 419,493 -- -- (419,493)(i) -- Other long-term liabilities, including redeemable preferred shares............. 39,330 -- -- (39,330)(k) -- Equity........................ 75,099 3,510 -- 1,246,391(l) 1,325,000 ---------- ------ --------- ---------- ---------- Total liabilities and equity..................... $1,527,062 $5,539 $(336,160) $2,034,839 $3,231,280 ========== ====== ========= ========== ========== AS OF JUNE 30, 1999 ---------------------------------------------------------------------------- PENDING ACQUISITIONS ---------------------------------------------------------------------------- PRO FORMA --------------------------------------------------------------- HISTORICAL ACQUISITIONS(B) DISPOSITIONS(C) ADJUSTMENTS TOTAL ---------- --------------- --------------- ----------- ---------- Cash and cash equivalents..... $ 18,920 $ 755 $ (3,919) $ -- $ 15,756 Accounts receivable, net...... 36,991 55 (386) -- 36,660 Receivable from related party........................ 6,949 591 -- (7,540)(e) -- Prepaid expenses and other.... 36,671 196 (39) -- 36,828 ---------- ------- -------- ----------- ---------- Total current assets......... 99,531 1,597 (4,344) (7,540) 89,244 Property, plant and equipment.................... 1,211,219 7,188 (20,360) -- 1,198,047 Franchises.................... 1,183,830 359 (64,362) 7,629,389(f) 8,749,216 Deferred income taxes......... -- -- -- -- -- Other assets.................. 1,087,546 1,242 (88) (1,130,454)(h) (41,754) ---------- ------- -------- ----------- ---------- Total assets................. 3,582,126 $10,386 $(89,154) $ 6,491,395 $9,994,753 ========== ======= ======== =========== ========== Current maturities of long-term debt............... $ 779 $ -- -- $ (779)(j) $ -- Short-term debt............... -- -- -- 5,168,579(j) 5,168,579 Accounts payable and accrued expenses..................... 229,549 461 (952) -- 229,058 Current deferred revenue...... 5,766 263 -- (6,029)(d) -- Note payable to related party........................ -- (2,561) -- 2,561(i) -- Pending acquisitions payable...................... -- -- -- 2,898,500(j) 2,898,500 Other current liabilities..... 6,858 -- -- (6,858)(i) -- ---------- ------- -------- ----------- ---------- Total current liabilities.... 242,952 (1,837) (952) 8,055,974 8,296,137 Deferred revenue.............. -- -- -- -- -- Deferred income taxes......... 2,287 359 -- (2,646)(g) -- Long-term debt................ 2,970,847 2,815 (88,202) (1,936,844)(j) 948,616 Note payable to related party, including accrued interest... 1,457 -- -- (1,457)(i) -- Other long-term liabilities, including redeemable preferred shares............. 406,683 10 -- (406,693)(k) -- Equity........................ (42,100) 9,039 -- 783,061(l) 750,000 ---------- ------- -------- ----------- ---------- Total liabilities and equity..................... $3,582,126 $10,386 $(89,154) $ 6,491,395 $9,994,753 ========== ======= ======== =========== ========== 68
72 - ------------------------- (a) Fanch includes the balance sheet of Fanch cable systems as follows (dollars in thousands): FANCH CABLE SYSTEMS OTHERS TOTAL ----------- ------- -------- Total current assets................................... $ 3,482 $ 1,366 $ 4,848 Total assets........................................... 833,265 24,205 857,470 Total current liabilities.............................. 24,124 3,786 27,910 Equity................................................. 809,141 6,037 815,178 Total liabilities and equity........................... 833,265 24,205 857,470 (b) Represents the historical balance sheets as of June 30, 1999 for acquisitions to be completed subsequent to June 30, 1999. (c) Represents the historical assets and liabilities as of June 30, 1999 of cable systems transferred to InterMedia on October 1, 1999 and one Indiana cable system we are required to transfer to InterMedia as part of a swap of cable systems. The cable system being swapped will be accounted for at fair value. No material gain or loss is anticipated in conjunction with the swap. See "Business -- Acquisitions -- InterMedia Systems". (d) Represents the offset of advance billings against deferred revenue to be consistent with Charter Communications Holding Company accounting policy and the elimination of deferred revenue. (e) Reflects assets retained by the seller. (f) Substantial amounts of the purchase price have been allocated to franchises based on estimated fair values. This results in an allocation of purchase price as follows (dollars in thousands): INTERMEDIA SYSTEMS HELICON RIFKIN ---------- -------- ---------- Working capital............................................. $(20,493) $ (3,363) $ (23,796) Property, plant and equipment............................... 149,563 88,252 301,526 Franchises.................................................. 775,399 465,111 1,182,270 Other....................................................... (469) -- -- -------- -------- ---------- $904,000 $550,000 $1,460,000 ======== ======== ========== AVALON FALCON FANCH BRESNAN OTHER TOTAL ----------- ---------- ---------- ---------- -------- ----------- Working capital.................. $ (3,396) $ (78,943) $ (22,308) $ (31,775) $ 148 $ (183,926) Property, plant and equipment.... 121,470 524,892 241,169 330,876 20,610 1,778,358 Franchises....................... 741,101 3,095,581 2,181,139 2,795,757 126,892 11,363,250 Other............................ -- 8,334 -- -- -- 7,865 -------- ---------- ---------- ---------- -------- ----------- $859,175 $3,549,864 $2,400,000 $3,094,858 $147,650 $12,965,547 ======== ========== ========== ========== ======== =========== 69
73 The sources of cash for the recent and pending acquisitions are as follows (dollars in millions): CASH SHORTFALL: Current liabilities: 8% liability to Falcon sellers........................ $ 425.0 8% liability to Bresnan sellers....................... 1,000.0 8% liability to Rifkin sellers........................ 133.3 $1,558.3 -------- Publicly held debt, at fair market value: 9.375% senior subordinated notes -- Avalon............ 150.0 11.875% senior discount notes -- Avalon............... 128.6 278.6 -------- Falcon bridge loan facility............................. 705.7 Expected credit facilities draw down of acquisitions: Avalon............................................. 169.0 Fanch.............................................. 875.0 1,044.0 -------- Anticipated financing to be arranged in connection with Bresnan acquisition................................... 1,715.3 -------- Total cash shortfall.................................. $ 5,301.9 AVAILABLE AND COMMITTED SOURCES: Escrow deposit -- Avalon................................ 50.0 Funded or expected equity contributions: Mr. Allen equity contributions........................ 1,325.0 Mr. Allen committed equity contribution............... 750.0 Net proceeds from sale of Class B shares.............. 0.9 Net proceeds from the offering........................ 2,897.6 4,973.5 -------- Expected credit facilities draw down: Charter Operating's credit facilities................. 1,604.1 Falcon credit facilities.............................. 1,011.0 Helicon preferred limited liability company interests... 25.0 -------- Total available and committed sources................. 7,663.6 --------- $12,965.5 ========= The cash shortfall is included in short-term debt in the pro forma balance sheet. Available and committed sources of funds will not be sufficient to consummate our pending acquisitions and fund related obligations. In connection with our pending acquisitions, we may need to raise additional amounts up to a total of approximately $5.41 billion. We will need to raise approximately $1.72 billion by borrowing under credit facilities at Bresnan that have not yet been arranged and/or by issuing debt or equity securities of Charter Communications, Inc. or Charter Communications Holding Company to fund: - approximately $0.87 billion of the Bresnan purchase price; - approximately $0.50 billion in outstanding Bresnan credit facility borrowings that we would have to repay if we are unable to assume and amend the existing Bresnan credit facilities; and - approximately $0.35 billion in Bresnan notes that we expect to be put to us in connection with required change of control offers for these notes. 70
74 In addition, we will have to raise approximately $3.69 billion of additional financing if we are required to pay: - approximately $0.71 billion to repurchase outstanding notes of Falcon if committed bridge loan financing does not close; - approximately $0.17 billion if the Avalon credit facilities do not close; - approximately $0.88 billion if the Fanch credit facilities do not close; - approximately $0.27 billion to repurchase outstanding notes of Avalon; - approximately $1.57 billion to repurchase equity interests issued or to be issued to specified sellers in connection with a number of our acquisitions because of possible violations of Section 5 of the Securities Act of 1933; and - approximately $0.09 billion to InterMedia if we do not obtain timely regulatory approvals for our transfer to InterMedia of an Indiana cable system and we are unable to transfer replacement systems. The Avalon, Fanch and Falcon acquisitions are expected to close in the fourth quarter of 1999. We plan to fund these acquisitions with the proceeds of the offering, Mr. Allen's equity contribution through Vulcan Cable III Inc., borrowings under committed credit facilities and equity issued to specified sellers in the Falcon acquisition. If the new Fanch and Avalon credit facilities do not close as anticipated, we will need to arrange other sources of financing to consummate these acquisitions. We cannot assure you that alternate financing sources will be available. We may as a result be unable to consummate these acquisitions and may be in default under the related acquisition agreements. We plan to fund any repurchases of Falcon debentures and notes that are put to us with the committed Falcon bridge loan facility. If we do not obtain funding under the Falcon bridge loan facility, we may be in default under the Falcon debentures and notes that we may be required to repurchase. The Bresnan acquisition is expected to close in the first quarter of 2000. We will need to raise the $1.7 billion shortfall by borrowing under credit facilities at Bresnan that have not yet been arranged and/or by issuing debt or equity securities of Charter Communications, Inc. or Charter Communications Holding Company. We cannot assure you that we will be able to raise the financing necessary to consummate our pending acquisitions and to satisfy the obligations described above. If we are unable to raise the financing necessary to satisfy any or all of these obligations, we may be unable to close our pending acquisitions and could be in default under one or more other obligations. In any such case, the relevant sellers or creditors could initiate legal proceedings against us, including under bankruptcy and reorganization laws, for any damages they suffer as a result of our non-performance. Any such action could trigger defaults under our other obligations, including our credit facilities and debt instruments. The amounts shown above as current liabilities to Rifkin, Falcon and Bresnan sellers represent the possible obligations that we may owe to these sellers based on the possible violations of Section 5 of the Securities Act in connection with the issuance of membership units to these sellers. (g) Represents the elimination of deferred income tax assets and liabilities. 71
75 (h) Represents the elimination of the unamortized historical cost of various assets based on the allocation of purchase price (see (e) above) as follows (dollars in thousands): Subscriber lists............................................ $ (528,890) Noncompete agreements....................................... (14,871) Deferred financing costs.................................... (59,746) Goodwill.................................................... (738,127) Escrow deposit -- Avalon.................................... (50,000) Other assets................................................ (94,268) ----------- (1,485,902) Less-accumulated amortization............................... 262,532 ----------- $(1,223,370) =========== (i) Represents liabilities retained by the seller. (j) Represents the following (dollars in millions): Long-term debt not assumed.................................. $ (2,155.1) Helicon notes (to be called)................................ (115.0) Rifkin notes (to be tendered)............................... (125.0) Falcon notes and debentures (to be put)..................... (698.7) Bresnan notes (to be put)................................... (348.0) ---------- Total pro forma debt not assumed....................... (3,441.8) Short-term debt: 8% liability to Falcon sellers............................ 425.0 8% liability to Rifkin sellers............................ 133.3 8% liability to Bresnan sellers........................... 1,000.0 Falcon bridge loan facility............................... 705.7 Avalon credit facilities.................................. 169.0 Fanch credit facilities................................... 875.0 Anticipated financing..................................... 1,715.3 Avalon notes.............................................. 278.6 ---------- Total short-term debt.................................. 5,301.9 Long-term debt: Charter Operating's credit facilities..................... 1,604.1 Falcon credit facilities.................................. 1,011.0 Helicon preferred limited liability company interests..... 25.0 ---------- Total long-term debt................................... 2,640.1 Pending acquisitions payable................................ 2,898.5 ---------- $ 7,398.7 ========== The liabilities to the Bresnan, Falcon and Rifkin sellers represent the potential obligations to repurchase equity interests issued to the sellers arising from possible violations of the Securities Act in connection with the issuance of equity interests to these sellers. The pending acquisitions payable represents a portion of the purchase price of the pending acquisitions to be funded by the proceeds of the offering. (k) Represents the elimination of historical liabilities retained by the seller and the elimination of Falcon's historical redeemable preferred shares. 72
76 (l) Represents the following (dollars in thousands): Elimination of historical equity............................ $ (45,548) Additional contributions into Charter Communications Holding Company: Mr. Allen's equity contributions....................... 1,325,000 Mr. Allen's committed equity contribution.............. 750,000 ---------- $2,029,452 ========== NOTE B: Offering adjustments include the issuance and sale by Charter Communications, Inc. of Class A common stock for net proceeds of $2.90 billion, after deducting underwriting discounts and commissions and estimated offering expenses, and proceeds of $0.9 million from the sale of Class B common stock, all applied to reduce the pending acquisition payable. Also included as an offering adjustment is the effect of consolidating Charter Communications Holding Company into Charter Communications, Inc. using historical carrying values based on Charter Communications, Inc.'s purchase of membership units, including voting control, in Charter Communications Holding Company. This results in the $5.4 billion of member's equity in Charter Communications Holding Company becoming minority interest in the consolidated balance sheet of Charter Communications, Inc. Minority interest is calculated as follows (dollars in thousands): Historical member's equity.................................. $3,204,122 Expected equity contributions............................... 4,973,500 ---------- Pro forma members' equity.............................. 8,177,622 Minority interest percentage........................... 66% ---------- Minority interest........................................... $5,368,064 ========== Total stockholders' equity is calculated as follows (dollars in thousands): Net proceeds from sale of common stock...................... $2,898,500 Reductions in net equity allocated to minority interest..... (88,942) ---------- $2,809,558 ========== Certain equity interests in Charter Communications Holding Company are exchangeable into common stock of Charter Communications, Inc. We assume no such equity interests are exchanged. If all equity holders (other than Charter Communications, Inc.) in Charter Communications Holding Company exchanged all of their units for common stock, total stockholders' equity would increase by $5.4 billion and minority interest would decrease by $5.4 billion. 73
77 SELECTED HISTORICAL FINANCIAL DATA On July 22, 1999, Charter Communications, Inc. was formed. Charter Communications, Inc. will be a holding company whose sole asset, upon closing of the offering and before the closing of the Falcon and Bresnan acquisitions, will be an approximate 34% economic interest and a 100% voting interest in Charter Communications Holding Company. This results in the consolidation of Charter Communications Holding Company and Charter Communications, Inc. Therefore, we have included below selected historical financial data for Charter Communications Holding Company. The selected historical financial data below for the years ended December 31, 1996 and 1997, for the periods from January 1, 1998 through December 23, 1998, from December 24, 1998 through December 31, 1998, and January 1, 1999 through June 30, 1999 are derived from the consolidated financial statements of Charter Communications Holding Company. The consolidated financial statements of Charter Communications Holding Company for the years ended December 31, 1996 and 1997, for the periods from January 1, 1998 through December 23, 1998 and from December 24, 1998 through December 31, 1998, have been audited by Arthur Andersen LLP, independent public accountants, and are included elsewhere in this prospectus. The selected historical financial data for the period from October 1, 1995 through December 31, 1995, are derived from the predecessor of Charter Communications Holding Company's unaudited financial statements and are not included elsewhere in this prospectus. The selected historical financial data for the year ended December 31, 1994 and for the period from January 1, 1995 through September 30, 1995 are derived from the unaudited financial statements of Charter Communications Holding Company's predecessor business and are not included elsewhere in this prospectus. The information presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements of Charter Communications Holding Company and related notes included elsewhere in this prospectus. 74
78 PREDECESSOR OF CHARTER COMMUNICATIONS HOLDING COMPANY CHARTER COMMUNICATIONS HOLDING COMPANY ---------------------- ---------------------------------------------------- YEAR ENDED YEAR ENDED 1/1/95 10/1/95 DECEMBER 31, 1/1/98 12/24/98 1/1/99 DECEMBER 31, THROUGH THROUGH ----------------- THROUGH THROUGH THROUGH 1994 9/30/95 12/31/95 1996 1997 12/23/98 12/31/98 6/30/99 ------------ ------- -------- ------- ------- -------- ---------- ---------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS: Revenues............................. $ 6,584 $5,324 $ 1,788 $14,881 $18,867 $49,731 $ 13,713 $ 468,993 -------- ------- ------- ------- ------- -------- ---------- ---------- Operating expenses: Operating, general and administrative................... 3,247 2,581 931 8,123 11,767 25,952 7,134 241,341 Depreciation and amortization...... 2,508 2,137 648 4,593 6,103 16,864 8,318 249,952 Stock option compensation expense.......................... -- -- -- -- -- -- 845 38,194 Management fees/corporate expense charges.......................... 106 224 54 446 566 6,176 473 11,073 -------- ------- ------- ------- ------- -------- ---------- ---------- Total operating expenses......... 5,861 4,942 1,633 13,162 18,436 48,992 16,770 540,560 -------- ------- ------- ------- ------- -------- ---------- ---------- Income (loss) from operations........ 723 382 155 1,719 431 739 (3,057) (71,567) Interest expense..................... -- -- (691) (4,415) (5,120) (17,277) (2,353) (157,669) Interest income...................... 26 -- 5 20 41 44 133 10,085 Other income (expense)............... -- 38 -- (47) 25 (728) -- 2,840 -------- ------- ------- ------- ------- -------- ---------- ---------- Income (loss) before extraordinary item............................... $ 749 $ 420 $ (531) $(2,723) $(4,623) $(17,222) $ (5,277) $ (216,311) ======== ======= ======= ======= ======= ======== ========== ========== BALANCE SHEET DATA (AT END OF PERIOD): Total assets......................... $ 25,511 $26,342 $31,572 $67,994 $55,811 $281,969 $4,335,527 $8,687,474 Total debt........................... 10,194 10,480 28,847 59,222 41,500 274,698 2,002,206 5,134,310 Member's equity (deficit)............ 14,822 15,311 971 2,648 (1,975) (8,397) 2,147,379 3,204,122 75
79 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to the "-- Certain Trends and Uncertainties" section below in this Management's Discussion and Analysis for a discussion of important factors that could cause actual results to differ from expectations and non-historical information contained herein. INTRODUCTION We do not believe that our historical financial condition and results of operations are accurate indicators of future results because of recent and pending significant events, including: (1) the acquisition by Mr. Allen of CCA Group, Charter Communications Properties Holdings, LLC and CharterComm Holdings LLC, referred to together with their subsidiaries as the Charter companies; (2) the merger of Marcus Holdings with and into Charter Holdings; (3) the recent and pending acquisitions of Charter Communications Holding Company and its direct and indirect subsidiaries; (4) the refinancing of the previous credit facilities of the Charter companies; and (5) the purchase of publicly held notes that had been issued by several of the direct and indirect subsidiaries of Charter Communications Holding Company. Provided below is a discussion of our organizational history consisting of: (1) the operation and development of the Charter companies prior to the acquisition by Mr. Allen, together with the acquisition of the Charter companies by Mr. Allen; (2) the merger of Marcus Holdings with and into Charter Holdings; (3) the recent and pending acquisitions of Charter Communications Holding Company and its direct and indirect subsidiaries; and (4) the formation of Charter Communications, Inc. ORGANIZATIONAL HISTORY Prior to the acquisition of the Charter companies by Mr. Allen on December 23, 1998, and the merger of Marcus Holdings with and into Charter Holdings on April 7, 1999, the cable systems of the Charter and Marcus companies were operated under four groups of companies. Three of these groups were comprised of companies that were managed by Charter Investment, Inc. prior to the acquisition of the Charter companies by Mr. Allen and the fourth group was comprised of companies that were subsidiaries of Marcus Holdings. 76
80 The following is an explanation of how: (1) Charter Communications Properties; the operating companies that formerly comprised CCA Group; CharterComm Holdings; and the Marcus companies became wholly owned subsidiaries of Charter Operating; (2) Charter Operating became a wholly owned subsidiary of Charter Holdings; (3) Charter Holdings became a wholly owned subsidiary of Charter Communications Holding Company; and (4) Charter Communications Holding Company became a wholly owned subsidiary of Charter Investment, Inc. THE CHARTER COMPANIES Prior to Charter Investment, Inc. acquiring the remaining interests that it did not previously own in two of the three groups of Charter companies, namely CCA Group and CharterComm Holdings, as described below, the operating subsidiaries of the three groups of Charter companies were parties to separate management agreements with Charter Investment, Inc. under which Charter Investment, Inc. provided management and consulting services. Prior to our acquisition by Mr. Allen, the Charter companies were as follows: (1) Charter Communications Properties Holdings, LLC Charter Communications Properties Holdings, LLC was a wholly owned subsidiary of Charter Investment, Inc. The primary subsidiary of Charter Communications Properties Holdings, which owned the cable systems, was Charter Communications Properties. In connection with Mr. Allen's acquisition on December 23, 1998, Charter Communications Properties Holdings was merged out of existence. Charter Communications Properties became a direct, wholly owned subsidiary of Charter Investment, Inc. In May 1998, Charter Communications Properties acquired certain cable systems from Sonic Communications, Inc. for a total purchase price, net of cash acquired, of $228.4 million, including $60.9 million of assumed debt. (2) CCA Group The controlling interests in CCA Group were held by affiliates of Kelso & Co. Charter Investment, Inc. had only a minority interest. On December 21, 1998, prior to Mr. Allen's acquisition, the remaining interests it did not previously own in CCA Group were acquired by Charter Investment, Inc. from the Kelso affiliates. Consequently, the companies comprising CCA Group became wholly owned subsidiaries of Charter Investment, Inc. CCA Group consisted of the following three sister companies: (a) CCT Holdings, LLC, (b) CCA Holdings, LLC, and (c) Charter Communications Long Beach, LLC. 77
81 The cable systems were owned by the various subsidiaries of these three sister companies. The financial statements for these three sister companies historically were combined and the term "CCA Group" was assigned to these combined entities. In connection with Mr. Allen's acquisition on December 23, 1998, the three sister companies and some of the non-operating subsidiaries were merged out of existence, leaving certain of the operating subsidiaries owning all of the cable systems under this former group. These operating subsidiaries became indirect, wholly owned subsidiaries of Charter Investment, Inc. (3) CharterComm Holdings, LLC The controlling interests in CharterComm Holdings were held by affiliates of Charterhouse Group International Inc. Charter Investment, Inc. had only a minority interest. On December 21, 1998, prior to Mr. Allen's acquisition, the remaining interests it did not previously own in CharterComm Holdings were acquired by Charter Investment, Inc. from the Charterhouse affiliates. Consequently, CharterComm Holdings became a wholly owned subsidiary of Charter Investment, Inc. The cable systems were owned by the various subsidiaries of CharterComm Holdings. In connection with Mr. Allen's acquisition on December 23, 1998, some of the non-operating subsidiaries were merged out of existence, leaving certain of the operating subsidiaries owning all of the cable systems under this former group. CharterComm Holdings was merged out of existence. Charter Communications, LLC became a direct, wholly owned subsidiary of Charter Investment, Inc. The acquisition by Mr. Allen became effective on December 23, 1998, through a series of transactions in which Mr. Allen acquired approximately 94% of the equity interests of Charter Investment, Inc. for an aggregate purchase price of $2.2 billion, excluding $2.0 billion in assumed debt. Charter Communications Properties, the operating companies that formerly comprised CCA Group and CharterComm Holdings were contributed to Charter Operating subsequent to Mr. Allen's acquisition. Charter Communications Properties is deemed to be our predecessor. Consequently, the contribution of Charter Communications Properties was accounted for as a reorganization under common control. Accordingly, the accompanying financial statements for periods prior to December 24, 1998 include the accounts of Charter Communications Properties. The contributions of the operating companies that formerly comprised CCA Group and CharterComm Holdings were accounted for in accordance with purchase accounting. Accordingly, the financial statements for periods after December 23, 1998 include the accounts of Charter Communications Properties, CCA Group and CharterComm Holdings. In February 1999, Charter Holdings was formed as a wholly owned subsidiary of Charter Investment, Inc., and Charter Operating was formed as a wholly owned subsidiary of Charter Holdings. All of Charter Investment, Inc.'s direct interests in the entities described above were transferred to Charter Operating. All of the prior management agreements were terminated and a new management agreement was entered into between Charter Investment, Inc. and Charter Operating. 78
82 In May 1999, Charter Communications Holding Company was formed as a wholly owned subsidiary of Charter Investment, Inc. All of Charter Investment, Inc.'s interests in Charter Holdings were transferred to Charter Communications Holding Company. MARCUS COMPANIES In April 1998, Mr. Allen acquired approximately 99% of the non-voting economic interests in Marcus Cable, and agreed to acquire the remaining interests. The owner of the remaining partnership interests retained voting control of Marcus Cable. In October 1998, Marcus Cable entered into a management consulting agreement with Charter Investment, Inc., pursuant to which Charter Investment, Inc. provided management and consulting services to Marcus Cable and its subsidiaries which own the cable systems. This agreement placed the Marcus cable systems under common management with the cable systems of the Charter companies acquired by Mr. Allen in December 1998. In March 1999, all of Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings, a then newly formed company. Later in March 1999, Mr. Allen acquired the remaining interests in Marcus Cable, including voting control, which interests were transferred to Marcus Holdings. In April 1999, Mr. Allen merged Marcus Holdings into Charter Holdings, and the operating subsidiaries of Marcus Holdings and all of the cable systems they owned came under the ownership of Charter Holdings and, in turn, Charter Operating. For financial reporting purposes, the merger of Marcus Holdings with and into Charter Holdings was accounted for as an acquisition of Marcus Holdings effective March 31, 1999, and accordingly, the results of operations of Marcus Holdings have been included in the financial statements of Charter Communications Holding Company since that date. ACQUISITIONS In the second, third and fourth quarters of 1999, direct or indirect subsidiaries of Charter Holdings acquired Renaissance, American Cable, Greater Media systems, Helicon, Vista, a cable system of Cable Satellite, Rifkin and InterMedia for a total purchase price of approximately $4.3 billion which included assumed debt of $351 million. See "Business -- Acquisitions" and "Description of Certain Indebtedness". These acquisitions were funded through excess cash from the issuance by Charter Holdings of senior notes, borrowings under our credit facilities, capital contributions to Charter Communications Holding Company by Mr. Allen and the assumption of the outstanding Renaissance, Helicon and Rifkin notes. As part of the transaction with InterMedia, we agreed to "swap" some of our non-strategic cable systems located in Indiana, Montana, Utah and northern Kentucky, representing 144,000 customers. The InterMedia systems serve approximately 412,000 customers in Georgia, North Carolina, South Carolina and Tennessee. We have transferred 114,000 customers to InterMedia in connection with this swap. Approximately 30,000 customers are yet to be transferred pending the necessary regulatory approvals. See "Business -- Acquisitions -- InterMedia Systems". 79
83 In addition to these acquisitions, since the beginning of 1999, Charter Communications Holding Company and its subsidiaries have entered into definitive agreements to acquire the Avalon, Fanch, Falcon and Bresnan cable systems. All of these acquisitions are set forth in the table below. These acquisitions are expected to be funded through the net proceeds of the offering, borrowings under credit facilities, additional equity and debt financings and the assumption of outstanding notes issued by Avalon and Bresnan. Not all of the funding necessary to complete these acquisitions has been arranged. See "-- Liquidity and Capital Resources" and "Description of Certain Indebtedness". Under the Falcon purchase agreement, specified Falcon sellers have agreed to receive a portion of the Falcon purchase price in the form of membership units in Charter Communications Holding Company ranging from a minimum with an estimated value of $425 million to a maximum of $550 million. Under the Bresnan purchase agreement, the Bresnan sellers have agreed to receive $1.0 billion of the Bresnan purchase price in the form of membership units in Charter Communications Holding Company, which, as of the closing of the offering, would equal approximately 6.7% of the total membership units in Charter Communications Holding Company. See "Business -- Acquisitions". In addition, certain Rifkin sellers received $133.3 million of the purchase price in the form of preferred equity of Charter Communications Holding Company. Under the Helicon purchase agreement, $25 million of the purchase price was paid in the form of preferred limited liability company interests of Charter-Helicon, LLC, a direct wholly owned subsidiary of Charter Communications, LLC, itself an indirect subsidiary of Charter Communications Holding Company. AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 ACTUAL OR ---------------------------- ANTICIPATED PURCHASE ACQUISITION PRICE REVENUE ACQUISITION DATE (IN MILLIONS) CUSTOMERS (IN THOUSANDS) - ----------- ----------- ------------- --------- -------------- Renaissance........................ 4/99 $ 459 129,000 $ 30,807 American Cable..................... 5/99 240 69,000 17,958 Greater Media systems.............. 6/99 500 175,000 42,348 Helicon............................ 7/99 550 173,000 42,956 Vista.............................. 7/99 126 28,000 7,101 Cable Satellite.................... 8/89 22 9,000 2,056 Rifkin............................. 9/99 1,460 461,000 105,592 InterMedia systems................. 10/99 904+ 412,000 100,644 systems swap (144,000)(a) ----------- 268,000 Avalon............................. 4th Quarter 1999 845 260,000 51,769 Fanch.............................. 4th Quarter 1999 2,400 537,000 98,931 Falcon............................. 4th Quarter 1999 3,550 1,008,000 212,205 Bresnan............................ 1st Quarter 2000 3,100 656,000 137,291 --------------- --------- -------- Total......................... $ 14,156 3,773,000 $849,658 =============== ========= ======== - --------------- (a) Represents the number of customers served by cable systems that we agreed to transfer to InterMedia. This number includes 30,000 customers served by an Indiana cable system that we did 80
84 not transfer at the time of the InterMedia closing because the necessary regulatory approvals were still pending. The systems acquired pursuant to these recent and pending acquisitions served, in the aggregate, approximately 3.8 million customers as of June 30, 1999. In addition, we are negotiating with several other potential acquisition and swapping candidates whose systems would further complement our regional operating clusters. CHARTER COMMUNICATIONS, INC. Charter Communications, Inc. was formed as a holding company in July 1999. In connection with the offering, Charter Communications, Inc. will issue: - 170,000,000 shares of Class A common stock in the offering, and an additional 25,500,000 shares of Class A common stock if the underwriters exercise their over-allotment option in full; and - 50,000 shares of high vote Class B common stock to Mr. Allen. Charter Communications, Inc. will use all of the net proceeds of the offering and the sale of shares of Class B common stock to purchase Charter Communications Holding Company membership units, except for a portion of the net proceeds of the offering which will be retained by Charter Communications, Inc. to acquire a portion of the equity interests in the Avalon acquisition. Charter Communications, Inc. has committed to contribute these equity interests to Charter Communications Holding Company in exchange for membership interests in Charter Communications Holding Company. See "Use of Proceeds". Immediately following the offering, Mr. Allen will control approximately 95% of the total voting power of Charter Communications, Inc.'s outstanding capital stock and will control Charter Communications Holding Company and its direct and indirect subsidiaries. The sale of shares of Class A common stock in the offering and the sale of the shares of Class B common stock as described above will affect us in many ways, including the following: - Our Management. The current management agreement between Charter Operating and Charter Investment, Inc. will be amended and assigned from Charter Investment, Inc. to Charter Communications, Inc. Charter Communications, Inc. and Charter Communications Holding Company will enter into a new agreement relating to the management of the cable systems of the subsidiaries of Charter Communications Holding Company. In addition, Charter Investment, Inc. and Charter Communications, Inc. will enter into a mutual services agreement. These agreements are described under the heading "Certain Relationships and Related Transactions". - Option Plan. After the offering, each membership unit in Charter Communications Holding Company received as a result of an exercise of an option issued under the Charter Communications Holding Company option plan will automatically be exchanged for one share of Class A common stock of Charter 81
85 Communications, Inc. See "Management -- Option Plan" for additional information regarding the option plan. - Business Activities. Upon the completion of the offering, we will not be permitted to engage in any business activity other than the cable transmission of video, audio and data unless Mr. Allen first consents to our pursuing that particular business activity. See "Risk Factors -- We are not permitted to engage in any business activity other than the cable transmission of video, audio and data unless Mr. Allen authorizes us to pursue that particular business activity" and "Certain Relationships and Related Transactions -- Allocation of Business Opportunities with Mr. Allen". - Special Loss Allocation. Charter Communications Holding Company's limited liability company agreement provides that through the end of 2003, tax losses of Charter Communications Holding Company that would otherwise have been allocated to Charter Communications, Inc. based generally on its percentage of outstanding membership units will be allocated instead to the membership units held by Vulcan Cable III Inc. and Charter Investment, Inc. The limited liability company agreement also provides that beginning at the time that Charter Communications Holding Company first becomes profitable, as determined under applicable federal income tax rules for determining book profits, tax profits that would otherwise have been allocated to Charter Communications, Inc. based generally on its percentage of outstanding membership units will instead be allocated to the membership units held by Vulcan Cable III Inc. and Charter Investment, Inc. The purpose of these arrangements is to allow Mr. Allen to take advantage, for tax purposes, of the losses expected to be generated by Charter Communications Holding Company. These arrangements should not materially affect our results of operations. See "Description of Capital Stock and Membership Units -- Special Allocation of Losses". OVERVIEW Approximately 85% of our historical revenues for the six months ended June 30, 1999 are attributable to monthly subscription fees charged to customers for our basic, expanded basic and premium cable television programming services, equipment rental and ancillary services provided by our cable television systems. In addition, we derive other revenues from installation and reconnection fees charged to customers to commence or reinstate service, pay-per-view programming, where users are charged a fee for individual programs requested, advertising revenues and commissions related to the sale of merchandise by home shopping services. We have generated increased revenues in each of the past three fiscal years, primarily through internal customer growth, basic and expanded tier rate increases and acquisitions as well as innovative marketing, such as our MVP package of premium services. The MVP package entitles customers to receive a substantial discount on bundled premium services of HBO, Showtime, Cinemax and The Movie Channel. The MVP package has increased premium revenue by 3.4% and premium cash flow by 5.5% in the initial nine months of this program. We are beginning to offer our customers several other services, which are expected to significantly 82
86 contribute to our revenues. One of these services is digital cable, which provides subscribers with additional programming options. We are also offering high speed Internet access to the World Wide Web through cable modems. Cable modems can be attached to personal computers so that users can send and receive data over cable systems. Our television based Internet access allows us to offer the services provided by WorldGate Communications, Inc., which provides users with TV based e-mail and other Internet access. Our expenses primarily consist of operating costs, general and administrative expenses, depreciation and amortization expense and management fees/corporate expense charges. Operating costs primarily include programming costs, cable service related expenses, marketing and advertising costs, franchise fees and expenses related to customer billings. Programming costs account for approximately 46% of our operating costs. Programming costs have increased in recent years and are expected to continue to increase due to additional programming being provided to customers, increased cost to produce or purchase cable programming, inflation and other factors affecting the cable television industry. In each year we have operated, our costs to acquire programming have exceeded customary inflationary increases. Significant factors with respect to increased programming costs are the rate increases and surcharges imposed by national and regional sports networks directly tied to escalating costs to acquire programming for professional sports packages in a competitive market. We have benefited in the past from our membership in an industry cooperative that provides members with volume discounts from programming networks. We believe our membership has kept increases in our programming costs below what the increases would otherwise have been. We also believe that we should derive additional discounts from programming networks due to our increased size. Finally, we were able to negotiate favorable terms with premium networks in conjunction with the premium packages we offer, which minimized the impact on margins and provided substantial volume incentives to grow the premium category. Although we believe that we will be able to pass future increases in programming costs through to customers, there can be no assurance that we will be able to do so. General and administrative expenses primarily include accounting and administrative personnel and professional fees. Depreciation and amortization expense relates to the depreciation of our tangible assets and the amortization of our franchise costs. Management fees/corporate expense charges are fees paid to or charges from Charter Investment, Inc. for corporate management and consulting services. Charter Holdings records actual corporate expense charges incurred by Charter Investment, Inc. on behalf of Charter Holdings. Prior to the acquisition of us by Mr. Allen, the CCA Group and CharterComm Holdings recorded management fees payable to Charter Investment, Inc. equal to 3.0% to 5.0% of gross revenues plus certain expenses. In October 1998, Charter Investment, Inc. began managing the cable operations of Marcus Holdings under a management agreement, which was terminated in February 1999 and replaced by a master management fee arrangement. The Charter Operating credit facilities limit management fees to 3.5% of gross revenues. In connection with the offering, the existing management agreement between Charter Investment, Inc. and Charter Operating will be assigned to Charter Communica- 83
87 tions, Inc. and Charter Communications, Inc. will enter into a new management agreement with Charter Communications Holding Company. This management agreement will be substantially similar to the existing management agreement with Charter Operating except that Charter Communications, Inc. will only be entitled to receive reimbursement of its expenses as consideration for its providing management services. See "Certain Relationships and Related Transactions". We have had a history of net losses and expect to continue to report net losses for the foreseeable future. The principal reasons for our prior and anticipated net losses include depreciation and amortization expenses associated with our acquisitions, capital expenditures related to construction and upgrading of our systems, and interest costs on borrowed money. We cannot predict what impact, if any, continued losses will have on our ability to finance our operations in the future. RESULTS OF OPERATIONS The following discusses the results of operations for: (1) Charter Communications Holding Company, comprised of Charter Communications Properties, for the six months ended June 30, 1998, and (2) Charter Communications Holding Company, comprised of the following for the six months ended June 30, 1999: - Charter Communications Properties, CCA Group and CharterComm Holdings for the entire period; - Marcus Holdings for the period from March 31, 1999 (the date Mr. Allen acquired voting control) through June 30, 1999; - Renaissance for the period from May 1, 1999 (the acquisition date) through June 30, 1999; and - American Cable for the period from May 8, 1999 (the acquisition date) through June 30, 1999. 84
88 The following table sets forth the percentages of revenues that items in the statements of operations constitute for the indicated periods. SIX MONTHS ENDED ------------------------------------------ 6/30/99 6/30/98 ------------------ ------------------ (DOLLARS IN THOUSANDS) STATEMENTS OF OPERATIONS Revenues........................................... $ 468,993 100.0% $ 15,129 100.0% --------- ------ -------- ------ Operating expenses: Operating, general and administrative............ 241,341 51.5 8,378 55.4 Depreciation and amortization.................... 249,952 53.3 5,312 35.1 Stock option compensation expense................ 38,194 8.1 -- -- Management fees/corporate expense charges........ 11,073 2.4 628 4.1 --------- ------ -------- ------ Total operating expenses................. 540,560 115.3 14,318 94.6 --------- ------ -------- ------ Income (loss) from operations...................... (71,567) (15.3) 811 5.4 Interest income.................................... 10,085 2.2 14 0.1 Interest expense................................... (157,669) (33.6) (5,618) (37.1) Other income....................................... 2,840 0.6 3 -- --------- ------ -------- ------ Loss before extraordinary item..................... (216,311) (46.1) (4,790) (31.6) Extraordinary item-loss from early extinguishment of debt.......................................... 7,794 1.7 -- -- --------- ------ -------- ------ Net loss................................. $(224,105) (47.8)% $ (4,790) (31.6)% ========= ====== ======== ====== PERIOD FROM JANUARY 1, 1999 THROUGH JUNE 30, 1999 COMPARED TO PERIOD FROM JANUARY 1, 1998 THROUGH JUNE 30, 1998 REVENUES. Revenues increased by $453.9 million, or 3,000%, from $15.1 million for the period from January 1, 1998 through June 30, 1998 to $469.0 million for the period from January 1, 1999 through June 30, 1999. The increase in revenues primarily resulted from the acquisitions of CCA Group, CharterComm Holdings, Sonic, Marcus Holdings and Renaissance. Additional revenues from these entities included for the period ended June 30, 1999 were $185.1 million, $108.9 million, $26.2 million, $128.1 million and $10.4 million, respectively. OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES. Operating, general and administrative expenses increased by $232.9 million, or 2,781%, from $8.4 million for the period from January 1, 1998 through June 30, 1998 to $241.3 million for the period from January 1, 1999 through June 30, 1999. This increase was due primarily to the acquisitions of the CCA Group, CharterComm Holdings, Sonic, Marcus Holdings and Renaissance. Additional operating, general and administrative expenses from these entities included for the period from January 1, 1999 through June 30, 1999 were $93.4 million, $54.2 million, $13.7 million, $69.5 million and $4.9 million, respectively. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased by $244.7 million, or 4,605%, from $5.3 million for the period from January 1, 1998 through June 30, 1998 to $250.0 million for the period from January 1, 1999 through June 30, 1999. There was a significant increase in amortization expense resulting from the acquisitions of the CCA Group, CharterComm Holdings, Sonic, Marcus Holdings 85
89 and Renaissance. Additional depreciation and amortization expense from these entities included for the period ended June 30, 1999 were $100.7 million, $67.4 million, $5.3 million, $65.6 million and $5.8 million, respectively. STOCK OPTION COMPENSATION EXPENSE. Stock option compensation expense for the period from January 1, 1999 through June 30, 1999 was $38.2 million due to the granting of options to employees in December 1998, February 1999 and April 1999. The exercise prices of the options are less than the estimated fair values of the underlying membership units on the date of grant, resulting in compensation expense accrued over the vesting period of each grant that varies from four to five years. MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Management fees/corporate expense charges increased by $10.5 million, or 1,663%, from $0.6 million for the period from January 1, 1998 through June 30, 1998 to $11.1 million for the period from January 1, 1999 through June 30, 1999. The increase from the period from January 1, 1998 through June 30, 1998 compared to the period from January 1, 1999 through June 30, 1999 was the result of the acquisitions of CCA Group, CharterComm Holdings, Sonic, Marcus Holdings, Renaissance and American Cable. INTEREST INCOME. Interest income increased by $10.1 million from $14,000 for the period from January 1, 1998 to June 30, 1998 to $10.1 million for the period from January 1, 1999 to June 30, 1999. The increase was primarily due to investing excess cash that resulted from required credit facilities draw downs. INTEREST EXPENSE. Interest expense increased by $152.1 million, or 2,706%, from $5.6 million for the period from January 1, 1998 through June 30, 1998 to $157.7 million for the period from January 1, 1999 through June 30, 1999. This increase resulted primarily from interest on the notes at Charter Holdings, the credit facilities at Charter Operating and the financing of the acquisitions of CCA Group and CharterComm Holdings. The interest expenses resulting from each of these transactions were $68.7 million, $44.9 million, $12.8 million and $11.3 million, respectively. OTHER INCOME. Other income increased by $2.8 million from $3,000 for the period from January 1, 1998 to June 30, 1998 to $2.8 million for the period from January 1, 1999 to June 30, 1999. The increase was primarily due to the gain on the sale of certain aircrafts. NET LOSS. Net loss increased by $219.3 million, or 4,579%, from $4.8 million for the period from January 1, 1998 through June 30, 1998 to $224.1 million for the period from January 1, 1998 through June 30, 1999. The increase in revenues that resulted from the acquisitions of CCA Group, CharterComm Holdings, Sonic and Marcus Holdings was not sufficient to offset the operating expenses associated with the acquired systems and loss from early extinguishment of debt. 86
90 RESULTS OF OPERATIONS The following discusses the results of operations for: (1) Charter Communications Holding Company, comprised of Charter Communications Properties, for the period from January 1, 1998 through December 23, 1998 and for the years ended December 31, 1997 and 1996, and (2) Charter Communications Holding Company, comprised of Charter Communications Properties, CCA Group and CharterComm Holdings, for the period from December 24, 1998 through December 31, 1998. The following table sets forth the percentages of revenues that items in the statements of operations constitute for the indicated periods. YEAR ENDED DECEMBER 31, 1/1/98 12/24/98 ------------------------------------ THROUGH THROUGH 1996 1997 12/23/98 12/31/98 ---------------- ---------------- ----------------- ---------------- (DOLLARS IN THOUSANDS) STATEMENTS OF OPERATIONS Revenues........................................ $14,881 100.0% $18,867 100.0% $ 49,731 100.0% $13,713 100.0% ------- ----- ------- ----- -------- ----- ------- ----- Operating expenses: Operating costs................................ 5,888 39.5% 9,157 48.5% 18,751 37.7% 6,168 45.0% General and administrative costs............... 2,235 15.0% 2,610 13.8% 7,201 14.5% 966 7.0% Depreciation and amortization.................. 4,593 30.9% 6,103 32.4% 16,864 33.9% 8,318 60.7% Stock option compensation expense.............. -- -- -- -- -- -- 845 6.2% Management fees/corporate expense charges...... 446 3.0% 566 3.0% 6,176 12.4% 473 3.4% ------- ----- ------- ----- -------- ----- ------- ----- Total operating expenses....................... 13,162 88.4% 18,436 97.7% 48,992 98.5% 16,770 122.3% ------- ----- ------- ----- -------- ----- ------- ----- Income (loss) from operations................... 1,719 11.6% 431 2.3% 739 1.5% (3,057) (22.3%) Interest income................................. 20 0.1% 41 0.2% 44 0.1% 133 1.0% Interest expense................................ (4,415) (29.7%) (5,120) (27.1%) (17,277) (34.7%) (2,353) (17.2%) Other income (expense).......................... (47) (0.3%) 25 0.1% (728) (1.5%) -- -- ------- ----- ------- ----- -------- ----- ------- ----- Net loss........................................ $(2,723) (18.3%) $(4,623) (24.5%) $(17,222) (34.6%) $(5,277) (38.5%) ======= ===== ======= ===== ======== ===== ======= ===== PERIOD FROM DECEMBER 24, 1998 THROUGH DECEMBER 31, 1998 This period is not comparable to any other period presented. The financial statements represent eight days of operations. This period not only contains the results of operations of Charter Communications Properties, but also the results of operations of those entities purchased in the acquisition of the Charter companies by Mr. Allen. As a result, no comparison of the operating results for this eight-day period is presented. PERIOD FROM JANUARY 1, 1998 THROUGH DECEMBER 23, 1998 COMPARED TO 1997 REVENUES. Revenues increased by $30.8 million, or 163.6%, from $18.9 million in 1997 to $49.7 million for the period from January 1, 1998 through December 23, 1998. The increase in revenues primarily resulted from the acquisition of Sonic whose revenues for that period were $29.8 million. OPERATING EXPENSES. Operating expenses increased by $9.6 million, or 104.8%, from $9.2 million in 1997 to $18.8 million for the period from January 1, 1998 through December 23, 1998. This increase was due primarily to the acquisition of Sonic, whose 87
91 operating expenses for that period were $9.4 million, partially offset by the loss of $1.4 million on the sale of a cable system in 1997. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased by $4.6 million, or 175.9%, from $2.6 million in 1997 to $7.2 million for the period from January 1, 1998 through December 23, 1998. This increase was due primarily to the acquisition of Sonic whose general and administrative expenses for that period were $6.0 million. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased by $10.8 million, or 176.3%, from $6.1 million in 1997 to $16.9 million for the period from January 1, 1998 through December 23, 1998. There was a significant increase in amortization resulting from the acquisition of Sonic. Incremental depreciation and amortization expenses of the acquisition of Sonic were $9.9 million. MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Corporate expense charges increased by $5.6 million, or 991.2% from $0.6 million in 1997 to $6.2 million for the period from January 1, 1998 through December 23, 1998. The increase from 1997 compared to the period from January 1, 1998 through December 23, 1998 was the result of additional Charter Investment, Inc. charges related to equity appreciation rights plans of $3.8 million for the period from January 1, 1998 through December 23, 1998 and an increase of $0.9 million in management services provided by Charter Investment, Inc. as a result of the acquisition of Sonic. INTEREST EXPENSE. Interest expense increased by $12.2 million, or 237.4%, from $5.1 million in 1997 to $17.3 million for the period from January 1, 1998 through December 23, 1998. This increase resulted primarily from the indebtedness of $220.6 million, including a note payable for $60.9 million, incurred in connection with the acquisition of Sonic resulting in additional interest expense. NET LOSS. Net loss increased by $12.6 million, or 272.5%, from $4.6 million in 1997 to $17.2 million for the period from January 1, 1998 through December 23, 1998. The increase in revenues that resulted from cable television customer growth was not sufficient to offset the operating expenses related to the acquisition of Sonic. 1997 COMPARED TO 1996 REVENUES. Revenues increased by $4.0 million, or 26.8%, from $14.9 million in 1996 to $18.9 million in 1997. The primary reason for this increase is the acquisition of five cable systems in 1996 that increased customers by 58.9%. Revenues of Charter Communications Properties, excluding the activity of any other systems acquired during the periods, increased by $0.7 million, or 8.9%, from $7.9 million in 1996 to $8.6 million in 1997. OPERATING EXPENSES. Operating expenses increased by $3.3 million, or 55.5%, from $5.9 million in 1996 to $9.2 million in 1997. This increase was primarily due to the acquisitions of the cable systems in 1996 and the loss of $1.4 million on the sale of a cable system in 1997. 88
92 GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased by $0.4 million, or 16.8%, from $2.2 million in 1996 to $2.6 million in 1997. This increase was primarily due to the acquisitions of the cable systems in 1996. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased by $1.5 million, or 32.9%, from $4.6 million in 1996 to $6.1 million in 1997. There was a significant increase in amortization resulting from the acquisitions of the cable systems in 1996. MANAGEMENT FEES/CORPORATE EXPENSE CHARGES. Corporate expense charges increased by $0.2 million, or 26.9%, from $0.4 million in 1996 to $0.6 million in 1997. These fees were 3.0% of revenues in both 1996 and 1997. INTEREST EXPENSE. Interest expense increased by $0.7 million, or 16.0%, from $4.4 million in 1996 to $5.1 million in 1997. This increase resulted primarily from the indebtedness incurred in connection with the acquisitions of several cable systems in 1996. NET LOSS. Net loss increased by $1.9 million, or 69.8%, from $2.7 million in 1996 to $4.6 million in 1997. The increase in net loss is primarily related to the $1.4 million loss on the sale of a cable system. OUTLOOK Our business strategy emphasizes the increase of our operating cash flow by increasing our customer base and the amount of cash flow per customer. We believe that there are significant advantages in increasing the size and scope of our operations, including: - improved economies of scale in management, marketing, customer service, billing and other administrative functions; - reduced costs for our cable systems and our infrastructure in general; - increased leverage for negotiating programming contracts; and - increased influence on the evolution of important new technologies affecting our business. We seek to "cluster" cable systems in suburban and ex-urban areas surrounding selected metropolitan markets. We believe that such "clustering" offers significant opportunities to increase operating efficiencies and to improve operating margins and cash flow by spreading fixed costs over an expanding subscriber base. In addition, we believe that by concentrating "clusters" in markets, we will be able to generate higher growth in revenues and operating cash flow. Through strategic acquisitions and "swaps" of cable systems, we seek to enlarge the coverage of our current areas of operations, and, if feasible, develop "clusters" in new geographic areas within existing regions. Swapping of cable systems allows us to trade systems that do not coincide with our operating strategy while gaining systems that meet our objectives. Several significant swaps have been announced. These swaps have demonstrated the industry's trend to cluster operations. To date, Charter Holdings has participated in one swap in connection with 89
93 the transaction with InterMedia. We are currently negotiating other possible swap transactions. LIQUIDITY AND CAPITAL RESOURCES Our business requires significant cash to fund acquisitions, capital expenditures, debt service costs and ongoing operations. We have historically funded and expect to fund future liquidity and capital requirements through cash flows from operations, equity contributions, borrowings under our credit facilities and debt and equity financings. Our historical cash flows from operating activities for 1998 were $30.2 million, and for the six months ended June 30, 1999 were $145.8 million. Pro forma for our recent and pending acquisitions and the merger of Marcus Holdings with Charter Holdings, our cash flows from operating activities for 1998 were $725.2 million, and for the six months ended June 30, 1999 were $451.1 million. CAPITAL EXPENDITURES We have substantial ongoing capital expenditure requirements. We make capital expenditures primarily to upgrade, rebuild and expand our cable systems, as well as for system maintenance, the development of new products and services, and converters. Converters are set-top devices added in front of a subscriber's television receiver to change the frequency of the cable television signals to a suitable channel. The television receiver is then able to tune and to allow access to premium service. Upgrading our cable systems will enable us to offer new products and services, including digital television, additional channels and tiers, expanded pay-per-view options, high-speed Internet access and interactive services. For the period from January 1, 2000 to December 31, 2002, we plan to spend approximately $5.5 billion for capital expenditures, approximately $2.9 billion of which will be used to upgrade and rebuild our systems to bandwidth capacity of 550 megahertz or greater and add two-way capability, so that we may offer advanced services. The remaining $2.6 billion will be used for extensions of systems, development of new products and services, converters and system maintenance. Capital expenditures for 2000, 2001 and 2002 are expected to be approximately $1.5 billion, $2.0 billion and $2.0 billion, respectively. We currently expect to finance approximately 80% of the anticipated capital expenditures with cash generated from operations and approximately 20% with additional borrowings under credit facilities. We cannot assure you that these amounts will be sufficient to accomplish our planned system upgrade, expansion and maintenance. See "Risk Factors -- We may not be able to obtain capital sufficient to fund our planned upgrades and other capital expenditures". This could adversely affect our ability to offer new products and services and compete effectively, and could adversely affect our growth, financial condition and results of operations. Capital expenditures for 1999, pro forma for recent and pending acquisitions, are expected to be approximately $1.048 billion. For the six months ended June 30, 1999, we made capital expenditures, excluding the acquisition of cable systems, of $206 million. Those expenditures were funded from cash flows from operations and credit facilities 90
94 borrowings. The majority of the capital expenditures related to rebuilding existing cable systems. FINANCING ACTIVITIES As of June 30, 1999, pro forma for the pending acquisitions and acquisitions completed since that date, our total debt was approximately $13.1 billion. Our significant amount of debt may adversely affect our ability to obtain financing in the future and react to changes in our business. Our debt and credit facilities contain and the credit facilities that we expect to enter into and debt that we expect to assume in connection with the pending acquisitions will contain, various financial and operating covenants that could adversely impact our ability to operate our business, including restrictions on the ability of operating subsidiaries to distribute cash to their parents. See "-- Certain Trends and Uncertainties -- Restrictive Covenants" and "Description of Certain Indebtedness", for further information and a more detailed description of our debt and the debt that we will assume or refinance in connection with our pending acquisitions. CHARTER HOLDINGS NOTES. On March 17, 1999, Charter Holdings issued $3.6 billion principal amount of senior notes. The net proceeds of approximately $2.99 billion, combined with the borrowings under our credit facilities, were used to consummate tender offers for publicly held debt of several of our subsidiaries, as described below, to refinance borrowings under our previous credit facilities, for working capital purposes and to finance a number of recent acquisitions. Semi-annual interest payments with respect to the 8.250% notes and the 8.625% notes will be approximately $89.4 million, commencing on October 1, 1999. No interest on the 9.920% notes will be payable prior to April 1, 2004. Thereafter, semi-annual interest payments on the three series of senior notes will be approximately $162.6 million in the aggregate, commencing on October 1, 2004. Charter Holdings and its wholly owned subsidiary, Charter Communications Capital Corporation, recently completed an offer to exchange the senior notes they issued in March 1999 for senior notes with substantially similar terms, except that the new notes are registered and are not subject to restrictions on transfer. With the exception of $120,000 principal amount of the 8.625% notes, all of the Charter Holdings notes were exchanged for new notes. As of June 30, 1999, $2.1 billion was outstanding under the 8.250% and 8.625% notes, and the accreted value of the 9.920% notes was $931.6 million. Concurrently with the issuance of the Charter Holdings notes, we refinanced substantially all of our previous credit facilities and Marcus Cable Operating Company, L.L.C.'s credit facilities with new credit facilities entered into by Charter Operating. In February and March 1999, we commenced cash tender offers to purchase the 14% senior discount notes issued by Charter Communications Southeast Holdings, LLC, the 11.25% senior notes issued by Charter Communications Southeast, LLC, the 13.50% senior subordinated discount notes issued by Marcus Cable Operating Company, L.L.C., and the 14.25% senior discount notes issued by Marcus Cable. All notes, except for $1.1 million in principal amount, were paid off for an aggregate amount of $1.0 billion. 91
95 CHARTER OPERATING CREDIT FACILITIES. Charter Operating's credit facilities provide for two term facilities, one with a principal amount of $1.0 billion that matures September 2007 (Term A), and the other with the principal amount of $1.85 billion that matures on March 2008 (Term B). Our credit facilities also provide for a $1.25 billion revolving credit facility with a maturity date of September 2007. As of June 30, 1999, approximately $2.025 billion was outstanding and $2.075 billion was available for borrowing under Charter Operating's credit facilities. In addition, an uncommitted incremental term facility of up to $500 million with terms similar to the terms of Charter Operating's credit facilities is permitted under these credit facilities, but will be conditioned on receipt of additional new commitments from existing and new lenders. Amounts under Charter Operating's credit facilities bear interest at a base rate or a eurodollar rate, plus a margin up to 2.75%. A quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the unborrowed balance of Term A and the revolving credit facility. The weighted average interest rate for outstanding debt on June 30, 1999 was 7.4%. Furthermore, Charter Operating has entered into interest rate protection agreements to reduce the impact of changes in interest rates on our debt outstanding under its credit facilities. See "-- Interest Rate Risk". RENAISSANCE NOTES. We acquired Renaissance in April 1999. The Renaissance 10% senior discount notes due 2008 had a $163.2 million principal amount at maturity outstanding and $100.0 million accreted value upon issuance. The Renaissance notes do not require the payment of interest until April 15, 2003. From and after April 15, 2003, the Renaissance notes bear interest, payable semi-annually in cash, on each April 15 and October 15, commencing October 15, 2003. The Renaissance notes are due on April 15, 2008. Due to the change of control of Renaissance, an offer to purchase the Renaissance notes was made at 101% of their accreted value, plus accrued and unpaid interest, on June 28, 1999. Of the $163.2 million face amount of Renaissance notes outstanding, $48.8 million were repurchased. As of June 30, 1999, the accreted value of the Renaissance notes was approximately $82.6 million. HELICON NOTES. We acquired Helicon in July 1999. As of June 30, 1999, Helicon had outstanding $115.0 million in principal amount of 11% senior secured notes due 2003. On November 1, 1999, we redeemed all of the Helicon notes at a purchase price equal to 103% of their principal amount, plus accrued interest, for $124.8 million. RIFKIN NOTES. We acquired Rifkin in September 1999. As of June 30, 1999, Rifkin had outstanding $125.0 million in principal amount of 11 1/8% senior subordinated notes due 2006. Interest on the Rifkin subordinated notes is payable semi-annually on January 15 and July 15 of each year. In September 1999, we commenced an offer to purchase any and all of the outstanding Rifkin notes, together with a $3.0 million promissory note payable to Monroe Rifkin, for cash at a premium over the principal amounts. In conjunction with this tender offer, we sought and obtained the consent of a majority in principal amount of the holders of the outstanding Rifkin notes to proposed amendments to the indenture governing the Rifkin notes, which eliminated substantially all of the restrictive covenants. We purchased notes with a total outstanding principal amount of $124.1 million for a total of $140.6 million, including a consent fee of $30 per 92
96 $1,000 to the holders who delivered timely consents to amending the indenture. We repurchased the promissory note issued to Monroe Rifkin for $3.4 million. FALCON DEBENTURES AND NOTES. Falcon has outstanding publicly held debt comprised of 8.375% senior debentures due 2010 and 9.285% senior discount debentures due 2010, as well as 11.56% subordinated notes due 2001. As of June 30, 1999, $375.0 million total principal amount of senior debentures and approximately $15.0 million principal amount of subordinated notes were outstanding and the accreted value of the Falcon senior discount debentures was approximately $308.7 million. Interest on the Falcon senior debentures is payable semi-annually on April 15 and October 15 of each year. No interest on the Falcon senior discount debentures will be payable prior to April 15, 2003. From and after April 15, 2003, the issuers of the senior discount debentures may elect to commence accrual of cash interest payment on any date, and the interest will be payable semi-annually in cash on each April 15 and October 15 thereafter. Interest on the subordinated notes is payable semi-annually on March 31 and September 30 of each year. Our acquisition of Falcon will trigger change of control provisions under the Falcon debentures that will require us to make offers to repurchase these notes at prices equal to 101% of the outstanding principal amounts, plus accrued interest. In addition, our acquisition of Falcon will constitute an event of default under the terms of the Falcon subordinated notes and will give rise, if written notice is given by holders of a majority in outstanding principal amount, to an obligation to repay all outstanding principal and accrued interest on the Falcon subordinated notes, plus a specified premium. We intend to finance required repayments of Falcon debentures and notes with additional debt financing that has not yet been arranged. We have obtained a commitment from a group of lenders to provide to Falcon bridge loans of up to $750 million to finance these repayments until additional debt financing can be arranged or if additional debt financing is unavailable. Goldman Sachs Credit Partners L.P. is the administrative agent under this facility. For a description of this bridge loan facility, see "Description of Certain Indebtedness". FALCON CREDIT FACILITIES. In connection with the Falcon acquisition, we have amended and restated, effective upon the closing of the acquisition, the existing Falcon credit facilities providing for available borrowing capacity of $1.25 billion. As of June 30, 1999, $967.0 million was outstanding, $175.3 million was committed and available for borrowing and an additional $110.0 million supplemental revolving facility was committed and will be available for borrowing upon completion of the Falcon acquisition under these credit facilities. It is also our intention to raise commitments for an additional supplemental revolving credit facility in the maximum amount of $240.0 million. AVALON NOTES. Avalon has 11 7/8% senior discount notes due 2008 and 9 3/8% senior subordinated notes due 2008. As of June 30, 1999, the accreted value of the Avalon 11 7/8% senior discount notes was $118.1 and $150.0 million in total principal 9 3/8% senior subordinated notes remained outstanding. Before December 1, 2003, there will be no payments of cash interest on the 11 7/8% senior discount notes. After December 1, 2003, cash interest on the 11 7/8% senior discount notes will be payable semi-annually on June 1 93
97 and December 1 of each year, commencing June 1, 2004. Interest on the 9 3/8% senior subordinated notes is payable semi-annually on June 1 and December 1 of each year. Our acquisition of Avalon will trigger change of control provisions under the Avalon notes that will require us to make an offer to repurchase them at a price equal to 101% of the outstanding principal amounts, plus accrued interest. AVALON CREDIT FACILITIES. We are not assuming debt in connection with the Avalon acquisition. We have received commitments from a group of lenders for credit facilities for Avalon providing for borrowings of up to $300 million, of which we expect to use $169 million to fund a portion of the Avalon purchase price. The closing of these facilities is expected to occur with the closing of the Avalon acquisition. BRESNAN NOTES. Bresnan has 8% senior notes due 2009 and 9 1/4% senior discount notes due 2009. As of June 30, 1999, $170.0 million in total principal 8% Bresnan senior notes was outstanding and the accreted value of the Bresnan 9 1/4% senior discount notes was $181.8 million. Interest on the 8% senior notes is payable semi-annually on February 1 and August 1 of each year. On and after August 1, 2004, interest on the 9 1/4% senior discount notes will be payable semi-annually in cash on February 1 and August 1 of each year. Our acquisition of Bresnan will trigger change of control provisions under the Bresnan notes that will require us to make an offer to repurchase these notes at a price equal to 101% of the outstanding principal amounts plus accrued interest. We expect that the Bresnan notes will be tendered and that we will repurchase the Bresnan notes with borrowings under credit facilities to be arranged at Bresnan. BRESNAN CREDIT FACILITIES. Bresnan has credit facilities providing for borrowings of up to $650.0 million. As of June 30, 1999, $500.0 million was outstanding and $150.0 million was available for borrowing under these credit facilities. Because our acquisition of Bresnan will trigger change of control and other provisions under the Bresnan credit facilities, we intend to assume and amend these credit facilities. If we cannot assume and amend these credit facilities, we will be required to refinance the Bresnan credit facilities and repay all outstanding borrowings. FANCH CREDIT FACILITIES. We are not assuming debt in connection with the Fanch acquisition. We have received commitments from a group of lenders for credit facilities for Fanch providing for borrowings of up to $1.2 billion, of which we expect to use $0.9 billion to fund a portion of the purchase price. The closing of these facilities is expected to occur concurrently with the closing of the Fanch acquisition. ACQUISITIONS In the second, third and fourth quarters of 1999, we acquired the Renaissance, American Cable, Greater Media, Helicon, Vista, Cable Satellite, Rifkin and InterMedia cable systems. The total purchase price for these acquisitions was $4.3 billion, including $351 million of assumed debt. We financed the cash portion of the purchase prices for these acquisitions through excess cash from the issuance of the Charter Operating senior notes, borrowings under our credit facilities, capital contributions by Mr. Allen through Vulcan Cable III Inc., and, in the case of InterMedia, through a swap of cable systems 94
98 valued at $331.8 million and a commitment to transfer an additional cable system valued at $88.2 million. We have agreed to purchase the Avalon, Fanch, Falcon and Bresnan cable systems. The total purchase price for these acquisitions is $9.9 billion. This amount includes assumed debt of $2.8 billion as of June 30, 1999. The debt consists of $1.3 billion aggregate principal amount of notes and debentures and $1.5 billion of credit facility borrowings that are subject to change of control provisions which will be triggered by these pending acquisitions. We intend to finance these acquisitions and required debt repayments, in part, with the proceeds of the offering, Mr. Allen's equity contribution through Vulcan Cable III Inc. to Charter Communications Holding Company, borrowings under committed credit facilities at Fanch, Avalon and Falcon, and the issuance to certain Falcon and Bresnan sellers of between $1.425 and $1.55 billion in membership units of Charter Communications Holding Company. In August 1999, Vulcan Cable III Inc. contributed to Charter Communications Holding Company $500 million in cash and, in September 1999, an additional $825 million, of which approximately $644.3 million was in cash and approximately $180.7 million was in the form of equity interests acquired by Vulcan Cable III Inc. in connection with the Rifkin acquisition. In addition, Mr. Allen has agreed to make a $750 million equity investment in Charter Communications Holding Company at the closing of the offering for membership units at the initial public offering price less the underwriting discount. We plan to fund required repurchases of the approximately $0.7 billion of outstanding Falcon debentures and notes that are put to us with borrowings under the committed Falcon bridge loan facility, or other debt financing if available. Available and committed sources of funds will not be sufficient to consummate our pending acquisitions and fund related obligations. In connection with our acquisitions, we may need to raise additional amounts up to a total of approximately $5.41 billion. We will need to raise approximately $1.72 billion by borrowing under credit facilities at Bresnan that have not yet been arranged and/or by issuing debt or equity securities of Charter Communications, Inc. or Charter Communications Holding Company to fund: - approximately $0.87 billion of the Bresnan purchase price; - approximately $0.50 billion in outstanding Bresnan credit facility borrowings that we would have to repay if we are unable to assume and amend the existing Bresnan credit facilities; and - approximately $0.35 billion in Bresnan notes that we expect to be put to us in connection with required change of control offers for these notes. In addition, we will have to raise approximately $3.69 billion of additional financing if we are required to pay: - approximately $0.71 billion to repurchase outstanding notes of Falcon if committed bridge loan financing does not close; - approximately $0.17 billion if the Avalon credit facilities do not close; 95
99 - approximately $0.88 billion if the Fanch credit facilities do not close; - approximately $0.27 billion to repurchase outstanding notes of Avalon; - approximately $1.57 billion to repurchase equity interests issued or to be issued to specified sellers in connection with a number of our acquisitions because of possible violations of Section 5 of the Securities Act of 1933; and - approximately $0.09 billion to InterMedia if we do not obtain timely regulatory approvals for our transfer to InterMedia of an Indiana cable system and we are unable to transfer replacement systems. We cannot assure you that we will be able to raise the financing necessary to consummate our pending acquisitions and to satisfy the obligations described above. If we are unable to raise the financing necessary to satisfy any or all of these obligations, we may be unable to close our pending acquisitions and could be in default under one or more other obligations. In any such case, the relevant sellers or creditors could initiate legal proceedings against us, including under bankruptcy and reorganization laws, for any damages they suffer as a result of our non-performance. Any such action could trigger defaults under our other obligations, including our credit facilities and debt instruments. For a description of our recently completed and pending acquisitions, see "Business -- Acquisitions". The following table sets forth the anticipated sources and uses of funds (in millions) as of the anticipated closing dates for our pending acquisitions and acquisitions closed since June 30, 1999 based on the following assumptions: (1) Mr. Allen, through Vulcan Cable III Inc., had made a total equity contribution of $1.325 billion to Charter Communications Holding Company in exchange for membership units; (2) Mr. Allen, through Vulcan Cable III Inc., had purchased membership units from Charter Communications Holding Company for $750 million; (3) the initial public offering price per share is $18.00, which is the mid-point of the range appearing on the cover of this prospectus; (4) all of the Helicon and Rifkin notes had been purchased through tender offers; (5) we had arranged new credit facilities at Falcon, Avalon and Fanch for which we have received commitments; (6) we had raised additional financing by borrowing under credit facilities at Bresnan that have not yet been arranged; (7) the Avalon notes had not been put to us as permitted by the indentures pursuant to change of control provisions; (8) the Falcon bridge loan facility will close; (9) all of the Falcon and Bresnan notes and debentures had been put to us as permitted by the respective indentures pursuant to change of control 96
100 provisions. We expect to repurchase the Falcon notes and debentures with proceeds from the Falcon bridge loan facility. We expect to repurchase the Bresnan notes with proceeds from new credit facilities that we assume will be arranged at Bresnan; (8) $425 million of Falcon's purchase price had been paid in the form of membership units in Charter Communications Holding Company. Up to $550 million of the purchase price may, at the option of specified Falcon sellers, be paid in the form of membership units; and (9) pending acquisitions had been funded with additional debt that is not arranged at this time. 97
101 SOURCES: -------- Borrowings under Charter Operating's credit facilities................... $ 1,579 Publicly held debt (anticipated principal amount and accreted value at closing of acquisitions): 9.375% senior subordinated notes -- Avalon............ $ 150 11.875% senior discount notes -- Avalon............ 123 273 ----- Anticipated borrowings under Falcon's committed credit facilities at closing date of acquisition.................. 1,011 ----- Anticipated financing to be arranged by Bresnan and Charter Communications Holding Company or Charter Communications, Inc. in connection with the Bresnan acquisition.................. 1,732 Anticipated borrowings under acquired companies' credit facilities at closing date of acquisitions: Avalon....................... 169 Fanch........................ 875 1,044 ----- Falcon bridge loan facility.... 712 Gross proceeds from offering... 3,060 Helicon preferred limited liability company interest... 25 Funded and expected equity contributions: Rifkin preferred equity...... 133 Falcon equity................ 425 Bresnan equity............... 1,000 Mr. Allen contributed equity..................... 1,325 Mr. Allen committed equity... 750 3,633 ----- ------- $13,069 ======= USES: ----- Payments for pending acquisitions and acquisitions closed since June 30, 1999: Helicon............................. $ 550 Vista and Cable Satellite........... 148 Rifkin.............................. 1,460 InterMedia.......................... 904 Avalon (less escrow deposit of $50).............................. 795 Fanch............................... 2,400 Falcon.............................. 3,550 Bresnan............................. 3,100 Underwriting discounts and estimated offering expenses................... 162 ------- $13,069 ======= 98
102 CERTAIN TRENDS AND UNCERTAINTIES The following discussion highlights a number of trends and uncertainties, in addition to those discussed elsewhere in this prospectus, including in "Risk Factors" and "Business", that could materially impact our business, results of operations and financial condition. SUBSTANTIAL LEVERAGE. As of June 30, 1999, pro forma for our pending acquisitions and acquisitions completed since that date, our total debt was approximately $13.1 billion and our total stockholders' equity was approximately $2.8 billion. We anticipate incurring substantial additional debt in the future to fund the expansion, maintenance and the upgrade of our systems. Our ability to make payments on our debt and to fund our planned capital expenditures for upgrading our cable systems, our pending acquisitions and our ongoing operations will depend on our ability to generate cash and secure financing in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. There can be no assurance that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our existing credit facilities, new facilities or from other sources of financing in an amount sufficient to enable us to repay our debt, to grow our business or to fund our other liquidity and capital needs. VARIABLE INTEREST RATES. A significant portion of our debt bears interest at variable rates that are linked to short-term interest rates. In addition, a significant portion of our assumed debt or debt we expect to arrange in connection with our pending acquisitions will bear interest at variable rates. If interest rates rise, our costs relative to those obligations will also rise. See later discussion on "Interest Rate Risk". RESTRICTIVE COVENANTS. Our debt and credit facilities contain and the facilities that we expect to enter into and debt that we expect to assume in connection with the pending acquisitions will contain a number of significant covenants that, among other things, restrict the ability of our subsidiaries to: - pay dividends; - pledge assets; - dispose of assets or merge; - incur additional debt; - issue equity; - repurchase or redeem equity interests and debt; - create liens; and - make certain investments or acquisitions. In addition, each of the credit facilities requires the particular borrower to maintain specified financial ratios and meet financial tests. The ability to comply with these provisions may be affected by events beyond our control. The breach of any of these 99
103 covenants will result in a default under the applicable debt agreement or instrument, which could trigger acceleration of the debt. Any default under our credit facilities or the indentures governing outstanding debt securities may adversely affect our growth, our financial condition and our results of operations. IMPORTANCE OF GROWTH STRATEGY AND RELATED RISKS. We expect that a substantial portion of any of our future growth will be achieved through revenues from additional services and the acquisition of additional cable systems. We cannot assure you that we will be able to offer new services successfully to our customers or that those new services will generate revenues. In addition, the acquisition of additional cable systems may not have a positive net impact on our operating results. Acquisitions involve a number of special risks, including diversion of management's attention, failure to retain key acquired personnel, risks associated with unanticipated events or liabilities and difficulties in assimilation of the operations of the acquired companies, some or all of which could have a material adverse effect on our business, results of operations and financial condition. If we are unable to grow our cash flow sufficiently, we may be unable to fulfill our obligations or obtain alternative financing. MANAGEMENT OF GROWTH. As a result of the acquisition of the Charter companies by Paul G. Allen, our merger with Marcus Holdings and our recent and pending acquisitions, we have experienced and will continue to experience rapid growth that has placed and is expected to continue to place a significant strain on our management, operations and other resources. Our future success will depend in part on our ability to successfully integrate the operations acquired and to be acquired and to attract and retain qualified personnel. Historically, acquired entities have had minimal employee benefit related costs and all benefit plans have been terminated with acquired employees transferring to our 401(k) plan. No significant severance cost is expected in conjunction with the recent and pending acquisitions. The failure to retain or obtain needed personnel or to implement management, operating or financial systems necessary to successfully integrate acquired operations or otherwise manage growth when and as needed could have a material adverse effect on our business, results of operations and financial condition. In connection with our pending acquisitions, we have formed multi-disciplinary teams to formulate plans for establishing customer service centers, identifying property, plant and equipment requirements and possible reduction of headends. Headends are the control centers of a cable television system, where incoming signals are amplified, converted, processed and combined for transmission to customers. These teams also determine market position and how to attract talented personnel. Our goals include rapid transition in achieving performance objectives and implementing "best practice" procedures. REGULATION AND LEGISLATION. Cable systems are extensively regulated at the federal, state, and local level. These regulations have increased the administrative and operational expenses of cable television systems and affected the development of cable competition. Rate regulation of cable systems has been in place since passage of the Cable Television Consumer Protection and Competition Act of 1992, although the scope of this regulation 100
104 recently was sharply contracted. Since March 31, 1999, rate regulation exists only with respect to the lowest level of basic cable service and associated equipment. Basic cable service is the service that cable customers receive for a threshold fee. This service usually includes local television stations, some distant signals and perhaps one or more non-broadcast services. This change affords cable operators much greater pricing flexibility, although Congress could revisit this issue if confronted with substantial rate increases. Cable operators also face significant regulation of their channel capacity. They currently can be required to devote substantial capacity to the carriage of programming that they would not carry voluntarily, including certain local broadcast signals, local public, educational and government access users, and unaffiliated commercial leased access programmers. This carriage burden could increase in the future, particularly if the Federal Communications Commission were to require cable systems to carry both the analog and digital versions of local broadcast signals or if it were to allow unaffiliated Internet service providers seeking direct cable access to invoke commercial leased access rights originally devised for video programmers. The Federal Communications Commission is currently conducting proceedings in which it is considering both of these channel usage possibilities. There is also uncertainty whether local franchising authorities, the Federal Communications Commission, or the U.S. Congress will impose obligations on cable operators to provide unaffiliated Internet service providers with access to cable plant on non-discriminatory terms. If they were to do so, and the obligations were found to be lawful, it could complicate our operations in general, and our Internet operations in particular, from a technical and marketing standpoint. These access obligations could adversely impact our profitability and discourage system upgrades and the introduction of new products and services. POSSIBLE SECTION 5 AND CONTRACTUAL REPURCHASE OBLIGATIONS. The Rifkin sellers who acquired preferred membership units in connection with the Rifkin acquisition, the Falcon and Bresnan sellers who will acquire membership units in the Falcon and Bresnan acquisitions and the Helicon sellers who are acquiring Class A common stock in the directed share program may have rescission rights against Charter Communications, Inc. and/or Charter Communications Holding Company arising out of possible violations of Section 5 of the Securities Act in connection with the offers and sales of these equity interests. Rifkin sellers who hold preferred membership units also have the right to cause Charter Communications Holding Company to redeem these securities. If all of these sellers successfully exercised their possible rescission rights, we would be required to repurchase these equity securities for up to approximately $1.6 billion. This amount would increase to approximately $1.7 billion if the Falcon sellers elect to receive an additional $125 million in Charter Communications Holding Company membership units. If we failed to satisfy these obligations, these sellers could initiate legal proceedings against us, including under bankruptcy and reorganization laws, for damages suffered by them as a result of our non-performance. Any such failure could trigger defaults under our other obligations, including our credit facilities and other debt instruments. 101
105 INTEREST RATE RISK The use of interest rate risk management instruments, such as interest rate exchange agreements, interest rate cap agreements and interest rate collar agreements, is required under the terms of our credit facilities. Our policy is to manage interest costs using a mix of fixed and variable rate debt. Using interest rate swap agreements, we agree to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount. Interest rate cap agreements are used to lock in a maximum interest rate should variable rates rise, but enable us to otherwise pay lower market rates. Collars limit our exposure to and benefits from interest rate fluctuations on variable rate debt to within a certain range of rates. The table set forth below summarizes the fair values and contract terms of financial instruments subject to interest rate risk maintained by us as of December 31, 1998 (dollars in thousands): EXPECTED MATURITY DATE FAIR VALUE AT ---------------------------------------------------- DECEMBER 31, 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998 -------- -------- -------- -------- -------- ---------- ---------- ------------- DEBT Fixed Rate....................... -- -- -- -- -- $ 271,799 $ 271,799 $ 271,799 Average Interest Rate........... -- -- -- -- -- 13.5% 13.5% Variable Rate.................... $ 10,450 $ 21,495 $ 42,700 $113,588 $157,250 $1,381,038 $1,726,521 $1,726,521 Average Interest Rate........... 6.0% 6.1% 6.3% 6.5% 7.2% 7.6% 7.2% INTEREST RATE INSTRUMENTS Variable to Fixed Swaps.......... $130,000 $255,000 $180,000 $320,000 $370,000 $ 250,000 $1,505,000 $ (28,977) Average Pay Rate................ 4.9% 6.0% 5.8% 5.5% 5.6% 5.6% 5.6% Average Receive Rate............ 5.0% 5.0% 5.2% 5.2% 5.4% 5.4% 5.2% Caps............................. $ 15,000 -- -- -- -- -- $ 15,000 -- Average Cap Rate................ 8.5% -- -- -- -- -- 8.5% Collar........................... -- $195,000 $ 85,000 $ 30,000 -- -- $ 310,000 $ (4,174) Average Cap Rate................ -- 7.0% 6.5% 6.5% -- -- 6.8% Average Floor Rate.............. -- 5.0% 5.1% 5.2% -- -- 5.0% The notional amounts of interest rate instruments, as presented in the above table, are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The estimated fair value approximates the proceeds (costs) to settle the outstanding contracts. Interest rates on variable debt are estimated using the average implied forward London Interbank Offering Rate (LIBOR) rates for the year of maturity based on the yield curve in effect at December 31, 1998. While swaps, caps and collars represent an integral part of our interest rate risk management program, their incremental effect on interest expense for the years ended December 31, 1998, 1997, and 1996 was not significant. In March 1999, substantially all existing long-term debt, excluding borrowings of our previous credit facilities, was extinguished, and all previous credit facilities were refinanced with the borrowings under credit facilities of Charter Operating. The following 102
106 table sets forth the fair values and contract terms of the long-term debt maintained by us as of June 30, 1999 (dollars in thousands): EXPECTED MATURITY DATE FAIR VALUE AT -------------------------------------------------- JUNE 30, 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1999 -------- -------- -------- ------- ------- ---------- ---------- ------------- DEBT Fixed Rate......................... -- -- -- -- -- $3,109,310 $3,109,310 $3,010,000 Average Interest Rate............. -- -- -- -- -- 9.0% 9.0% Variable Rate...................... -- -- -- $25,313 $39,375 $1,960,312 $2,025,000 $2,025,000 Average Interest Rate............. -- -- -- 6.5% 6.5% 6.8% 6.8% Interest rates on variable debt are estimated using the average implied forward LIBOR rates for the year of maturity based on the yield curve in effect at June 30, 1999. We expect that the terms of the debt that we assume or expect to arrange in connection with the pending acquisitions, primarily our expected new credit facilities, will require us to use interest rate management instruments to partially hedge our exposure to variable interest rates. We expect to use interest rate exchange agreements, interest rate cap agreements and interest rate collar agreements similar to those we currently use. YEAR 2000 ISSUES GENERAL. Many existing computer systems and applications, and other control devices and embedded computer chips use only two digits, rather than four, to identify a year in the date field, failing to consider the impact of the upcoming change in the century. Computer chips are the physical structure upon which integrated circuits are fabricated as components of systems, such as telephone systems, computers and memory systems. As a result, such systems, applications, devices, and chips could create erroneous results or might fail altogether unless corrected to properly interpret data related to the year 2000 and beyond. These errors and failures may result, not only from a date recognition problem in the particular part of a system failing, but may also result as systems, applications, devices and chips receive erroneous or improper data from third-parties suffering from the year 2000 problem. In addition, two interacting systems, applications, devices or chips, each of which has individually been fixed so that it will properly handle the year 2000 problem, could nonetheless result in a failure because their method of dealing with the problem is not compatible. These problems are expected to increase in frequency and severity as the year 2000 approaches. This issue impacts our owned or licensed computer systems and equipment used in connection with internal operations, including: - information processing and financial reporting systems; - customer billing systems; - customer service systems; - telecommunication transmission and reception systems; and - facility systems. 103
107 THIRD PARTIES. We also rely directly and indirectly, in the regular course of business, on the proper operation and compatibility of third party systems. The year 2000 problem could cause these systems to fail, err, or become incompatible with our systems. If we or a significant third party on which we rely fails to become year 2000 ready, or if the year 2000 problem causes our systems to become internally incompatible or incompatible with such third party systems, our business could suffer from material disruptions, including the inability to process transactions, send invoices, accept customer orders or provide customers with our cable services. We could also face similar disruptions if the year 2000 problem causes general widespread problems or an economic crisis. We cannot now estimate the extent of these potential disruptions. STATE OF READINESS. We are addressing the year 2000 problem with respect to our internal operations in three stages: (1) conducting an inventory and evaluation of our systems, components, and other significant infrastructure to identify those elements that we reasonably believe could be expected to be affected by the year 2000 problems. This stage has been completed; (2) remediating or replacing equipment that, based upon such inventory and evaluation, we believe may fail to operate properly in the year 2000. This stage is substantially complete; and (3) testing of the remediation and replacement conducted in stage two. This stage is substantially complete. Much of our assessment efforts in stage one have involved, and depend on, inquiries to third party service providers, suppliers and vendors of various parts or components of our systems. We have obtained certifications from third party service providers, suppliers and vendors as to the readiness of mission critical elements and we are in the process of obtaining certifications of readiness as to non-mission critical elements. Certain of these third parties that have certified the readiness of their products will not certify their interoperability within our fully integrated systems. We cannot assure you that these technologies of third parties, on which we rely, will be year 2000 ready or timely converted into year 2000 compliant systems compatible with our systems. Moreover, because a full test of our systems, on an integrated basis, would require a complete shut down of our operations, it is not practicable to conduct such testing. However, we have utilized a third party, in cooperation with other cable operators, to test a "mock-up" of our major billing and plant components, including pay-per-view systems, as an integrated system. We are utilizing another third party to conduct comprehensive testing on our advertising related scheduling and billing systems. In addition, we have evaluated the potential impact of third party failure and integration failure on our systems in developing our contingency plans. RISKS AND REASONABLY LIKELY WORST CASE SCENARIOS. The failure to correct a material year 2000 problem could result in system failures leading to a disruption in, or failure of certain normal business activities or operations, for example, a failure of our major billing systems and plant components such as our pay-per-view systems. Such 104
108 failures could materially and adversely affect our results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the year 2000 problem, resulting in part from the uncertainty of the year 2000 readiness of third-party suppliers and customers, we are unable to determine at this time whether the consequences of year 2000 failures will have a material impact on our results of operations, liquidity or financial condition. However, our year 2000 taskforce has significantly reduced our level of uncertainty about the year 2000 problem and, in particular, about the year 2000 compliance and readiness of our material vendors. We are in the process of acquiring certain cable television systems, and have negotiated certain contractual rights in the acquisition agreements relating to the year 2000 issue. We have included the acquired cable television systems in our year 2000 taskforce's plan. We are monitoring the remediation process for systems we are acquiring to ensure completion of remediation before or as we acquire these systems. We have found that these companies are following a three stage process similar to that outlined above and are on a similar time line. We are not currently aware of any likely material system failures relating to the year 2000 affecting the acquired systems. CONTINGENCY AND BUSINESS CONTINUATION PLAN. Our year 2000 plan calls for suitable contingency planning for our at-risk business functions. We normally make contingency plans in order to avoid interrupted service providing video, voice and data products to our customers. We also plan to distribute detailed guidelines outlining remedial actions for year 2000 failure of any component of our systems which is critical to the transport of our signal by mid-November. This includes a communications plan to our key personnel in the event of a year 2000 failure so as to accelerate remediation actions throughout the company. COST. We have incurred $5.6 million in costs to date directly related to addressing the year 2000 problem. We have redeployed internal resources and have selectively engaged outside vendors to meet the goals of our year 2000 program. We currently estimate the total cost of our year 2000 remediation programs, including pending acquisitions, to be approximately $9.8 million. OPTIONS In accordance with an employment agreement between Charter Investment, Inc. and Jerald L. Kent, the President and Chief Executive Officer of Charter Investment, Inc. and a related option agreement between Charter Communications Holding Company and Mr. Kent, an option to purchase 3% of the equity value of all cable systems managed by Charter Investment, Inc. on the date of the grant, or 7,044,127 membership units, were issued to Mr. Kent. The option vests over a four-year period from the date of grant and expires ten years from the date of grant. In February 1999, Charter Holdings adopted an option plan, which was assumed by Charter Communications Holding Company in May 1999, providing for the grant of options to purchase up to 25,009,798 Charter Communications Holding Company membership units. The option plan provides for grants of options to employees and consultants of Charter Communications Holding Company and its affiliates. Options 105
109 granted will be fully vested after five years from the date of 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. Following the closing of the offering, membership units received upon exercise of the options will be automatically exchanged for shares of Class A common stock of Charter Communications, Inc. on a one-for-one basis. OPTIONS OPTIONS OUTSTANDING EXERCISABLE ------------------------------------------------------------ ----------- NUMBER OF EXERCISE TOTAL REMAINING CONTRACT NUMBER OF OPTIONS PRICE DOLLARS LIFE (IN YEARS) OPTIONS ---------- ------------ ------------ ------------------ ----------- Outstanding as of January 1, 1999(1)........................ 7,044,127 $20.00 $140,882,540 9.2 1,761,032 Granted: February 9, 1999(2)............ 9,111,681 20.00 182,233,620 -- April 5, 1999(2)............... 473,000 20.73 9,805,290 -- Cancelled........................ (378,400) 20.00-20.73 (7,595,886) -- ---------- ------------ ------------ --- --------- Outstanding as of October 15, 1999........................... 16,250,408 $20.02(3) $325,325,564 9.3(3) 1,761,032 ========== ============ ============ === ========= - --------------- (1) Granted to Jerald L. Kent pursuant to his employment agreement and related option agreement. (2) Granted pursuant to the option plan. (3) Weighted average. Charter Communications Holding Company intends to issue on the date of this prospectus up to 5,000,000 additional options under the plan. The exercise price for these options will be equal to the initial public offering price per share of Class A common stock in this offering. We follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" to account for the option plans. We recorded stock option compensation expense of $845,000 for the year ended December 31, 1998 and $38.2 million for the six months ended June 30, 1999 in the financial statements since the exercise prices are less than the estimated fair values of the underlying membership units on the date of grant. The estimated fair value was determined using the valuation inherent in Mr. Allen's acquisition of Charter and valuations of public companies in the cable television industry adjusted for factors specific to us. Compensation expense is accrued over the vesting period of each grant that varies from four to five years. As of June 30, 1999, deferred compensation remaining to be recognized in future periods totalled $126 million. ACCOUNTING STANDARD NOT YET IMPLEMENTED In June 1998, the Financial Accounting Standards Board adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". 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 106
110 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 No. 133" has delayed the effective date of SFAS No. 133 to fiscal years beginning after June 15, 2000. We have not yet quantified the impacts of adopting SFAS No. 133 on our consolidated financial statements nor have we determined the timing or method of our adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings (loss). 107
111 BUSINESS OVERVIEW We are the fourth largest operator of cable television systems in the United States, serving approximately 6.2 million customers, after giving effect to our pending acquisitions. We are currently the seventh largest operator of cable television systems in the United States serving approximately 3.7 million customers as of June 30, 1999. We offer a full range of traditional cable services. Our service offerings include the following programming packages: - basic programming; - expanded basic programming; - premium service; and - pay-per-view television programming. As part of our Wired World vision, we are also beginning to offer an array of new services including: - digital television; - interactive video programming; and - high-speed Internet access. We are also exploring opportunities in telephony. These new products and services will take advantage of the significant bandwidth of our cable systems. We are accelerating the upgrade of our cable systems to more quickly provide these products and services. For the year ended December 31, 1998, pro forma for our merger with Marcus Holdings and the acquisitions we completed during 1998 and 1999, our revenues were approximately $1.7 billion. For the six months ended June 30, 1999, pro forma for our merger with Marcus Holdings and the acquisitions we completed during 1999, our revenues were approximately $910 million. Pro forma for our merger with Marcus Holdings and our recent and pending acquisitions, for the year ended December 31, 1998, our revenues would have been approximately $2.7 billion. Pro forma for our merger with Marcus Holdings and our recent and pending acquisitions, for the six months ended June 30, 1999, our revenues would have been approximately $1.4 billion. Mr. Allen, the principal owner of our ultimate parent company and one of the computer industry's visionaries, has long believed in a Wired World in which cable technology will facilitate the convergence of television, computers and telecommunications. We believe cable's ability to deliver voice, video and data at high speeds will enable it to serve as the primary platform for the delivery of new services to the home and workplace. 108
112 BUSINESS STRATEGY Our objective is to increase our operating cash flow by increasing our customer base and the amount of cash flow per customer. To achieve this objective, we are pursuing the following strategies: INTEGRATE AND IMPROVE ACQUIRED CABLE SYSTEMS. We seek to rapidly integrate acquired cable systems and apply our core operating strategies to raise the financial and operating performance of these systems. Our integration process occurs in three stages: SYSTEM EVALUATION. We conduct an extensive evaluation of each system we acquire. This process begins prior to reaching an agreement to purchase the system and focuses on the system's: - business plan; - customer service standards; - management capabilities; and - technological capacity and compatibility. We also evaluate opportunities to consolidate headends and billing and other administrative functions. Based upon this evaluation, we formulate plans for customer service centers, plant upgrades, market positioning, new product and service launches and human resource requirements. IMPLEMENTATION OF OUR CORE OPERATING STRATEGIES. To achieve our high standards for customer satisfaction and financial and operating performance, we: - attract and retain high quality local management; - empower local managers with a high degree of day-to-day operational autonomy; - set key financial and operating benchmarks for management to meet, such as revenue and cash flow per subscriber, subscriber growth, customer service and technical standards; and - provide incentives to all employees through grants of cash bonuses and stock options. ONGOING SUPPORT AND MONITORING. We provide local managers with regional and corporate management guidance, marketing and other support for implementation of their business plans. We monitor performance of our acquired cable systems on a frequent basis to ensure that performance goals can be met. The turn-around in our Fort Worth system, which our management team began to manage in October 1998, is an example of our success in integrating newly acquired cable systems into our operations. We introduced a customer care team that has worked closely with city governments to improve customer service and local government relations, and each of our customer service representatives attended a training program. We also conducted extensive training programs for our technical and engineering, dispatch, sales and support, and management personnel. We held a series of sales events 109
113 and service demonstrations to increase customer awareness and enhance our community exposure and reputation. We reduced the new employee hiring process from two to three weeks to three to five days. OFFER NEW PRODUCTS AND SERVICES. We intend to expand the array of products and services we offer to our customers to implement our Wired World vision. Using digital technology, we plan to offer additional channels on our existing service tiers, create new service tiers, introduce multiple packages of premium services and increase the number of pay-per-view channels. We also plan to add digital music services and interactive program guides which are comprehensive guides to television program listings that can be accessed by network, time, date or genre. In addition, we have begun to roll out advanced services, including interactive video programming and high speed Internet access, and we are currently exploring opportunities in telephony. We have entered into agreements with several providers of high speed Internet and other interactive services, including EarthLink Network, Inc., High Speed Access Corp., WorldGate Communications, Inc., Wink Communications, Inc. and Excite@Home Corporation. We have recently entered into a joint venture with Vulcan Ventures Inc. and Go2Net, Inc. to form Broadband Partners, LLC. The purpose of this joint venture is to deliver high speed Internet portal services to our subscribers. UPGRADE THE BANDWIDTH CAPACITY OF OUR SYSTEMS. Over the next three years, we plan to spend approximately $2.9 billion from 2000 to 2002 to upgrade to 550 megahertz or greater the bandwidth of our cable systems and the systems we acquire through our pending acquisitions and to add two-way capability. Upgrading to at least 550 megahertz of bandwidth capacity will allow us to: - offer advanced services, such as digital television, Internet access and other interactive services; - increase channel capacity up to 82 channels, or even more programming channels if some of our bandwidth is used for digital services; and - permit two-way communication which will give our customers the ability to send and receive signals over the cable system so that high speed cable services, such as Internet access, will not require a separate telephone line. As of June 30, 1999, approximately 57% of our customers were served by cable systems with at least 550 megahertz bandwidth capacity, and approximately 34% of our customers had two-way communication capability. By year-end 2003, including all recent and pending acquisitions, we expect that approximately 94% of our customers will be served by cable systems with at least 550 megahertz bandwidth capacity and two-way communication capability. Our planned upgrades are designed to reduce the number of headends from 1,267 in 1999 to 479 in 2003, including our pending acquisitions. Reducing the number of headends will reduce headend equipment and maintenance expenditures and, together with other upgrades, will provide enhanced picture quality and system reliability. In addition by year-end 2003, including all pending acquisitions, we expect that 110
114 approximately 95% of our customers will be served by headends serving at least 5,000 customers. MAXIMIZE CUSTOMER SATISFACTION. To maximize customer satisfaction, we operate our business to provide reliable, high-quality products and services, superior customer service and attractive programming choices at reasonable rates. We have implemented stringent internal customer service standards which we believe meet or exceed those established by the National Cable Television Association, which is the Washington, D.C.-based trade association for the cable television industry. We believe that our customer service efforts have contributed to our superior customer growth, and will strengthen the Charter brand name and increase acceptance of our new products and services. EMPLOY INNOVATIVE MARKETING. We have developed and successfully implemented a variety of innovative marketing techniques to attract new customers and increase revenue per customer. Our marketing efforts focus on tailoring Charter branded entertainment and information services that provide value, choice, convenience and quality to our customers. We use demographic "cluster codes" to address messages to target audiences through direct mail and telemarketing. Cluster codes identify customers by marketing type such as young professionals, retirees or families. In addition, we promote our services on radio, in local newspapers and by door-to-door selling. In many of our systems, we offer discounts to customers who purchase multiple premium services such as Home Box Office or Showtime. We also have a coordinated strategy for retaining customers that includes televised retention advertising to reinforce the link between quality service and the Charter brand name and to encourage customers to purchase higher service levels. Successful implementation of these marketing techniques has contributed to internal customer growth rates in excess of the cable industry average in each year from 1996 through 1998 for the systems we owned in each of those years. We have begun to implement our marketing programs in all of the systems we have recently acquired. EMPHASIZE LOCAL MANAGEMENT AUTONOMY WHILE PROVIDING REGIONAL AND CORPORATE SUPPORT AND CENTRALIZED FINANCIAL CONTROLS. Our local cable systems are organized into seven operating regions. A regional management team oversees local system operations in each region. We believe that a strong management presence at the local system level: - improves our customer service; - increases our ability to respond to customer needs and programming preferences; - reduces the need for a large centralized corporate staff; - fosters good relations with local governmental authorities; and - strengthens community relations. Our regional management teams work closely with both local managers and senior management in our corporate office to develop budgets and coordinate marketing, programming, purchasing and engineering activities. Our centralized financial management enables us to set financial and operating benchmarks and monitor performance on 111
115 an ongoing basis. In order to attract and retain high quality managers at the local and regional operating levels, we provide a high degree of operational autonomy and accountability and cash and equity-based compensation. Charter Communications Holding Company has adopted a plan to distribute to employees and consultants, including members of corporate management and key regional and system-level management personnel, options exercisable for up to 25,009,798 Charter Communications Holding Company membership units. CONCENTRATE OUR SYSTEMS IN TIGHTER GEOGRAPHICAL CLUSTERS. To improve operating margins and increase operating efficiencies, we regularly seek to improve the geographic clustering of our cable systems by selectively swapping our cable systems for systems of other cable operators or acquiring systems in close proximity to our systems. We believe that by concentrating our systems in clusters, we will be able to generate higher growth in revenues and operating cash flow. Clustering enables us to consolidate headends and spread fixed costs over a larger subscriber base. We are negotiating with several other cable operators whose systems we consider to be potential acquisition or swapping candidates. ORGANIZATIONAL STRUCTURE Each of the entities in our organizational structure and how it relates to us is described below. In our discussion of the following entities, we make the same assumptions as described on page 4 with respect to our organizational chart. CHARTER COMMUNICATIONS, INC. Charter Communications, Inc. is a holding company whose principal asset after completion of the offering will be an approximate 31% equity interest and a 100% voting interest in Charter Communications Holding Company. Charter Communications, Inc.'s only business will be acting as the sole manager of Charter Communications Holding Company and its subsidiaries. As sole manager of Charter Communications Holding Company, Charter Communications, Inc. will control the affairs of Charter Communications Holding Company and its subsidiaries. Immediately following the offering, the holders of the Class A common stock will own more than 99.9% of Charter Communications, Inc.'s outstanding capital stock. However, Mr. Allen, through his ownership of Charter Communications, Inc.'s high vote Class B common stock and his indirect ownership of Charter Communications Holding Company membership units, will control approximately 95% of the voting power of all of Charter Communications, Inc.'s capital stock immediately following the offering. Accordingly, Mr. Allen will be able to elect all of Charter Communications, Inc.'s directors. VULCAN CABLE III INC. In August 1999, Mr. Allen, through Vulcan Cable III Inc., contributed to Charter Communications Holding Company $500 million in cash and, in September 1999, an additional $825 million, of which approximately $644.3 million was in cash and approximately $180.7 million was in the form of equity interests acquired by Vulcan Cable III Inc. in connection with the Rifkin acquisition, in each case in exchange for membership units at a price per membership unit of $20.73. In addition, Mr. Allen, through Vulcan Cable III Inc., has agreed to make a $750 million equity 112
116 contribution to Charter Communications Holding Company at the closing of the offering. He will pay a purchase price per membership unit equal to the net initial public offering price per share. Mr. Allen owns 100% of the equity of Vulcan Cable III Inc. Vulcan Cable III Inc. will have a 19.6% equity interest and no voting rights in Charter Communications Holding Company. CHARTER INVESTMENT, INC. Mr. Allen owns approximately 96.8% of the outstanding stock of Charter Investment, Inc. The remaining equity is owned by our founders, Jerald L. Kent, Barry L. Babcock and Howard L. Wood. Charter Investment, Inc. will have a 39.7% equity interest and no voting rights in Charter Communications Holding Company. FORMER OWNERS OF FALCON AND BRESNAN. Under the terms of the pending Falcon and Bresnan acquisitions, some of the sellers will receive or have the right to receive a portion of their purchase price in Charter Communications Holding Company common membership units rather than in cash. To the extent they receive common membership units, they will be able to exchange these membership units for shares of Class A common stock. These equity holders as a group will have a 9.7% equity interest and no voting rights in Charter Communications Holding Company. Certain sellers under the Rifkin acquisition have received, at their election, preferred membership units of Charter Communications Holding Company, with an approximate value of $133.3 million. CHARTER COMMUNICATIONS HOLDING COMPANY, LLC. Charter Communications Holding Company is the indirect owner of all of our cable systems. It is the direct parent of Charter Holdings and will be the owner of the cable systems to be acquired through four pending acquisitions: Avalon, Fanch, Falcon and Bresnan, as described below. Charter Communications Holding Company has an option plan permitting the issuance to employees and consultants of Charter Communications Holding Company and its affiliates of options exercisable for up to 25,009,798 Charter Communications Holding Company membership units of which 9,206,281 are outstanding. Membership units received upon exercise of these options will be automatically exchanged for Class A common stock. Of these options, 65,000 options have vested and the remaining options will vest prior to April 2000. In addition to options available for grant to our employees under Charter Communications Holding Company's option plan, our chief executive officer has options to purchase 7,044,127 Charter Communications Holding Company membership units. Membership units received upon exercise of these options will be exchangeable for Class A common stock. Of the options granted to our chief executive officer, 25% are immediately exercisable and the remaining 75% will vest in 36 equal monthly installments commencing on January 1, 2000. CHARTER COMMUNICATIONS HOLDING COMPANY'S PENDING ACQUISITIONS. Charter Communications Holding Company is a party to agreements to acquire cable systems or the companies owning cable systems from the owners of Avalon, Fanch, Falcon and Bresnan. CHARTER COMMUNICATIONS HOLDINGS, LLC. Charter Holdings is a co-issuer with Charter Communications Holdings Capital Corporation of $3.6 billion in principal amount of notes sold in March 1999. Charter Holdings owns 100% of Charter Operating. 113
117 CHARTER COMMUNICATIONS HOLDINGS CAPITAL CORPORATION. Charter Communications Holdings Capital Corporation is a wholly owned subsidiary of Charter Holdings. CHARTER COMMUNICATIONS OPERATING, LLC. Charter Operating is a holding company for all of the cable systems currently owned by Charter Holdings. As of June 30, 1999, Charter Operating was the borrower under credit facilities with total availability of $4.1 billion and had total outstanding borrowings of $2.025 billion. CHARTER OPERATING COMPANIES. These companies consist of the companies that operate all of the cable systems currently owned by Charter Holdings. These include all recent acquisitions, the systems obtained through the merger of Marcus Holdings with Charter Holdings and the cable systems originally managed by Charter Investment, Inc., namely Charter Communications Properties Holdings, LLC, CCA Group and CharterComm Holdings. Historical financial information is presented separately for these companies. ACQUISITIONS Our primary criterion in considering acquisition and swapping opportunities is the financial return that we expect to ultimately realize. We consider each acquisition in the context of our overall existing and planned operations, focusing particularly on the impact on our size and scope and the ability to reinforce our clustering strategy, either directly or through future swaps or acquisitions. Other specific factors we consider in acquiring a cable system are: - demographic profile of the market as well as the number of homes passed and customers within the system; - per customer revenues and operating cash flow and opportunities to increase these financial benchmarks; - proximity to our existing cable systems or the potential for developing new clusters of systems; - the technological state of such system; and - the level of competition within the local market. We believe that there are significant advantages in increasing the size and scope of our operations, including: - improved economies of scale in management, marketing, customer service, billing and other administrative functions; - reduced costs for our cable plants and our infrastructure in general; - increased leverage for negotiating programming contracts; and - increased influence on the evolution of important new technologies affecting our business. We believe that as a result of our acquisition strategy and our systems upgrade we will be well-positioned to have cable systems with economies of scale sufficient to allow 114
118 us to execute our strategy to expand the array of products and services that we offer to our customers as we implement our Wired World vision. We will, however, continue to explore acquisitions and swaps of cable systems that would further complement our existing cable systems and those that we are acquiring in our pending acquisitions. See "Description of Certain Indebtedness" for a description of the material debt that we have assumed or may assume in connection with our recent and pending acquisitions. For a discussion of the risks associated with our funding requirements resulting from our acquisitions, see "Risk Factors -- Our Acquisitions" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources". MERGER WITH MARCUS HOLDINGS. On April 23, 1998, Mr. Allen acquired approximately 99% of the non-voting economic interests in Marcus Cable Company, L.L.C., and agreed to acquire the remaining interests in Marcus Cable. The aggregate purchase price was approximately $1.4 billion, excluding $1.8 billion in debt assumed. On February 22, 1999, Marcus Holdings was formed, and all of Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings on March 15, 1999. On March 31, 1999, Mr. Allen completed the acquisition of all remaining interests of Marcus Cable. On April 7, 1999, the holding company parent of the Marcus companies, Marcus Holdings, merged into Charter Holdings, which was the surviving entity of the merger. The subsidiaries of Marcus Holdings became subsidiaries of Charter Operating. During the period of obtaining the requisite regulatory approvals for the transaction, the Marcus systems came under common management with our subsidiaries in October 1998 pursuant to the terms of a management agreement dated as of October 1998. RECENTLY COMPLETED ACQUISITIONS RENAISSANCE. In April 1999, one of Charter Holdings' subsidiaries purchased Renaissance Media Group LLC for approximately $459 million, consisting of $348 million in cash and $111 million of assumed debt, consisting of the Renaissance notes. As a result of our acquisition of Renaissance, we recently completed a tender offer for this publicly held debt pursuant to the change of control provisions under the Renaissance notes. Holders of notes representing 30% of the total outstanding principal amount of the notes tendered their notes. See "Description of Certain Indebtedness" for a description of the material restrictive covenants and other terms under the Renaissance notes. Renaissance owns cable systems located in Louisiana, Mississippi and Tennessee, has approximately 129,000 customers and is being operated as part of our Southern region. For the six months ended June 30, 1999, Renaissance had revenues of approximately $30.8 million. For the year ended December 31, 1998, Renaissance had revenues of approximately $41.5 million. Approximately 48% of Renaissance's customers are currently served by systems with at least 550 megahertz bandwidth capacity. AMERICAN CABLE. In May 1999, one of Charter Holdings' subsidiaries purchased American Cable Entertainment, LLC for approximately $240 million. American Cable owns cable systems located in California serving approximately 69,000 customers and is being operated as part of our Western region. For the six months ended June 30, 1999, 115
119 American Cable had revenues of approximately $18.0 million. For the year ended December 31, 1998, American Cable had revenues of approximately $15.7 million. None of the American Cable systems' customers is currently served by systems with 550 megahertz bandwidth capacity or greater. GREATER MEDIA SYSTEMS. In June 1999, one of Charter Holdings' subsidiaries purchased certain cable systems of Greater Media Cablevision Inc. for approximately $500 million. The Greater Media systems are located in Massachusetts, have approximately 175,000 customers and are being operated as part of our Northeast Region. For the six months ended June 30, 1999, the Greater Media systems had revenues of approximately $42.3 million. For the year ended December 31, 1998, the Greater Media systems had revenues of approximately $78.6 million. Approximately 49% of the Greater Media systems' customers are currently served by systems with at least 550 megahertz bandwidth capacity. HELICON. In July 1999, one of Charter Holdings' subsidiaries acquired Helicon Partners I, L.P. and affiliates for approximately $550 million, consisting of $410 million in cash, $115 million of assumed debt, and $25 million in the form of preferred limited liability company interest of Charter-Helicon LLC, a direct wholly owned subsidiary of Charter Communications, LLC. The holders of the preferred interest have the right to require Mr. Allen to purchase the interest until the fifth anniversary of the closing of the Helicon acquisition. The preferred interest will be redeemable at any time following the fifth anniversary of the Helicon acquisition or upon a change of control, and it must be redeemed on the tenth anniversary of the Helicon acquisition. Helicon owns cable systems located in Alabama, Georgia, New Hampshire, North Carolina, West Virginia, South Carolina, Tennessee, Pennsylvania, Louisiana and Vermont, and has approximately 173,000 customers. For the six months ended June 30, 1999, Helicon had revenues of approximately $43.0 million. For the year ended December 31, 1998, Helicon had revenues of approximately $75.6 million. Approximately 79% of Helicon's customers are currently served by systems with at least 550 megahertz bandwidth capacity. The debt we assumed consisted of publicly held Helicon notes. On November 1, 1999, we redeemed all of the Helicon notes at a price of 103% of the total principal amount of the notes, plus accrued and unpaid interest to the date of redemption. In connection with the acquisition of Helicon, Charter Investment, Inc. entered into separate agreements with Baum Investments, Inc. and with Roberts Cable Corporation, GAK Cable, Inc. and Gimbel Cable Corp., pursuant to which Charter Investment, Inc. has agreed to cause the underwriters to make $12 million worth of shares of our Class A common stock being sold in this offering available for purchase by Baum Investments, Roberts Cable, GAK Cable and Gimbel Cable, at the initial public offering price. RIFKIN. In September 1999, Charter Operating acquired Rifkin Acquisition Partners L.L.L.P. and InterLink Communications Partners, LLLP for a purchase price of approximately $1.46 billion, consisting of $1.2 billion in cash, $133.3 million in equity and $125.0 million in assumed debt. In accordance with the terms of the agreements, certain sellers elected to receive a total of $133.3 million of the purchase price in the form of Class A preferred 116
120 membership units of Charter Communications Holding Company with the following terms: - The value of the preferred membership units will increase at a rate of 8.0% annually and Charter Communications Holding Company must redeem any preferred membership units outstanding on September 15, 2014. - In addition, the holders of the preferred membership units have the right to require Charter Communications Holding Company to redeem their preferred membership units in tranches of at least $1 million for a price equal to the current value of their membership units. This right will be exercisable at any time until the earliest to occur of: (1) September 15, 2004; and (2) a business combination in which the preferred membership units are converted into the right to receive consideration other than securities of Charter Communications Holding Company or its successor. If Charter Communications Holding Company defaults on this obligation, Mr. Allen has granted the holders the right to require Mr. Allen to purchase these preferred membership units at the same value. If Mr. Allen or any of his affiliates acquires any preferred membership units, they will automatically be converted into a number of common membership units equal to the value of the preferred membership units at that time divided by the initial public offering price of the Class A common stock. - The preferred membership units are exchangeable in whole or in part at the option of the Rifkin sellers only concurrently with this offering for shares of our Class A common stock. The preferred membership units are exchangeable for a number of shares of Class A common stock equal to the value of the exchanged portion of the preferred membership units at the time of the offering divided by the initial public offering price. Assuming that this offering closes on or about November 12, 1999, and that the initial offering price is $18.00 per share, the preferred membership units would be exchangeable for up to 7,502,002 shares of Class A common stock. After this offering, the preferred membership units are not exchangeable by the former Rifkin owners into Class A common stock or any other security. - If the former Rifkin owners exchange their preferred membership units of Charter Communications Holding Company for shares of Charter Communications, Inc. Class A common stock, those preferred membership units will be transferred to Charter Communications, Inc. and will automatically convert into a number of common membership units in Charter Communications Holding Company equal to the number of shares of Class A common stock issued in exchange for the preferred membership units. 117
121 Upon the exchange by the Rifkin sellers of any or all of their preferred membership units for shares of Class A common stock, Mr. Allen and the exchanging holders will enter into one of the following agreements: - Mr. Allen will grant the exchanging holders the right to put their shares of Class A common stock to him at a price equal to the public offering price plus interest at a rate of 4.5% per year. This put right terminates on the second anniversary of this offering, or earlier in specified circumstances. - Mr. Allen will also grant the exchanging holders the right to put their Class A common stock to Mr. Allen for a price equal to the closing price of the Class A common stock on the day the notice of exercise is delivered, but only if on the date of exercise the holders are not able to resell their shares pursuant to an effective shelf registration statement. This put right will terminate two years after the closing of this offering. The debt assumed in the Rifkin acquisition consisted of the publicly held Rifkin notes and one individually held promissory note. In September 1999, we commenced an offer to repurchase the Rifkin notes at a premium over their principal amount, plus accrued interest. In connection with this offer to repurchase the Rifkin notes, we obtained consents to amend the related indenture and offered to pay any holder of notes that consented and tendered on or prior to October 1, 1999 an additional $30 for each $1,000 principal amount of notes tendered. We repurchased Rifkin notes with a total outstanding principal amount of $124.1 million for an aggregate purchase price of $140.6 million. In addition, we repurchased the individually held promissory note for $3.4 million. See "Description of Certain Indebtedness" for a description of the material restrictive covenants and other terms of the $900,000 total principal amount of Rifkin notes that remain outstanding. Rifkin owns cable systems primarily in Florida, Georgia, Illinois, Indiana, Tennessee, Virginia and West Virginia, serving approximately 461,000 customers. For the six months ended June 30, 1999, Rifkin had revenues of approximately $105.6 million. For the year ended December 31, 1998, Rifkin had revenues of approximately $124.4 million. Approximately 30% of the Rifkin systems' customers are currently served by systems with at least 550 megahertz bandwidth capacity. INTERMEDIA SYSTEMS. In October 1999, Charter Communications, LLC purchased certain cable systems of InterMedia Capital Partners IV, L.P., InterMedia Partners and their affiliates in exchange for approximately $904 million in cash and certain of our cable systems. The InterMedia systems serve approximately 412,000 customers in North Carolina, South Carolina, Georgia and Tennessee. As part of this transaction, we agreed to "swap" some of our non-strategic cable systems serving approximately 144,000 customers located in Indiana, Montana, Utah and northern Kentucky. At the closing, we retained a cable system located in Indiana serving approximately 30,000 customers for which we were unable to obtain the necessary regulatory approval. We agreed to retain ownership and bear the risk of loss associated with this system until 118
122 such approvals can be obtained. In the event that the necessary regulatory approvals are not obtained by November 5, 1999, InterMedia may elect to receive other properties from us mutually acceptable to InterMedia and us. If the necessary regulatory approvals cannot be obtained for the transfer of the Indiana system by November 5, 1999 and we are unable to transfer to InterMedia satisfactory replacement systems before April 1, 2000, we must pay InterMedia $0.1 billion in cash. In addition, if we transfer cash or property other than the retained Indiana system to InterMedia, in certain circumstances, we must indemnify InterMedia and its affiliates 50% of all taxes and associated costs incurred or arising out of any claim that InterMedia suffered tax losses to which it would not have been subject if we had transferred the retained Indiana system in October 1999. This transaction after giving effect to the transfer of the retained Indiana system will result in a net increase of 268,000 customers concentrated in our Southeast and Southern regions. Approximately 84% of these customers are currently served by systems with at least 550 megahertz bandwidth capacity. For the six months ended June 30, 1999, the InterMedia systems had revenues of approximately $100.6 million. For the year ended December 31, 1998, the InterMedia systems had revenues of approximately $176.1 million. OTHER ACQUISITIONS. One of Charter Holdings' subsidiaries acquired Vista Broadband Communications, LLC in July 1999 and acquired a cable system of Cable Satellite of South Miami, Inc. in August 1999. These cable systems are located in Georgia and southern Florida and serve a total of approximately 37,000 customers. The total purchase price for these other acquisitions was approximately $148 million in cash. For the six months ended June 30, 1999, the systems acquired in connection with these other acquisitions had revenues of approximately $9.2 million. For the year ended December 31, 1998, these systems had revenues of approximately $15.8 million. Approximately 76% of the Vista and South Miami systems' customers are currently served by 550 megahertz bandwidth capacity. PENDING ACQUISITIONS AVALON. In May 1999, Charter Investment, Inc. and Charter Communications Holding Company entered into an agreement to purchase directly and indirectly all of the equity interests of Avalon Cable LLC from Avalon Cable Holdings LLC and Avalon Investors, L.L.C. for approximately $576.9 million in cash and $268.1 million in assumed notes and bank debt. In connection with the consummation of this acquisition, Charter Communications, Inc. has agreed to assume the obligation to acquire the stock of Avalon Cable of Michigan Holdings, Inc. See "Description of Capital Stock and Membership Units -- Membership Units". Avalon Cable operates primarily in Michigan and New England and serves approximately 260,000 customers. For the six months ended June 30, 1999, Avalon Cable had revenues of approximately $51.8 million. For the year ended December 31, 1998, Avalon Cable had revenues of approximately $18.2 million. As of June 30, 1999, there was $150.0 million, $118.1 million and $177.4 million accreted principal outstanding under the Avalon 9 3/8% notes, the Avalon 119
123 11 7/8% notes and the Avalon credit facilities, respectively. We will make an offer to repurchase the Avalon 9 3/8% notes and the Avalon 11 7/8% notes. We have received commitments from a group of lenders for credit facilities for Avalon providing for borrowings of up to $300.0 million. We are not assuming debt in connection with the Avalon acquisition. We have received commitments from a group of leaders for credit facilities for Avalon providing for borrowings of up $300 million, of which we expect to use $169 million to fund a portion of the Avalon purchase price. We expect the closing of these facilities to occur concurrently with the closing of the Avalon acquisition. See "Description of Certain Indebtedness" for a description of the material restrictive covenants and other terms of the Avalon indebtedness. Approximately 15% of the Avalon systems' customers are currently served by systems with at least 550 megahertz bandwidth capacity. Following regulatory approvals, we anticipate that the transaction will close during the fourth quarter of 1999. Either Avalon Cable Holdings, LLC or we may terminate the agreement if the acquisition has not been completed on or prior to March 31, 2000. FANCH. In May 1999, Charter Investment, Inc. entered into an agreement to purchase the partnership interests of Fanch Cablevision of Indiana, L.P., specified assets of Cooney Cable Associates of Ohio, Limited Partnership, Fanch-JV2 Master Limited Partnership, Mark Twain Cablevision Limited Partnership, Fanch-Narragansett CSI Limited Partnership, North Texas Cablevision, Ltd., Post Cablevision of Texas, Limited Partnership and Spring Green Communications, L.P. and the stock of Tioga Cable Company, Inc., Cable Systems, Inc. and, indirectly, Hornell Television Service, Inc. for a total combined purchase price of approximately $2.4 billion in cash. We have received commitments from a group of lenders for credit facilities for Fanch providing for borrowings of up to $1.2 billion. We expect to use $0.9 billion of this availability to fund a portion of the Fanch purchase price. The closing of these facilities is expected to occur concurrently with the closing of the Fanch acquisition. Charter Investment, Inc. has assigned its rights and obligations to purchase the stock of Tioga Cable Company, Inc. and Cable Systems, Inc. under this agreement to Charter Communications Holding Company and its rights and obligations to purchase partnership interests and assets under this agreement to Charter Communications VI, LLC, an indirect wholly owned subsidiary of Charter Communications Holding Company. Under the Fanch purchase agreement, immediately prior to the closing of the Fanch acquisition, certain assets of TWFanch-one Co. will be distributed to Fanch Cablevision of Indiana and Hornell Television Service, Inc. in exchange for all of their partnership interests in TWFanch-one Co. In addition, immediately prior to the closing of the Fanch acquisition, certain assets of TWFanch-two Co. will be distributed to Fanch-JV2 Master and Cooney Cable in exchange for all of their partnership interests in TWFanch-two Co. The cable television systems to be acquired in this acquisition are located in Colorado, Indiana, Kansas, Kentucky, Michigan, Mississippi, New Mexico, Oklahoma, Texas and Wisconsin, and serve approximately 537,000 customers. For the six months ended June 30, 1999, the cable systems to be acquired had revenues of approximately 120
124 $98.9 million. For the year ended December 31, 1998, the systems to be acquired had revenues of approximately $141.1 million. Approximately 19% of these systems' customers are currently served by systems with at least 550 megahertz bandwidth capacity. Following regulatory approvals, we anticipate that this transaction will close during the last quarter of 1999. Either we or the sellers may terminate the agreement if the acquisition is not completed on or prior to March 31, 2000. FALCON. In May 1999, Charter Investment, Inc. entered into an agreement to purchase partnership interests in Falcon Communications, L.P. from Falcon Holding Group, L.P. and TCI Falcon Holdings, LLC, interests in a number of Falcon entities held by Falcon Cable Trust and Falcon Holding Group, Inc., specified interests in Enstar Communications Corporation and Enstar Finance Company, LLC held by Falcon Holding Group, L.P., and specified interests in Adlink held by DHN Inc. Charter Investment, Inc. assigned its rights under the Falcon purchase agreement to Charter Communications Holding Company. The purchase price for the transaction is approximately $3.6 billion, consisting of cash, membership units in Charter Communications Holding Company and $1.67 billion in assumed debt. We will not be required to repay the Falcon credit facilities but we will be required to make an offer to repurchase the Falcon debentures. In addition, the Falcon acquisition will constitute a default under the Falcon subordinated notes, and a majority of lenders acting together would be entitled to require us to repay the Falcon subordinated notes. We intend to finance required repayments of Falcon debentures and notes with additional debt financing that has not yet been arranged. We have obtained a commitment from a group of lenders to provide to Falcon bridge loans of up to $750 million to finance these repayments until additional debt financing can be arranged or if additional debt financing is unavailable. Goldman Sachs Credit Partners L.P. is the administrative agent under this facility. See "Description of Certain Indebtedness" for a discussion of the material restrictive covenants and other terms of the Falcon indebtedness, including the Falcon bridge loan facility. Under the Falcon purchase agreement, Falcon Holding Group, L.P. has agreed to contribute to Charter Communications Holding Company a portion of its partnership interest in Falcon Communications, L.P. in exchange for membership units in Charter Communications Holding Company on the following terms: - Falcon Holding Group, L.P. may select the amount of its equity in Falcon Communications, L.P. it will transfer in exchange for membership units, subject to minimum and maximum limits. Falcon Holding Group, L.P. can elect to apply any percentage of the value of its interest in Falcon Communications, L.P. but such percentage can not be below 45.3%. The value of Falcon Communications, L.P. used for this purpose increases if Falcon Communications, L.P.'s net assets increase and decreases if Falcon Communications, L.P.'s net assets decrease. Falcon Holding Group, L.P.'s right to transfer interests in Falcon Communications, L.P. is subject to a maximum amount of $550 million. We believe that if the Falcon acquisition closes at the time of this offering, the minimum amount 121
125 that Falcon Holding Group, L.P. may receive in the form of membership units will be approximately $425 million. - Falcon Holding Group, L.P. will receive a number of membership units of Charter Communications Holding Company that will result in ownership by Falcon Holding Group, L.P. of a percentage of the outstanding membership units equal to the amount of the purchase price payable in membership units divided by the value of Charter Communications Holding Company. The value of Charter Communications Holding Company for these purposes will be determined according to a formula which values Charter Communications Holding Company at the closing of the acquisition at a specified amount. This amount will decrease if its liabilities increase, and will increase if Charter Communications Holding Company acquires additional assets or agrees to acquire additional assets prior to completion of the Falcon acquisition. - If the Falcon acquisition is consummated prior to or concurrently with this offering, Falcon Holding Group, L.P. has agreed to exercise its right to exchange the membership units immediately prior to this offering, so long as certain tax requirements are satisfied. - Assuming that Falcon Holding Group, L.P. elects to exchange the minimum amount of partnership interests for membership units, we estimate that Falcon Holding Group, L.P. would receive 16,407,576 membership units at the closing of the Falcon acquisition, and each membership unit would be valued at $25.90 per unit for these purposes. If Falcon Holding Group, L.P. elects the maximum amount of membership units, we estimate that Falcon Holding Group, L.P. would receive 21,233,854 membership units, and each membership unit would be valued at $25.90. The Charter Communications Holding Company membership units to be issued to Falcon Holding Group, L.P. are common membership units exchangeable at any time for shares of our Class A common stock. The exchange agreement governing the exchange of the common membership units issued to Falcon Holding Group, L.P. will state that these common membership units are exchangeable for shares of Class A common stock at a value equal to the fair market value of the common membership units. The exchange ratio of common membership units to shares of Class A common stock will be one to one because we have structured Charter Communications, Inc. and Charter Communications Holding Company so that the fair market value of a share of the Class A common stock will equal the fair market value of a common membership unit. Our organizational documents achieve this result by: - limiting the assets and liabilities that Charter Communications, Inc. may hold; and - requiring the number of shares of Charter Communications, Inc. common stock outstanding at any time to equal the number of common membership units owned by Charter Communications, Inc. 122
126 If we fail to comply with these provisions or they are changed, the exchange ratio may vary from one to one and will then be based on a pre-determined formula contained in the Falcon exchange agreement. See "Description of Capital Stock and Membership Units" for further information. The holders of the membership units issued in the Falcon acquisition have the right to require Mr. Allen or his designee to purchase these membership units or shares of Class A common stock of Charter Communications, Inc. issued in exchange for these membership units. The purchase price per unit or share is equal to the aggregate amount of the purchase price of the Falcon acquisition paid in membership units divided by the aggregate number of membership units issued to Falcon Holdings, plus interest of 4.5% per annum. Based on the assumptions described under "Unaudited Pro Forma Financial Statements", this purchase price will initially equal $25.90 per unit or share. These rights terminate upon the second anniversary of the closing of the acquisition, or earlier in specified circumstances. The Falcon cable systems to be acquired are located in California and the Pacific Northwest, Missouri, North Carolina, Alabama and Georgia and serve approximately 1,008,000 customers. For the six months ended June 30, 1999, the cable systems to be acquired had revenues of approximately $212.2 million. For the year ended December 31, 1998, the cable systems to be acquired had revenues of approximately $307.6 million. As of June 30, 1999, $375.0 million total principal amount of Falcon senior debentures and $15.0 million total principal amount of Falcon subordinated notes were outstanding and the accreted value of the Falcon senior discount debentures was $308.7 million. In addition, $967.0 million was outstanding under the Falcon credit facilities. Approximately 7% of the customers of the systems to be acquired are currently served by systems with at least 550 megahertz bandwidth capacity. Following regulatory approvals, we anticipate that the transaction will close during the fourth quarter of 1999. Either we or the sellers may terminate the agreement if the acquisition is not completed on or prior to November 30, 2000. In connection with the Falcon acquisition, Marc Nathanson will become a director of Charter Communications, Inc. BRESNAN. In June 1999, Charter Communications Holding Company entered into an agreement to purchase Bresnan Communications Company Limited Partnership for a total purchase price of approximately $3.1 billion. Of this amount, $1.3 billion is in cash and $1.0 billion is in the form of equity in Charter Communications Holding Company. We also agreed to assume debt in the amount of approximately $852 million as of June 30, 1999, consisting of credit facilities borrowings and publicly held notes. We will need to raise approximately $1.72 billion by borrowing under credit facilities at Bresnan that have not yet been arranged and/or by issuing debt or equity securities of Charter Communications, Inc. or Charter Communications Holding Company to fund: - approximately $0.87 billion of the Bresnan purchase price; - approximately $0.50 billion in outstanding Bresnan credit facilities borrowings that we would have to repay if we are unable to assume and amend the existing Bresnan credit facilities; and 123
127 - approximately $0.35 billion of publicly held notes that we expect to be put to us in connection with required change of control offers for these notes. See "Description of Certain Indebtedness" for a description of the material restrictive covenants and other terms of the Bresnan indebtedness. The equity portion of the purchase price will be membership units in Charter Communications Holding Company, the total amount of which was calculated at the time the agreements were executed to equal 6.14% of the total membership units in Charter Communications Holding Company then outstanding. We calculated this percentage interest based on a number of assumptions about Charter Communications Holding Company and our pending acquisitions, including our debt, the value of our pending acquisition targets and the enterprise value of Charter Communications Holding Company. Accordingly, this percentage interest may change at or prior to the closing of the Bresnan acquisition. Each of the sellers under the Bresnan acquisition agreement shall have the right, during the sixty-day period beginning on the second anniversary of the closing of the Bresnan acquisition, to sell to Mr. Allen their common membership units in Charter Communications Holding Company or the shares of Class A common stock for which these membership units were exchanged. The per unit purchase price for these securities is equal to the aggregate value of the common units issued to the Bresnan sellers at the closing as increased or decreased pursuant to post-closing adjustments, divided by the number of common units so issued, plus interest of 4.5% per annum accrued to date. The Bresnan sellers will receive a number of membership units so that the Bresnan sellers will own a percentage of the outstanding membership interests equal to $1.0 billion divided by the value of Charter Communications Holding Company. The value of Charter Communications Holding Company for these purposes will be determined according to a formula pursuant to which the value of Charter Communications Holding Company will decrease if its liabilities and preferred equity, including liabilities it expects to incur under new acquisition agreements other than the pending acquisitions, increase. The value of Charter Communications Holding Company for this purpose will increase if additional assets, other than the pending acquisitions, are acquired. The Bresnan acquisition agreement provides for post-closing adjustments that would change the number of membership units issued to the Bresnan sellers by recalculating the value of Charter Communications Holding Company to reflect the failure to complete any acquisition pending at the time of the Bresnan closing. We estimate that the Bresnan sellers would receive 37,068,750 membership units at the closing of the Bresnan acquisition, and each membership unit would be valued at $26.98 per unit for these purposes. The Charter Communications Holding Company membership units to be issued to the Bresnan sellers are common membership units exchangeable at any time for shares of our Class A common stock. So long as we comply with relevant provisions in our organizational documents and these provisions are not changed, the exchange ratio of common membership units for shares of Class A common stock will be one to one, as 124
128 described above with respect to the Falcon acquisition. See also "Description of Capital Stock and Membership Units" for further information. The Bresnan cable systems to be acquired in this acquisition are located in Michigan, Minnesota, Wisconsin and Nebraska and serve approximately 656,000 customers. For the six months ended June 30, 1999, the Bresnan cable systems we are buying had revenues of approximately $137.3 million. For the year ended December 31, 1998, these systems had revenues of approximately $262.0 million. Approximately 57% of these systems' customers are currently served by systems with at least 550 megahertz bandwidth capacity. Following regulatory approvals, we anticipate that this transaction will close during the first quarter of 2000. The agreement may be terminated if the acquisition has not been completed on or prior to May 1, 2000. PRODUCTS AND SERVICES We offer our customers a full array of traditional cable television services and programming and we have begun to offer new and advanced high bandwidth services such as high-speed Internet access. We plan to continually enhance and upgrade these services, including adding new programming and other telecommunications services, and will continue to position cable television as an essential service. TRADITIONAL CABLE TELEVISION SERVICES. As of June 30, 1999, more than 87% of our customers subscribe to both "basic" and "expanded basic" service and generally receive a line-up of between 33 and 85 channels of television programming, depending on the bandwidth capacity of the system. Customers who pay additional amounts can also subscribe for additional channels, either individually or in packages of several channels, as add-ons to the basic channels. As of June 30, 1999, approximately 25% of our customers subscribe for premium channels, with additional customers subscribing for other special add-on packages. We tailor both our basic channel line-up and our additional channel offerings to each system according to demographics, programming preferences, competition, price sensitivity and local regulation. Our traditional cable television service offerings include the following: - BASIC CABLE. All of our customers receive basic cable services, which generally consist of local broadcast television, local community programming, including governmental and public access, and limited satellite programming. As of June 30, 1999, the average monthly fee was $10.59 for basic service. - EXPANDED BASIC CABLE. This expanded tier includes a group of satellite-delivered or non-broadcast channels, such as Entertainment and Sports Programming Network (ESPN), Cable News Network (CNN) and Lifetime Television, in addition to the basic channel line-up. For the six months ended June 30, 1999, the average monthly fee was $19.16 for expanded basic service. - PREMIUM CHANNELS. These channels provide unedited, commercial-free movies, sports and other special event entertainment programming. Home Box Office, Cinemax and Showtime are typical examples. We offer subscriptions to these 125
129 channels either individually or in packages. For the six months ended June 30, 1999, the average monthly fee was $6.35 per premium subscription. - PAY-PER-VIEW. These channels allow customers to pay to view a single showing of a recently released movie, a one-time special sporting event or music concerts on an unedited, commercial-free basis. We currently charge a fee that ranges from $2.95 to $8.95 for movies. For special events, such as championship boxing matches, we have charged a fee of up to $50.95. We have employed a variety of targeted marketing techniques to attract new customers by focusing on delivering value, choice, convenience and quality. We employ direct mail and telemarketing, using demographic "cluster codes" to target specific messages to target audiences. In many of our systems, we offer discounts to customers who purchase premium services on a limited trial basis in order to encourage a higher level of service subscription. We also have a coordinated strategy for retaining customers that includes televised retention advertising to reinforce the decision to subscribe and to encourage customers to purchase higher service levels. NEW PRODUCTS AND SERVICES. A variety of emerging technologies and the rapid growth of Internet usage have presented us with substantial opportunities to provide new or expanded products and services to our customers and to expand our sources of revenue. The desire for such new technologies and the use of the Internet by businesses in particular have triggered a significant increase in our commercial market penetration. As a result, we are in the process of introducing a variety of new or expanded products and services beyond the traditional offerings of analog television programming for the benefit of both our residential and commercial customers. These new products and services include: - digital television and its related enhancements; - high-speed Internet access, through television set-top converter boxes, cable modems installed in personal computers and traditional telephone Internet access; - interactive services, such as Wink, which adds interactivity and electronic commerce opportunities to traditional programming and advertising; and - telephony and data transmission services, which are private network services interconnecting locations for a customer. Cable television's high bandwidth allows cable to be well positioned to deliver a multitude of channels and/or new and advanced products and services. We believe that this high bandwidth will be a key factor in the successful delivery of these products and services. DIGITAL TELEVISION. As part of upgrading our systems, we are installing headend equipment capable of delivering digitally encoded cable transmissions to a two-way digital-capable set-top converter box in the customer's home. This digital connection offers significant advantages. For example, we can compress the digital signal to allow the transmission of up to twelve digital channels in the bandwidth normally used by one analog channel. This will allow us to increase both programming and service offerings, 126
130 including near video-on-demand for pay-per-view customers. We expect to increase the amount of services purchased by our customers. Digital services customers may receive a mix of additional television programming, an electronic program guide and up to 40 channels of digital music. The additional programming falls into four categories which are targeted toward specific markets: - additional basic channels, which are marketed in systems primarily serving rural communities; - additional premium channels, which are marketed in systems serving both rural and urban communities; - "multiplexes" of premium channels to which a customer previously subscribed, such as multiple channels of HBO or Showtime, which are varied as to time of broadcast or varied based on programming content theme which are marketed in systems serving both rural and urban communities; and - additional pay-per-view programming, such as more pay-per-view options and/or frequent showings of the most popular films to provide near video-on-demand, which are more heavily marketed in systems primarily serving both rural and urban communities. As part of our current pricing strategy for digital services, we have established a retail rate of $4.95 to $8.95 per month for the digital set-top converter and the delivery of "multiplexes" of premium services, additional pay-per-view channels, digital music and an electronic programming guide. Some of our systems also offer additional basic and expanded basic tiers of service. These tiers of services retail for $6.95 per month. As of June 30, 1999, more than 10,900 of our customers subscribed to the digital service offered by 16 of our cable systems, which served approximately 330,000 basic cable customers. For the month of June 1998, revenue per customer for our digital service was approximately $20.96 and cash flow per customer was $9.63. By December 31, 1999, we anticipate that approximately 2.4 million of our customers will be served by cable systems capable of delivering digital services. INTERNET ACCESS. We currently provide Internet access to our customers by two principal means: - via cable modems attached to personal computers, either directly or through an outsourcing contract with an Internet service provider; and - through television access, via a service such as WorldGate. We also provide Internet access in some markets through traditional dial-up telephone modems, using a third party service provider. The principal advantage of cable Internet connections is the high speed of data transfer over a cable system. We currently offer these services to our residential customers over coaxial cable at speeds that can range up to approximately 50 times the speed of a conventional telephone modem. Furthermore, a two-way communication cable system using a hybrid fiber optic/coaxial structure can support the entire connection at cable modem speeds without the need for a separate telephone line. If the cable system 127
131 only supports one-way signals from the headend to the customer, the customer must use a separate telephone line in order to send signals to the provider, although such customer still receives the benefit of high speed cable access when downloading information, which is the primary reason for using cable as an Internet connection. In addition to Internet access over our traditional coaxial system, we also provide our commercial customers fiber optic cable access at a price that we believe is less than the price offered by the telephone companies. In the past, cable Internet connections have provided customers with widely varying access speeds because each customer accessed the Internet by sending and receiving data through a node. Users connecting simultaneously through a single node share the bandwidth of that node, so that users' connection speeds may diminish as additional users connect through the same node. To induce users to switch to our Internet services, however, we guarantee our cable modem customers the minimum access speed selected from several speed options we offer. We also provide higher guaranteed access speeds for customers willing to pay an additional cost. In order to meet these guarantees, we are increasing the bandwidth of our systems and "splitting" nodes easily and cost-effectively to reduce the number of customers per node. - CABLE MODEM-BASED INTERNET ACCESS. We have deployed cable modem-based Internet access services in 27 markets including: Los Angeles, California; St. Louis, Missouri; and Fort Worth, Texas. As of June 30, 1999, we provided Internet access service to approximately 13,460 homes and 160 commercial customers. The following table indicates the historical and projected availability, pro forma for our recent and pending acquisitions, of cable modem Internet access services in our systems, as of the dates indicated. Only a small percentage of the homes passed currently subscribe to these services. HOMES PASSED BY ADVANCED DATA SERVICES ---------------------------------- JUNE 30, 1999 DECEMBER 31, 1999 ------------- ----------------- (ACTUAL) (PROJECTED) HIGH SPEED INTERNET ACCESS VIA CABLE MODEMS: High Speed Access ..................................... 644,600 1,391,000 EarthLink/Charter Pipeline............................. 572,700 708,700 Excite@Home............................................ 233,400 617,300 Convergence.com........................................ -- 353,200 In-House/Other......................................... -- 344,000 --------- --------- Total cable modems.................................. 1,450,700 3,414,200 ========= ========= Internet access via WorldGate.......................... 245,200 428,800 ========= ========= We have an agreement with EarthLink, an independent Internet service provider, to provide as a label service Charter Pipeline(TM), which is a cable modem-based, high-speed Internet access service we offer. We currently charge a monthly usage fee of between $24.95 and $34.95. Our customers have the option to lease a cable modem for $10 to $15 a month or to purchase a modem for between $300 and $400. As of June 30, 1999, 128
132 we offered EarthLink Internet access to approximately 573,000 of our homes passed and have approximately 7,200 customers. We have a relationship with High Speed Access to offer Internet access in some of our smaller systems. High Speed Access also provides Internet access services to our customers under the Charter Pipeline brand name. Although the Internet access service is provided by High Speed Access, the Internet "domain name" of our customer's e-mail address and web site, if any, is "Charter.net," allowing the customer to switch or expand to our other Internet services without a change of e-mail address. High Speed Access provides three different tiers of service to us. The base tier is similar to our arrangements with EarthLink and Excite@Home. The turnkey tier bears all capital, operating and marketing costs of providing the service, and seeks to build economies of scale in our smaller systems that we cannot efficiently build ourselves by simultaneously contracting to provide the same services to other small geographically contiguous systems. The third tier allows for a la carte selection of services between the base tier and the turnkey tier. As of June 30, 1999, High Speed Access offered Internet access to approximately 645,000 of our homes passed, and approximately 5,700 customers have signed up for the service. During the remaining six months of 1999, we, jointly with High Speed Access, plan to launch service in an additional 21 systems, covering approximately 758,000 additional homes passed. Vulcan Ventures, Inc., a company controlled by Mr. Allen, has an equity investment in High Speed Access. See "Certain Relationships and Related Transactions". We have a revenue sharing agreement with Excite@Home, under which Excite@Home currently provides Internet service to customers in our systems serving Fort Worth, University Park and Highland Park, Texas. The Excite@Home network provides high-speed, cable modem-based Internet access using our cable infrastructure. As of June 30, 1999, we offered Excite@Home Internet service to approximately 233,000 of our homes passed and had approximately 3,000 customers. We also have services agreements with Convergence.com, under which Convergence.com currently provides Internet service to customers in systems acquired from Rifkin. The Convergence.com network provides high-speed, cable modem-based Internet access using our cable infrastructure. As of June 30, 1999, Rifkin offered Convergence.com service to approximately 260,000 homes passed and had approximately 5,400 customers. We actively market our cable modem service to businesses in each one of our systems where we have the capability to offer such service. Our marketing efforts are often door-to-door, and we have established a separate division whose function is to make businesses aware that this type of Internet access is available through us. We also provide several virtual local area networks for municipal and educational facilities in our Los Angeles cluster including Cal Tech, the City of Pasadena and the City of West Covina. - TV-BASED INTERNET ACCESS. We have a non-exclusive agreement with WorldGate to provide its TV-based e-mail and Internet access to our cable customers. WorldGate's technology is only available to cable systems with two-way capability. WorldGate offers 129
133 easy, low-cost Internet access to customers at connection speeds ranging up to 128 kilobits per second. For a monthly fee, we provide our customers with e-mail and Internet access that does not require the use of a PC, an existing or additional telephone line, or any additional equipment. Instead, the customer accesses the Internet through the set-top box, which the customer already has on his television set, and a wireless keyboard, that is provided with the service and which interfaces with the box. WorldGate works on advanced analog and digital converters and, therefore, can be installed utilizing advanced analog converters already deployed. In contrast, other converter-based, non-PC Internet access products require a digital platform and a digital converter prior to installation. Customers who opt for television-based Internet access are generally first-time users who prefer this more user-friendly interface. Of these users, 41% use WorldGate at least once a day, and 77% use it at least once a week. Although the WorldGate service bears the WorldGate brand name, the Internet domain name of the customers who use this service is "Charter.net". This allows the customer to switch or expand to our other Internet services without a change of e-mail address. We first offered WorldGate to customers on the upgraded portion of our systems in St. Louis in April 1998. We are also currently offering this service in our systems in Maryville, Illinois and Newtown, Connecticut, and plan to introduce it in eight additional systems by December 31, 1999. Charter Investment, Inc. owns a minority interest in WorldGate which will be contributed to Charter Communications Holding Company. See "Certain Relationships and Related Transactions". As of June 30, 1999, we provided WorldGate Internet service to approximately 4,300 customers. - INTERNET PORTAL SERVICES. On October 1, 1999, Charter Communications Holding Company, Vulcan Ventures, an entity controlled by Mr. Allen, and Go2Net, Inc. entered into a joint venture to form Broadband Partners, LLC. Broadband will provide access to the Internet through a "portal" to Charter Communications Holding Company's current and future subscribers and potentially to other providers of high speed Internet access. A portal is an Internet web site that serves as a user's initial point of entry to the World Wide Web. By offering selected content, services and links to other web sites, a portal guides and directs users through the World Wide Web and generates revenues from advertising on its own web pages and by sharing revenues generated by linked or featured web sites. Revenue splits and other economic terms in this arrangement will be at least as favorable to Charter Communications Holding Company as terms between Broadband and any other party. Charter Communications Holding Company has agreed to use Broadband's portal services exclusively for an initial six-year period that will begin when the portal services are launched, except that Charter's existing agreements with other Internet high speed portal services and High Speed Access may run for their current term to the extent that such agreements do not allow for the carriage of content provided by Charter Communications Holding Company or Vulcan Ventures. The joint venture is for an initial 25-year term, subject to successive five-year renewals by mutual consent. Vulcan Ventures will own 55.2%, Charter Communications Holding Company will own 130
134 24.9% and Go2Net will own 19.9% of Broadband's membership interests. Vulcan Ventures will have voting control over the Broadband entity. Broadband's board of directors will consist of three directors designated by Vulcan Ventures and one by each of Charter Communications Holding Company and Go2Net. Each of Broadband's investors will be obligated to provide their pro rata share of funding for Broadband's operations and capital expenditures, except that Vulcan Ventures will fund Charter Communications Holding Company's portion of Broadband's expenses for the first four years and will fund Go2Net's portion of Broadband's expenses to the extent such expenses exceed budget for the first four years. We believe that our participation in the Broadband Partners joint venture will facilitate the delivery of a broad array of Internet products and services to our customers over the television set's digital set-top box and through the personal computer. The Broadband Partners joint venture has not yet established a timetable for launching its portal services. We do not anticipate that our participation in the joint venture will have a material impact on our financial condition or results of operations for the foreseeable future. This is especially the case because Charter Communications Holding Company's portion of the joint venture's expenses are to be funded by Vulcan Ventures during the first four years. WINK-ENHANCED PROGRAMMING. We have formed a relationship with Wink, which sells technology to embed interactive features, such as additional information and statistics about a program or the option to order an advertised product, into programming and advertisements. A customer with a Wink-enabled set-top box and a Wink-enabled cable provider sees an icon flash on the screen when additional Wink features are available to enhance a program or advertisement. By pressing the select button on a standard remote control, a viewer of a Wink-enhanced program is able to access additional information regarding such program, including, for example, information on prior episodes or the program's characters. A viewer watching an advertisement would be able to access additional information regarding the advertised product and may also be able to utilize the two-way transmission features to order a product. We have bundled Wink's services with our traditional cable services in both our advanced analog and digital platforms. Wink's services are provided free of charge. A company controlled by Mr. Allen has made an equity investment in Wink. See "Certain Relationships and Related Transactions". Various programming networks, including CNN, NBC, ESPN, HBO, Showtime, Lifetime, VH1, the Weather Channel, and Nickelodeon, are currently producing over 1,000 hours of Wink-enhanced programming per week. Under certain revenue-sharing arrangements, we will modify our headend technology to allow Wink-enabled programming to be offered on our systems. Each time one of our customers uses Wink to request certain additional information or order an advertised product, we receive fees from Wink. TELEPHONE SERVICES. We expect to be able to offer cable telephony services in the near future using our systems' direct, two-way connections to homes and other buildings. We are exploring technologies using Internet protocol telephony, as well as traditional 131
135 switching technologies that are currently available, to transmit digital voice signals over our systems. AT&T and other telephone companies have already begun to pursue strategic partnering and other programs which make it attractive for us to acquire and develop this alternative Internet protocol technology. For the last two years, we have sold telephony services as a competitive access provider in the state of Wisconsin through one of our subsidiaries, and are currently looking to expand our services as a competitive access provider into other states. JOINT VENTURE WITH RCN CORPORATION. On October 1, 1999, Charter Communications Holding Company and RCN Corporation entered into a binding term sheet containing the principal terms of a non-exclusive joint venture to provide a broad range of telephony services to the customers of Charter Communications Holding Company's subsidiaries in its Los Angeles franchise territory. RCN is engaged in the businesses of bundling residential voice, video and Internet access operations, cable operations and certain long distance telephony operations. RCN is developing advanced fiber optic networks to provide a wide range of telecommunications services, including long distance telephone, video programming and data services, such as high speed Internet access. Charter Communications Holding Company will provide access to its subsidiaries' Los Angeles subscriber base and will provide the capital necessary to develop telephony capability in Los Angeles. In addition, Charter Communications Holding Company will provide the necessary personnel to oversee and manage the telephony services. RCN will provide the necessary personnel and support services to develop and implement telephony services to be provided by Charter Communications Holding Company. Charter Communications Holding Company will pay RCN's fees at rates consistent with industry market compensation. Charter Communications Holding Company will have all rights to the telephony business and assets and will receive all revenues derived from the telephony business unless the parties expand RCN's role by mutual agreement. We believe that our telephony joint venture, together with Mr. Allen's investment in RCN, may allow us to take advantage of RCN's telephony experience as we deliver telephone services to our customers, although we cannot assure you that we will realize anticipated advantages. The term sheet contains only the principal terms of this joint venture and provides that the parties will enter into definitive agreements before the end of 1999. These agreements will contain, among other terms, details of the compensation to be received by RCN. To date, we and RCN have had only preliminary discussions regarding specific operational matters and have not determined a timetable for the commencement of services by the joint venture. We do not anticipate that this joint venture will have a material impact on our financial condition or results of operations for the foreseeable future. MISCELLANEOUS SERVICES. We also offer paging services to our customers in certain markets. As of June 30, 1999, we had approximately 9,400 paging customers. We also lease our fiber-optic cable plant and equipment to commercial and non-commercial users of data and voice telecommunications services. 132
136 OUR SYSTEMS As of June 30, 1999, our systems consisted of approximately 65,900 miles of coaxial and approximately 10,600 sheath miles of fiber optic cable passing approximately 4.5 million households and serving approximately 2.7 million customers. Coaxial cable is a type of cable used for broadband data and cable systems. This type of cable has excellent broadband frequency characteristics, noise, immunity and physical durability. The cable is connected from each node to individual homes or buildings. A node is a single connection to a cable system's main high-capacity fiber optic cable that is shared by a number of customers. A sheath mile is the actual length of cable in miles. Fiber optic cable is a communication medium that uses hair-thin glass fibers to transmit signals over long distances with minimum signal loss or distortion. As of June 30, 1999, approximately 57% of our customers were served by systems with at least 550 megahertz bandwidth capacity, approximately 38% had at least 750 megahertz bandwidth capacity and approximately 34% were served by systems capable of providing two-way interactive communication capability. Such two-way interactive communication capability includes two-way Internet connections, services provided by Wink, and interactive program guides. These amounts do not reflect the impact of our recent or pending acquisitions. CORPORATE MANAGEMENT. We are managed from our corporate offices in St. Louis, Missouri. As of the closing of the offering, Charter Communications, Inc. will have only twelve employees, all of whom are senior management and are also executive officers of Charter Investment, Inc. Pursuant to a services agreement between Charter Communications, Inc. and Charter Investment, Inc., Charter Investment, Inc. will provide the necessary personnel and services to manage Charter Communications Holding Company and its subsidiaries. These personnel and services will be provided to Charter Communications, Inc. on a cost reimbursement basis. Management of Charter Communications, Inc. and Charter Investment, Inc. consists of approximately 200 people led by our chief executive officer Jerald L. Kent. They are responsible for coordinating and overseeing our operations, including certain critical functions, such as marketing and engineering, that are conducted by personnel at the regional and local system level. The corporate office also performs certain financial control functions such as accounting, finance and acquisitions, payroll and benefit administration, internal audit, purchasing and programming contract administration on a centralized basis. OPERATING REGIONS. To manage and operate our systems, we have established two divisions that contain a total of seven operating regions: Western; Central; MetroPlex (Dallas/Fort Worth); North Central; Northeast; Southeast; and Southern. Each of the two divisions is managed by a Senior Vice President who reports directly to Mr. Kent and is responsible for overall supervision of the operating regions within the division. Each region is managed by a team consisting of a Senior Vice President or a Vice President, supported by operational, marketing and engineering personnel. Within each region, certain groups of cable systems are further organized into clusters. We believe that much of our success is attributable to our operating philosophy which emphasizes decentralized management, with decisions being made as close to the customer as possible. We anticipate that we will reorganize into a total of eleven regions with the closings of our pending acquisitions. 133
137 The following table provides an overview of selected technical, operating and financial data for each of our operating regions as of and for the six months ended June 30, 1999. The following table does not reflect the impact of our pending acquisitions or acquisitions closed since June 30, 1999. Upon completion of the pending acquisitions, our systems will pass approximately 9.7 million homes serving approximately 6.2 million customers. SELECTED TECHNICAL, OPERATING AND FINANCIAL DATA BY OPERATING REGION AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 NORTH WESTERN CENTRAL METROPLEX CENTRAL NORTHEAST SOUTHEAST SOUTHERN TOTAL --------- ------- --------- ------- --------- --------- -------- --------- TECHNICAL DATA: Miles of coaxial cable...... 7,500 8,800 5,700 10,000 4,600 16,700 12,600 65,900 Density(a).................. 147 68 85 61 79 40 54 68 Headends.................... 23 34 16 86 18 60 79 316 Planned headend eliminations.............. 3 3 1 30 -- 11 8 56 Plant bandwidth(b): 450 megahertz or less....... 32.1% 53.7% 28.0% 41.9% 43.3% 37.9% 54.3% 43.3% 550 megahertz............... 7.0% 10.2% 14.4% 9.5% 38.6% 24.0% 23.6% 19.1% 750 megahertz or greater.... 60.9% 36.1% 57.6% 48.6% 18.1% 38.1% 22.1% 37.6% Two-way capability.......... 48.6% 49.0% 68.9% 64.3% 10.9% 16.8% 15.1% 33.8% OPERATING DATA: Homes passed................ 1,101,000 595,000 487,000 606,000 364,000 672,000 684,000 4,509,000 Basic customers............. 575,000 368,000 187,000 402,000 301,000 453,000 448,000 2,734,000 Basic penetration(c)........ 52.2% 61.8% 38.4% 66.3% 82.7% 67.4% 65.5% 60.6% Premium units............... 365,000 217,000 172,000 146,000 265,000 288,000 223,000 1,676,000 Premium penetration(d)...... 63.5% 59.0% 92.0% 36.3% 88.0% 63.6% 49.8% 61.3% FINANCIAL DATA: Revenues, in millions....... $122.8 $82.3 $25.9 $46.1 $32.0 $89.1 $70.8 $469.0 - ------------------------- (a) Represents homes passed divided by miles of coaxial cable. (b) Represents percentage of basic customers within a region served by the indicated plant bandwidth. (c) Represents basic customers as a percentage of homes passed. (d) Represents premium units as a percentage of basic customers. 134
138 WESTERN REGION. The Western region consists of cable systems serving approximately 575,000 customers located entirely in the state of California, with approximately 474,000 customers located within the Los Angeles metropolitan area. These customers reside primarily in the communities of Pasadena, Alhambra, Glendale, Long Beach and Riverside. We also have approximately 101,000 customers in central California, principally located in the communities of San Luis Obispo, West Sacramento and Turlock. The Western region is also responsible for managing approximately 69,000 customers associated with the recent acquisition of American Cable and 32,000 customers associated with the recent acquisition of Rifkin. According to National Decision Systems, the projected median household growth in the counties currently served by this region's systems is 5.2% for the period ending 2003, which is also the projected U.S. median household growth for the same period. The Western region's cable systems have been significantly upgraded with approximately 68% of the region's customers served by cable systems with at least 550 megahertz bandwidth capacity as of June 30, 1999. The planned upgrade of the Western region's cable systems will reduce the number of headends from 21 to 18 by December 31, 2001. CENTRAL REGION. The Central region consists of cable systems serving approximately 368,000 customers of which approximately 250,000 customers reside in and around St. Louis County or in adjacent areas in Illinois, and over 94% are served by two headends. The remaining approximately 118,000 of these customers reside in Indiana, and these systems are primarily classic cable systems serving small to medium-sized communities. A portion of the Indiana systems have been "swapped" as part of the InterMedia transaction. See "Business -- Acquisitions". The Central region is also responsible for managing approximately 77,000 customers associated with the recent acquisition of Rifkin. According to National Decision Systems, the projected median household growth in the counties currently served by this region's systems is 4.7% for the period ending 2003, versus the projected U.S. median household growth of 5.2% for the same period. At June 30, 1999, approximately 46% of the Central region's customers were served by cable systems with at least 550 megahertz bandwidth capacity. The majority of the cable plants in the Illinois systems have been upgraded to 750 megahertz bandwidth capacity. The planned upgrade of the Central region's cable systems will reduce the number of headends from 34 to 31 by December 31, 2001. We have begun a three-year project, scheduled for completion in 2001, to upgrade the cable plant in St. Louis County, serving approximately 178,000 customers, to 870 megahertz bandwidth capability. METROPLEX REGION. The MetroPlex region consists of cable systems serving approximately 187,000 customers of which approximately 131,000 are served by the Fort Worth system. The systems in this region serve one of the fastest growing areas of Texas. The anticipated population growth combined with the existing low basic penetration rate of approximately 38% offers significant potential to increase the total number of customers and the associated revenue and cash flow in this region. According 135
139 to National Decision Systems, the projected median household growth in the counties served by this region's systems is 8.4% for the period ending 2003, versus the projected U.S. median household growth of 5.2% for the same period. The MetroPlex region's cable systems have been significantly upgraded with approximately 72% of the region's customers served by cable systems with at least 550 megahertz bandwidth capacity as of June 30, 1999. In 1997, we began to upgrade the Fort Worth system to 870 megahertz of bandwidth capacity. We expect to complete this project during 1999. The planned upgrade of the MetroPlex region's cable systems will reduce the number of headends from 16 to 15 by December 31, 2001. NORTH CENTRAL REGION. The North Central region consists of cable systems serving approximately 402,000 customers. These customers are primarily located throughout the state of Wisconsin, along with a small system of approximately 27,000 customers in Rosemont, Minnesota, a suburb of Minneapolis. Within the state of Wisconsin, the four largest operating clusters are located in and around Eau Claire, Fond du Lac, Janesville and Wausau. According to National Decision Systems, the projected median household growth in the counties served by this region's systems is 5.4% for the period ending 2003, versus the projected U.S. median household growth of 5.2% for the same period. At June 30, 1999, approximately 58% of the North Central region's customers were served by cable systems with at least 550 megahertz bandwidth capacity. The planned upgrade of the North Central region's cable systems will reduce the number of headends from 86 to 56 by December 31, 2001. NORTHEAST REGION. The Northeast region consists of cable systems serving approximately 301,000 customers residing in the states of Connecticut and Massachusetts. These systems serve the communities of Newtown and Willimantic, Connecticut, and areas in and around Pepperell, Massachusetts, and are included in the New York, Hartford, and Boston areas of demographic influence. The Northeast region will be responsible for managing the approximately 175,000 customers associated with the recent acquisition of cable systems from Greater Media and approximately 15,000 customers associated with the recent acquisition of Helicon. According to National Decision Systems, the projected median household growth in the counties currently served by this region's systems is 3.7% for the period ending 2003, versus the projected U.S. median household growth of 5.2% for the same period. At June 30, 1999, approximately 57% of the Northeast region's customers were served by cable systems with at least 550 megahertz of bandwidth capacity. SOUTHEAST REGION. The Southeast region consists of cable systems serving approximately 453,000 customers residing primarily in small to medium-sized communities in North Carolina, South Carolina, Georgia and eastern Tennessee. There are significant clusters of cable systems in and around the cities and counties of Greenville/Spartanburg, South Carolina; Hickory and Asheville, North Carolina; Henry County, Georgia, a suburb of Atlanta; and Johnson City, Tennessee. These areas have experienced rapid population growth over the past few years, contributing to the high rate of internal customer growth for these systems. According to National Decision 136
140 Systems, the projected median household growth in the counties currently served by this region's systems is 6.9% for the period ending 2003, versus the projected U.S. median household growth of 5.2% for the same period. In addition, the Southeast region is responsible for managing an aggregate of 606,000 customers associated with the recent Helicon, InterMedia, Rifkin, Vista and Cable Satellite acquisitions. At June 30, 1999, approximately 62% of the Southeast region's customers were served by cable systems with at least 550 megahertz bandwidth capacity. The planned upgrade of the Southeast region's cable systems will reduce the number of headends from 60 to 49 by December 31, 2001. SOUTHERN REGION. The Southern region consists of cable systems serving approximately 448,000 customers located primarily in the states of Louisiana, Alabama, Kentucky, Mississippi and central Tennessee. In addition, the Southern region includes systems in Kansas, Colorado, Utah and Montana. The Southern region has significant clusters of cable systems in and around the cities of Birmingham, Alabama; Nashville, Tennessee; and New Orleans, Louisiana. According to National Decision Systems, the projected median household growth in the counties currently served by this region's systems is 6.3% for the period ending 2003, versus the projected U.S. median household growth of 5.2% for the same period. In addition, the Southern region is responsible for managing an aggregate of 328,000 customers associated with the recent Helicon, InterMedia and Rifkin acquisitions. At June 30, 1999, approximately 46% of the Southern region's customers were served by cable systems with at least 550 megahertz bandwidth capacity. The planned upgrade of the Southeast region's cable systems will reduce the number of headends from 59 to 51 by December 31, 2001. PLANT AND TECHNOLOGY OVERVIEW. We have engaged in an aggressive program to upgrade our existing cable plant over the next three years. For the period from January 1, 2000 to December 31, 2002, we plan to spend approximately $5.5 billion for capital expenditures, approximately $2.9 billion of which will be used to upgrade our systems to bandwidth capacity of 550 megahertz or greater, so that we may offer advanced services. The remaining capital will be spent on plant extensions, new services, converters and system maintenance. The following table describes the current technological state of our systems and the anticipated progress of planned upgrades through 2001, based on the percentage of our customers who will have access to the bandwidth and other features shown: LESS THAN 750 MEGAHERTZ TWO-WAY 550 MEGAHERTZ 550 MEGAHERTZ OR GREATER CAPABILITY ------------- ------------- ------------- ---------- June 30, 1999........................ 43.3% 19.1% 37.6% 33.8% December 31, 1999.................... 58.7% 15.9% 25.4% 25.4% December 31, 2000.................... 47.3% 14.5% 38.2% 38.2% December 31, 2001.................... 30.1% 12.5% 57.4% 57.4% We have adopted HFC architecture as the standard for our ongoing systems upgrades. HFC architecture combines the use of fiber optic cable, which can carry 137
141 hundreds of video, data and voice channels over extended distances, with coaxial cable, which requires a more extensive signal amplification in order to obtain the desired transmission levels for delivering channels. In most systems, we connect fiber optic cable to individual nodes serving an average of 500 homes or commercial buildings. We believe that this network design provides high capacity and superior signal quality, and will enable us to provide the newest forms of telecommunications services to our customers. The primary advantages of HFC architecture over traditional coaxial cable networks include: - increased channel capacity of cable systems; - reduced number of amplifiers, which are devices to compensate for signal loss caused by coaxial cable, needed to deliver signals from the headend to the home, resulting in improved signal quality and reliability; - reduced number of homes that need to be connected to an individual node, improving the capacity of the network to provide high-speed Internet access and reducing the number of households affected by disruptions in the network; and - sufficient dedicated bandwidth for two-way services, which avoids reverse signal interference problems that can otherwise occur when you have two-way communication capability. The HFC architecture will enable us to offer new and enhanced services, including: - additional channels and tiers; - expanded pay-per-view options; - high-speed Internet access; - wide area networks, which permit a network of computers to be connected together beyond an area; - point-to-point data services, which can switch data links from one point to another; and - digital advertising insertion, which is the insertion of local, regional and national programming. The upgrades will facilitate our new services in two primary ways: - Greater bandwidth allows us to send more information through our systems. This provides us with the capacity to provide new services in addition to our current services. As a result, we will be able to roll out digital cable programming in addition to existing analog channels offered to customers who do not wish to subscribe to a package of digital services. - Enhanced design configured for two-way communication with the customer allows us to provide cable Internet services without telephone support and other interactive services, such as an interactive program guide, impulse pay-per-view, video-on-demand and Wink, that cannot be offered without upgrading the bandwidth capacity of our systems. 138
142 This HFC architecture will also position us to offer cable telephony services in the future, using either Internet protocol technology or switch-based technology, another method of linking communications. CUSTOMER SERVICE AND COMMUNITY RELATIONS Providing a high level of service to our customers has been a central driver of our historical success. Our emphasis on system reliability, engineering support and superior customer satisfaction is key to our management philosophy. In support of our commitment to customer satisfaction, we operate a 24-hour customer service hotline in most systems and offer on-time installation and service guarantees. It is our policy that if an installer is late for a scheduled appointment the customer receives free installation, and if a service technician is late for a service call the customer receives a $20 credit. As of June 30, 1999, we maintained eight call centers located in our seven regions, which are responsible for handling call volume for more than 55% of our customers. They are staffed with dedicated personnel who provide service to our customers 24 hours a day, seven days a week. We believe operating regional call centers allows us to provide "localized" service, which also reduces overhead costs and improves customer service. We have invested significantly in both personnel and equipment to ensure that these call centers are professionally managed and employ state-of-the-art technology. We also maintain approximately 170 field offices, and employ approximately 1,200 customer service representatives throughout the systems. Our customer service representatives receive extensive training to develop customer contact skills and product knowledge critical to successful sales and high rates of customer retention. We have approximately 2,300 technical employees who are encouraged to enroll in courses and attend regularly scheduled on-site seminars conducted by equipment manufacturers to keep pace with the latest technological developments in the cable television industry. We utilize surveys, focus groups and other research tools as part of our efforts to determine and respond to customer needs. We believe that all of this improves the overall quality of our services and the reliability of our systems, resulting in fewer service calls from customers. We are also committed to fostering strong community relations in the towns and cities our systems serve. We support many local charities and community causes in various ways, including marketing promotions to raise money and supplies for persons in need, and in-kind donations that include production services and free air-time on major cable networks. Recent charity affiliations include campaigns for "Toys for Tots," United Way, local theatre, children's museums, local food banks and volunteer fire and ambulance corps. We also participate in the "Cable in the Classroom" program, whereby cable television companies throughout the United States provide schools with free cable television service. In addition, we install and provide free basic cable service to public schools, government buildings and non-profit hospitals in many of the communities in which we operate. We also provide free cable modems and high-speed Internet access to schools and public libraries in our franchise areas. We place a special emphasis on education, and regularly award scholarships to employees who intend to pursue courses of study in the communications field. 139
143 SALES AND MARKETING PERSONNEL RESOURCES. We have a centralized team responsible for coordinating the marketing efforts of our individual systems. For most of our systems with over 30,000 customers we have a dedicated marketing manager, while smaller systems are handled regionally. We believe our success in marketing comes in large part from new and innovative ideas and from good interaction between our corporate office, which handles programs and administration, and our field offices, which implement the various programs. We are also continually monitoring the regulatory arena, customer perception, competition, pricing and product preferences to increase our responsiveness to our customer base. Our customer service representatives are given the incentive to use their daily contacts with customers as opportunities to sell our new service offerings. MARKETING STRATEGY. Our long-term marketing objective is to increase cash flow through deeper market penetration and growth in revenue per household. To achieve this objective and to position our service as an indispensable consumer service, we are pursuing the following strategies: - increase the number of rooms per household with cable; - introduce new cable products and services; - design product offerings to enable greater opportunity for customer choices; - utilize "tiered" packaging strategies to promote the sale of premium services and niche programming; - offer our customers more value through discounted bundling of products; - increase the number of residential consumers who use our set-top box, which enables them to obtain advanced digital services such as a greater number of television stations and interactive services; - target households based on demographic data; - develop specialized programs to attract former customers, households that have never subscribed and illegal users of the service; and - employ Charter branding of products to promote customer awareness and loyalty. We have innovative marketing programs which utilize market research on selected systems, compare the data to national research and tailor marketing programs for individual markets. We gather detailed customer information through our regional marketing representatives and use the Claritas geodemographic data program and consulting services to create unique packages of services and marketing programs. These marketing efforts and the follow-up analysis provide consumer information down to the city block or suburban subdivision level, which allows us to create very targeted marketing programs. We seek to maximize our revenue per customer through the use of "tiered" packaging strategies to market premium services and to develop and promote niche programming services. 140
144 We regularly use targeted direct mail campaigns to sell these tiers and services to our existing customer base. We are developing an in-depth profile database that goes beyond existing and former customers to include all homes passed. This database information is expected to improve our targeted direct marketing efforts, bringing us closer toward our objective of increasing total customers as well as sales per customer for both new and existing customers. For example, using customer profile data currently available, we are able to identify customers who have children under a specified age and do not currently subscribe to The Disney Channel. We then target our marketing efforts with respect to The Disney Channel to those households. In 1998, we were chosen by Claritas Corporation, sponsor of a national marketing competition across all industries, as the first place winner in their media division, which includes cable systems operations, telecommunications and newspapers, for our national segmenting and targeted marketing program. Our marketing professionals have also received numerous industry awards within the last two years, including the Cable and Telecommunication Association of Marketers' awards for consumer research and best advertising and marketing programs. In 1998, we introduced a new package of premium services. Customers receive a substantial discount on bundled premium services of HBO, Showtime, Cinemax and The Movie Channel. We were able to negotiate favorable terms with premium networks, which allowed minimal impact on margins and provided substantial volume incentives to grow the premium category. The MVP package has increased our premium household penetration, premium revenue and cash flow. As a result of this package, HBO recognized us as a top performing customer. We are currently introducing this same premium strategy in the systems we have recently acquired. We expect to continue to invest significant amounts of time, effort and financial resources in the marketing and promotion of new and existing services. To increase customer penetration and increase the level of services used by our customers, we use a coordinated array of marketing techniques, including door-to-door solicitation, telemarketing, media advertising and direct mail solicitation. We believe we have one of the cable television industry's highest success rates in attracting and retaining customers who have never before subscribed to cable television. Historically, these "nevers" are the most difficult customers to attract and retain. PROGRAMMING SUPPLY GENERAL. We believe that offering a wide variety of conveniently scheduled programming is an important factor influencing a customer's decision to subscribe to and retain our cable services. We devote considerable resources to obtaining access to a wide range of programming that we believe will appeal to both existing and potential customers of basic and premium services. We rely on extensive market research, customer demographics and local programming preferences to determine channel offerings in each of our markets. See "-- Sales and Marketing". PROGRAMMING SOURCES. We obtain basic and premium programming from a number of suppliers, usually pursuant to a written contract. As of June 30, 1999, we obtain 141
145 approximately 64% of our programming through contracts entered into directly with a programming supplier. We obtain the rest of our programming through TeleSynergy, Inc., which offers its partners contract benefits in buying programming by virtue of volume discounts available to a larger buying base. Programming tends to be made available to us for a flat fee per customer. However, some channels are available without cost to us. In connection with the launch of a new channel, we may receive a distribution fee to support the channel launch, a portion of which is applied to marketing expenses associated with the channel launch. The amounts we receive in distribution fees are not significant. Our programming contracts generally continue for a fixed period of time, usually from three to ten years. Although longer contract terms are available, we prefer to limit contracts to three years so that we retain flexibility to change programming and include new channels as they become available. Some program suppliers offer marketing support or volume discount pricing structures. Some of our programming agreements with premium service suppliers offer cost incentives under which premium service unit prices decline as certain premium service growth thresholds are met. For home shopping channels, we may receive a percentage of the amount spent in home shopping purchases by our customers on channels we carry. In 1998, these revenues totalled approximately $220,000. PROGRAMMING COSTS. Our cable programming costs have increased in recent years and are expected to continue to increase due to factors including: - system acquisitions; - additional programming being provided to customers; - increased cost to produce or purchase cable programming; and - inflationary increases. In every year we have operated, our costs to acquire programming have exceeded customary inflationary and cost-of-living type increases. Sports programming costs have increased significantly over the past several years. In addition, contracts to purchase sports programming sometimes contain built-in cost increases for programming added during the term of the contract which we may or may not have the option to add to our service offerings. Under rate regulation of the Federal Communications Commission, cable operators may increase their rates to customers to cover increased costs for programming, subject to certain limitations. See "Regulation and Legislation". We now contract through TeleSynergy for approximately 36% of our programming. We believe our partnership in TeleSynergy limited increases in our programming costs relative to what the increases would otherwise have been. However, given our increased size and purchasing ability, the effect may not be material. This is because some programming suppliers offer advantageous pricing terms to cable operators whose number of customers exceeds thresholds established by these programming suppliers. Our increase in size as a result of our merger with Marcus Holdings and our recent and pending acquisitions should 142
146 provide increased bargaining power, whether or not through TeleSynergy, resulting in an ability to limit increases in programming costs. In addition, upon the close of the InterMedia, Falcon and Bresnan acquisitions, the InterMedia, Falcon and Bresnan cable systems will no longer be able to obtain certain of their programming services through affiliates of AT&T Broadband and Internet Services, formerly Tele-Communications, Inc. We expect that the impact of any programming cost increases associated with the termination of these arrangements will be more than offset by cost savings generated from our other recent and pending acquisitions. Management believes it will, as a general matter, be able to pass increases in its programming costs through to customers, although we cannot assure you that it will be possible. RATES Pursuant to the Federal Communications Commission's rules, we have set rates for cable-related equipment, such as converter boxes and remote control devices, and installation services. These rates are based on actual costs plus a 11.25% rate of return. We have unbundled these charges from the charges for the provision of cable service. Rates charged to customers vary based on the market served and service selected, and are typically adjusted on an annual basis. As of June 30, 1999, the average monthly fee was $10.59 for basic service and $19.16 for expanded basic service. Regulation of the expanded basic service was eliminated by federal law as of March 31, 1999 and such rates are now based on market conditions. A one-time installation fee, which may be waived in part during certain promotional periods, is charged to new customers. We believe our rate practices are in accordance with Federal Communications Commission Guidelines and are consistent with those prevailing in the industry generally. See "Regulation and Legislation". THEFT PROTECTION The unauthorized tapping of cable plant and the unauthorized receipt of programming using cable converters purchased through unauthorized sources are problems which continue to challenge the entire cable industry. We have adopted specific measures to combat the unauthorized use of our plant to receive programming. For instance, in several of our regions, we have instituted a "perpetual audit" whereby each technician is required to check at least four other nearby residences during each service call to determine if there are any obvious signs of piracy, namely, a drop line leading from the main cable line into other homes. Addresses where the technician observes drop lines are then checked against our customer billing records. If the address is not found in the billing records, a sales representative calls on the unauthorized user to correct the "billing discrepancy" and persuade the user to become a formal customer. In our experience, approximately 25% of unauthorized users who are solicited in this manner become customers. Billing records are then closely monitored to guard against these new customers reverting to their status as unauthorized users. Unauthorized users who do not convert are promptly disconnected and, in certain instances, flagrant violators are referred for prosecution. In addition, we have prosecuted individuals who have sold cable converters programmed to receive our signals without proper authorization. 143
147 FRANCHISES As of June 30, 1999, our systems operated pursuant to an aggregate of 1,247 franchises, permits and similar authorizations issued by local and state governmental authorities. As of June 30, 1999, on a pro forma basis, we held approximately 4,250 franchises in the aggregate. Each franchise is awarded by a governmental authority and is usually not transferable unless the granting governmental authority consents. Most franchises are subject to termination proceedings in the event of a material breach. In addition, most franchises require us to pay the granting authority a franchise fee of up to 5.0% of gross revenues generated by cable television services under the franchise (i.e., the maximum amount that may be charged under the Communications Act). Our franchises have terms which range from four years to more than 32 years. Prior to the scheduled expiration of most franchises, we initiate renewal proceedings with the granting authorities. This process usually takes three years but can take a longer period of time and often involves substantial expense. The Communications Act provides for an orderly franchise renewal process in which granting authorities may not unreasonably withhold renewals. If a renewal is withheld and the granting authority takes over operation of the affected cable system or awards it to another party, the granting authority must pay the existing cable operator the "fair market value" of the system. The Communications Act also established comprehensive renewal procedures requiring that an incumbent franchisee's renewal application be evaluated on its own merit and not as part of a comparative process with competing applications. In connection with the franchise renewal process, many governmental authorities require the cable operator make certain commitments, such as technological upgrades to the system, which may require substantial capital expenditures. We cannot assure you, however, that any particular franchise will be renewed or that it can be renewed on commercially favorable terms. Our failure to obtain renewals of our franchises, especially those in major metropolitan areas where we have the most customers, would have a material adverse effect on our business, results of operations and financial condition. See "Risk Factors -- Regulatory and Legislative Matters". The following table summarizes our systems' franchises by year of expiration, and approximate number of basic customers as of June 30, 1999 and does not reflect pending acquisitions or acquisitions closed since that date. PERCENTAGE PERCENTAGE NUMBER OF OF TOTAL TOTAL BASIC OF TOTAL YEAR OF FRANCHISE EXPIRATION FRANCHISES FRANCHISES CUSTOMERS CUSTOMERS - ---------------------------- ---------- ---------- ----------- ---------- Prior to December 31, 1999............... 109 9% 275,000 10% 2000 to 2002............................. 239 19% 608,000 22% 2003 to 2005............................. 267 21% 525,000 19% 2006 or after............................ 632 51% 1,326,000 49% ----- --- --------- --- Total............................... 1,247 100% 2,734,000 100% Under the 1996 Telecom Act, cable operators are not required to obtain franchises in order to provide telecommunications services, and granting authorities are prohibited from limiting, restricting or conditioning the provision of such services. In addition, 144
148 granting authorities may not require a cable operator to provide telecommunications services or facilities, other than institutional networks, as a condition of an initial franchise grant, a franchise renewal, or a franchise transfer. The 1996 Telecom Act also limits franchise fees to an operator's cable-related revenues and clarifies that they do not apply to revenues that a cable operator derives from providing new telecommunications services. We believe our relations with the franchising authorities under which our systems are operated are generally good. Substantially all of the material franchises relating to our systems which are eligible for renewal have been renewed or extended at or prior to their stated expiration dates. COMPETITION We face competition in the areas of price, service offerings, and service reliability. We compete with other providers of television signals and other sources of home entertainment. In addition, as we expand into additional services such as Internet access, interactive services and telephony, we will face competition from other providers of each type of service. See "Risk Factors -- We operate in a very competitive business environment which can adversely affect our business and operations". To date, we believe that we have not lost a significant number of customers, or a significant amount of revenue, to our competitors' systems. However, competition from other providers of the technologies we expect to offer in the future may have a negative impact on our business in the future. Through mergers such as the recent merger of Tele-Communications, Inc. and AT&T, customers will come to expect a variety of services from a single provider. While the TCI/AT&T merger has no direct or immediate impact on our business, it encourages providers of cable and telecommunications services to expand their service offerings. It also encourages consolidation in the cable industry as cable operators recognize the competitive benefits of a large customer base and expanded financial resources. Key competitors today include: - BROADCAST TELEVISION. Cable television has long competed with broadcast television, which consists of television signals that the viewer is able to receive without charge using a traditional "off-air" antenna. The extent of such competition is dependent upon the quality and quantity of broadcast signals available through "off-air" reception compared to the services provided by the local cable system. The recent licensing of digital spectrum by the Federal Communications Commission will provide incumbent television licenses with the ability to deliver high definition television pictures and multiple digital-quality program streams, as well as advanced digital services such as subscription video. - DBS. Direct broadcast satellite, known as DBS, has emerged as significant competition to cable systems. The DBS industry has grown rapidly over the last several years, far exceeding the growth rate of the cable television industry, and now serves 145
149 approximately 10 million subscribers nationwide. DBS service allows the subscriber to receive video services directly via satellite using a relatively small dish antenna. Moreover, video compression technology allows DBS providers to offer more than 100 digital channels, thereby surpassing the typical cable system. DBS, however, is limited in the local programming it can provide because of the current capacity limitations of satellite technology. In addition, existing copyright rules restrict the ability of DBS providers to offer local broadcast programming. Congress is now considering legislation that would remove these legal obstacles. DirecTV and EchoStar Communications Corporation, the two primary DBS providers, have reached agreements allowing them to offer Fox's owned-and-operated stations in their local markets. These agreements are contingent upon passage of satellite TV reform legislation. America Online Inc., the nation's leading provider of Internet services has recently announced a plan to invest $1.5 billion in Hughes Electronics Corp., DirecTV, Inc.'s parent company, and these companies intend to jointly market America Online's prospective Internet television service to DirecTV's DBS customers. - DSL. The deployment of digital subscriber line technology, known as DSL, will allow Internet access to subscribers at data transmission speeds greater than those of modems over conventional telephone lines. Several telephone companies and other companies are introducing DSL service. The Federal Communications Commission has initiated an administrative proceeding to consider its authority and the possibility of rules to facilitate the deployment of advanced communications services, including high speed broadband services and interactive online Internet services. We are unable to predict the ultimate outcome of any Federal Communications Commission proceeding, the likelihood of success of the Internet access offered by our competitors or the impact on our business and operations of these competitive ventures. - TRADITIONAL OVERBUILDS. Cable television systems are operated under non-exclusive franchises granted by local authorities. More than one cable system may legally be built in the same area. It is possible that a franchising authority might grant a second franchise to another cable operator and that franchise might contain terms and conditions more favorable than those afforded us. In addition, entities willing to establish an open video system, under which they offer unaffiliated programmers non-discriminatory access to a portion of the system's cable system may be able to avoid local franchising requirements. Well financed businesses from outside the cable industry, such as public utilities which already possess fiber optic and other transmission lines in the areas they serve may over time become competitors. There has been a recent increase in the number of cities that have constructed their own cable systems, in a manner similar to city-provided utility services. Constructing a competing cable system is a capital intensive process which involves a high degree of risk. We believe that in order to be successful, a competitor's overbuild would need to be able to serve the homes and businesses in the overbuilt area on a more cost-effective basis than us. Any such overbuild operation would require either significant access to capital or access to facilities already in place that are capable of delivering cable television programming. We are aware of overbuild situations in some of our systems located in Newnan, Columbus and West Point, Georgia; Barron and Cameron, Wisconsin; Auburn, Rancho 146
150 Cucamonga and Victorville, California; and Lanett and Valley, Alabama. Approximately 49,000 basic customers, approximately 1.8% of our total basic customers, are passed by these overbuilds. Additionally, we have been notified that franchises have been awarded, and present potential overbuild situations, in some of our systems located in Denton, Southlake, Roanoke and Keller, Texas and Willimantic, Connecticut. These potential overbuild areas service an aggregate of approximately 54,000 basic customers or approximately 2.0% of our total basic customers. In response to such overbuilds, these systems have been designated priorities for the upgrade of cable plant and the launch of new and enhanced services. We have upgraded each of these systems to at least 750 megahertz two-way HFC architecture, with the exceptions of our systems in Columbus, Georgia, and Willimantic, Connecticut. Upgrades to at least 750 megahertz two-way HFC architecture with respect to these two systems are expected to be completed by December 31, 2000 and December 31, 2001, respectively. - TELEPHONE COMPANIES AND UTILITIES. The competitive environment has been significantly affected by both technological developments and regulatory changes enacted in The Telecommunications Act of 1996, which were designed to enhance competition in the cable television and local telephone markets. Federal cross-ownership restrictions historically limited entry by local telephone companies into the cable television business. The 1996 Telecom Act modified this cross-ownership restriction, making it possible for local exchange carriers who have considerable resources to provide a wide variety of video services competitive with services offered by cable systems. As we expand our offerings to include Internet and other telecommunications services, we will be subject to competition from other telecommunications providers. The telecommunications industry is highly competitive and includes competitors with greater financial and personnel resources, who have brand name recognition and long-standing relationships with regulatory authorities. Moreover, mergers, joint ventures and alliances among franchise, wireless or private cable television operators, local exchange carriers and others may result in providers capable of offering cable television, Internet, and telecommunications services in direct competition with us. Several telephone companies have obtained or are seeking cable television franchises from local governmental authorities and are constructing cable systems. Cross-subsidization by local exchange carriers of video and telephony services poses a strategic advantage over cable operators seeking to compete with local exchange carriers that provide video services. Some local exchange carriers may choose to make broadband services available under the open video regulatory framework of the Federal Communications Commission. In addition, local exchange carriers provide facilities for the transmission and distribution of voice and data services, including Internet services, in competition with our existing or potential interactive services ventures and businesses, including Internet service, as well as data and other non-video services. We cannot predict the likelihood of success of the broadband services offered by our competitors or the impact on us of such competitive ventures. The entry of telephone companies as direct competitors in the video marketplace, however, is likely to become more widespread and could adversely affect the profitability and valuation of the systems. 147
151 Additionally, we are subject to competition from utilities which possess fiber optic transmission lines capable of transmitting signals with minimal signal distortion. - SMATV. Additional competition is posed by satellite master antenna television systems known as "SMATV systems" serving multiple dwelling units, referred to in the cable industry as "MDU's", such as condominiums, apartment complexes, and private residential communities. These private cable systems may enter into exclusive agreements with such MDUs, which may preclude operators of franchise systems from serving residents of such private complexes. Such private cable systems can offer both improved reception of local television stations and many of the same satellite-delivered program services which are offered by cable systems. SMATV systems currently benefit from operating advantages not available to franchised cable systems, including fewer regulatory burdens and no requirement to service low density or economically depressed communities. Exemption from regulation may provide a competitive advantage to certain of our current and potential competitors. - WIRELESS DISTRIBUTION. Cable television systems also compete with wireless program distribution services such as multi-channel multipoint distribution systems or "wireless cable", known as MMDS. MMDS uses low-power microwave frequencies to transmit television programming over-the-air to paying customers. Wireless distribution services generally provide many of the programming services provided by cable systems, and digital compression technology is likely to increase significantly the channel capacity of their systems. Both analog and digital MMDS services require unobstructed "line of sight" transmission paths. While no longer as significant a competitor, analog MMDS has impacted our customer growth in Riverside and Sacramento, California and Missoula, Montana. Digital MMDS is a more significant competitor, presenting potential challenges to us in Los Angeles, California and Atlanta, Georgia. PROPERTIES Our principal physical assets consist of cable television 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. The physical components of our cable television systems require maintenance and periodic upgrading to keep pace with technological advances. We own or lease real property for signal reception sites and business offices in many of the communities served by our systems and for our principal executive offices. We own most of our service vehicles. Our subsidiaries own the real property housing our regional data center in Town & Country, Missouri, as well as the regional office for the Northeast Region in Newtown, Connecticut and additional real estate located in Hickory, North Carolina; Hammond, Louisiana; and West Sacramento and San Luis Obispo, California. Our subsidiaries lease space for our regional data center located in Dallas, Texas and additional locations for business offices throughout our operating regions. Our headend locations are generally 148
152 located on owned or leased parcels of land, and we generally own the towers on which our equipment is located. All of our properties and assets are subject to liens securing payment of indebtedness under the existing credit facilities. We believe that our properties are in good operating condition and are suitable and adequate for our business operations. EMPLOYEES As of the closing of the offering, Charter Communications, Inc. will have only twelve employees, all of whom are senior management and are also executive officers of Charter Investment, Inc. Pursuant to a services agreement between Charter Communications, Inc. and Charter Investment, Inc., Charter Investment, Inc. will provide the necessary personnel and services to manage Charter Communications Holding Company and its subsidiaries. These personnel and services will be provided to Charter Communications, Inc. on a cost reimbursement basis. As of June 30, 1999, Charter Communications Holding Company's subsidiaries had approximately 4,980 full-time equivalent employees of which 280 were represented by the International Brotherhood of Electrical Workers. We believe we have a good relationship with our employees and have never experienced a work stoppage. See "Certain Relationships and Related Transactions". INSURANCE We have insurance to cover risks incurred in the ordinary course of business, including general liability, property coverage, business interruption and workers' compensation insurance in amounts typical of similar operators in the cable industry and with reputable insurance providers. As is typical in the cable industry, we do not insure our underground plant. We believe our insurance coverage is adequate. LEGAL PROCEEDINGS We are involved from time to time in routine legal matters incidental to our business. We believe that the resolution of such matters will not have a material adverse impact on our financial position or results of operations. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 to register the Class A common stock offered by this prospectus. This prospectus, which forms a part of the registration statement, does not contain all the information included in that registration statement. For further information about us and the Class A common stock offered in this prospectus, you should refer to the registration statement and its exhibits. After completion of the offering, we will be required to file annual, quarterly and other information with the SEC. You may read and copy any document we file with the SEC at the public reference facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices at 3475 Lenox Road, N.E., Suite 1000, Atlanta, Georgia 149
153 30326-1232. Copies of such material may be obtained from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You can also review such material by accessing the SEC's Internet web site at http:// www.sec.gov. This site contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. We intend to furnish to each holder of our Class A common stock annual reports containing audited financial statements and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. We will also furnish to each holder of our Class A common stock such other reports as may be required by law. 150
154 REGULATION AND LEGISLATION The following summary addresses the key regulatory developments and legislation affecting the cable television industry. The operation of a cable system is extensively regulated by the Federal Communications Commission, some state governments and most local governments. The 1996 Telecom Act has altered the regulatory structure governing the nation's communications providers. It removes barriers to competition in both the cable television market and the local telephone market. Among other things, it also reduces the scope of cable rate regulation and encourages additional competition in the video programming industry by allowing local telephone companies to provide video programming in their own telephone service areas. The 1996 Telecom Act requires the Federal Communications Commission to undertake a host of implementing rulemakings. Moreover, Congress and the Federal Communications Commission have frequently revisited the subject of cable regulation. Future legislative and regulatory changes could adversely affect our operations, and there have been calls in Congress and at the Federal Communications Commission to maintain or even tighten cable regulation in the absence of widespread effective competition. CABLE RATE REGULATION. The 1992 Cable Act imposed an extensive rate regulation regime on the cable television industry, which limited the ability of cable companies to increase subscriber fees. Under that regime, all cable systems are subject to rate regulation, unless they face "effective competition" in their local franchise area. Federal law now defines "effective competition" on a community-specific basis as requiring satisfaction of conditions rarely satisfied in the current marketplace. Although the Federal Communications Commission has established the underlying regulatory scheme, local government units, commonly referred to as local franchising authorities, are primarily responsible for administering the regulation of the lowest level of cable -- the basic service tier, which typically contains local broadcast stations and public, educational, and government access channels. Before a local franchising authority begins basic service rate regulation, it must certify to the Federal Communications Commission that it will follow applicable federal rules. Many local franchising authorities have voluntarily declined to exercise their authority to regulate basic service rates. Local franchising authorities also have primary responsibility for regulating cable equipment rates. Under federal law, charges for various types of cable equipment must be unbundled from each other and from monthly charges for programming services. As of June 30, 1999, approximately 21% of our local franchising authorities were certified to regulate basic tier rates. The 1992 Cable Act permits communities to certify and regulate rates at any time, so that it is possible that additional localities served by the systems may choose to certify and regulate rates in the future. The Federal Communications Commission itself directly administers rate regulation of cable programming service tiers, which is expanded basic programming offering more services than basic programming, which typically contain satellite-delivered program- 151
155 ming. Under the 1996 Telecom Act, the Federal Communications Commission can regulate cable programming service tier rates only if a local franchising authority first receives at least two rate complaints from local subscribers and then files a formal complaint with the Federal Communications Commission. When new cable programming service tier rate complaints are filed, the Federal Communications Commission considers only whether the incremental increase is justified and it will not reduce the previously established cable programming service tier rate. We currently have rate complaints relating to approximately 240,000 subscribers pending at the Federal Communications Commission. The Federal Communications Commission's authority to regulate cable programming service tier rates effectively expired on March 31, 1999. The Federal Communications Commission has taken the position that it will still adjudicate cable programming service tier complaints filed after this sunset date, but no later than 180 days after the last cable programming service tier rate increase imposed prior to March 31, 1999, and will strictly limit its review, and possibly refund orders, to the time period predating the sunset date. We do not believe any adjudications regarding these pre-sunset complaints will have a material adverse effect on our business. The elimination of cable programming service tier regulation, which is the rate regulation of a particular level of packaged programming services, typically referring to the expanded basic level of service, on a prospective basis affords us substantially greater pricing flexibility. Under the rate regulations of the Federal Communication Commission, most cable systems were required to reduce their basic service tier and cable programming service tier rates in 1993 and 1994, and have since had their rate increases governed by a complicated price cap scheme that allows for the recovery of inflation and certain increased costs, as well as providing some incentive for expanding channel carriage. The Federal Communications Commission has modified its rate adjustment regulations to allow for annual rate increases and to minimize previous problems associated with regulatory lag. Operators also have the opportunity to bypass this "benchmark" regulatory scheme in favor of traditional "cost-of-service" regulation in cases where the latter methodology appears favorable. Cost of service regulation is a traditional form of rate regulation, under which a utility is allowed to recover its costs of providing the regulated service, plus a reasonable profit. The Federal Communications Commission and Congress have provided various forms of rate relief for smaller cable systems owned by smaller operations. Premium cable services offered on a per-channel or per-program basis remain unregulated, as do affirmatively marketed packages consisting entirely of new programming product. However, federal law requires that the basic service tier be offered to all cable subscribers and limits the ability of operators to require purchase of any cable programming service tier if a customer seeks to purchase premium services offered on a per-channel or per-program basis, subject to a technology exception which sunsets in 2002. As noted above, Federal Communications Commission regulation of cable programming service tier rates for all systems, regardless of size, sunset pursuant to the 1996 Telecom Act on March 31, 1999. Certain legislators, however, have called for new rate regulations if unregulated cost rates increase dramatically. The 1996 Telecom Act also 152
156 relaxes existing "uniform rate" requirements by specifying that uniform rate requirements do not apply where the operator faces "effective competition," and by exempting bulk discounts to multiple dwelling units, although complaints about predatory pricing still may be made to the Federal Communications Commission. CABLE ENTRY INTO TELECOMMUNICATIONS. The 1996 Telecom Act creates a more favorable environment for us to provide telecommunication services beyond traditional video delivery. It provides that no state or local laws or regulations may prohibit or have the effect of prohibiting any entity from providing any interstate or intrastate telecommunications service. A cable operator is authorized under the 1996 Telecom Act to provide telecommunication services without obtaining a separate local franchise. States are authorized, however, to impose "competitively neutral" requirements regarding universal service, public safety and welfare, service quality, and consumer protection. State and local governments also retain their authority to manage the public rights-of-way and may require reasonable, competitively neutral compensation for management of the public rights-of-way when cable operators provide telecommunications service. The favorable pole attachment rates afforded cable operators under federal law can be gradually increased by utility companies owning the poles, beginning in 2001, if the operator provides telecommunications service, as well as cable service, over its plant. The Federal Communications Commission recently clarified that a cable operator's favorable pole rates are not endangered by the provision of Internet access. Cable entry into telecommunications will be affected by the regulatory landscape now being developed by the Federal Communications Commission and state regulators. One critical component of the 1996 Telecom Act to facilitate the entry of new telecommunications providers, including cable operators, is the interconnection obligation imposed on all telecommunications carriers. In July 1997, the Eighth Circuit Court of Appeals vacated certain aspects of the Federal Communications Commission initial interconnection order but most of that decision was reversed by the U.S. Supreme Court in January 1999. The Supreme Court effectively upheld most of the Federal Communications Commission interconnection regulations. Although these regulations should enable new telecommunications entrants to reach viable interconnection agreements with incumbent carriers, many issues, including whether the Federal Communications Commission ultimately can mandate that incumbent carriers make available specific network elements, remains subject to further Federal Communications Commission review. Aggressive regulation by the Federal Communications Commission in this area, if upheld by the courts, would make it easier for us to provide telecommunications service. INTERNET SERVICE. Although there is at present no significant federal regulation of cable system delivery of Internet services, and the Federal Communications Commission recently issued a report to Congress finding no immediate need to impose such regulation, this situation may change as cable systems expand their broadband delivery of Internet services. In particular, proposals have been advanced at the Federal Communications Commission and Congress that would require cable operators to provide access to unaffiliated Internet service providers and online service providers. Certain Internet service providers also are attempting to use existing modes of access that are 153
157 commercially leased to gain access to cable system delivery. A petition on this issue is now pending before the Federal Communications Commission. Finally, some local franchising authorities are considering the imposition of mandatory Internet access requirements as part of cable franchise renewals or transfers. A federal district court in Portland, Oregon recently upheld the legal ability of local franchising authority to impose such conditions, but an appeal has been filed. Other local authorities have imposed or may impose mandatory Internet access requirements on cable operators. These developments could, if they become widespread, burden the capacity of cable systems and complicate our own plans for providing Internet service. TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION. The 1996 Telecom Act allows telephone companies to compete directly with cable operators by repealing the historic telephone company/cable cross-ownership ban. Local exchange carriers, including the regional telephone companies, can now compete with cable operators both inside and outside their telephone service areas with certain regulatory safeguards. Because of their resources, local exchange carriers could be formidable competitors to traditional cable operators, and certain local exchange carriers have begun offering cable service. Various local exchange carriers currently are seeking to provide video programming services within their telephone service areas through a variety of distribution methods, including both the deployment of broadband wire facilities and the use of wireless transmission. Under the 1996 Telecom Act, local exchange carriers or any other cable competitor providing video programming to subscribers through broadband wire should be regulated as a traditional cable operator, subject to local franchising and federal regulatory requirements, unless the local exchange carrier or other cable competitor elects to deploy its broadband plant as an open video system. To qualify for favorable open video system status, the competitor must reserve two-thirds of the system's activated channels for unaffiliated entities. The Fifth Circuit Court of Appeals recently reversed certain of the Federal Communications Commission's open video system rules, including its preemption of local franchising. That decision may be subject to further appeal. It is unclear what effect this ruling will have on the entities pursuing open video system operation. Although local exchange carriers and cable operators can now expand their offerings across traditional service boundaries, the general prohibition remains on local exchange carrier buyouts of co-located cable systems. Co-located cable systems are cable systems serving an overlapping territory. Cable operator buyouts of co-located local exchange carrier systems, and joint ventures between cable operators and local exchange carriers in the same market. The 1996 Telecom Act provides a few limited exceptions to this buyout prohibition, including a carefully circumscribed "rural exemption." The 1996 Telecom Act also provides the Federal Communications Commission with the limited authority to grant waivers of the buyout prohibition. ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS/CABLE TELEVISION. The 1996 Telecom Act provides that registered utility holding companies and subsidiaries may provide telecommunications services, including cable television, notwithstanding the Public Utility Holding Company Act. Electric utilities must establish separate 154
158 subsidiaries, known as "exempt telecommunications companies" and must apply to the Federal Communications Commission for operating authority. Like telephone companies, electric utilities have substantial resources at their disposal, and could be formidable competitors to traditional cable systems. Several such utilities have been granted broad authority by the Federal Communications Commission to engage in activities which could include the provision of video programming. ADDITIONAL OWNERSHIP RESTRICTIONS. The 1996 Telecom Act eliminates statutory restrictions on broadcast/cable cross-ownership, including broadcast network/cable restrictions, but leaves in place existing Federal Communications Commission regulations prohibiting local cross-ownership between co-located television stations and cable systems. Pursuant to the 1992 Cable Act, the Federal Communications Commission adopted rules precluding a cable system from devoting more than 40% of its activated channel capacity to the carriage of affiliated national video program services. Also pursuant to the 1992 Cable Act, the Federal Communications Commission has adopted rules that preclude any cable operator from serving more than 30% of all U.S. domestic video subscribers, including cable and direct broadcast satellite subscribers. However, this provision has been stayed pending further judicial review. MUST CARRY/RETRANSMISSION CONSENT. The 1992 Cable Act contains broadcast signal carriage requirements. Broadcast signal carriage is the transmission of broadcast television signals over a cable system to cable customers. These requirements, among other things, allow local commercial television broadcast stations to elect once every three years between a "must carry" status or a "retransmission consent" status. Less popular stations typically elect must carry, which is the broadcast signal carriage requirement that allows local commercial television broadcast stations to require a cable system to carry the station. More popular stations, such as those affiliated with a national network, typically elect retransmission consent which is the broadcast signal carriage requirement that allows local commercial television broadcast stations to negotiate for payments for granting permission to the cable operator to carry the stations. Must carry requests can dilute the appeal of a cable system's programming offerings because a cable system with limited channel capacity may be required to forego carriage of popular channels in favor of less popular broadcast stations electing must carry. Retransmission consent demands may require substantial payments or other concessions. Either option has a potentially adverse effect on our business. The burden associated with must carry may increase substantially if broadcasters proceed with planned conversion to digital transmission and the Federal Communications Commission determines that cable systems must carry all analog and digital broadcasts in their entirety. This burden would reduce capacity available for more popular video programming and new internet and telecommunication offerings. A rulemaking is now pending at the Federal Communications Commission regarding the imposition of dual digital and analog must carry. ACCESS CHANNELS. Local franchising authorities can include franchise provisions requiring cable operators to set aside certain channels for public, educational and governmental access programming. Federal law also requires cable systems to designate a 155
159 portion of their channel capacity, up to 15% in some cases, for commercial leased access by unaffiliated third parties. The Federal Communications Commission has adopted rules regulating the terms, conditions and maximum rates a cable operator may charge for commercial leased access use. We believe that requests for commercial leased access carriages have been relatively limited. A new request has been forwarded to the Federal Communications Commission, however, requesting that unaffiliated Internet service providers be found eligible for commercial leased access. Although we do not believe such use is in accord with the governing statute, a contrary ruling could lead to substantial leased activity by Internet service providers and disrupt our own plans for Internet service. ACCESS TO PROGRAMMING. To spur the development of independent cable programmers and competition to incumbent cable operators, the 1992 Cable Act imposed restrictions on the dealings between cable operators and cable programmers. Of special significance from a competitive business posture, the 1992 Cable Act precludes video programmers affiliated with cable companies from favoring their cable operators over new competitors and requires such programmers to sell their programming to other multichannel video distributors. This provision limits the ability of vertically integrated cable programmers to offer exclusive programming arrangements to cable companies. Recently, there has been increased interest in further restricting the marketing practices of cable programmers, including subjecting programmers who are not affiliated with cable operators to all of the existing program access requirements, and subjecting terrestrially delivered programming to the program access requirements. Terrestrially delivered programming is programming delivered other than by satellite. These changes should not have a dramatic impact on us, but would limit potential competitive advantages we now enjoy. INSIDE WIRING; SUBSCRIBER ACCESS. In an order issued in 1997, the Federal Communications Commission established rules that require an incumbent cable operator upon expiration of a multiple dwelling unit service contract to sell, abandon, or remove "home run" wiring that was installed by the cable operator in a multiple dwelling unit building. These inside wiring rules are expected to assist building owners in their attempts to replace existing cable operators with new programming providers who are willing to pay the building owner a higher fee, where such a fee is permissible. The Federal Communications Commission has also proposed abrogating all exclusive multiple dwelling unit service agreements held by incumbent operators, but allowing such contracts when held by new entrants. In another proceeding, the Federal Communications Commission has preempted restrictions on the deployment of private antenna on rental property within the exclusive use of a tenant, such as balconies and patios. This Federal Communications Commission ruling may limit the extent to which we along with multiple dwelling unit owners may enforce certain aspects of multiple dwelling unit agreements which otherwise prohibit, for example, placement of digital broadcast satellite receiver antennae in multiple dwelling unit areas under the exclusive occupancy of a renter. These developments may make it even more difficult for us to provide service in multiple dwelling unit complexes. 156
160 OTHER REGULATIONS OF THE FEDERAL COMMUNICATIONS COMMISSION. In addition to the Federal Communications Commission regulations noted above, there are other regulations of the Federal Communications Commission covering such areas as: - equal employment opportunity, - subscriber privacy, - programming practices, including, among other things, (1) syndicated program exclusivity, which is a Federal Communications Commission rule which requires a cable system to delete particular programming offered by a distant broadcast signal carried on the system which duplicates the programming for which a local broadcast station has secured exclusive distribution rights, (2) network program nonduplication, (3) local sports blackouts, (4) indecent programming, (5) lottery programming, (6) political programming, (7) sponsorship identification, (8) children's programming advertisements, and (9) closed captioning, - registration of cable systems and facilities licensing, - maintenance of various records and public inspection files, - aeronautical frequency usage, - lockbox availability, - antenna structure notification, - tower marking and lighting, - consumer protection and customer service standards, - technical standards, - consumer electronics equipment compatibility, and - emergency alert systems. The Federal Communications Commission recently ruled that cable customers must be allowed to purchase cable converters from third parties and established a multi-year phase-in during which security functions, which would remain in the operator's exclusive control, would be unbundled from basic converter functions, which could then be satisfied by third party vendors. The Federal Communications Commission has the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of Federal Communications Commission licenses needed to operate certain transmission facilities used in connection with cable operations. 157
161 COPYRIGHT. Cable television systems are subject to federal copyright licensing covering carriage of television and radio broadcast signals. In exchange for filing certain reports and contributing a percentage of their revenues to a federal copyright royalty pool, that varies depending on the size of the system, the number of distant broadcast television signals carried, and the location of the cable system, cable operators can obtain blanket permission to retransmit copyrighted material included in broadcast signals. The possible modification or elimination of this compulsory copyright license is the subject of continuing legislative review and could adversely affect our ability to obtain desired broadcast programming. We cannot predict the outcome of this legislative activity. Copyright clearances for nonbroadcast programming services are arranged through private negotiations. Cable operators distribute locally originated programming and advertising that use music controlled by the two principal major music performing rights organizations, the Association of Songwriters, Composers, Artists and Producers and Broadcast Music, Inc. The cable industry and Broadcast Music have reached a standard licensing agreement, and negotiations with the Association of Songwriters are ongoing. Although we cannot predict the ultimate outcome of these industry negotiations or the amount of any license fees we may be required to pay for past and future use of association-controlled music, we do not believe such license fees will be significant to our business and operations. STATE AND LOCAL REGULATION. Cable television systems generally are operated pursuant to nonexclusive franchises granted by a municipality or other state or local government entity in order to cross public rights-of-way. Federal law now prohibits local franchising authorities from granting exclusive franchises or from unreasonably refusing to award additional franchises. Cable franchises generally are granted for fixed terms and in many cases include monetary penalties for non-compliance and may be terminable if the franchisee failed to comply with material provisions. The specific terms and conditions of franchises vary materially between jurisdictions. Each franchise generally contains provisions governing cable operations, service rates, franchising fees, system construction and maintenance obligations, system channel capacity, design and technical performance, customer service standards, and indemnification protections. A number of states, including Connecticut, 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. Although local franchising authorities have considerable discretion in establishing franchise terms, there are certain federal limitations. For example, local franchising authorities cannot insist on franchise fees exceeding 5% of the system's gross cable-related revenues, cannot dictate the particular technology used by the system, and cannot specify video programming other than identifying broad categories of programming. Federal law contains renewal procedures designed to protect incumbent franchisees against arbitrary denials of renewal. Even if a franchise is renewed, the local franchising authority may seek to impose new and more onerous requirements such as significant upgrades in facilities and service or increased franchise fees as a condition of renewal. Similarly, if a local franchising authority's consent is required for the purchase or sale of 158
162 a cable system or franchise, such local franchising authority may attempt to impose more burdensome or onerous franchise requirements in connection with a request for consent. Historically, most franchises have been renewed for and consents granted to cable operators that have provided satisfactory services and have complied with the terms of their franchise. Under the 1996 Telecom Act, cable operators are not required to obtain franchises for the provision of telecommunications services, and local franchising authorities are prohibited from limiting, restricting, or conditioning the provision of such services. In addition, local franchising authorities may not require a cable operator to provide any telecommunications service or facilities, other than institutional networks under certain circumstances, as a condition of an initial franchise grant, a franchise renewal, or a franchise transfer. The 1996 Telecom Act also provides that franchising fees are limited to an operator's cable-related revenues and do not apply to revenues that a cable operator derives from providing new telecommunications services. 159
163 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS As of the completion of the offering, the following will be the executive officers and directors of Charter Communications, Inc. As of the date of this prospectus, there are three directors of Charter Communications, Inc. On the date of this prospectus, two independent directors will be appointed to the board. After the offering, two additional directors will be appointed to the board. All directors will serve until Charter Communications, Inc.'s next annual meeting. Mr. Allen, the holder of all of the Class B common stock, is entitled to elect all but one of the directors. The remaining director is elected by the holders of Class B common stock and Class A common stock voting together as a class. See "Description of Capital Stock and Membership Units -- Voting Rights". EXECUTIVE OFFICERS AND DIRECTORS AS OF THE DATE OF THIS PROSPECTUS AGE POSITION - -------------------------------------- ---- -------- Paul G. Allen................................ 46 Chairman of the Board of Directors William D. Savoy............................. 35 Director Jerald L. Kent............................... 43 President, Chief Executive Officer and Director David G. Barford............................. 41 Senior Vice President of Operations -- Western Division Mary Pat Blake............................... 44 Senior Vice President -- Marketing and Programming Eric A. Freesmeier........................... 46 Senior Vice President -- Administration Thomas R. Jokerst............................ 50 Senior Vice President -- Advanced Technology Development Kent D. Kalkwarf............................. 40 Senior Vice President and Chief Financial Officer Ralph G. Kelly............................... 42 Senior Vice President -- Treasurer David L. McCall.............................. 44 Senior Vice President of Operations -- Eastern Division John C. Pietri............................... 50 Senior Vice President -- Engineering Steven A. Schumm............................. 47 Executive Vice President, Assistant to the President Curtis S. Shaw............................... 50 Senior Vice President, General Counsel and Secretary Stephen E. Silva............................. 39 Senior Vice President -- Corporate Development and Technology TO BE APPOINTED ON THE DATE OF THIS PROSPECTUS - --------------------------------------------- Ronald L. Nelson............................. 47 Director Nancy B. Peretsman........................... 45 Director TO BE APPOINTED AFTER THE OFFERING - --------------------------------------------- Marc B. Nathanson............................ 54 Director Howard L. Wood............................... 60 Director The following sets forth certain biographical information with respect to our executive officers, directors and director nominees. PAUL G. ALLEN is the Chairman of the board of directors of Charter Communications, Inc. and of the board of directors of Charter Investment, Inc. Mr. Allen has been a private investor for more than five years, with interests in a wide variety of companies, 160
164 many of which focus on multimedia digital communications. Such companies include Interval Research Corporation, of which Mr. Allen is a director, Vulcan Ventures, Inc., of which Mr. Allen is the President, Chief Executive Officer and Chairman of the board of directors, Vulcan Northwest, Inc., of which Mr. Allen is the Chairman of the board, Vulcan Programming, Inc. and Vulcan Cable III Inc. In addition, Mr. Allen is the owner and the Chairman of the board of directors of the Portland Trail Blazers of the National Basketball Association, and is the owner and the Chairman of the board of directors of the Seattle Seahawks of the National Football League. Mr. Allen currently serves as a director of Microsoft Corporation and USA Networks, Inc. and also serves as a director of various private corporations. WILLIAM D. SAVOY is a director of Charter Communications, Inc., Charter Holdings and Charter Investment, Inc. Since 1990, Mr. Savoy has been an officer and a director for many affiliates of Mr. Allen, including Vice President and a director of Vulcan Ventures, President of Vulcan Northwest, President and a director of Vulcan Programming and President and director of Vulcan Cable III Inc. From 1987 until November 1990, Mr. Savoy was employed by Layered, Inc. and became its President in 1988. Mr. Savoy serves on the Advisory Board of DreamWorks SKG and also serves as director of CNET, Inc., Go2Net, Inc., Harbinger Corporation, High Speed Access Corp., Metricom, Inc., Telescan, Inc., Ticketmaster Online -- CitySearch, Inc., USA Networks, Inc. and Value America, Inc. Mr. Savoy holds a B.S. in computer science, accounting and finance from Atlantic Union College. JERALD L. KENT is the President, Chief Executive Officer and director of Charter Communications, Inc., Charter Holdings, Charter Communications Holdings Capital Corporation and Charter Investment, Inc. and has previously held the position of Chief Financial Officer of Charter Investment, Inc. Prior to co-founding Charter Investment, Inc. in 1993, Mr. Kent was associated with Cencom Cable Associates, Inc., where he served as Executive Vice President and Chief Financial Officer. Mr. Kent also served Cencom as Senior Vice President of Finance from May 1987, Senior Vice President of Acquisitions and Finance from July 1988, and Senior Vice President and Chief Financial Officer from January 1989. Mr. Kent is a member of the board of directors of High Speed Access Corp., Cable Television Laboratories, Inc. and Com21 Inc. Prior to that time, Mr. Kent was employed by Arthur Andersen LLP, certified public accountants, where he attained the position of tax manager. Mr. Kent, a certified public accountant, received his undergraduate and M.B.A. degrees with honors from Washington University (St. Louis). DAVID G. BARFORD is Senior Vice President of Operations -- Western Division of Charter Communications, Inc. and Charter Investment, Inc. where he has primary responsibility for all cable operations in the Central, Western, North Central and MetroPlex Regions. Prior to joining Charter Investment, Inc. in July 1995, he served as Vice President of Operations and New Business Development for Comcast Cable Communications, Inc., where he held various senior marketing and operating roles since November 1986. Mr. Barford received a B.A. degree from California State University, Fullerton and an M.B.A. from National University in La Jolla, California. 161
165 MARY PAT BLAKE is Senior Vice President -- Marketing and Programming of Charter Communications, Inc. and Charter Investment, Inc. and is responsible for all aspects of marketing, sales and programming and advertising sales. Prior to joining Charter Investment, Inc. in August 1995, Ms. Blake was active in the emerging business sector, and formed Blake Investments, Inc. in September 1993, which created, operated and sold a branded coffeehouse and bakery. From September 1990 to August 1993, Ms. Blake served as Director -- Marketing for Brown Shoe Company. Ms. Blake has 18 years of experience with senior management responsibilities in marketing, sales, finance, systems, and general management with companies such as The West Coast Group, Pepsico Inc.-Taco Bell Division, General Mills, Inc. and ADP Network Services, Inc. Ms. Blake received a B.S. degree from the University of Minnesota, and an M.B.A. degree from the Harvard Business School. ERIC A. FREESMEIER is Senior Vice President -- Administration of Charter Communications, Inc. and Charter Investment, Inc. and is responsible for human resources, public relations and communications, corporate facilities and aviation. From 1986 until joining Charter Investment, Inc. in April 1998, he served in various executive management positions at Edison Brothers Stores, Inc., a specialty retail company where his most recent position was Executive Vice President -- Human Resources and Administration. From 1974 to 1986, Mr. Freesmeier held management and executive positions with Montgomery Ward, a national mass merchandise retailer, and its various subsidiaries. Mr. Freesmeier holds Bachelor of Business degrees in marketing and industrial relations from the University of Iowa and a Masters of Management degree in finance from Northwestern University's Kellogg Graduate School of Management. THOMAS R. JOKERST is Senior Vice President -- Advanced Technology Development of Charter Communications, Inc. and Charter Investment, Inc. Prior to his appointment to this position, Mr. Jokerst held the position of Senior Vice President -- Engineering since January 1994. Prior to joining Charter Investment, Inc., from March 1991 to March 1993, Mr. Jokerst served as Vice President -- Office of Science and Technology for Cable Television Laboratories in Boulder, Colorado. From June 1976 to March 1993, Mr. Jokerst was Director of Engineering for the midwest region of Continental Cablevision. Mr. Jokerst participates in professional activities with the National Cable Television Association, SCTE and Cable Television Laboratories. Mr. Jokerst is a graduate of Ranken Technical Institute in St. Louis with a degree in communications electronics and computer technology and of Southern Illinois University in Carbondale, Illinois with a degree in electronics technology. KENT D. KALKWARF is Senior Vice President and Chief Financial Officer of Charter Communications, Inc., Charter Holdings, Charter Communications Holdings Capital Corporation and Charter Investment, Inc. From July 1995 to May 1997, Mr. Kalkwarf served as a Vice President. Prior to joining Charter Investment, Inc. in 1995, Mr. Kalkwarf was employed by Arthur Andersen LLP, from 1982 to July 1995, where he attained the position of senior tax manager. Mr. Kalkwarf has extensive experience in cable, real estate and international tax issues. Mr. Kalkwarf has a B.S. degree from Illinois Wesleyan University and is a certified public accountant. 162
166 RALPH G. KELLY is Senior Vice President -- Treasurer of Charter Communications, Inc., Charter Holdings, Charter Communications Holdings Capital Corporation and Charter Investment, Inc. Mr. Kelly joined Charter Investment Inc. in 1993 as Vice President -- Finance, a position he held until early 1994 when he became Chief Financial Officer of CableMaxx, Inc., a wireless cable television operator. Mr. Kelly returned to Charter Investment, Inc. as Senior Vice President -- Treasurer in February 1996, and has responsibility for treasury operations, investor relations and financial reporting. From 1984 to 1993, Mr. Kelly was associated with Cencom Cable Associates, Inc. where he held the positions of Controller from 1984 to 1989 and Treasurer from 1990 to 1993. Mr. Kelly is a certified public accountant and was in the audit division of Arthur Andersen LLP from 1979 to 1984. Mr. Kelly received his undergraduate degree in accounting from the University of Missouri -- Columbia and his M.B.A. from Saint Louis University. DAVID L. MCCALL is Senior Vice President of Operations -- Eastern Division of Charter Communications, Inc. and Charter Investment, Inc. Mr. McCall joined Charter Investment, Inc. in January 1995 as Regional Vice President Operations and has primary responsibility for all cable system operations managed by Charter Investment, Inc. in the Southeast, Southern and Northeast Regions of the United States. Prior to joining Charter Investment, Inc., Mr. McCall was associated with Crown Cable and its predecessor company, Cencom Cable Associates, Inc., from 1983 to 1994. As a Regional Manager of Cencom, Mr. McCall's responsibilities included supervising all aspects of operations for systems located in North Carolina, South Carolina and Georgia, consisting of over 142,000 customers. From 1977 to 1982, Mr. McCall was System Manager of Coaxial Cable Developers (known as Teleview Cablevision) in Simpsonville, South Carolina. Mr. McCall has served as a director of the South Carolina Cable Television Association for the past ten years. JOHN C. PIETRI is Senior Vice President -- Engineering of Charter Communications, Inc. and Charter Investment, Inc. since November 1998. Prior to joining Charter Investment, Inc. Mr. Pietri was with Marcus Cable in Dallas, Texas for eight years, most recently serving as Senior Vice President and Chief Technical Officer. Prior to Marcus, Mr. Pietri served as Regional Technical Operations Manager for West Marc Communications in Denver, Colorado, and before that he served as Operations Manager with Minnesota Utility Contracting. Mr. Pietri attended the University of Wisconsin-Oshkosh. STEVEN A. SCHUMM is Executive Vice President and Assistant to the President of Charter Communications, Inc., Charter Holdings, Charter Communications Holdings Capital Corporation and Charter Investment, Inc. Mr. Schumm joined Charter Investment, Inc. in December 1998 and currently directs the MIS Regulatory and Financial Controls Groups. Prior to joining Charter Investment, Inc., Mr. Schumm was managing partner of the St. Louis office of Ernst & Young LLP. Mr. Schumm was with Ernst & Young LLP for 24 years and was a partner of the firm for 14 of those years. Mr. Schumm held various management positions with Ernst & Young LLP, including the Director of Tax Services for the three-city area of St. Louis, Kansas City and Wichita and then National Director of Industry Tax Services. He served as one of 10 163
167 members comprising the firm's National Tax Committee. Mr. Schumm earned a B.S. degree from Saint Louis University with a major in accounting. CURTIS S. SHAW is Senior Vice President, General Counsel and Secretary of Charter Communications, Inc., Charter Holdings, Charter Communications Holdings Capital Corporation and Charter Investment, Inc. and is responsible for all legal aspects of their businesses, government relations and the duties of the corporate secretary. Prior to joining Charter Investment, Inc. in February 1997, Mr. Shaw served as Corporate Counsel to NYNEX since 1988. From 1983 until 1988, Mr. Shaw served as Associate General Counsel for Occidental Chemical Corporation, and, from 1986 until 1988, as Vice President and General Counsel of its largest operating division. Mr. Shaw has 25 years of experience as a corporate lawyer, specializing in mergers and acquisitions, joint ventures, public offerings, financings, and federal securities and antitrust law. Mr. Shaw received a B.A. with honors from Trinity College and a J.D. from Columbia University School of Law. STEPHEN E. SILVA is Senior Vice President -- Corporate Development and Technology of Charter Communications, Inc. and Charter Investment, Inc. and is responsible for strategic development, testing and initial rollout of new products and services. From 1983 until joining Charter Investment, Inc. in April 1995, Mr. Silva served in various management positions at U.S. Computer Services, Inc. (doing business as CableData), a service bureau organization engaged in customer billing services. Mr. Silva joined Charter Investment, Inc. as Director of Billing Services, and was promoted to Vice President -- Information Services in January 1997. Mr. Silva became Vice President -- Corporate Development and Technology in April 1998, and was promoted to Senior Vice President -- Corporate Development and Technology in September 1999. Mr. Silva is a member of the board of directors of High Speed Access Corp. DIRECTORS TO BE APPOINTED ON THE DATE OF THIS PROSPECTUS Each of the following persons has agreed to join the board of directors of Charter Communications, Inc. upon the closing of the offering: RONALD L. NELSON is a founding member of DreamWorks LLC and has been serving as a member of its executive management team since 1994 with responsibility for overseeing operations and corporate finance. Prior to joining DreamWorks, Mr. Nelson was employed for 15 years by Paramount Communications Inc. (formerly Gulf + Western Inc.), serving in a variety of operating and executive positions. Mr. Nelson was elected Executive Vice President of Paramount Communications in 1990 and was appointed to its board of directors in 1992. He also served as Chief Financial Officer of the corporation from 1987 until 1994. Mr. Nelson serves on the board of directors of Advanced Tissue Sciences, a biotechnology firm. Mr. Nelson has a B.S. in biochemistry from the University of California at Berkeley and a masters degree in business from the University of California at Los Angeles. NANCY B. PERETSMAN has been a managing director and executive vice president of Allen & Company Incorporated, an investment bank unrelated to Mr. Allen, since June 1995. Prior to joining Allen & Company Incorporated, Ms. Peretsman had been an 164
168 investment banker since 1983 at Salomon Brothers Inc, where she was a managing director since 1990. She served for fourteen years on the Board of Trustees of Princeton University and is currently an emerita trustee. Ms. Peretsman also is Vice Chairman of the board of The New School and serves on the board of directors of Oxygen Media, Inc., an Internet and cable television enterprise. Ms. Peretsman also serves on the board of NewSub Services, Inc. and Priceline.com Incorporated. DIRECTOR TO BE APPOINTED AFTER THE OFFERING MARC B. NATHANSON has been Chairman of the board and Chief Executive Officer of Falcon Holding Group, Inc. and its predecessors since 1975, and prior to September 1995 also served as President. Upon the closing of the Falcon acquisition, Mr. Nathanson will be employed by Charter Communications, Inc. in a non-executive position as Vice Chairman. Prior to 1975, Mr. Nathanson was vice president of marketing for Teleprompter Corporation, then the largest cable operator in the United States. He also held executive positions with Warner Cable and Cypress Communications Corporation. He is a former President of the California Cable Television Association and a member of Cable Pioneers. He is currently a director of the National Cable Television Association and chaired its 1999 National Convention. Mr. Nathanson has served as Chairman of the board, Chief Executive Officer and President of Enstar Communications Corporation since October 1988, and is a director of Digital Entertainment Network, Inc. and an Advisory Board member of TVA (Brazil). Mr. Nathanson was appointed by President Clinton on November 1, 1998 as Chair of the Board of Governors for the International Bureau of Broadcasting, which oversees Voice of America, Radio/TV Marti, Radio Free Asia, Radio Free Europe and Radio Liberty. Mr. Nathanson is a trustee of the Annenburg School of Communications at the University of Southern California and a member of the Board of Visitors of the Anderson School of Management at UCLA. In addition, he serves on the Board of the UCLA Foundation and the UCLA Center for Communications Policy and is on the Board of Governors of AIDS Project Los Angeles and Cable Positive. HOWARD L. WOOD currently serves as Vice Chairman of Charter Communications, Inc. and Charter Investment, Inc. and is a co-founder of Charter Investment, Inc. Prior to co-founding Charter Investment, Inc. in 1993, Mr. Wood was associated with Cencom Cable Associates, Inc. Mr. Wood joined Cencom as President, Chief Financial Officer and director and assumed the additional position of Chief Executive Officer effective January 1, 1989. Prior to that time, Mr. Wood was a partner in Arthur Andersen LLP, certified public accountants, where he served as Partner-in-Charge of the St. Louis Tax Division from 1973 until joining Cencom. Mr. Wood is a certified public accountant and a member of the American Institute of Certified Public Accountants. He also serves as a director of VanLiner Group, Inc., First State Community Bank, Gaylord Entertainment Company and Data Research, Inc. Mr. Wood serves as Commissioner for the Missouri Department of Conservation. He is also a past Chairman of the board of directors and former director of the St. Louis College of Pharmacy. Mr. Wood graduated with honors from Washington University (St. Louis) School of Business. 165
169 COMMITTEES OF THE BOARD OF DIRECTORS At the same time Charter Communications, Inc. completes this offering, it will establish an audit committee and a compensation committee, each composed of two outside directors. The audit committee will recommend the annual appointment of Charter Communications, Inc.'s auditors with whom the audit committee will review the scope of audit and non-audit assignments and related fees, accounting principles used in Charter Communications, Inc.'s financial reporting, internal auditing procedures and the adequacy of Charter Communications, Inc.'s internal control procedures. The compensation committee will make recommendations to the board regarding compensation for Charter Communications, Inc.'s executive officers. DIRECTOR COMPENSATION The employee directors of Charter Communications, Inc. are not entitled to any compensation for serving as a director, nor are they paid any fees for attendance at any meeting of the board of directors. Each non-employee director will be issued 40,000 options when they join the board of directors and may receive additional compensation in a manner to be determined. Directors may also be reimbursed for the actual reasonable costs incurred in connection with attendance at board meetings. EMPLOYMENT AND CONSULTING AGREEMENTS Effective as of December 23, 1998, Jerald L. Kent entered into an employment agreement with Mr. Allen for a three-year term with automatic one-year renewals. The employment agreement was assigned by Mr. Allen to Charter Investment, Inc. as of December 23, 1998. Under this agreement, Mr. Kent agrees to serve as President and Chief Executive Officer of Charter Investment, Inc., with responsibility for the nationwide general management, administration and operation of all present and future business of Charter Investment, Inc. and its subsidiaries. During the initial term of the agreement, Mr. Kent will receive an annual base salary of $1,250,000, or such higher rate as may from time to time be determined by the board of directors in its discretion. In addition, Mr. Kent will be eligible to receive an annual bonus in an aggregate amount not to exceed $625,000, to be determined by the board based on an assessment of the performance of Mr. Kent as well as the achievement of certain financial targets. Under the agreement, Mr. Kent is entitled to participate in any disability insurance, pension, or other benefit plan afforded to employees generally or executives of Charter Investment, Inc. Mr. Kent will be reimbursed by Charter Investment, Inc. for life insurance premiums up to $30,000 per year, and is granted personal use of Charter Investment's airplane. Mr. Kent was also granted a car valued at up to $100,000 and membership fees and dues for his membership in a country club of his choice, but has not accepted use of the car as of the date of this prospectus. He may choose to do so in the future. Also under this agreement and a related agreement with Charter Communications Holding Company, Mr. Kent received options to purchase 3% of the equity value of all cable systems managed by Charter Investment, Inc. on the date of the grant, or 7,044,127 Charter Communications Holding Company membership units. The options have a term of ten years and vested 25% on December 23, 1998. The remaining 166
170 75% will vest 1/36 on the first day of each of the 36 months commencing on the first day of the thirteenth month following December 23, 1998. The terms of these options provide that immediately following the issuance of Charter Communications Holding Company membership units, these units will automatically convert to shares of Class A common stock. This exchange will occur on a one-for-one basis, as described under "Description of Capital Stock and Membership Units -- Exchange Agreements". Charter Investment, Inc. agrees to indemnify and hold harmless Mr. Kent to the maximum extent permitted by law from and against any claims, damages, liabilities, losses, costs or expenses in connection with or arising out of the performance by Mr. Kent of his duties. If the agreement expires because Charter Investment, Inc. gives Mr. Kent notice of its intention not to extend the initial term, or if the agreement is terminated by Mr. Kent for good reason or by Charter Investment, Inc. without cause: - Charter Investment, Inc. will pay to Mr. Kent an amount equal to the aggregate base salary due to Mr. Kent for the remaining term and the board will consider additional amounts, if any, to be paid to Mr. Kent; and - any unvested options of Mr. Kent shall immediately vest. Charter Investment, Inc. will assign Mr. Kent's employment agreement to Charter Communications, Inc. and Charter Communications, Inc. will assume all rights and obligations of Charter Investment, Inc. under the agreement, except with respect to the grant of options, which will be obligations of Charter Communications Holding Company. Charter Communications, Inc. will enter into a consulting agreement with Howard L. Wood, who will become a director of Charter Communications, Inc. upon the closing of the offering. The consulting agreement will become effective upon the closing of the offering and will have a one-year term with automatic one-year renewals. Under this agreement, Mr. Wood will provide consulting services to Charter Communications, Inc. and will also be responsible for such other duties as our Chief Executive Officer determines. During the term of this agreement, Mr. Wood will receive annual cash compensation initially at a rate of $60,000. In addition, Mr. Wood will be entitled to receive disability and health benefits as well as use of an office and a full-time secretary. Charter Communications, Inc. will enter into a consulting agreement with Barry L. Babcock, one of our founders and former Vice Chairman. The consulting agreement will expire in March 2000. Under this agreement, Mr. Babcock will provide consulting services to Charter Communications, Inc. and will be responsible for such other duties as our Chief Executive Officer determines. During the term of this agreement, Mr. Babcock will receive monthly cash compensation at a rate of $10,000 per month. In addition, Mr. Babcock will be entitled to receive disability and health benefits as well as the use of an office and secretarial services, upon request. Charter Communications, Inc. will indemnify and hold harmless Mr. Wood and Mr. Babcock to the maximum extent permitted by law from and against any claims, 167
171 damages, liabilities, losses, costs or expenses incurred in connection with or arising out of the performance by them of their duties. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Upon completion of the offering, Charter Communications, Inc. will appoint three outside directors who will form Charter Communications, Inc.'s compensation committee. There are no compensation committee interlocks. EXECUTIVE COMPENSATION Charter Communications, Inc. has not paid any compensation to its executive officers. Immediately prior to the offering, the executive officers will no longer be paid by Charter Investment, Inc. and will become paid employees of Charter Communications, Inc. These employees will remain as unpaid officers of Charter Investment, Inc. The employment agreement of Mr. Kent will be assigned from Charter Investment, Inc. to Charter Communications, Inc. Pursuant to a mutual services agreement between Charter Communications, Inc. and Charter Investment, Inc., to be effective upon closing of the offering, each of those entities agrees to provide services to each other, including the knowledge and expertise of their respective officers. See "Certain Relationships and Related Transactions". The following table sets forth information regarding the compensation paid by Charter Investment, Inc. during its last completed fiscal year to the President and Chief Executive Officer and each of the other four most highly compensated executive officers as of December 31, 1998. This compensation was paid to these executive officers by certain of our subsidiaries and affiliates for their services to these entities. SUMMARY COMPENSATION TABLE LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARD --------------------------------------- ------------ YEAR OTHER SECURITIES ENDED ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION DEC. 31 SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($) - --------------------------- ------- --------- -------- --------------- ------------ --------------- Jerald L. Kent...................... 1998 790,481 641,353 -- 7,044,127(1) 18,821(2) President and Chief Executive Officer Barry L. Babcock(3)................. 1998 575,000 925,000(4) -- -- 41,866(5) Vice Chairman Howard L. Wood...................... 1998 575,000 675,000(6) -- -- 15,604(7) Vice Chairman David G. Barford.................... 1998 220,000 225,000(8) -- -- 8,395,235(9) Senior Vice President of Operations -- Western Division Curtis S. Shaw...................... 1998 190,000 80,000 -- -- 8,182,303(10) Senior Vice President, General Counsel and Secretary - --------------- (1) Options for membership units in Charter Communications Holding Company granted pursuant to an employment agreement and a related option agreement. (2) Includes $4,000 in 401(k) plan matching contribution, $918 in life insurance premiums, $418 in gasoline reimbursement and $13,485 attributed to personal use of Charter Investment, Inc.'s airplane. 168
172 (3) Mr. Babcock resigned as an executive officer of Charter Communications, Inc. in October 1999. (4) Includes $500,000 earned as a one-time bonus upon signing of an employment agreement. (5) Includes $4,000 in 401(k) plan matching contributions, $2,493 in life insurance premiums, $970 in gasoline reimbursement and $34,403 attributed to personal use of Charter Investment, Inc.'s airplane. (6) Includes $250,000 earned as a one-time bonus upon signing of an employment agreement. (7) Includes $4,000 in 401(k) plan matching contributions, $4,050 in life insurance premiums, $1,242 in gasoline reimbursement and $6,312 attributed to personal use of Charter Investment, Inc.'s airplane. (8) Includes $150,000 received as a one-time bonus after completion of three years of employment. (9) Includes $4,000 in 401(k) plan matching contribution, $347 in life insurance premiums, and $8,390,888 received in March 1999, in connection with a one-time change of control payment under the terms of a previous equity appreciation rights plan. This payment was triggered by the acquisition of us by Mr. Allen on December 23, 1998, but is income for 1999. (10) Includes $2,529 in 401(k) plan matching contribution, $807 in life insurance premiums, and $8,178,967 received in March 1999, in connection with a one-time change of control payment under the terms of a previous equity appreciation rights plan. This payment was triggered by the acquisition of us by Mr. Allen on December 23, 1998, but is income for 1999. 1998 OPTION GRANTS The following table shows individual grants of options made to certain executive officers during the fiscal year ended December 31, 1998. NUMBER OF POTENTIAL REALIZABLE VALUE AT MEMBERSHIP % OF TOTAL ASSUMED ANNUAL RATES OF UNITS OPTIONS MEMBERSHIP UNIT PRICE APPRECIATION UNDERLYING GRANTED TO FOR OPTION TERM(1) OPTIONS EMPLOYEES EXERCISE EXPIRATION ---------------------------------- NAME GRANTED IN 1998 PRICE DATE 5% 10% - ---- ---------- ------------ --------- ---------- --------------- ---------------- Jerald L. Kent............. 7,044,127(2) 100% $20.00 12/22/08 $88,600,272 $224,530,486 Barry L. Babcock........... -- -- -- -- -- -- Howard L. Wood............. -- -- -- -- -- -- David G. Barford........... -- -- -- -- -- -- Curtis S. Shaw............. -- -- -- -- -- -- - --------------- (1) This column shows the hypothetical gains on the options granted based on assumed annual compound price appreciation of 5% and 10% over the full ten-year term of the options. The assumed rates of appreciation are mandated by the SEC and do not represent our estimate or projection of future prices. (2) Options for membership units in Charter Communications Holding Company granted pursuant to an employment agreement and a related option agreement which amends the options granted under the employment agreement. Under these agreements, Mr. Kent received an option to purchase 3% of the net equity value of all of the cable systems managed by Charter Investment, Inc. on the date of the grant. The option has a term of 10 years and vested one fourth on December 23, 1998, with the remaining portion vesting monthly at a rate of 1/36th on the first of each month for months 13 through 48. Upon the exercise of an option, each membership unit received will automatically be exchanged on a one-for-one basis for shares of Class A common stock. 169
173 1998 AGGREGATED OPTION EXERCISES AND OPTION VALUE TABLE The following table sets forth for certain executive officers information concerning the options granted during the fiscal year ended December 31, 1998, and the value of unexercised options as of December 31, 1998. NUMBER OF VALUE OF UNEXERCISED SECURITIES UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS OPTIONS AT AT DECEMBER 31, 1998 DECEMBER 31, 1998(1) ---------------------------- ---------------------------- EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- ------------- ----------- ------------- Jerald L. Kent............................ 1,761,032 5,283,095 -- -- Barry L. Babcock.......................... -- -- -- -- Howard L. Wood............................ -- -- -- -- David G. Barford.......................... -- -- -- -- Curtis S. Shaw............................ -- -- -- -- - --------------- (1) No options were in-the-money as of December 31, 1998. 1999 OPTION GRANTS The following table shows individual grants of options made to certain executive officers during 1999, as of June 30, 1999. All such grants were made under the option plan. NUMBER OF AGGREGATE VALUE OF OPTIONS TO HOLDER IF MEMBERSHIP CHARTER COMMUNICATIONS, INC.'S UNITS COMMON STOCK PRICE PER SHARE AT UNDERLYING SOME FUTURE DATE IS: OPTIONS EXERCISE EXPIRATION ------------------------------------------- NAME GRANTED PRICE DATE $18.00 $22.00 $26.00 $30.00 - ---- ---------- -------- ---------- ------ -------- ---------- ---------- Jerald L. Kent.............. -- -- -- -- -- -- -- Barry L. Babcock............ 65,000 $20.00 2/9/09 $ 0 $130,000 $ 390,000 $ 650,000 Howard L. Wood.............. 65,000 20.00 2/9/09 0 130,000 390,000 650,000 David G. Barford............ 200,000 20.00 2/9/09 0 400,000 1,200,000 2,000,000 Curtis S. Shaw.............. 200,000 20.00 2/9/09 0 400,000 1,200,000 2,000,000 OPTION PLAN Charter Holdings adopted an option plan on February 9, 1999, which was assumed by Charter Communications Holding Company on May 25, 1999. This plan provides for the grant of options to purchase up to 25,009,798 membership units in Charter Communications Holding Company, which is equal to 10% of the aggregate equity value of the subsidiaries of Charter Communications Holding Company as of February 9, 1999, the date of adoption of the plan. The plan provides for grants of options current and prospective to employees and consultants of Charter Communications Holding Company and its affiliates and current and prospective non-employee directors of Charter Communications, Inc. The plan is intended to promote the long-term financial interest of Charter Communications Holding Company and its affiliates by encouraging eligible individuals to acquire an ownership position in Charter Communications Holding Company and its affiliates and providing incentives for performance. There are a total of 9,206,281 options outstanding under the plan. The options expire after ten years from the date of grant. Of those, 8,771,481 options were granted on February 9, 1999 with an exercise price of $20.00 and 170
174 434,800 options were granted on April 5, 1999 with an exercise price of $20.73. Of the options granted on February 9, 1999, 65,000 options have vested and an additional 65,000 options will vest on the date of the closing of this offering. Of the remaining 8,641,481 options, one-fourth vest on April 3, 2000 and the remainder vest 1/45 on each monthly anniversary following April 3, 2000. One-fourth of the options granted on April 5, 1999 vest on the 15-month anniversary from April 5, 1999, with the remainder vesting 1/45 on each monthly anniversary for 45 months following the 15-month anniversary. The options expire after ten years from the date of grant. Under the plan, the plan administrator has the discretion to accelerate the vesting of any options. Charter Communications Holding Company intends to issue on the date of this prospectus up to 5,000,000 additional options under the plan. The exercise price for these options will be equal to the initial public offering price per share of Class A common stock in this offering. Under the terms of the plan, following consummation of the offering, each membership unit held as a result of exercise of options will be exchanged automatically for shares of Class A common stock on a one-for-one basis. Exchanges will occur on a one-for-one basis, as described under "Description of Capital Stock and Membership Units -- Exchange Agreements". Any unvested options issued under the plan vest immediately upon a change of control of Charter Communications Holding Company. Options will not vest upon a change of control, however, to the extent that any such acceleration of vesting would result in the disallowance of specified tax deductions that would otherwise be available to Charter Communications Holding Company or any of its affiliates or to the extent that any optionee would be liable for any excise tax under a specified section of the tax code. In the plan, a change of control includes: (1) a sale of more than 49.9% of the outstanding membership units in Charter Communications Holding Company, except where Mr. Allen and his affiliates retain effective voting control of Charter Communications Holding Company; (2) a merger or consolidation of Charter Communications Holding Company with or into any other corporation or entity, except where Mr. Allen and his affiliates retain effective voting control of Charter Communications Holding Company; or (3) any other transactions or event, including a sale of the assets of Charter Communications Holding Company, that results in Mr. Allen holding less than 50.1% of the voting power of the surviving entity, except where Mr. Allen and his affiliates retain effective voting control of Charter Communications Holding Company. The sale of Class A common stock pursuant to this prospectus is not a change of control under the option plan. If an optionee's employment with or service to Charter Communications Holding Company or its affiliates is terminated other than for cause, the optionee has the right to exercise any vested options within sixty days of the termination of employment. After this sixty-day period, all vested and unvested options held by the optionee are automatically canceled. If an optionee's employment or service is terminated for cause, 171
175 any unexercised options are automatically canceled. In this case, Mr. Allen, or, at his option, Charter Communications Holding Company will have the right for ninety days after termination to purchase all membership units held by the optionee for a purchase price equal to the exercise price at which the optionee acquired the membership units, or the optionee's purchase price for the membership units if they were not acquired on the exercise of an option. In the event of an optionee's death or disability, all vested options may be exercised until the earlier of their expiration and one year after the date of the optionee's death or disability. Any options not so exercised will automatically be canceled. Upon termination for any other reason, all unvested options will immediately be canceled and the optionee will not be entitled to any payment. All vested options will be automatically canceled if not exercised within ninety days after termination. LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION MATTERS Charter Communications, Inc.'s restated certificate of incorporation will limit the liability of directors to the maximum extent permitted by Delaware law. The Delaware General Corporation Law provides that a corporation may eliminate or limit the personal liability of a director for monetary damages for breach of fiduciary duty as a director, except for liability for: (1) any breach of the director's duty of loyalty to the corporation and its stockholders; (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (3) unlawful payments of dividends or unlawful stock purchases or redemptions; or (4) any transaction from which the director derived an improper personal benefit. Charter Communications, Inc.'s bylaws provide that Charter Communications, Inc. shall indemnify all persons whom it may indemnify pursuant thereto to the fullest extent permitted by law. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling Charter Communications, Inc. pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. 172
176 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of Charter Communications, Inc. common stock as of the closing of the offering by: - each person known by us to own beneficially 5% or more of the outstanding shares of Charter Communications, Inc. common stock and Charter Communications Holding Company membership units; - each of our directors who owns common stock or membership units; - each of our named executive officers who owns Charter Communications, Inc. common stock or membership units; and - all current directors and executive officers as a group. With respect to the percentage of voting power set forth in the following table: - each holder of Class A common stock is entitled to one vote per share; and - each holder of Class B common stock is entitled to a number of votes based on the number of outstanding Class B common stock and outstanding membership units exchangeable for Class B common stock. For example, Mr. Allen will be entitled to ten votes for each share of Class B common stock held by him or his affiliates and ten votes for each membership unit held by him or his affiliates. NUMBER OF PERCENTAGE OF NAME AND ADDRESS OF SHARES BENEFICIALLY SHARES BENEFICIALLY PERCENTAGE OF BENEFICIAL OWNER OWNED(1) OWNED(1) VOTING POWER(1) - ------------------- ------------------- ------------------- ------------------ Paul G. Allen(2)(3)............................... 317,955,052 58.0% 95.0% Charter Investment, Inc.(4)(5).................... 217,585,246 39.7% 0.0% Vulcan Cable III Inc.(2)(5)....................... 107,319,806 19.6% 0.0% Jerald L. Kent(4)(6).............................. 5,261,032 1.0% 0.0% Barry L. Babcock(4)(7)............................ 2,565,000 0.5% 0.0% Howard L. Wood(4)(8).............................. 1,065,000 0.2% 0.0% Marc B. Nathanson(9).............................. 16,407,576 3.0% 0.0% All directors and executive officers as a group (18 persons).................................... 340,688,660 61.9% 95.0% - --------------- (1) In calculating beneficial share ownership and percentages, we have made the same assumptions described on page 4 with respect to our organizational chart, except for options granted to Messrs. Kent, Babcock and Wood that have vested. In calculating the voting power percentages, we have also assumed that membership units have not been exchanged for Class A or Class B common stock. Membership units are exchangeable for Charter Communications, Inc. common stock on a one-for-one basis. Class B common stock is convertible into Class A common stock on a one-for-one basis. (2) The address of these persons is 110 110th Street, NE, Suite 500, Bellevue, WA 98004. (3) Represents 210,585,246 membership units attributable to such holder because of his equity interest in Charter Investment, Inc.; 107,319,806 membership units attributable to such holder because of his equity interest in Vulcan Cable III Inc.; and 50,000 shares of Class B common stock. (4) The address of these persons is Charter Communications, Inc., 12444 Powerscourt Drive, St. Louis, MO 63131. (5) Represents membership units. (6) Represents 3,500,000 membership units attributable to such holder because of his equity interest in Charter Investment, Inc.; and 1,761,032 shares of Class A common stock issuable upon the exchange of membership units issuable upon the exercise of options to purchase membership units. 173
177 (7) Represents 2,500,000 membership units attributable to such holder because of his equity interest in Charter Investment, Inc. and 65,000 shares of Class A common stock issuable upon exchange of membership units issuable upon exercise of options to purchase membership units. (8) Represents 1,000,000 membership units attributable to such holder because of his equity interest in Charter Investment, Inc. and 65,000 shares of Class A common stock issuable upon exchange of membership units issuable upon exercise of options to purchase membership units. (9) Represents membership units that will be acquired by the Falcon sellers in the Falcon acquisition. Falcon Holding Group, L.P. will acquire all of these membership units at the closing of the Falcon acquisition. Falcon Holding Group, Inc., which is controlled by Mr. Nathanson, is the general partner of Falcon Holding Group, L.P. Mr. Nathanson disclaims beneficial ownership of all shares owned by Falcon Holding Group, L.P. or its partners, other than any such shares he will directly own. The address of this person is c/o Falcon Communications LP and Affiliates, 10900 Wilshire Blvd., Los Angeles, CA 90024. 174
178 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The following sets forth certain transactions in which we and our directors, executive officers and affiliates, including the directors and executive officers of Charter Investment, Inc., are involved. We believe that each of the transactions described below was on terms no less favorable to us than could have been obtained from independent third parties. TRANSACTIONS WITH MANAGEMENT AND OTHERS MERGER WITH MARCUS On April 23, 1998, Mr. Allen acquired approximately 99% of the non-voting economic interests in Marcus Cable, and agreed to acquire the remaining interests in Marcus Cable. The aggregate purchase price was approximately $1.4 billion, excluding $1.8 billion in debt assumed. On February 22, 1999, Marcus Holdings was formed, and all of Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings on March 15, 1999. On March 31, 1999, Mr. Allen completed the acquisition of all remaining interests in Marcus Cable. On December 23, 1998, Mr. Allen acquired approximately 94% of the equity of Charter Investment, Inc. for an aggregate purchase price of approximately $2.2 billion, excluding $2.0 billion in debt assumed. On February 9, 1999, Charter Holdings was formed as a wholly owned subsidiary of Charter Investment, Inc. On February 10, 1999, Charter Operating was formed as a wholly owned subsidiary of Charter Holdings. In April 1999, Mr. Allen merged Marcus Holdings into Charter Holdings, and the operating subsidiaries of Marcus Holdings and all of the cable systems they owned came under the ownership of Charter Holdings, and, in turn, Charter Operating. On May 25, 1999, Charter Communications Holding Company was formed as a wholly owned subsidiary of Charter Investment, Inc. All of Charter Investment, Inc.'s equity interests in Charter Holdings were transferred to Charter Communications Holding Company. In March 1999, we paid $20 million to Vulcan Northwest, an affiliate of Mr. Allen, for reimbursement of direct costs incurred in connection with Mr. Allen's acquisition of Marcus Cable. Such costs were principally comprised of financial, advisory, legal and accounting fees. On April 7, 1999, Mr. Allen merged Marcus Holdings into Charter Holdings. Charter Holdings survived the merger, and the operating subsidiaries of Marcus Holdings became subsidiaries of Charter Holdings. At the time Charter Holdings issued $3.6 billion in principal amount of notes, this merger had not yet occurred. Consequently, Marcus Holdings was a party to the indentures governing the notes as a guarantor of Charter Holdings' obligations. Charter Holdings loaned some of the proceeds from the sale of the original notes to Marcus Holdings, which amounts were used to complete the cash tender offers for then-outstanding notes of subsidiaries of Marcus Holdings. Marcus Holdings issued a promissory note in favor of Charter Holdings. The promissory note was in the amount of $1.7 billion, with an interest rate of 9.92% and a maturity date of April 1, 2007. Marcus 175
179 Holdings guaranteed its obligations under the promissory note by entering into a pledge agreement in favor of Charter Holdings pursuant to which Marcus Holdings pledged all of its equity interests in Marcus Cable as collateral for the payment and performance of the promissory note. Charter Holdings pledged this promissory note to the trustee under the indentures as collateral for the equal and ratable benefit of the holders of the notes. Upon the closing of the merger, and in accordance with the terms of the notes and the indentures: - the guarantee issued by Marcus Holdings was automatically terminated; - the promissory note issued by Marcus Holdings was automatically extinguished, with no interest having accrued or being paid; and - the pledge in favor of Charter Holdings of the equity interests in Marcus Cable as collateral under the promissory note and the pledge in favor of the trustee of the promissory note as collateral for the notes were automatically released. MANAGEMENT AGREEMENTS PREVIOUS MANAGEMENT AGREEMENTS. Prior to March 18, 1999, pursuant to a series of management agreements with certain of our subsidiaries, Charter Investment, Inc. provided management and consulting services to those subsidiaries. In exchange for these services, Charter Investment, Inc. was entitled to receive management fees of 3% to 5% of the gross revenues of all of our systems plus reimbursement of expenses. However, our previous credit facilities limited such management fees to 3% of gross revenues. The balance of management fees payable under the previous management agreements was accrued. Payment is at the discretion of Charter Investment, Inc. Certain deferred portions of management fees bore interest at the rate of 8% per annum. Following the closing of our current credit facilities, the previous management agreements were replaced by a revised management agreement. The material terms of our previous management agreements are substantially similar to the material terms of the revised management agreement. PREVIOUS MANAGEMENT AGREEMENT WITH MARCUS. On October 6, 1998, Marcus Cable entered into a management consulting agreement with Charter Investment, Inc. pursuant to which Charter Investment, Inc. agreed to provide certain management and consulting services to Marcus Cable and its subsidiaries, in exchange for a fee equal to 3% of the gross revenues of Marcus Cable's systems plus reimbursement of expenses. Management fees expensed by Marcus Cable during the period from October 1998 to December 31, 1998 were approximately $3.3 million. Upon Charter Holdings' merger with Marcus Holdings and the closing of our current credit facilities, this agreement was terminated and the subsidiaries of Marcus Cable now receive management and consulting services from Charter Investment, Inc. under the revised management agreement. THE REVISED MANAGEMENT AGREEMENT. On February 23, 1999, Charter Investment, Inc. entered into a revised management agreement with Charter Operating, which was amended and restated as of March 17, 1999. Upon the closing of our current credit facilities on March 18, 1999, our previous management agreements and the management consulting agreement with Marcus Cable terminated and the revised management 176
180 agreement became operative. Under the revised management agreement, Charter Investment, Inc. has agreed to manage the operations of the cable television systems owned by Charter Operating's subsidiaries, as well as any cable television systems Charter Operating may subsequently acquire in the future. The term of the revised management agreement is ten years. The revised management agreement provides that Charter Operating will pay Charter Investment, Inc. a management fee equal to its actual costs to provide these services and a management fee of 3.5% of gross revenues. Gross revenues include all revenues from the operation of Charter Operating's cable systems, including, without limitation, subscriber payments, advertising revenues, and revenues from other services provided by Charter Operating's cable systems. Gross revenues do not include interest income or income from investments unrelated to our cable systems. Payment of the management fee to Charter Investment, Inc. is permitted under our current credit facilities, but ranks below our payment obligations under our current credit facilities. In the event any portion of the management fee due and payable is not paid by Charter Operating, it is deferred and accrued as a liability. Any deferred amount of the management fee will bear interest at the rate of 10% per annum, compounded annually, from the date it was due and payable until the date it is paid. As of June 30, 1999, no interest had been accrued. The management fee is payable to Charter Investment, Inc. quarterly in arrears. If the current management agreement is terminated, Charter Investment, Inc. is entitled to receive the fee payable for an entire quarter, even if termination occurred before the end of that quarter. Additionally, Charter Investment, Inc. is entitled to receive payment of any deferred amount. Pursuant to the terms of the revised management agreement, Charter Operating has agreed to indemnify and hold harmless Charter Investment, Inc. and its shareholders, directors, officers and employees. This indemnity extends to any and all claims or expenses, including reasonable attorneys' fees, incurred by them in connection with any action not constituting gross negligence or willful misconduct taken by them in good faith in the discharge of their duties to Charter Operating. The total management fees, including expenses, earned by Charter Investment, Inc. under all management agreements were as follows: TOTAL FEES YEAR FEES PAID EARNED - ---- --------- ---------- (IN THOUSANDS) Six Months Ended June 30, 1999............................ $23,388 $20,796 Year Ended December 31, 1998.............................. 17,073 27,500 Year Ended December 31, 1997.............................. 14,772 20,290 Year Ended December 31, 1996.............................. 11,792 15,443 As of June 30, 1999, approximately $17.0 million remains unpaid for all management agreements. 177
181 ASSIGNMENT AND AMENDMENT OF REVISED MANAGEMENT AGREEMENT. Upon the closing of the offering, Charter Investment, Inc. will assign to Charter Communications, Inc. all of its rights and obligations under the revised Charter Operating management agreement. In connection with the assignment, the revised Charter Operating management agreement will be amended to eliminate the 3.5% management fee. Under the amended agreement, Charter Communications, Inc. will be entitled to reimbursement from Charter Operating for all of its expenses, costs, losses, liabilities and damages paid or incurred by it in connection with the performance of its obligations under the amended agreement, with no cap on the amount of reimbursement. MANAGEMENT AGREEMENT WITH CHARTER COMMUNICATIONS, INC. Upon the closing of the offering, Charter Communications, Inc. intends to enter into a management agreement with Charter Communications Holding Company. This management agreement will provide that Charter Communications, Inc. will manage and operate the cable television systems owned or to be acquired by Charter Communications Holding Company and its subsidiaries. The terms of the Charter Communications, Inc. management agreement will be substantially similar to the terms of the Charter Operating management agreement. Charter Communications, Inc. will be entitled to reimbursement from Charter Communications Holding Company for all expenses, costs, losses, liabilities and damages paid or incurred by Charter Communications, Inc. in connection with the performance of its services, which expenses will include any fees Charter Communications, Inc. is obligated to pay under the mutual services agreement described below. There is no cap on the amount of reimbursement to which Charter Communications, Inc. is entitled. MUTUAL SERVICES AGREEMENT WITH CHARTER INVESTMENT, INC. Charter Communications, Inc. will initially have only twelve executive officers, all of whom are also executive officers of Charter Investment, Inc. Charter Communications, Inc. and Charter Investment, Inc. will enter into a mutual services agreement to be effective upon the closing of the offering. Pursuant to the mutual services agreement, each entity agrees to provide services to the other as may be reasonably requested in order to manage Charter Communications Holding Company and to manage and operate our cable systems. In addition, officers of Charter Investment, Inc. will also serve as officers of Charter Communications, Inc. The officers and employees of each entity will be available to the other to provide the services described above. All expenses and costs incurred with respect to the services provided will be paid by Charter Communications, Inc. Charter Communications, Inc. will indemnify and hold harmless Charter Investment, Inc. and its directors, officers and employees from and against any and all claims that may be made against any of them in connection with the mutual services agreement except due to its or their gross negligence or willful misconduct. The term of the mutual services agreement will be ten years, commencing on the closing of the offering, and the agreement may be terminated at any time by either party upon thirty days' written notice to the other. 178
182 CONSULTING AGREEMENT On March 10, 1999, Charter Holdings entered into a consulting agreement with Vulcan Northwest and Charter Investment, Inc. Pursuant to the terms of the consulting agreement, Charter Holdings retained Vulcan Northwest and Charter Investment, Inc. to provide advisory, financial and other consulting services with respect to acquisitions of the business, assets or stock of other companies by Charter Holdings or by any of its affiliates. Such services include participation in the evaluation, negotiation and implementation of these acquisitions. The agreement expires on December 31, 2000, and automatically renews for successive one-year terms unless otherwise terminated. All reasonable out-of-pocket expenses incurred by Vulcan Northwest and Charter Investment, Inc. are Charter Holdings' responsibility and must be reimbursed. Charter Holdings must also pay Vulcan Northwest and Charter Investment, Inc. a fee for their services rendered for each acquisition made by Charter Holdings or any of its affiliates. This fee equals 1% of the aggregate value of such acquisition. Neither Vulcan Northwest nor Charter Investment, Inc. will receive a fee in connection with the American Cable, Renaissance, Greater Media, Helicon, Vista, Cable Satellite, InterMedia and Rifkin acquisitions. No such fee is payable to either Vulcan Northwest or Charter Investment, Inc. in connection with other acquisitions being made by Charter Holdings' affiliates. Charter Holdings has also agreed to indemnify and hold harmless Vulcan Northwest and Charter Investment, Inc., and their respective officers, directors, stockholders, agents, employees and affiliates, for all claims, actions, demands and expenses that arise out of this consulting agreement and the services they provide to Charter Holdings. Mr. Allen owns 100% of Vulcan Northwest and is the Chairman of the board. William D. Savoy, another of Charter Communications, Inc.'s directors, is the President and a director of Vulcan Northwest. TRANSACTIONS WITH MR. ALLEN On December 21, 1998, Mr. Allen contributed approximately $431 million to Charter Investment, Inc. and received non-voting common stock of Charter Investment, Inc. Such non-voting common stock was converted to voting common stock on December 23, 1998. On December 23, 1998, Mr. Allen contributed approximately $1.3 billion to Charter Investment, Inc. and received voting common stock of Charter Investment, Inc. Additionally, Charter Investment, Inc. borrowed approximately $6.2 million in the form of a bridge loan from Mr. Allen. This bridge loan was contributed by Mr. Allen to Charter Investment, Inc. in March 1999. No interest on such bridge loan was accrued or paid by Charter Investment, Inc. On the same date, Mr. Allen also contributed approximately $223.5 million to Vulcan Cable II, Inc., a company owned by Mr. Allen. Vulcan II was merged with and into Charter Investment, Inc. On January 5, 1999, Charter Investment, Inc. borrowed approximately $132.2 million in the form of a bridge loan from Mr. Allen. This bridge loan was contributed by Mr. Allen to Charter Investment, Inc. in March 1999. No interest on such bridge loan was accrued or paid by Charter Investment, Inc. On the same date, Mr. Allen also 179
183 acquired additional voting common stock of Charter Investment, Inc. from Jerald L. Kent, Howard L. Wood and Barry L. Babcock for an aggregate purchase price of approximately $176.7 million. On January 11, 1999, Charter Investment, Inc. borrowed $25 million in the form of a bridge loan from Mr. Allen. This bridge loan was contributed by Mr. Allen to Charter Investment, Inc. in March 1999. No interest on such bridge loan was accrued or paid by Charter Investment, Inc. On March 16, 1999, Charter Investment, Inc. borrowed approximately $124.8 million in the form of a bridge loan from Mr. Allen. This bridge loan was contributed by Mr. Allen to Charter Investment, Inc. in March 1999. No interest on such bridge loan was accrued or paid by Charter Investment, Inc. The $431 million contribution was used to redeem stock of certain shareholders in Charter Investment, Inc. The $1.3 billion and $223.5 million contributions by Mr. Allen were used by Charter Investment, Inc. to purchase the remaining interest in CCA Group and CharterComm Holdings. All other contributions to Charter Investment, Inc. by Mr. Allen were used in operations of Charter Investment, Inc. and were not contributed to Charter Holdings. On August 10, 1999, Vulcan Cable III Inc. purchased 24.1 million membership units for $500 million. On September 22, 1999, Mr. Allen, through Vulcan Cable III Inc., contributed an additional $825 million, consisting of approximately $644.3 million in cash and approximately $180.7 million in equity interests in Rifkin that Vulcan Cable III Inc. had acquired in the Rifkin acquisition in exchange for 39.8 million membership units. As part of the membership interests purchase agreement, Vulcan Ventures Incorporated and Charter Communications, Inc., Charter Investment, Inc. and Charter Communications Holding Company entered into an agreement on September 21, 1999 regarding the right of Vulcan Ventures to use up to eight of our digital cable channels. Specifically, we will provide Vulcan Ventures with exclusive rights for carriage of up to eight digital cable television programming services or channels on each of the digital cable television systems with local control of the digital product now or hereafter owned, operated, controlled or managed by us of 550 megahertz or more. If the system offers digital services but has less than 550 megahertz of capacity, then the programming services will be equitably reduced. The programming services will consist of any designated by Vulcan Ventures. We agree that upon request of Vulcan Ventures, we will attempt to reach a comprehensive programming agreement pursuant to which we will pay the programmer, if possible, a fee per digital subscriber. If such fee arrangement is not achieved, then we and the programmer shall enter into a standard programming agreement. We believe that this transaction is on terms at least as favorable to us as Mr. Allen would negotiate with other cable operators. During the second and third quarters of 1999, one of our subsidiaries sold shared interests in several airplanes to Mr. Allen for approximately $8 million. We believe that the purchase price paid by Mr. Allen for these interests was the fair market price. 180
184 ALLOCATION OF BUSINESS OPPORTUNITIES WITH MR. ALLEN As described under "-- Business Relationships", Mr. Allen and a number of his affiliates have interests in various entities that provide services or programming to a number of our subsidiaries. Given the diverse nature of Mr. Allen's investment activities and interests, and to avoid the possibility of future disputes as to potential business, Charter Communications Holding Company and Charter Communications, Inc. may not, under the terms of their organizational documents, engage in any business transaction outside the cable transmission business except for the joint venture with Broadband Partners and incidental businesses engaged in as of the closing of this offering. We will be subject to this restriction until all shares of Class B common stock have converted into Class A common stock. See "Description of Capital Stock and Membership Units". Should we wish to pursue a business transaction outside of this scope, we must first offer Mr. Allen the opportunity to pursue the particular business transaction. If he decides not to do so and consents to our engaging in the business transaction, we will be able to do so. In any such case, the restated certificate of incorporation and the limited liability company agreement would be amended accordingly to appropriately modify the current restrictions on our ability to engage in any business other than the cable transmission business. The cable transmission business means the business of transmitting video, audio, including telephony, and data over cable television systems owned, operated or managed by us from time to time. Under Charter Communications, Inc.'s restated certificate of incorporation, the businesses of RCN Corporation, a company in which Mr. Allen is making a significant investment, are not considered cable transmission businesses. See "-- Business Relationships -- RCN Corporation". Under Delaware corporate law, each director of Charter Communications, Inc., including Mr. Allen, is generally required to present to Charter Communications, Inc. any opportunity he or she may have to acquire any cable transmission business or any company whose principal business is the ownership, operation or management of cable transmission businesses so that we may determine whether we wish to pursue such opportunities. However, Mr. Allen and the other directors generally will not have an obligation to present to Charter Communications, Inc. other business opportunities and they may exploit such opportunities for their own account. ASSIGNMENTS OF ACQUISITIONS On January 1, 1999, Charter Investment, Inc. entered into a membership purchase agreement with ACEC Holding Company, LLC for the acquisition of American Cable. On February 23, 1999, Charter Investment, Inc. assigned its rights and obligations under this agreement to one of our subsidiaries, Charter Communications Entertainment II, LLC, effective as of March 8, 1999, or such earlier date as mutually agreed to by the parties. The acquisition of American Cable was completed in May 1999. On February 17, 1999, Charter Investment, Inc. entered into an asset purchase agreement with Greater Media, Inc. and Greater Media Cablevision, Inc. for the acquisition of the Greater Media systems. On February 23, 1999, Charter Investment, Inc. assigned its rights and obligations under this agreement to one of our subsidiaries, 181
185 Charter Communications Entertainment I, LLC. The acquisition of the Greater Media systems was completed in June 1999. On April 26, 1999, Charter Communications, Inc. entered into a purchase and sale agreement with InterLink Communications Partners, LLLP and the other sellers listed on the signature pages of the agreement. On June 30, 1999, Charter Communications, Inc. assigned its rights and obligations under this agreement to Charter Communications Operating, LLC. The acquisition contemplated by these agreements was completed in September 1999. On April 26, 1999, Charter Communications, Inc. entered into a purchase and sale agreement with Rifkin Acquisition Partners L.L.L.P and the other sellers listed on the signature pages of the agreement. On June 30, 1999, Charter Communications, Inc. assigned its rights and obligations under this agreement to Charter Communications Operating, LLC. The acquisition contemplated by these agreements was completed in September 1999. On April 26, 1999, Charter Communications, Inc. entered into the RAP indemnity agreement with InterLink Communications Partners, LLLP and the other sellers and InterLink partners listed on the signature pages of the agreement. On June 30, 1999, Charter Communications, Inc. assigned its rights and obligations under this agreement to Charter Communications Operating, LLC. In May 1999, Charter Investment, Inc. entered into the Falcon purchase agreement. As of June 22, 1999, pursuant to the first amendment to the Falcon purchase agreement, Charter Investment, Inc. assigned its rights under the Falcon purchase agreement to Charter LLC, a subsidiary of Charter Communications Holding Company. In May 1999, Charter Investment, Inc. entered into the Fanch purchase agreement. On September 21, 1999, Charter Investment, Inc. assigned its rights and obligations to purchase stock interests under this agreement to Charter Communications Holding Company and its rights and obligations to purchase partnership interests and assets under this agreement to Charter Communications VI, LLC, an indirect wholly owned subsidiary of Charter Communications Holding Company. In May 1999, Charter Communications Holdings, LLC and Charter Investment, Inc., as guarantor, entered into an agreement to purchase directly and indirectly all of the equity interests of Avalon Cable LLC. Effective as of June 16, 1999, Charter Communications Holdings, LLC assigned its rights and obligations under this agreement to Charter Communications Holding Company. On October 11, 1999, Charter Communications Holding Company and Charter Communications, Inc. entered into an Assignment and Contribution Agreement pursuant to which Charter Communications, Inc. has agreed to assume the obligation to acquire the stock of Avalon Cable of Michigan Holdings, Inc. Charter Communications, Inc. is obligated under the terms of the Assignment and Contribution Agreement to retain a portion of the proceeds of this offering to purchase this stock and then to contribute all of the equity interests in Avalon Cable LLC, an indirect wholly owned subsidiary of Avalon Cable of Michigan Holdings, Inc., along with any unused proceeds, to Charter Communications Holding Company in 182
186 exchange for Class B common membership units. In connection with the contribution of this indirect interest in Avalon Cable LLC to Charter Communications Holding Company, Avalon Cable of Michigan Holdings, Inc. will be merged into a limited liability company. Charter Investment, Inc. remains a guarantor of the obligations of Charter Communication Holdings, LLC and its assignees, including Charter Communications, Inc., under the Avalon acquisition agreement. See "Description of Capital Stock and Membership Units -- Membership Units". EMPLOYMENT AGREEMENTS Mr. Kent has entered into an employment agreement with us. We have summarized this agreement in "Management -- Employment and Consulting Agreements". Effective as of December 23, 1998, Barry L. Babcock entered into an employment agreement with Charter Investment for a one-year term with automatic one-year renewals. Under this agreement, Mr. Babcock agreed to serve as Vice Chairman of Charter Investment, Inc. with responsibilities including the government and public relations of Charter Investment, Inc. During the initial term of the agreement, Mr. Babcock was entitled to receive a base salary of $625,000, or such higher rate as may have been determined by the Chief Executive Officer in his discretion. In addition, Mr. Babcock was eligible to receive an annual bonus to be determined by the board of directors at its discretion. Mr. Babcock received a one-time payment of $500,000 as part of his employment agreement. Under the agreement, Mr. Babcock was entitled to participate in any disability insurance, pension or other benefit plan afforded to employees generally or executives of Charter Investment, Inc. Charter Investment, Inc. agreed to grant options to Mr. Babcock to purchase its stock as determined by the board of directors in its discretion, pursuant to an option plan that was adopted by Charter Investment. Charter Investment, Inc. agreed to indemnify and hold harmless Mr. Babcock to the maximum extent permitted by law from and against any claims, damages, liabilities, losses, costs or expenses in connection with or arising out of the performance by Mr. Babcock of his duties. In the event of the termination of the agreement by Charter Investment, Inc. without cause or by Mr. Babcock for good reason: - Charter Investment, Inc. was required to pay to Mr. Babcock an amount equal to the aggregate base salary due to Mr. Babcock for the remainder of the term of the agreement; and - vested options, if any, of Mr. Babcock were to be redeemed for cash for their then-current intrinsic value. Mr. Babcock and Charter Investment, Inc. have reached agreement on the principal terms of the termination of this employment agreement which include the vesting of options held by Mr. Babcock and the payment of an amount equal to his base salary plus a $312,500 bonus. 183
187 Effective as of December 23, 1998, Howard L. Wood entered into an employment agreement with Charter Investment, Inc. for a one-year term with automatic one-year renewals. Under this agreement, Mr. Wood agreed to serve as an officer of Charter Investment, Inc. During the initial term of the agreement, Mr. Wood is entitled to receive a base salary of $312,500, or such higher rate as determined by the Chief Executive Officer in his discretion. In addition, Mr. Wood is eligible to receive an annual bonus to be determined by the board of directors in its discretion. Mr. Wood received a one-time payment as part of his employment agreement of $250,000. Under the agreement, Mr. Wood is entitled to participate in any disability insurance, pension or other benefit plan afforded to employees generally or executives of Charter Investment, Inc. Charter Investment, Inc. has agreed to indemnify and hold harmless Mr. Wood to the maximum extent permitted by law from and against any claims, damages, liabilities, losses, costs or expenses in connection with or arising out of the performance by Mr. Wood of his duties. In the event of the termination of the agreement by Charter Investment, Inc. without cause or by Mr. Wood for good reason, Charter Investment, Inc. is required to pay to Mr. Wood an amount equal to the aggregate base salary due to Mr. Wood for the remainder of the term of the agreement. Mr. Wood and Charter Investment, Inc. have agreed that upon closing of this offering, this employment agreement will cease to be effective. Upon termination of the employment agreement, Mr. Wood will receive an amount equal to his base salary plus a $312,500 bonus. In light of the consulting agreement to be entered into between Mr. Wood and Charter Communications, Inc., the options held by Mr. Wood will vest. CONSULTING AGREEMENTS Mr. Wood and Mr. Babcock will enter into consulting agreements with us. We have summarized these agreements in "Management -- Employment and Consulting Agreements". INSURANCE Charter Communications, Inc. receives insurance and workers' compensation coverage through Charter Investment, Inc. Charter Investment, Inc.'s insurance policies provide coverage for Charter Investment, Inc. and its - subsidiaries, and associated, affiliated and inter-related companies, - majority (51% or more) owned partnerships and joint ventures, - interest in (or its subsidiaries' interest in) any other partnerships, joint ventures or limited liability companies, - interest in (or its subsidiaries' interest in) any company or organization coming under its active management or control, and 184
188 - any entity or party required to be insured under any contract or agreement, which may now exist, may have previously existed, or may hereafter be created or acquired. Charter Investment, Inc. expensed approximately $5,498,000 for the six months ended June 30, 1999, approximately $603,000 for the year ended December 31, 1998, approximately $172,100 for the year ended December 31, 1997, and approximately $108,000, for the year ended December 31, 1996, relating to insurance allocations. BUSINESS RELATIONSHIPS Paul G. Allen or certain affiliates of Mr. Allen own equity interests or warrants to purchase equity interests in various entities which provide a number of our subsidiaries with services or programming. Among these entities are High Speed Access Corp., WorldGate Communications, Inc., Wink Communications, Inc., ZDTV, L.L.C., USA Networks, Oxygen Media, Inc., Broadband Partners LLC, Go2Net, Inc. and RCN Corporation. Affiliates of Mr. Allen include Charter Investment, Inc. and Vulcan Ventures, Inc. Mr. Allen owns 100% of the equity of Vulcan Ventures, and is its Chief Executive Officer. Mr. Savoy is also a Vice President and a director of Vulcan Ventures. The various cable, Internet and telephony companies that Mr. Allen has invested in may mutually benefit one another. The recently announced Broadband Partners Internet portal joint venture is an example of a cooperative business relationship among his affiliated companies. We can give no assurance, nor should you expect, that this joint venture will be successful, that Charter Communications, Inc. and its subsidiaries will realize any benefits from this or other relationships with Mr. Allen's affiliated companies or that we will enter into any joint ventures or business relationships in the future with Mr. Allen's affiliated companies. Mr. Allen and his affiliates have made and in the future likely will make, numerous investments outside of Charter Communications Holding Company. We cannot assure you that, in the event that we or any of our subsidiaries enter into transactions in the future with any affiliate of Mr. Allen, such transactions will be on terms as favorable to us as terms we might have obtained from an unrelated third party. Also, conflicts could arise with respect to the allocation of corporate opportunities between us and Mr. Allen and his affiliates. We have not instituted any formal plan or arrangement to address potential conflicts of interest. HIGH SPEED ACCESS. High Speed Access is a provider of high-speed Internet access over cable modems. In November 1998, Charter Investment, Inc. entered into a systems access and investment agreement with Vulcan Ventures and High Speed Access and a related network services agreement with High Speed Access. Additionally, Vulcan Ventures and High Speed Access entered into a programming content agreement. Under these agreements, High Speed Access will have exclusive access to at least 750,000 of our homes with an installed cable drop from our cable system or which is eligible for a cable drop by virtue of our cable system passing the home. The term of the systems access and investment agreement continues until midnight of the day High Speed Access 185
189 ceases to provide High Speed Access services to cable subscribers in any geographic area or region. The term of the network services agreement is as to a particular cable system, five years from the date revenue billing commences for that cable system and, following this initial term, the network services agreement automatically renews itself on a year-to-year basis. Additionally, we can terminate our exclusivity rights, on a system-by-system basis, if High Speed Access fails to meet performance benchmarks or otherwise breaches the agreements including their commitment to provide content designated by Vulcan Ventures. The programming content agreement is effective until terminated for any breach and will automatically terminate upon the expiration of the systems access and investment agreement. During the term of the agreements, High Speed Access has agreed not to deploy WorldGate, Web TV, digital television or related products in the market areas of any committed system or in any area in which we operate a cable system. All of Charter Investment, Inc.'s operations take place at the subsidiary level and it is through Charter Investment, Inc. that we derive our rights and obligations with respect to High Speed Access. Under the terms of the network services agreement, we split revenue with High Speed Access based on set percentages of gross revenues in each category of service. The programming content agreement provides each of Vulcan Ventures and High Speed Access with a license to use certain content and materials of the other on a non-exclusive, royalty-free basis. Operations began in the first quarter of 1999. Net receipts from High Speed Access for the six months ended June 30, 1999 were approximately $24,000. Concurrently with entering into these agreements, High Speed Access issued 8 million shares of Series B convertible preferred stock to Vulcan Ventures at a purchase price of $2.50 per share. Vulcan Ventures also subscribed to purchase 2.5 million shares of Series C convertible preferred stock, at a purchase price of $5.00 per share on or before November 25, 2000, and received an option to purchase an additional 2.5 million shares of Series C convertible preferred stock at a purchase price of $5.00 per share. In April 1999, Vulcan Ventures purchased the entire 5 million shares of Series C convertible preferred stock for $25 million in cash. The shares of Series B and Series C convertible preferred stock issued to Vulcan Ventures automatically converted at a price of $3.23 per share into 20.15 million shares of common stock upon completion of High Speed Access' initial public offering in June 1999. Additionally, High Speed Access granted Vulcan Ventures warrants to purchase up to 5,006,500 shares of common stock at a purchase price of $5.00 per share. These warrants were converted to warrants to purchase up to 7,750,000 shares of common stock at a purchase price of $3.23 per share upon completion of High Speed Access' initial public offering. Vulcan Ventures subsequently assigned the warrants to Charter Investment, Inc. The warrants are exercisable at the rate of 1.55 shares of common stock for each home passed in excess of 750,000, 3.9 million warrants may be earned on or before July 31, 2001 and must be exercised on or before July 31, 2002. 3.9 million warrants may be earned on or before July 31, 2003 and must be exercised on or before July 31, 2004. The warrants may be forfeited in certain circumstances, generally if the number of homes passed in a committed system is reduced. 186
190 Jerald L. Kent, our President and Chief Executive Officer and a director of Charter Holdings, Stephen E. Silva, our Senior Vice President -- Corporate Development and Technology, and Mr. Savoy, a member of our board of directors are all members of the board of directors of High Speed Access Corp. Upon completion of the offering, Charter Investment, Inc. will assign to Charter Communications Holding Company all of its rights and obligations under its agreements with High Speed Access, and transfer the warrants to purchase up to 7,750,000 shares of common stock of High Speed Access, to Charter Communications Holding Company. WORLDGATE. WorldGate is a provider of Internet access through cable television systems. On November 7, 1997, Charter Investment, Inc. signed an affiliation agreement with WorldGate pursuant to which WorldGate's services will be offered to some of our customers. The term of the agreement is five years unless terminated by either party for failure of the other party to perform any of its obligations or undertakings required under the agreement. The agreement automatically renews for additional successive two-year periods upon expiration of the initial five-year term. All of Charter Investment, Inc.'s operations take place at the subsidiary level and it is through Charter Investment, Inc. that we derive our rights and obligations with respect to WorldGate. Pursuant to the agreement, we have agreed to use our reasonable best efforts to deploy the WorldGate Internet access service within a portion of our cable television systems and to install the appropriate headend equipment in all of our major markets in those systems. Major markets for purposes of this agreement include those in which we have more than 25,000 customers. We incur the cost for the installation of headend equipment. In addition, we have agreed to use our reasonable best efforts to deploy such service in all non-major markets that are technically capable of providing interactive pay-per-view service, to the extent we determine that it is economically practical. When WorldGate has a telephone return path service available, we will, if economically practical, use all reasonable efforts to install the appropriate headend equipment and deploy the WorldGate service in our remaining markets. Telephone return path service is the usage of telephone lines to connect to the Internet to transmit data or receive data. We have also agreed to market the WorldGate service within our market areas. We pay a monthly subscriber access fee to WorldGate based on the number of subscribers to the WorldGate service. We have the discretion to determine what fees, if any, we will charge our subscribers for access to the WorldGate service. We started offering WorldGate service in 1998. For the six months ended June 30, 1999, we paid to WorldGate approximately $570,000. For the year ended December 31, 1998, we paid to WorldGate approximately $276,000. We charged our subscribers approximately $76,000 for the six months ended June 30, 1999, and approximately $22,000 for the year ended December 31, 1998. On November 24, 1997, Charter Investment, Inc. acquired 70,423 shares of WorldGate's Series B preferred stock at a purchase price of $7.10 per share. On February 3, 1999, a subsidiary of Charter Holdings acquired 90,909 shares of Series C preferred stock at a purchase price of $11.00 per share. As a result of a stock split, each share of Series B preferred stock will convert into two-thirds of a share of WorldGate's common stock, and each share of Series C preferred stock will convert into two-thirds of 187
191 a share of WorldGate's common stock. Upon completion of WorldGate's initial public offering, each series of preferred stock will automatically convert into common stock. Upon completion of the offering, Charter Investment, Inc. will assign to Charter Communications Holding Company all of its rights and obligations under its agreements with WorldGate and transfer its 70,423 shares of WorldGate Series B preferred stock to Charter Communications Holding Company. WINK. Wink offers an enhanced broadcasting system that adds interactivity and electronic commerce opportunities to traditional programming and advertising. Viewers can, among other things, find news, weather and sports information on-demand and order products through use of a remote control. On October 8, 1997, Charter Investment, Inc. signed a cable affiliation agreement with Wink to deploy this enhanced broadcasting technology in our systems. The term of the agreement is three years. Either party has the right to terminate the agreement for the other party's failure to comply with any of its respective material obligations under the agreement. All of Charter Investment, Inc.'s operations take place at the subsidiary level and it is through Charter Investment, Inc. that we derive our rights and obligations with respect to Wink. Pursuant to the agreement, Wink granted us the non-exclusive license to use their software to deliver the enhanced broadcasting to all of our cable systems. For the first year of the agreement, we pay a monthly license fee to Wink which is based on the number of our subscribers in our operating areas. After the first year of the agreement we pay a fixed monthly license fee to Wink regardless of the number of our subscribers in our operating areas. We also supply all server hardware required for deployment of Wink services. In addition, we agreed to promote and market the Wink service to our customers within the area of each system in which such service is being provided. We share in the revenue Wink generates from all fees collected by Wink for transactions generated by our customers. The amount of revenue shared is based on the number of transactions per month. As of June 30, 1999, no revenue or expenses have been recognized as a result of this agreement. On November 30, 1998, Vulcan Ventures acquired 1,162,500 shares of Wink's Series C preferred stock for approximately $9.3 million. In connection with such acquisition, Wink issued to Vulcan Venture warrants to purchase shares of common stock. Additionally, Microsoft Corporation, of which Mr. Allen is a director, also owns an equity interest in Wink. Upon the completion of the offering, Charter Investment, Inc. will assign to Charter Communications Holding Company all of its rights and obligations under its agreements with Wink. ZDTV. ZDTV operates a cable television channel which broadcasts shows about technology and the Internet. Pursuant to a carriage agreement which Charter Communications Holding Company intends to enter into with ZDTV, ZDTV has agreed to provide us with programming for broadcast via our cable television systems at no cost. The term of the proposed carriage agreement, with respect to each of our cable systems, is from the date of launch of ZDTV on that cable system until April 30, 2008. The term expires on the same day for each of our cable systems, regardless of when any individual 188
192 cable system launches ZDTV. The carriage agreement grants us a limited non-exclusive right to receive and to distribute ZDTV to our subscribers in digital or analog format. The carriage agreement does not grant us the right to distribute ZDTV over the Internet. We pay a monthly subscriber fee to ZDTV for the ZDTV programming based on the number of our subscribers subscribing to ZDTV. Additionally, we agreed to use commercially reasonable efforts to publicize the programming schedule of ZDTV in each of our cable systems that offers or will offer ZDTV. Upon reaching a specified threshold number of ZDTV subscribers, then, in the event ZDTV inserts any informercials, advertorials and/or home shopping into in the ZDTV programming, we receive from ZDTV a percentage of net product revenues resulting from our distribution of these services. ZDTV may not offer its services to any other cable operator which serves the same or fewer number of subscribers at a more favorable rate or on more favorable carriage terms. As of June 30, 1999, no expenses have been recognized as a result of these agreements. On February 5, 1999, Vulcan Programming acquired an approximate one-third interest in ZDTV. Mr. Allen owns 100% of Vulcan Programming. Mr. Savoy is the president and director of Vulcan Programming. The remaining approximate two-thirds interest in ZDTV is owned by Ziff-Davis Inc. Vulcan Ventures owns approximately 3% of the interests in Ziff-Davis. The total investment made by Vulcan Programming and Vulcan Ventures was $104 million. USA NETWORKS. USA Networks operates USA Network and The Sci-Fi Channel, which are cable television networks. USA Networks also operates Home Shopping Network, which is a retail sales program available via cable television systems. On May 1, 1994, Charter Investment, Inc. signed an affiliation agreement with USA Networks. Pursuant to this affiliation agreement, USA Networks has agreed to provide their programming for broadcast via our cable television systems. The term of the affiliation agreement is until December 30, 1999. The affiliation agreement grants us the nonexclusive right to cablecast the USA Network programming service. We pay USA Networks a monthly fee for the USA Network programming service number based on the number of subscribers in each of our systems and the number and percentage of such subscribers receiving the USA Network programming service. Additionally, we agreed to use best efforts to publicize the schedule of the USA Network programming service in the television listings and program guides which we distribute. We have paid to USA Networks for programming approximately $4,931,614 for the six months ended June 30, 1999, approximately $556,000 for the year ended December 31, 1998, approximately $204,000 for the year ended December 31, 1997, and approximately $134,000 for the year ended December 31, 1996. In addition, we received commissions from Home Shopping Network for sales generated by our customers totaling approximately $794,000 for the six months ended June 30, 1999, approximately $121,000 for the year ended December 31, 1998, approximately $62,000 for the year ended December 31, 1997, and approximately $35,000 for the year ended December 31, 1996. Mr. Allen and Mr. Savoy are also directors of USA Networks. As of April 1999, Mr. Allen owned approximately 9.8% and Mr. Savoy owned less than 1% of the common stock of USA Networks. Upon completion of the offering, Charter Investment, Inc. will 189
193 assign to Charter Communications Holding Company all of its rights and obligations under its agreements with USA Networks. OXYGEN MEDIA, INC. Oxygen Media provides content aimed at the female audience for distribution over the Internet and cable television systems. Vulcan Ventures has agreed to invest up to $100 million in Oxygen Media. In addition, Charter Communications Holding Company has agreed to enter into a carriage agreement with Oxygen Media pursuant to which we intend to carry Oxygen Media programming content on our cable systems. As of June 30, 1999, no expenses have been recognized as a result of these agreements. Nancy B. Peretsman, one of our nominees for director, serves on the board of directors of Oxygen Media. BROADBAND PARTNERS, LLC. Charter Communications, Inc. has entered into a joint venture with Vulcan Ventures and Go2Net to provide broadband portal services. See "Business -- Products and Services". Mr. Allen owns approximately 33% of the outstanding equity of Go2Net. Mr. Savoy, a director of Charter Communications, Inc., is also a director of Go2Net. RCN CORPORATION. On October 1, 1999, Vulcan Ventures entered into an agreement to purchase shares of convertible preferred stock of RCN Corporation for an aggregate purchase price of approximately $1.65 billion. If Vulcan Ventures immediately converts the RCN preferred stock it has agreed to purchase into common stock, it will own 27.4% of RCN when combined with the common stock that Vulcan Ventures already owns. None of Charter Communications, Inc., Charter Communications Holding Company or their respective stockholders or members, other than Vulcan Ventures, have any interest in the RCN investment and none of them is expected to have any interest in any subsequent investment in RCN that Vulcan Ventures may make. The businesses of RCN are not deemed to be the "cable transmission business" under Charter Communications, Inc.'s Certificate of Incorporation. OTHER RELATIONSHIPS David L. McCall, Senior Vice President of Operations -- Eastern Division, is a partner in a partnership that leases office space to us. The partnership has received $108,647 pursuant to such lease for the period from January 1999 to June 1999. In January 1999, Charter Investment, Inc. issued bonuses to executive officers in the form of three-year promissory notes. One-third of the original outstanding principal amount of each of these notes is forgiven, as long as the employee is still employed by Charter Investment, Inc. or any of its affiliates, at the end of each of the first three 190
194 anniversaries of the issue date. The promissory notes bear interest at 7% per year. Outstanding balances as of June 30, 1999 are as follows: INDIVIDUAL AMOUNT ---------- -------- David G. Barford.................................. $450,000 Mary Pat Blake.................................... $450,000 Eric A. Freesmeier................................ $450,000 Thomas R. Jokerst................................. $450,000 Kent D. Kalkwarf.................................. $450,000 Ralph G. Kelly.................................... $450,000 David L. McCall................................... $450,000 John C. Pietri.................................... $225,000 Steven A. Schumm.................................. $900,000 Curtis S. Shaw.................................... $450,000 Stephen E. Silva.................................. $300,000 Mr. Wood has agreed to lease, from time to time, to Charter Communications, Inc. and its subsidiaries and affiliates an airplane owned by Mr. Wood for business travel. We or our subsidiary or affiliate, as applicable, would, in turn, pay Mr. Wood market rates for such use. When Mr. Wood uses the plane for personal matters, we have agreed to provide, if available, Charter-employed airplane operating personnel. This agreement with Mr. Wood is not in writing. Marc B. Nathanson is the Chairman of the board of directors of Falcon Holding Group, Inc., the general partner of Falcon Holding Group, L.P. 191
195 DESCRIPTION OF CERTAIN INDEBTEDNESS The following description of our indebtedness is qualified in its entirety by reference to the relevant credit facility, indenture and related documents governing the debt. EXISTING CREDIT FACILITIES CHARTER OPERATING CREDIT FACILITIES. On March 18, 1999, all of our then-existing senior debt, consisting of seven separate credit facilities, was refinanced with proceeds of the sale of the original Charter Holdings notes and proceeds of our initial senior secured credit facilities. The borrower under our initial senior secured credit facilities is Charter Operating. The initial senior secured credit facilities were arranged by Chase Securities, Inc., NationsBank Montgomery Securities LLC and TD Securities (USA) Inc. The initial Charter Operating senior secured credit facilities provided for borrowings of up to $2.75 billion. The initial Charter Operating senior secured credit facilities were increased on April 30, 1999 by $1.35 billion of additional senior secured credit facilities. Obligations under the Charter Operating credit facilities are guaranteed by Charter Operating's parent, Charter Holdings, and by Charter Operatings' subsidiaries. The obligations under the Charter Operating credit facilities are secured by pledges by Charter Operating of inter-company obligations and the ownership interests of Charter Operating and its subsidiaries, but are not secured by the other assets of Charter Operating or its subsidiaries. The guarantees are secured by pledges of inter-company obligations and the ownership interests of Charter Holdings in Charter Operating, but are not secured by the other assets of Charter Holdings or Charter Operating. The initial senior secured credit facilities of $4.1 billion consist of: - an eight and one-half year reducing revolving loan in the amount of $1.25 billion; - an eight and one-half year Tranche A term loan in the amount of $1.0 billion; and - a nine-year Tranche B term loan in the amount of $1.85 billion. The Charter Operating credit facilities provide for the amortization of the principal amount of the Tranche A term loan facility and the reduction of the revolving loan facility beginning on June 30, 2002 with respect to the Tranche A term loan and on March 31, 2004 with respect to the revolving credit facility, with a final maturity date of September 18, 2007. The amortization of the principal amount of the Tranche B term loan facility is substantially "back-ended," with more than ninety percent of the principal balance due in the year of maturity. The Charter Operating credit facilities also provide for an incremental term facility of up to $500 million which is conditioned upon receipt of additional new commitments from lenders. If the incremental term facility becomes available, up to 50% of the borrowings under it may be repaid on terms substantially similar to that of the Tranche A term loan and the remaining portion on terms substantially similar to the Tranche B term loan. The credit facilities also contain provisions requiring mandatory loan prepayments under some circumstances, such as 192
196 when significant amounts of assets are sold and the proceeds are not promptly reinvested in assets useful in the business. The Charter Operating credit facilities provide the borrower with two interest rate options, to which a margin is added: a base rate option, generally the "prime rate" of interest, and an interest rate option based on the interbank eurodollar rate. Interest rate margins for the Charter Operating credit facilities depend upon performance measured by a leverage ratio, which is the ratio of indebtedness to annualized operating cash flow. Annualized operating cash flow is defined as the immediately preceding quarter's operating cash flow, before management fees, multiplied by four. This leverage ratio is based on the debt of Charter Operating and its subsidiaries, exclusive of the outstanding notes and other debt for money borrowed, including guarantees by Charter Operating and by Charter Holdings. The interest rate margins for the Charter Operating credit facilities are as follows: - with respect to the revolving loan and the Tranche A term loan, the margin ranges from 1.5% to 2.25% for eurodollar loans and from 0.5% to 1.25% for base rate loans; and - with respect to the Tranche B term loan, the margin ranges from 2.25% to 2.75% for eurodollar loans and from 1.25% to 1.75% for base rate loans. The Charter Operating credit facilities contain representations and warranties, affirmative and negative covenants, information requirements, events of default and financial covenants. The events of default include a cross-default provision that is triggered by the failure of Charter Holdings, Charter Operating or Charter Operating's subsidiaries to make payment on debt with an outstanding total principal amount exceeding $50 million or the acceleration of debt of this amount prior to its maturity. The financial covenants, which are generally tested on a quarterly basis, measure performance against standards set for leverage, debt service coverage, and operating cash flow coverage of cash interest expense. Under most circumstances, acquisitions and investments may be made without the consent of the lenders as long as Charter Operating's operating cash flow for the four complete quarters preceding the acquisition or investment equals or exceeds 1.75 times the sum of its cash interest expense plus any restricted payments, on a pro forma basis after giving effect to the acquisition or investment. The Charter Operating credit facilities also contain a change of control provision, making it an event of default, and permitting acceleration of the debt, in the event that either: - Mr. Allen, including his estate, heirs and other related entities, fails to maintain a 51% direct or indirect voting and economic interest in Charter Operating, provided that after the consummation of an initial public offering by Charter Holdings or an affiliate of Charter Holdings, the economic interest percentage may be reduced to 25%, or - a change of control occurs under the indentures governing the Charter Holdings notes. 193
197 The various negative covenants place limitations on the ability of Charter Holdings, Charter Operating and their subsidiaries to, among other things: - incur debt; - pay dividends; - incur liens; - make acquisitions; - make investments or asset sales; or - enter into transactions with affiliates. Distributions by Charter Operating under the credit facilities to Charter Holdings to pay interest on the Charter Holdings notes are generally permitted, except during the existence of a default under the credit facilities. If the 8.250% Charter Holdings notes are not refinanced prior to six months before their maturity date, the entire amount outstanding of the Charter Operating credit facilities will become due and payable. As of June 30, 1999, approximately $2.025 billion was outstanding and $2.075 billion was available for borrowing under the Charter Operating credit facilities. CREDIT FACILITIES TO BE ASSUMED OR ARRANGED IN CONNECTION WITH OUR PENDING ACQUISITIONS FALCON CABLE COMMUNICATIONS CREDIT FACILITIES. In May 1999, Charter Investment, Inc. entered into the Falcon acquisition agreements. As of June 30, 1999, the assumed debt portion of the purchase price includes $967.0 million of senior credit facilities of Falcon Cable Communications, LLC. As of July 21, 1999, a required percentage of the lenders under the credit agreement dated June 30, 1998 agreed to amend and restate the credit agreement, effective on the date that we close our acquisition of Falcon. Unless otherwise noted, the description below gives effect to this amendment and restatement, which becomes effective at the time of the acquisition. The Falcon Cable Communications credit facilities will have maximum borrowing availability of $1.25 billion consisting of the following: - a revolving facility in the amount of approximately $646.0 million; - a term loan B in the amount of approximately $198.5 million; - a term loan C in the amount of approximately $297.8 million; and - a committed supplemental revolving facility of $110.0 million. In addition, we intend to raise commitments for an additional supplemental revolving facility of approximately $240.0 million. The revolving facility and the supplemental revolving facility amortize beginning in 2001 and 2003, respectively, and ending on December 29, 2006 and December 31, 2007, respectively. The term loan B and term loan C facilities amortize beginning in 1999 and ending on June 29, 2007 and December 31, 2007, respectively. The obligations under these facilities are guaranteed by the subsidiaries of Falcon Cable Communications. The 194
198 obligations under these credit facilities are secured by pledges of the ownership interests and inter-company obligations of Falcon Cable Communications and its subsidiaries, but are not secured by other assets of Falcon Cable Communications or its subsidiaries. These credit facilities also contain provisions requiring mandatory loan prepayments under certain circumstances, such as when significant amounts of assets are sold and the proceeds are not promptly reinvested in assets useful in the business of Falcon Cable Communications. These credit facilities provide Falcon Cable Communications with two interest rate options, to which a margin is added: a base rate option, generally the "prime rate" of interest, and an interest rate option based on the interbank eurodollar rate. Interest rates for these credit facilities, as well as a fee payable on unborrowed amounts available under these facilities, will depend upon performance measured by a "leverage ratio" which is the ratio of indebtedness to annualized operating cash flow. Annualized operating cash flow is defined as the immediately preceding quarter's operating cash flow, before management fees, multiplied by four. This leverage ratio is based on the debt of Falcon Cable Communications and its subsidiaries, exclusive of the Falcon debentures described below. The interest rate margins for the Falcon Cable Communications credit facilities are as follows: - with respect to the revolving loan facility, the margin ranges from 1.0% to 2.0% for eurodollar loans and from 0.0% to 1.0% for base rate loans; - with respect to Term Loan B, the margin ranges from 1.75% to 2.25% for eurodollar loans and from 0.75% to 1.25% for base rate loans; and - with respect to Term Loan C, the margin ranges from 2.0% to 2.5% for eurodollar loans and from 1.0% to 1.5% for base rate loans. These credit facilities contain representations and warranties, affirmative and negative covenants, information requirements, events of default and financial covenants. The events of default for these credit facilities include a cross-default provision that is triggered by the failure to make payment relating to specified outstanding debt of Falcon Holding Group, L.P., Falcon Communications, L.P., Falcon Cable Communications and specified guarantors in a total amount of principal and accrued interest exceeding $10 million. The financial covenants, which are generally tested on a quarterly basis, measure performance against standards set for leverage, debt service coverage, and operating cash flow coverage of cash interest expense. These credit facilities also contain a change of control provision, making it an event of default, and permitting acceleration of the debt, in the event that either: - Mr. Allen, including his estate, heirs and other related entities, fails to maintain a 51% direct or indirect voting and economic interest in Falcon Cable Communications, provided that after the consummation of an initial public offering by the Falcon borrower or an affiliate of Falcon Cable Communications, the economic interest percentage may be reduced to 25%; or 195
199 - A change of control occurs under the indentures governing the Falcon debentures or under the terms of other debt of Falcon. The various negative covenants place limitations on the ability of Falcon Cable Communications and its subsidiaries to, among other things: - incur debt; - pay dividends; - incur liens; - make acquisitions; - make investments or asset sales; or - enter into transactions with affiliates. Distributions by Falcon Cable Communications under its credit facilities to pay interest on the Falcon debentures are generally permitted, except during the existence of a default under the credit facilities. As of June 30, 1999, $967.0 million was outstanding, $175.3 million was committed and available for borrowing and an additional $110.0 million was committed and will be available for borrowing upon completion of the Falcon acquisition under the Falcon Cable Communications credit facilities. FALCON BRIDGE LOAN FACILITY. We have received a commitment from a group of lenders for a bridge loan facility to finance required repayments of Falcon debentures and notes. Goldman Sachs Credit Partners, L.P. is the administrative agent under this facility. The Falcon bridge loan facility has a total borrowing capacity of $750 million and Falcon Communications, L.P. will be the borrower under the facility. Under the terms of the commitment, we are obligated to cause Falcon Cable Communications to assume our obligations under the commitment. The commitment to provide the bridge loans expires on February 12, 2000 if the closing of the bridge loans has not occurred by that date. The conditions to closing under the bridge loans include: - the receipt of net proceeds of at least $2.5 billion from this offering; - consummation of the Falcon acquisition and Falcon becoming a party to the bridge loan commitment upon consummation of the Falcon acquisition; - execution and delivery of satisfactory documentation of the bridge loans; - absence of various types of material adverse changes, including material adverse changes relative to us and to Falcon, as well as material adverse changes in the financial and capital markets; - the absence of certain litigation; - Falcon having adequate availability, in Goldman Sachs Credit Partners L.P.'s judgment, under the Falcon credit facilities; - satisfactory completion by the bridge lenders of a due diligence review of Falcon; 196
200 - receipt of certain historical and pro forma financial statements for Falcon; and - receipt of required approvals. Many of these closing conditions are outside of the control of Falcon or us. There can be no assurance that the closing conditions will be met. Under the commitment, the bridge loans will have a term of one year. If the bridge loans have not been repaid in full by the maturity date, and provided there is no default under the bridge loans or Falcon Cable Communications credit facilities, the bridge loans will be automatically converted into nine-year term loans. The events of default for the bridge loans will include a cross-default provision. The specific terms of this provision have not yet been set. The bridge loans will bear interest initially at one month LIBOR plus 400 basis points. The interest rate will increase by 25 basis points at the end of each three month period after the closing of the bridge loans. The bridge loans may be prepaid at any time without penalty. The bridge loans must be repaid with the net proceeds from any public or private offering of debt or equity securities by Falcon or any of its subsidiaries, or any future bank borrowings other than under Falcon Cable Communications credit facilities in effect at the closing date or any future asset sales, subject to customary exceptions. The bridge lenders may require Falcon to repay the bridge loans upon specified changes of control of Falcon or Charter Communications, Inc. FANCH CREDIT FACILITIES. In May 1999, Charter Communications, Inc. entered into the Fanch purchase agreement. As of October 1, 1999, a group of lenders had issued commitments, based on a detailed term sheet, in the aggregate amount of $1.2 billion to the borrower, CC VI Operating, LLC, to be effective on the date that we close our acquisition of Fanch. We intend to borrow approximately $875 million under the Fanch credit facilities to finance a portion of the Fanch purchase price. Upon the closing of the Fanch acquisition, CC VI Operating will own, directly or indirectly, the cable systems we are acquiring. The material closing conditions under the CC VI Operating credit facilities are as follows: - consummation of the Fanch acquisition; - the indebtedness of CC VI Operating not exceeding a specified amount; - absence of material adverse changes relating to the Fanch cable systems being acquired; and - receipt of required approvals. Many of these conditions are outside the control of CC VI Operating or us. There can be no assurance that the closing conditions will be met. These credit facilities have maximum borrowings of $1.2 billion, consisting of: - a revolving facility in the amount of approximately $350 million; - a term loan A in the amount of approximately $450 million; and - a term loan B in the amount of approximately $400 million. 197
201 The revolving facility amortizes beginning in 2004 and ending in May 2008. The term loan A and term loan B facilities amortize beginning in 2003 and ending in May 2008 and November 2008, respectively. The obligations under these facilities are guaranteed by the subsidiaries of CC VI Operating and CC VI Holdings, LLC, CC VI Operating's parent and a subsidiary of Charter Communications Holding Company. The obligations under these credit facilities are secured by pledges of the ownership interests and inter-company obligations of CC VI Operating and its subsidiaries, but are not secured by other assets of CC VI Operating or its subsidiaries. In addition to the foregoing, these credit facilities will permit a supplemental credit facility in the maximum amount of $300 million. This facility may be in the form of an additional term loan or an aggregate increase in the amount of the term loan A or the revolving facility. Upon the effectiveness of the CC VI Operating credit facilities, this supplemental facility will be available, subject to the borrower's ability to obtain additional commitments from lenders. The amortization of the additional term loans under the supplemental credit facility prior to May 2009 shall be limited to 1% per annum of the aggregate principal amount of such additional term loans. The CC VI Operating credit facilities also contain provisions requiring mandatory loan prepayments under specific circumstances, including when significant amounts of assets are sold and the proceeds are not promptly reinvested in assets useful in the business of CC VI Operating. These credit facilities provide CC VI Operating with the following two interest rate options, to which a margin is added: - a base rate option, generally the prime rate of interest; and - an interest rate option rate based on the interbank Eurodollar rate. Interest rates for the CC VI Operating credit facilities, as well as a fee payable on unborrowed amounts available under these facilities, will depend upon performance measured by a leverage ratio, which is the ratio of indebtedness to annualized operating cash flow. Annualized operating cash flow is defined as the immediately preceding quarter's operating cash flow, before management fees, multiplied by four. This leverage ratio is based on the debt of CC VI Operating and its subsidiaries. The interest rate margins for the CC VI Operating credit facilities are as follows: - with respect to the revolving loan facility and term loan A, the margin ranges from 1.0% to 2.25% for Eurodollar loans and from 0.0% to 1.25% for base rate loans; and - with respect to term loan B, the margin ranges from 2.50% to 3.00% for Eurodollar loans and from 1.50% to 2.00% for base rate loans. The CC VI Operating credit facilities contain representations and warranties, affirmative and negative covenants, information requirements, events of default and financial covenants. The events of default for the CC VI Operating credit facilities will include a cross-default provision covering defaults on material debt of CC VI Operating, CC VI Holdings and specified subsidiaries. The financial covenants, which are generally 198
202 tested on a quarterly basis, measure performance against standards set for leverage, debt service coverage, and operating cash flow coverage of cash interest expense. These credit facilities also contain a change of control provision, making it an event of default, and permitting acceleration of the debt, in the event of any of the following: - Mr. Allen, including his estate, heirs and other related entities, fails to maintain a 51% direct or indirect voting and economic interest in CC VI Operating. After consummation of an initial public offering by CC VI Operating or an affiliate of CC VI Operating, this economic interest percentage may be reduced to 25%. - CC VI Operating is no longer a direct or indirect subsidiary of Charter Communications Holding Company. - A change of control occurs under any material indebtedness of CC VI Holdings, CC VI Operating or CC VI Operating's subsidiaries. Various negative covenants place limitations on the ability of CC VI Operating and its subsidiaries to, among other things: - incur debt; - pay dividends; - incur liens; - make acquisitions; - make investments or asset sales; or - enter into transactions with affiliates. Distributions by CC VI Operating under its credit facilities to pay interest on certain indebtedness of CC VI Holdings are generally permitted, except during the existence of a default under the CC VI Operating credit facilities. AVALON CREDIT FACILITIES. As of October 22, 1999, a group of lenders had issued commitments for new credit facilities at Avalon, based on a detailed term sheet, in the aggregate amount of $300 million to lend to Avalon when we close our acquisition of Avalon. Upon the closing of the Avalon acquisition, we will own, directly or indirectly, all of the membership interests in Avalon Cable LLC, the parent company of the Avalon borrowers that own the cable systems we are acquiring. The material closing conditions under the Avalon credit facilities are as follows: - consummation of the Avalon acquisition; - indebtedness of the Avalon borrowers not exceeding a specified amount; - absence of various types of material adverse changes relating to Avalon; and - receipt of required approvals. Many of these closing conditions are outside the control of Avalon or us. There can be no assurance that the closing conditions will be met. 199
203 The new Avalon credit facilities have maximum borrowings of $300 million, consisting of: - a revolving facility in the amount of approximately $175 million; and - a term loan B in the amount of approximately $125 million. We are not assuming debt in connection with the Avalon acquisition. We have received commitments from a group of lenders for credit facilities for Avalon providing for borrowings of up to $300 million, of which we expect to use $169 million to fund a portion of the Avalon purchase price. Amounts available under the revolving facility reduce annually in specified percentages beginning in the fourth year following the closing date of the facility. The term loan B facility amortizes beginning in the fourth year following the closing date. The obligations under these facilities are guaranteed by the subsidiaries and the parent company of the Avalon borrowers. The obligations under the Avalon credit facilities are secured by pledges of the ownership interests and inter-company obligations of the Avalon borrowers and their subsidiaries, but are not secured by other assets of the Avalon borrowers or their subsidiaries. The credit facilities are also secured by a pledge of Avalon Cable LLC's equity interest in the Avalon borrowers. In addition to the foregoing, the Avalon credit facilities provide for a supplemental credit facility in the maximum amount of $75 million. This facility may be in the form of an additional term loan or an aggregate increase in the amount of the revolving facility. Upon the effectiveness of the Avalon credit facilities, this supplemental facility will be available, subject to the borrowers' ability to obtain additional commitments from lenders. The supplemental facility is available to the Avalon borrowers until December 31, 2003, and, if borrowed, the weighted average life and final maturity will not be less than that of the revolving facility. The Avalon credit facilities also contain provisions requiring mandatory loan prepayments under specific circumstances, including when significant amounts of assets are sold and the proceeds are not promptly reinvested in assets useful in the business of the Avalon borrowers. The Avalon credit facilities provide the Avalon borrowers with the following two interest rate options, to which a margin is added: - a base rate option, generally the prime rate of interest; and - an interest rate option based on the interbank Eurodollar rate. Interest rates for the Avalon credit facilities, as well as a fee payable on unborrowed amounts available under these facilities, will depend upon performance measured by a leverage ratio, which is the ratio of indebtedness to annualized operating cash flow. Annualized operating cash flow is defined as the immediately preceding quarter's operating cash flow, before management fees, multiplied by four. This leverage ratio is 200
204 based on the debt of the Avalon borrowers and their subsidiaries. The interest rate margins for the Avalon credit facilities are as follows: - with respect to the revolving loan facility, the margin ranges from 1.0% to 1.875% for Eurodollar loans and from 0.0% to 0.875% for base rate loans; and - with respect to term loan B, the margin ranges from 2.50% to 2.75% for Eurodollar loans and from 1.50% to 1.750% for base rate loans. The Avalon credit facilities contain representations and warranties, affirmative and negative covenants, information requirements, events of default and financial covenants. The events of default for the Avalon credit facilities and supplemental facility will include a cross-default provision for total debt exceeding $20 million of the Avalon borrowers, Avalon Cable LLC and specified subsidiaries. The financial covenants, which are generally tested on a quarterly basis, measure performance against standards set for leverage, debt service coverage, and operating cash flow coverage of cash interest expense. The Avalon credit facilities also contain a change of control provision, making it an event of default, and permitting acceleration of the debt, in the event that Mr. Allen, including his estate, heirs and other related entities, fails to maintain a 25% direct or indirect voting and economic interest in the Avalon borrowers. Various negative covenants place limitations on the ability of the Avalon borrowers and their subsidiaries to, among other things: - incur debt; - pay dividends; - incur liens; - make acquisitions; - make investments or asset sales; or - enter into transactions with affiliates. Distributions by Avalon borrowers under the new credit facilities to pay interest on certain indebtedness of Avalon Cable LLC are generally permitted, except during the existence of a default under the Avalon credit facilities. BRESNAN CREDIT FACILITIES. In connection with its acquisition of Bresnan, we intend to assume and amend the existing Bresnan credit facilities. We cannot assure you that we will be able to do this. If Charter Communications Holding Company assumes and amends these facilities, it will attempt, as it has succeeded with respect to Falcon, to renegotiate the terms of such indebtedness on terms substantially similar or identical to the terms of the senior credit facilities for Charter Operating and increase borrowing availability. In the event it is unable to do so, it will refinance such indebtedness and repay all borrowings outstanding under these credit facilities. However, we cannot assure you that Charter Communications Holding Company will be successful in its effort to assume and amend or to refinance any of such existing senior indebtedness. 201
205 On February 2, 1999, Bresnan entered into a loan agreement providing for borrowings of up to $650 million. The obligations under the Bresnan credit facilities are guaranteed by the restricted subsidiaries of Bresnan. The obligations under the Bresnan credit facilities are secured by pledges of the ownership interests and intercompany obligations of Bresnan, its subsidiaries and its parent company, but are not secured by other assets of Bresnan, its subsidiaries or its parent company. The Bresnan credit facilities consist of: - a reducing revolving loan facility in the amount of $150 million; - a term loan A facility in the amount of $328 million; and - a term loan B facility in the amount of $172 million. The Bresnan credit facilities provide for the amortization of the principal amount of the term loan A facility and the reduction of the revolving loan facility beginning March 31, 2002, with a final maturity date of June 30, 2007. The amortization of the term loan B facility is substantially "back-ended", with more than ninety percent of the principal balance due on the final maturity date of February 2, 2008. The Bresnan credit facilities also provide for an incremental term facility of up to $200 million, which is conditioned upon receipt of additional commitments from lenders. If the incremental term facility becomes available, it may be in the form of revolving loans or term loans, but may not amortize more quickly than the reducing revolving loan facility or the term loan A facility, and may not have a final maturity date earlier than six calendar months after the maturity date of the term loan B facility. The Bresnan credit facilities provide Bresnan with two interest rate options, to which a margin is added: a base rate, generally the prime rate of interest, and an interest rate option based on the interbank eurodollar rate. Interest rate margins for the Bresnan credit facilities depend upon performance measured by a leverage ratio, that is, the ratio of total debt to annualized operating cash flow of Bresnan and its restricted subsidiaries. Annualized operating cash flow is defined as the immediately preceding quarter's operating cash flow multiplied by four. The interest rate margins for the Bresnan credit facilities are as follows: - there is no margin with respect to the revolving loan facility; - with respect to the term loan A facility, the margin ranges from 0.75% to 2.25% for eurodollar loans and from 0.0% to 1.25% for base rate loans; and - with respect to the term loan B facility, the margin ranges from 2.5% to 2.75% for eurodollar loans and from 1.5% to 1.75% for base rate loans. The Bresnan credit facilities contain various representations and warranties, affirmative and negative covenants, information requirements, events of default and financial covenants. The events of default for the Bresnan credit facilities include a cross-default provision that is triggered by any acceleration of the maturity of debt of Bresnan, its parent and specified subsidiaries in a total amount of at least $15 million or the nonpayment of debt with this principal amount. The financial covenants, which are generally tested on a quarterly basis, measure performance against standards set for 202
206 leverage, debt service coverage, and operating cash flow coverage of cash interest expense. Certain negative covenants place limitations on the ability of Bresnan and its restricted subsidiaries to, among other things: - incur debt; - pay dividends; - incur liens; - make acquisitions; - make investments or asset sales; or - enter into transactions with affiliates. Acquisitions may be made by Bresnan or its restricted subsidiaries without the consent of the lenders so long as the leverage ratio for total debt is less than or equal to 5.50 to 1.00, after giving effect to the acquisition. Other investments may only be made on a limited basis within certain dollar amounts or "baskets". The Bresnan credit facilities contain a change of control provision, making it an event of default, and permitting acceleration of the debt, in the event of any of the following: - TCI Communications, including its affiliates, fails to own at least 25% of the membership interests of Bresnan; - entities affiliated with the Blackstone Funds fail to own at least 20% of the membership interest in Bresnan prior to January 29, 2002; or - after January 29, 2000, if the entities affiliated with the Blackstone Funds fail to own at least 20% of the membership interests in Bresnan, any party(other than Bresnan Communications, Inc. or its affiliates), owns a greater percentage interest in Bresnan than the percentage interest held by TCI Communications and its affiliates. The Bresnan credit facilities also contain an asset sale provision, requiring the borrower to use the net proceeds from any asset sales in excess of $10 million: - to repay outstanding principal under the Bresnan facilities; - for permitted acquisitions; or - for the purchase of similar assets. The Bresnan credit facilities also require that the company be managed by a Bresnan management company, BCI (USA), LLC. The foregoing provisions, among others, will require material amendments to, or a refinancing of, the Bresnan credit facilities upon the acquisition of Bresnan. As of June 30, 1999, there was $500 million total principal amount outstanding under the Bresnan credit facilities. 203
207 EXISTING PUBLIC DEBT THE CHARTER HOLDINGS NOTES. The original 8.250% Charter Holdings notes, 8.625% Charter Holdings notes and 9.920% Charter Holdings notes and the new 8.250% Charter Holdings notes, 8.625% Charter Holdings notes and 9.920% Charter Holdings notes were issued under three separate indentures, each dated as of March 17, 1999, among Charter Holdings and Charter Communications Holdings Capital Corporation, as the issuers, Marcus Cable Holdings, LLC, as guarantor and Harris Trust and Savings Bank, as trustee. The issuers of the original Charter Holdings notes recently exchanged these notes for new Charter Holdings notes with substantially similar terms, except that the new Charter Holdings notes are registered under the Securities Act and, therefore, do not bear legends restricting their transfer. At the time of the sale of the original Charter Holdings notes, Marcus Holdings guaranteed the Charter Holdings notes and issued a promissory note to Charter Holdings for certain amounts loaned by Charter Holdings to subsidiaries of Marcus Holdings. At the time of the merger of Charter Holdings with Marcus Holdings, both the guarantee and the promissory note automatically became ineffective under the terms of the Charter Holdings indentures. Consequently, all references in the Charter Holdings indentures and the Charter Holdings notes to the guarantor, the guarantee or the promissory note, and all related matters, such as the pledges of any collateral, became inapplicable. The Charter Holdings notes are general unsecured obligations of the issuers. The 8.250% Charter Holdings notes mature on April 1, 2007 and as of June 30, 1999, there was $600 million in total principal amount outstanding. The 8.625% Charter Holdings notes will mature on April 1, 2009 and as of June 30, 1999, there was $1.5 billion in total principal amount currently outstanding. The 9.920% Charter Holdings discount notes mature on April 1, 2011 and as of June 30, 1999, the total accreted value was $931.6 million. Net proceeds from the sale of Charter Holdings discount notes were $905.6 million. Cash interest on the 9.920% Charter Holdings notes will not accrue prior to April 1, 2004. The Charter Holdings notes are senior debts of the co-issuers. They rank equally with the current and future unsecured and unsubordinated debt, including trade payables, of Charter Holdings. The issuers will not have the right to redeem the 8.250% Charter Holdings notes prior to their maturity date on April 1, 2007. However, before April 1, 2002, the issuers may redeem up to 35% of each of the 8.625% Charter Holdings notes and the 9.920% Charter Holdings notes with the proceeds of certain offerings of equity securities. In addition, on or after April 1, 2004, the issuers may redeem some or all of the 8.625% Charter Holdings notes and the 9.920% Charter Holdings notes at any time. In the event of a specified change of control event, the issuers must offer to repurchase any then-outstanding Charter Holdings notes at 101% of their principal amount or accreted value, as applicable, plus accrued and unpaid interest. The consummation of the offering will not trigger any change of control provisions under the Charter Holdings notes. 204
208 The indentures governing the Charter Holdings notes also contain certain events of default, affirmative covenants and negative covenants. The events of default for the Charter Holdings notes include a cross-default provision triggered by the failure of Charter Holdings or specified subsidiaries to make payment on debt with a total principal amount exceeding $100 million or the acceleration of debt of this amount prior to its maturity date. Subject to certain important exceptions, the indentures governing the Charter Holdings notes, among other things, restrict the ability of the issuers and certain of their subsidiaries to: - incur additional debt; - create specified liens; - pay dividends on stock or repurchase stock; - make investments; - sell all or substantially all of our assets or merge with or into other companies; - sell assets; - in the case of our restricted subsidiaries, create or permit to exist dividend or payment restrictions with respect to us; and - engage in certain transactions with affiliates. RENAISSANCE NOTES. The original Renaissance notes and new Renaissance notes were issued by Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and Renaissance Media Capital Corporation, with Renaissance Media Group LLC as guarantor and the United States Trust Company of New York as trustee. Renaissance Media Group LLC, which is the direct or indirect parent company of these issuers, is now a subsidiary of Charter Operating. The Renaissance notes and the Renaissance guarantee are unsecured, unsubordinated debt of the issuers and the guarantor, respectively. In October 1998, the issuers exchanged $163.175 million of the original issued and outstanding 10% senior discount notes due 2008 for an equivalent value of 10% senior discount notes due April 15, 2008. The form and terms of the new Renaissance notes are the same in all material respects as the form and terms of the original Renaissance notes except that the issuance of the new Renaissance notes was registered under the Securities Act. There will not be any payment of interest in respect of the Renaissance notes prior to October 15, 2003. Interest on the Renaissance notes shall be paid semi-annually in cash at a rate of 10% per annum beginning on October 15, 2003. The Renaissance notes are redeemable at the option of the issuer, in whole or in part, at any time on or after April 15, 2003, initially at 105% of their principal amount at maturity, plus accrued interest, declining to 100% of the principal amount at maturity, plus accrued interest, on or after April 15, 2006. In addition, at any time prior to April 15, 2001, the issuers may redeem up to 35% of the original total principal amount at maturity of the Renaissance notes with the proceeds of one or more sales of capital stock at 110% of their accreted value on the redemption date, provided that after any such redemption at least 205
209 $106 million total principal amount at maturity of Renaissance notes remains outstanding. Our acquisition of Renaissance triggered change of control provisions of the Renaissance notes that required us to offer to purchase the Renaissance notes at a purchase price equal to 101% of their accreted value on the date of the purchase, plus accrued interest, if any. In May 1999, we made an offer to repurchase the Renaissance notes, and holders of Renaissance notes representing 30% of the total principal amount outstanding at maturity tendered their Renaissance notes for repurchase. The indenture contains certain covenants that restrict the ability of the issuers and their restricted subsidiaries to: - incur additional debt; - create liens; - engage in sale-leaseback transactions; - pay dividends or make contributions in respect of their capital stock; - redeem capital stock; - make investments or certain other restricted payments; - sell assets; - issue or sell stock of restricted subsidiaries; - enter into transactions with stockholders or affiliates; or - effect a consolidation or merger. The events of default for the Renaissance notes include a cross-default provision triggered by the failure to make payment at maturity, or an event that causes the holder to declare the debt to be payable prior to its maturity of debt of Renaissance Media Group LLC or any of its specified subsidiaries if this debt has a total outstanding principal amount of at least $10 million. As of June 30, 1999, there was outstanding $114.4 million, total principal amount at maturity of Renaissance notes, with an accreted value of $82.6 million. RIFKIN NOTES. The Rifkin notes were issued by Rifkin Acquisition Partners, and Rifkin Acquisition Capital Corp. as co-issuers, subsidiaries of the partnership other than Rifkin Acquisition Capital Corp. as guarantors, and Marine Midland Bank as trustee. In March 1996, the issuers exchanged $125 million aggregate principal amount of the originally issued and outstanding 11 1/8% senior subordinated notes due 2006 for an equivalent value of new 11 1/8% senior subordinated notes due 2006. The form and terms of the new Rifkin notes were substantially identical to the form and terms of the original Rifkin notes except that the new Rifkin notes have been registered under the Securities Act and, therefore, do not bear legends restricting their transfer. Interest on the Rifkin notes accrues at the rate of 11 1/8% per year and is payable in cash semi-annually in arrears on January 15 and July 15 of each year. 206
210 The Rifkin notes are redeemable at the issuers' option, in whole or in part, at any time on or after January 15, 2001, at 105.563% of the principal amount together with accrued and unpaid interest, if any, to the date of the redemption. This redemption premium declines over time to 100% of the principal amount, plus accrued and unpaid interest, if any, on or after January 15, 2005. In September 1999, we commenced an offer to purchase any and all of the outstanding Rifkin notes, together with the Monroe Rifkin note, for cash, at a premium over the outstanding principal amounts. In conjunction with this tender offer, we sought and obtained the consent of a majority in principal amount of the holders of the outstanding Rifkin notes to proposed amendments to the indenture governing the Rifkin notes, which eliminated substantially all of the restrictive covenants, including any cross-default provisions. We purchased notes with a total outstanding principal amount of $124.1 million for a total of $140.6 million, including a consent fee of $30 per $1,000 of outstanding principal amount to the holders who delivered timely consents to amending the indenture. We repurchased the promissory note payable to Monroe Rifkin for $3.4 million. Rifkin notes with a total principal amount of approximately $900,000 remain outstanding. The Rifkin notes are jointly and severally guaranteed on a senior subordinated basis by specified subsidiaries of the issuers. The guarantees of the Rifkin notes are general unsecured obligations of the guarantors and will be subordinated in right of payment to all existing and future senior debt of the guarantors. Among other restrictions, the indentures governing the Rifkin notes contain covenants which limit the ability of the issuers and specified subsidiaries to: - assume additional debt and issue specified additional equity interests; - make restricted payments; - enter into transactions with affiliates; - incur liens; - make specified contributions and payments to Rifkin Acquisition Partners; - transfer specified assets to subsidiaries; and - merge, consolidate, and transfer all or substantially all of the assets of Rifkin Acquisition Partners to another person. As of June 30, 1999, there was $125.0 million total principal outstanding on the Rifkin notes. As of October 15, 1999, Rifkin notes with a total principal amount of approximately $900,000 remained outstanding. PUBLIC DEBT TO BE ASSUMED OR REPURCHASED IN CONNECTION WITH OUR PENDING ACQUISITIONS THE FALCON DEBENTURES. The Falcon debentures, consisting of 8.375% Series A senior debentures due 2010 and 9.285% Series A senior discount debentures due 2010, were issued by Falcon Holding Group, L.P. and Falcon Funding Corporation on April 3, 1998. On August 5, 1998, the issuers proposed an exchange offer whereby the outstanding 207
211 $375 million Series A senior debentures and $435.3 million Series A senior discount debentures were exchanged for an equivalent value of Series B senior debentures and Series B senior discount debentures. The form and terms of the new debentures are the same as the form and terms of the corresponding original Falcon debentures except that the issuance of the new debentures was registered under the Securities Act of 1933 and, therefore, the new debentures do not bear legends restricting their transfer. The Falcon debentures will mature on April 15, 2010. Interest on the Falcon debentures accrues from the issue date or from the most recent interest payment date to which interest has been paid or provided for, payable semiannually on April 15 and October 15 of each year. No interest on the Series B senior discount debentures will be paid prior to April 15, 2003. The issuers may, however, elect to commence accrual of cash interest on any payment date, in which case the outstanding principal amount at maturity of Series B senior discount debenture will be reduced to the accreted value of such Series B senior discount debenture as of such interest payment date and the interest will be payable semiannually in cash on each interest payment date thereafter. The Falcon debentures will be redeemable at the option of the issuers, in whole or in part, at any time on or after April 15, 2003, at a premium and, in each case, plus accrued and unpaid interest, if any, to the date of redemption. This premium declines over time to 100% of their principal amount, plus accrued and unpaid interest, if any, on or after April 15, 2006. In addition, at any time prior to April 15, 2001, the issuers may redeem, at a premium, up to 35% of the total principal amount or accreted value, as applicable, of the Falcon debentures with the net cash proceeds of specified equity issuances, in each case plus accrued and unpaid interest, if any, to the date of redemption. Following a redemption, at least 65% in total principal amount at maturity of the Falcon senior discount debentures and $195 million of the total principal amount of Falcon senior debentures must remain outstanding. In the event of specified change of control events, the holders of the Falcon debentures will have the right to require the issuers to purchase their Falcon debentures at a price equal to 101% of their principal amount or accreted value, as applicable, plus accrued and unpaid interest, if any, to the date of purchase. The Falcon acquisition will give rise to this right. We expect the Falcon debentures to be tendered. We intend to finance required repayments of Falcon debentures with debt financing that has not yet been arranged. We have obtained a commitment for a Falcon bridge loan facility providing for borrowings up to $750 million to finance these repayments until this additional debt financing can be arranged or if this additional debt financing is unavailable. The Falcon debentures are joint and several senior unsecured obligations of the issuers. The Falcon debentures are the obligations of the issuers only, and the issuers' subsidiaries do not have any obligation to pay any amounts due under the Falcon debentures. Therefore, the Falcon debentures are effectively subordinated to all existing and future liabilities of the issuers' subsidiaries. 208
212 Among other restrictions, the indentures governing the Falcon debentures contain certain limitations on the issuers' and their specified subsidiaries' ability to: - incur additional debt; - make restricted payments; - create certain liens; - sell all or substantially all of their assets or merge with or into other companies; - invest in unrestricted subsidiaries and affiliates; - pay dividends or make any other distributions on any capital stock; and - guarantee any debt which is equal or subordinate in right of payment to the Falcon debentures. The events of default for the Falcon debentures include a cross-default provision triggered by the acceleration of the maturity, or nonpayment of debt, by Falcon Holding Group, L.P. or any specified subsidiary in excess of $25 million. As of June 30, 1999, there was $375.0 million total principal amount outstanding on the Falcon senior debentures, and the accreted value of the senior discount debentures was $308.7 million. THE FALCON SUBORDINATED NOTES. On October 21, 1991, Falcon Telecable, L.P., a subsidiary of Falcon Holding Group, L.P. issued $15.0 million aggregate principal amount of 11.56% subordinated notes due 2001. Interest is payable semi-annually on March 31 and September 30 of each year. The Falcon subordinated notes are redeemable at the issuer's option, in whole or in part, at any time in whole or part on or after June 30, 1993, at 100% of their principal amount, plus accrued interest to the date of redemption and a make-whole premium. Among other restrictions, the note purchase agreement governing the Falcon subordinated notes limits the activities of the issuer and its subsidiaries to: - incur additional debt; - pay dividends or make other restricted payments; - enter into transactions with affiliates; - create liens; - incur additional debt; and - sell assets or subsidiary stock. In addition, the terms of the note purchase agreement prohibits the issuer from being acquired by an unaffiliated entity. The events of default for the Falcon subordinated notes include a cross-default provision that is triggered by the failure to pay the principal of debt of Falcon Telecable or specified subsidiaries in a total principal amount in excess of $1 million, or any event which results in acceleration of the maturity of this debt. 209
213 Our acquisition of Falcon will constitute an event of default under the note purchase agreement and will give rise, if written notice is given by holders of a majority in outstanding amount of notes, to an obligation to repay all outstanding principal and accrued interest on the Falcon subordinated notes, plus a specified premium, within 30 days of the receipt of the notice. Absent receipt of a waiver by the noteholders of the change of control default, which we do not expect to receive, we expect to repay at the time of the closing of the Falcon acquisition, the $15 million principal amount of the notes, plus accrued interest and a specified premium, with available sources of funds. As of June 30, 1999, $15.0 million principal amount of the Falcon subordinated notes was outstanding. THE AVALON 11 7/8% NOTES. On December 3, 1998, Avalon Cable LLC and Avalon Cable Holdings Finance, Inc. jointly issued $196 million total principal amount at maturity of 11 7/8% senior discount notes due December 1, 2008. On July 22, 1999, the issuers exchanged $196 million of the original issued and outstanding 11 7/8% senior discount notes for an equivalent amount of new 11 7/8% senior discount notes due December 1, 2008. The form and terms of the new Avalon 11 7/8% notes are substantially identical to the original Avalon 11 7/8% notes except that they will be registered under the Securities Act of 1933 and, therefore, are not subject to the same transfer restrictions. The issuers received no proceeds from the exchange offer. The Avalon 11 7/8% notes are guaranteed by Avalon Cable of Michigan, Inc., an equity holder in Avalon Cable LLC, and its sole stockholder, Avalon Cable of Michigan Holdings, Inc. There will be no current payments of cash interest on the Avalon 11 7/8% notes before December 1, 2003. The new Avalon 11 7/8% notes accrete in value at a rate of 11 7/8% per annum, compounded semi-annually, to an aggregate principal amount of $196 million on December 1, 2003. After December 1, 2003, cash interest on the Avalon 11 7/8% notes: - will accrue at the rate of 11 7/8% per year on the principal amount at maturity of the new notes; and - will be payable semi-annually in arrears on June 1 and December 1 of each year, commencing June 1, 2004. On December 1, 2003, the issuers will be required to redeem an amount equal to $369.79 per $1,000 in principal amount at maturity of each Avalon 11 7/8% note, on a pro rata basis at a redemption price of 100% of the principal amount at maturity of the Avalon 11 7/8% notes so redeemed. On or after December 1, 2003, the issuers may redeem the Avalon 11 7/8% notes, in whole or in part. Before December 1, 2001, the issuers may redeem up to 35% of the total principal amount at maturity of the Avalon 11 7/8% notes with the proceeds of one or more equity offerings and/or strategic equity investments. In the event of specified change of control events, holders of the Avalon 11 7/8% notes will have the right to sell their Avalon 11 7/8% notes to the issuers at 101% of: 210
214 - the accreted value of the Avalon 11 7/8% notes in the case of repurchases of Avalon notes prior to December 1, 2003; or - the total principal amount of the Avalon 11 7/8% notes in the case of repurchases of Avalon 11 7/8% notes on or after December 1, 2003, plus accrued and unpaid interest and liquidated damages, if any, to the date of purchase. Our acquisition of Avalon will trigger this right. Among other restrictions, the indenture governing the Avalon 11 7/8% notes limits the ability of the issuers and their specified subsidiaries to: - incur additional debt; - pay dividends or make specified other restricted payments; - enter into transactions with affiliates; - sell assets or subsidiary stock; - create liens; - restrict dividends or other payments from restricted subsidiaries; - merge, consolidate or sell all or substantially all of their combined assets; and - with respect to restricted subsidiaries, issue capital stock. The Avalon 11 7/8% notes contain events of default that include a cross-default provision triggered by the failure of Avalon Cable LLC, Avalon Cable Holdings Finance, Inc. or any specified subsidiary to make payment on debt with total principal amount of $5 million or more or the acceleration of debt of this amount prior to maturity. As of June 30, 1999, the total accreted value of the outstanding Avalon 11 7/8% notes was $118.1 million. THE AVALON 9 3/8% NOTES. On December 3, 1998, Avalon Cable of New England LLC, Avalon Cable Finance, Inc. and Avalon Cable of Michigan, Inc. jointly issued $150 million total principal amount at maturity of 9 3/8% senior subordinated notes due December 1, 2008. On July 22, 1999, the issuers exchanged $150 million of the original issued and outstanding 9 3/8% senior subordinated notes for an equivalent amount of new 9 3/8% senior subordinated notes due December 1, 2008. The form and terms of the new Avalon 9 3/8% notes are substantially the same as the form and terms of the original Avalon 9 3/8% notes except that the new Avalon 9 3/8% notes will be registered under the federal securities laws and will not bear a legend restricting the transfer thereof. Interest on the Avalon 9 3/8% notes accrues at a rate of 9.375% per annum from the date of issuance and is payable semiannually in arrears on June 1 and December 1. The Avalon 9 3/8% notes are guaranteed by Avalon Cable of Michigan, Inc. Avalon Cable of Michigan, Inc., however, does not have any significant assets other than its interest in Avalon Cable LLC. On or after December 1, 2003, the issuers may redeem the Avalon 9 3/8% notes in whole or in part. Until December 1, 2001, the issuers may redeem up to 35% of the total principal amount of the Avalon 9 3/8% notes at a redemption price equal to 109.375% of 211
215 the principal amount thereof, plus accrued and unpaid interest, if any, and liquidated damages, if any, with the net cash proceeds of a strategic equity investment and/or an equity offering. Following the redemption, at least 65% of the total principal amount of the Avalon 9 3/8% notes must remain outstanding after each redemption. Upon the occurrence of specified change of control events or the sale of certain assets, holders of the Avalon 9 3/8% notes will have the opportunity to sell their Avalon 9 3/8% notes to the issuers at 101% of their face amount, plus accrued and unpaid interest and liquidated damages, if any, to the date of purchase. Our acquisition of Avalon will trigger this right. The Avalon 9 3/8% notes are general unsecured obligations of the issuers and are subordinate in right of payment to all existing and future senior debt of the issuers. The Avalon 9 3/8% notes rank equal in right of payment to any senior subordinated debt of the issuers and rank senior in the right of payment to all subordinated debt of the issuers. Among other restrictions, the indenture governing the new Avalon 9 3/8% notes limits the activities of the issuers and of their specified subsidiaries to: - incur additional debt; - pay dividends or make other restricted payments; - enter into transactions with affiliates; - sell assets or subsidiary stock; - create liens; - merge, consolidate or sell all or substantially all or their combined assets; - incur debt that is senior to the Avalon 9 3/8% notes but junior to senior debt; and - issue capital stock. The Avalon 9 3/8% notes contain events of default that include a cross-default provision triggered by the failure of Avalon Cable of New England, LLC, Avalon Cable Finance, Inc., Avalon Cable of Michigan, Inc. or any specified subsidiary to make payment on debt with an aggregate principal amount of $5 million or more or the acceleration of debt of this amount prior to maturity. As of June 30, 1999, there was $150.0 million total principal outstanding on the Avalon 9 3/8% notes. THE BRESNAN NOTES. On February 2, 1999, Bresnan Communications Group LLC and Bresnan Capital Corporation jointly issued $170 million total principal amount of 8% Series A senior notes due 2009 and $275 million total principal amount at maturity of 9 1/4% Series A senior discount notes due 2009. In September 1999, the issuers of the Bresnan notes completed an exchange offer in which Bresnan senior notes and senior discount notes representing 100% of the principal amount of all Bresnan notes outstanding were exchanged for new notes. The form and terms of the new Bresnan notes are the same in all material respects as the form and terms of the original Bresnan notes except that the new Bresnan notes have been registered under the federal securities laws and will not bear a legend restricting their transfer. 212
216 The Bresnan senior notes bear interest at 8% per year from the original issue date or from the most recent date to which interest has been paid or provided for, payable semiannually on February 1 and August 1 of each year, commencing on August 1, 1999. The Bresnan senior discount notes bear interest at 9 1/4% per year, compounded semiannually, to a total principal amount of $275 million by February 1, 2004, unless the issuers elect to accrue interest on or after February 1, 2002. On and after August 1, 2004, interest on the Bresnan senior discount notes will accrue at a rate of 9 1/4% per year and will be payable in cash semiannually in arrears on February 1 and August 1. The Bresnan senior notes are not redeemable prior to February 1, 2004. During the year 2004, the Bresnan senior notes are redeemable at 104.00% of the principal amount plus accrued and unpaid interest. The premium decreases to 102.667% in 2005, 101.33% in 2006 and 100% on or after February 1, 2007. The Bresnan senior discount notes are not redeemable prior to February 1, 2004. During the year 2004, the Bresnan senior discount notes will be redeemable at 104.625% of their accreted value plus accrued and unpaid interest. The premium decreases to 103.083% in 2005, 101.542% in 2006 and 100% in 2007. At any time prior to February 1, 2002, the issuers may redeem up to 35% of the total principal amount of the Bresnan senior notes at a redemption price equal to 108% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of redemption with the net cash proceeds of one or more equity offerings. Following such redemption, at least 65% of the total principal amount of the Bresnan senior notes must remain outstanding. At any time prior to February 1, 2002, the issuers may also redeem up to 35% of the total principal amount at maturity of the Bresnan senior discount notes at a redemption price equal to 109.250% of the accreted value thereof plus accrued and unpaid interest, if any, to the date of redemption, with the net cash proceeds of one or more equity offerings. Following such redemption, at least 65% of the total principal amount of the Bresnan senior discount notes must remain outstanding. The Bresnan notes will be senior unsecured obligations of the issuers and will rank equal in right of payment with all existing and future senior debt of and will be senior in right of payment to all its existing and future subordinated debt. Bresnan Capital Corporation has no, and the terms of the indenture governing the Bresnan notes prohibit it from having any, obligations other than the Bresnan notes. Upon the occurrence of specified change of control events, each holder of Bresnan notes shall have the right to require the issuers to purchase all or any part of such holder's notes at a purchase price of 101% of the principal amount in the case of the Bresnan senior notes, and 101% of the accreted value thereof in the case of the Bresnan senior discount notes, plus accrued and unpaid interest, if any, to the purchase date. Our acquisition of Bresnan will trigger this right. We expect that the Bresnan notes will be tendered and that we will repurchase the Bresnan notes with borrowings under credit facilities to be arranged at Bresnan. 213
217 Among other restrictions, the indenture governing the Bresnan notes limits the ability of Bresnan Communications Group LLC and its specified subsidiaries to: - incur additional debt; - make specified restricted payments; - create liens; - create or permit any restrictions on the payment of dividends or other distributions to Bresnan Communications Group LLC; - guarantee debt; - consolidate with, merge into or transfer all or substantially all of their assets; - sell assets; and - transact business with their affiliates. The events of default for the Bresnan notes include a cross-default provision that is triggered by any acceleration of the maturity of debt in a total amount in excess of $15 million of Bresnan or the specified subsidiaries of Bresnan or the failure to pay debt in this amount at final maturity. As of June 30, 1999, there was $170.0 million total principal outstanding on the Bresnan senior notes and the accreted value of the outstanding Bresnan senior discount notes was $181.8 million. 214
218 DESCRIPTION OF CAPITAL STOCK AND MEMBERSHIP UNITS GENERAL Upon the completion of the offering, the capital stock of Charter Communications, Inc. and the provisions of Charter Communications, Inc.'s restated certificate of incorporation and bylaws will be as described below. These summaries are qualified by reference to the restated certificate of incorporation and the bylaws, copies of which have been filed with the Securities and Exchange Commission as exhibits to our registration statement, of which this prospectus forms a part. Our authorized capital stock will consist of 1.75 billion shares of Class A common stock, par value $.001 per share, 750 million shares of Class B common stock, par value $.001 per share, and 250 million shares of preferred stock, par value $.001 per share. Charter Communications, Inc.'s restated certificate of incorporation and Charter Communications Holding Company's limited liability company agreement contain provisions that are designed to cause the number of shares of common stock of Charter Communications, Inc. that are outstanding to equal the number of common membership units of Charter Communication Holding Company owned by Charter Communications, Inc. and to cause the value of a share of common stock to be equal to the value of a common membership unit. These provisions are meant to allow a holder of common stock of Charter Communications, Inc. to easily understand the economic interest that such holder's common shares represent of Charter Communications Holding Company's business. In particular, provisions in Charter Communications, Inc.'s restated certificate of incorporation provide that: (1) at all times the number of shares of common stock of Charter Communications, Inc. outstanding will be equal to the number of Charter Communications Holding Company common membership units owned by Charter Communications, Inc.; (2) Charter Communications, Inc. will not hold any assets other than, among other allowable assets: - working capital and cash held for the payment of current obligations and receivables from Charter Communications Holding Company; - common membership units of Charter Communications Holding Company; - obligations and equity interests of Charter Communications Holding Company that correspond to obligations and equity interests issued by Charter Communications, Inc.; and - assets subject to an existing obligation to contribute such assets in exchange for membership units of Charter Communications Holding Company; and (3) Charter Communications, Inc. will not borrow any money or enter into any capital lease unless Charter Communications Holding Company enters into the 215
219 same arrangements with Charter Communications, Inc. so that Charter Communications, Inc.'s liability flows through to Charter Communications Holding Company. Provisions in Charter Communications Holding Company's limited liability company agreement provide that upon the contribution by Charter Communications, Inc. of assets acquired through the issuance of common stock by Charter Communications, Inc., Charter Communications Holding Company will issue to Charter Communications, Inc. an equal number of common membership units as Charter Communications, Inc. issued shares of common stock. In the event of the contribution by Charter Communications, Inc. of assets acquired through the issuance of indebtedness or preferred interests of Charter Communications, Inc., Charter Communications Holding Company will issue to Charter Communications, Inc. a corresponding obligation to allow Charter Communications, Inc. to pass through to Charter Communications Holding Company these liabilities or preferred interests. COMMON STOCK As of the completion of the offering, there will be 170,000,000 shares of Class A common stock issued and outstanding and 50,000 shares of Class B common stock issued and outstanding. If, as described below, all shares of Class B common stock convert to shares of Class A common stock as a result of dispositions by Mr. Allen and his affiliates, the holders of Class A common stock will be entitled to elect all members of the board of directors, other than any members elected separately by the holders of any preferred shares. VOTING RIGHTS. The holders of Class A common stock and Class B common stock generally have identical rights, except: - each Class A common stockholder is entitled to one vote per share; and - each Class B common stockholder is entitled to a number of votes based on the number of outstanding Class B common stock and membership units exchangeable for Class B common stock. For example, Mr. Allen will be entitled to ten votes for each share of Class B common stock held by him or his affiliates and ten votes for each membership unit held by him or his affiliates; and - the Class B common stockholders have the sole power to vote to amend or repeal the provisions of Charter Communications, Inc.'s restated certificate of incorporation relating to: (1) the activities in which Charter Communications, Inc. may engage; (2) the required ratio of outstanding shares of common stock to outstanding membership units owned by Charter Communications, Inc.; and (3) the restrictions on the assets and liabilities that Charter Communications, Inc. may hold. The effect of the provisions described in the final bullet point is that holders of Class A common stock will have no right to vote on these matters. These provisions 216
220 would allow Mr. Allen, for example, to amend the restated certificate of incorporation to permit Charter Communications, Inc. to engage in currently prohibited business activities without having to seek the approval of holders of Class A common stock. The voting rights relating to the election of Charter Communications, Inc.'s board of directors are as follows: - The Class B common stockholders, voting separately as a class, are entitled to elect all but one member of Charter Communications, Inc.'s board of directors. - Class A and Class B common stockholders, voting together as one class, are entitled to elect the remaining member of Charter Communications, Inc.'s board of directors who is not elected by the Class B common stockholders. - Class A common stockholders and Class B common stockholders are not entitled to cumulate their votes in the election of directors. - In addition, if Charter Communications, Inc. issues any series of preferred stock that entitles holders to elect directors, the holders of such series of preferred stock may be able to vote for directors if provided in the instrument creating such preferred stock. Other than the election of directors and any matters where Delaware law or Charter Communications, Inc.'s restated certificate of incorporation or bylaws requires otherwise, all matters to be voted on by stockholders must be approved by a majority of the votes cast by the holders of shares of Class A common stockholders and Class B common stockholders present in person or represented by proxy, voting together as a single class, subject to any voting rights granted to holders of any preferred stock. Amendments to Charter Communications, Inc.'s restated certificate of incorporation that would adversely alter or change the powers, preferences or special rights of the Class A common stock or the Class B common stock also must be approved by a majority of the votes entitled to be cast by the holders of the outstanding shares of the affected class, voting as a separate class. In addition, the following actions by Charter Communications, Inc. must be approved by the affirmative vote of the holders of at least a majority of the voting power of the outstanding Class B common stock, voting as a separate class: - the issuance of any Class B common stock other than to Mr. Allen and his affiliates and other than pursuant to specified stock splits and dividends; - the issuance of any stock of Charter Communications, Inc. other than Class A common stock (and other than Class B common stock as described above); and - the amendment, modification or repeal of any provision of its restated certificate of incorporation relating to capital stock or the removal of directors. Charter Communications, Inc. will lose its rights to manage the business of Charter Communications Holding Company and Charter Investment, Inc. will become the sole 217
221 manager of Charter Communications Holding Company if at any time a court holds that the holders of the Class B common stock no longer: - have the number of votes per share of Class B common stock described above; - have the right to elect, voting separately as a class, all but one member of Charter Communications, Inc.'s board of directors, except for any directors elected separately by the holders of preferred stock; or - have the right to vote as a separate class on matters that adversely affect the Class B common stock with respect to: (1) the issuance of equity securities of Charter Communications, Inc. other than the Class A common stock; or (2) the voting power of the Class B common stock. These provisions are contained in the limited liability company agreement of Charter Communications Holding Company. The Class B common stock could lose these rights if a holder of Class A common stock successfully challenges in a court proceeding the voting rights of the Class B common stock. In any of these circumstances, Charter Communications, Inc. would also lose its 100% voting control of Charter Communications Holding Company as provided in Charter Communications Holding Company's limited liability company agreement. These provisions exist to assure Mr. Allen that he will be able to control Charter Communications Holding Company in the event he was no longer able to control Charter Communications, Inc. through his ownership of Class B common stock. These events could have a material adverse impact on our business and the market price of the Class A common stock. See "Risk Factors -- Our Structure". DIVIDENDS. Holders of Class A common stock and Class B common stock will share ratably (based on the number of shares of common stock held) in any dividend declared by Charter Communications, Inc.'s board of directors, subject to any preferential rights of any outstanding preferred stock. Dividends consisting of shares of Class A common stock and Class B common stock may be paid only as follows: - shares of Class A common stock may be paid only to holders of Class A common stock; - shares of Class B common stock may be paid only to holders of Class B common stock; and - the number of shares of each class of common stock payable per share of such class of common stock shall be equal in number. Charter Communications, Inc.'s restated certificate of incorporation provides that Charter Communications, Inc. may not pay a stock dividend unless the number of outstanding Charter Communications Holding Company common membership units are adjusted accordingly. This provision is designed to maintain the equal value between shares of common stock and membership units and the one-to-one exchange ratio. 218
222 CONVERSION OF CLASS B COMMON STOCK. Each share of outstanding Class B common stock will automatically convert into one share of Class A common stock if, at any time, Mr. Allen or any of his affiliates sells any shares of common stock of Charter Communications, Inc. or membership units of Charter Communications Holding Company and as a result of such sale, Mr. Allen and his affiliates no longer own directly and indirectly common stock and other equity interests in Charter Communications, Inc. and membership units in Charter Communications Holding Company that in total represent at least: - 20% of the sum of the values, as of the date of this offering, of the shares of Class B common stock directly or indirectly owned by Mr. Allen and his affiliates and the shares of Class B common stock for which outstanding Charter Communications Holding Company membership units directly or indirectly owned by Mr. Allen and his affiliates are exchangeable, and - 5% of the sum of the values, calculated as of the date of such sale, of shares of outstanding common stock and other equity interests in Charter Communications, Inc. and the shares of Charter Communications, Inc. common stock for which outstanding Charter Communications Holding Company membership units are exchangeable. These provisions exist to assure that Mr. Allen will no longer be able to control Charter Communications, Inc. if after sales of his equity interests he owns an insignificant economic interest in our business. The conversion of all Class B common stock in accordance with these provisions would not trigger Charter Communications Holding Company's limited liability company agreement provisions described above whereby Charter Communications, Inc. would lose its management rights and special voting rights relating to Charter Communications Holding Company in the event of an adverse determination of a court affecting the rights of the Class B common stock. Each holder of a share of Class B common stock has the right to convert such share into one share of Class A common stock at any time on a one-for-one basis. If a Class B common stockholder transfers any shares of Class B common stock to a person other than an authorized Class B common stockholder, these shares of Class B common stock will automatically convert into shares of Class A common stock. Authorized Class B common stockholders are Paul G. Allen, entities controlled by Mr. Allen, Mr. Allen's estate, any organization qualified under Section 501(c)(3) of the Internal Revenue Code that is Mr. Allen's beneficiary upon his death and certain trusts established by or for the benefit of Mr. Allen. In this context, "controlled" means the ownership of more than 50% of the voting power and economic interest of an entity and "transfer" means the transfer of record or beneficial ownership of any such share of Class B common stock. OTHER RIGHTS. Shares of Class A common stock and Class B common stock will be treated equally in the event of any merger or consolidation of Charter Communications, Inc. so that: - each class of common stockholders will receive per share the same kind and amount of capital stock, securities, cash and/or other property received by any 219
223 other class of common stockholders, provided that any shares of capital stock so received may differ in a manner similar to the manner in which the shares of Class A common stock and Class B common stock differ; or - each class of common stockholders, to the extent they receive a different kind (other than as described above) or different amount of capital stock, securities, cash and/or other property than that received by any other class of common stockholders, will receive for each share of common stock they hold stock, securities, cash and/or other property having a value substantially equivalent to that received by such other class of common stockholders. Upon Charter Communications, Inc.'s liquidation, dissolution or winding up, after payment in full of the amounts required to be paid to preferred stockholders, if any, all common stockholders, regardless of class, are entitled to share ratably in any assets and funds available for distribution to common stockholders. No shares of any class of common stock are subject to redemption or have preemptive rights to purchase additional shares of common stock. PREFERRED STOCK Upon the closing of the offering, Charter Communications, Inc.'s board of directors will be authorized, subject to the approval of the holders of the Class B common stock, to issue from time to time up to an aggregate of 250 million shares of preferred stock in one or more series and to fix the numbers, powers, designations, preferences, and any special rights of the shares of each such series thereof, including: - dividend rights and rates; - conversion rights; - voting rights; - terms of redemption (including any sinking fund provisions) and redemption price or prices; - liquidation preferences; and - the number of shares constituting and the designation of such series. Upon the closing of the offering, there will be no shares of preferred stock outstanding. Charter Communications, Inc. has no present plans to issue any shares of preferred stock, other than possibly in connection with the financing of the Bresnan acquisition. OPTIONS As of October 15, 1999, options to purchase a total of 9,206,282 membership units in Charter Communications Holding Company were outstanding pursuant to the Charter Communications Holding Company 1999 option plan. Of these options, 65,000 have vested and 65,000 will vest on the date of the closing of this offering. The remainder will not vest before April 2000. In addition, 7,044,127 options to purchase membership units 220
224 in Charter Communications Holding Company were outstanding pursuant to an employment agreement and a related agreement with Charter Communications, Inc.'s chief executive officer. Of these options, 1,761,032 vested on December 23, 1998, with the remainder vesting at a rate of 1/36th on the first of each month for months 13 through 48. ANTI-TAKEOVER EFFECTS OF PROVISIONS OF CHARTER COMMUNICATIONS, INC.'S RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS Provisions of Charter Communications, Inc.'s restated certificate of incorporation and bylaws may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by stockholders. SPECIAL MEETING OF STOCKHOLDERS. Our bylaws provide that, subject to the rights of holders of any series of preferred stock, special meetings of our stockholders may be called only by the chairman of our board of directors, our chief executive officer or a majority of our board of directors. ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS. Our bylaws provide that stockholders seeking to bring business before an annual meeting of stockholders, or to nominate candidates for election as directors at an annual meeting of stockholders, must provide timely prior written notice of their proposals. To be timely, a stockholder's notice must be received at our principal executive offices not less than 45 days nor more than 70 days prior to the first anniversary of the date on which we first mailed our proxy statement for the prior year's annual meeting. If, however, the date of the annual meeting is more than 30 days before or after the anniversary date of the prior year's annual meeting, notice by the stockholder must be received not less than 90 days prior to the annual meeting or by the 10th day following the public announcement of the date of the meeting, whichever occurs later, and not more than 120 days prior to the annual meeting. Our bylaws also specify requirements as to the form and content of a stockholder's notice. These provisions may limit stockholders in bringing matters before an annual meeting of stockholders or in making nominations for directors at an annual meeting of stockholders. AUTHORIZED BUT UNISSUED SHARES. The authorized but unissued shares of Class A common stock are available for future issuance without stockholder approval and, subject to approval by the holders of the Class B common stock, the authorized but unissued shares of Class B common stock and preferred stock are available for future issuance. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of common stock and preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise. 221
225 MEMBERSHIP UNITS Charter Communications Holding Company has four separate classes of common membership units designated Class A, Class B, Class C and Class D and one class of preferred membership units designated Class A. Immediately following the offering, there will be 494,955,052 Charter Communications Holding Company common membership units issued and outstanding. - Charter Investment, Inc. will own 217,585,246 Class A common membership units, Vulcan Cable III Inc. will own 107,319,806 Class A common membership units; - Charter Communications, Inc. will own 170,050,000 Class B common membership units; - 135,036,045 Class A preferred membership units are owned by the sellers in the Rifkin transaction; - Upon the closing of the Falcon acquisition, a portion of the purchase price will be paid in the form of Class D common membership units, ranging from a minimum amount of units with an estimated value of $425 million to a maximum with a fixed value of $550 million at the option of specified Falcon sellers; and - Upon the closing of the Bresnan acquisition, approximately $1.0 billion of the purchase price will be paid in the form of Class C common membership units. Subsequent to the consummation of the offering, any matter requiring a vote of the members will require the affirmative vote of a majority of the Class B common membership units. Charter Communications, Inc. will own all Class B common membership units immediately after the offering and therefore will control Charter Communications Holding Company. Because Mr. Allen owns high vote Class B common stock of Charter Communications, Inc. that entitles him to approximately 95% of the voting power of the outstanding common stock of Charter Communications, Inc., Mr. Allen controls Charter Communications, Inc. and through this company will have voting control of Charter Communications Holding Company. The net cash proceeds that Charter Communications, Inc. receives from any issuance of shares of common stock will be immediately transferred to Charter Communications Holding Company in exchange for membership units equal in number to the number of shares of common stock issued by Charter Communications, Inc., except as described in the next paragraph in connection with the offering or permitted under Charter Communications, Inc.'s restated certificate of incorporation. Concurrently with the closing of the offering, Charter Communications, Inc. will contribute the proceeds of the offering to Charter Communications Holding Company, less a portion that will be retained by Charter Communications, Inc. to permit Charter Communications, Inc. to purchase the stock of Avalon Cable of Michigan Holdings, Inc. that will be acquired in the Avalon acquisition. Charter Communications, Inc., rather than Charter Communications Holding Company, will purchase this stock to simplify the organizational structure of the acquired Avalon companies without incurring tax. This 222
226 tax-free simplification would not be available if the stock were purchased by a limited liability company. After the closing of the Avalon acquisition and this simplification transaction, Charter Communications, Inc. will be obligated to contribute to Charter Communications Holding Company the equity interests in Avalon Cable LLC, an indirect wholly owned subsidiary of Avalon Cable of Michigan Holdings, Inc. that it will have purchased and any remaining cash retained from the proceeds of the offering. If the Avalon acquisition does not close on or before the termination date of the Avalon acquisition agreement (currently March 31, 2000), Charter Communications, Inc. will contribute the retained proceeds from the offering together with any earnings on the retained proceeds to Charter Communications Holding Company. Concurrently with the closing of the offering, Charter Communications Holding Company will issue to Charter Communications, Inc. 170,000,000 Class B common membership units in Charter Communications Holding Company in exchange for the contribution of proceeds and the obligation to contribute the Avalon interests described above. EXCHANGE AGREEMENTS Upon the closing of the offering, we will have entered into an agreement permitting Vulcan Cable III Inc., Charter Investment, Inc. and any other affiliate of Mr. Allen to exchange at any time on a one-for-one basis any or all of their Charter Communications Holding Company common membership units for shares of Class B common stock. This exchange may occur directly or, at the election of the exchanging holder, indirectly through a tax-free reorganization such as a share exchange or a statutory merger of any Allen-controlled entity with and into Charter Communications, Inc. or a wholly owned subsidiary of Charter Communications, Inc. In the case of an exchange in connection with a tax-free share exchange or a statutory merger, shares of Class A common stock held by Mr. Allen or the Allen-controlled entity will also be exchanged for Class B common stock. Mr. Allen or his affiliates may own Class A common stock, for example, if they were required to repurchase shares of Class A common stock as a result of the exercise of put rights granted to the Rifkin, Falcon and Bresnan sellers in respect of their shares of Class A common stock. Similar exchange agreements will also permit all other holders of Charter Communications Holding Company common membership units, other than Charter Communications, Inc., to exchange at any time on a one-for-one basis any or all of their common membership units for shares of Class A common stock. These other holders would include, for example, those sellers under the Falcon acquisition and the Bresnan acquisition that receive common membership units of Charter Communications Holding Company. Charter Communications Holding Company common membership units are exchangeable at any time for shares of our Class A common stock or, in the case of Mr. Allen and his affiliates, Class B common stock which is then convertible into shares of Class A common stock. The exchange agreements, Mr. Kent's option agreement and the Charter Communications Holding Company 1999 option plan will state that common membership units are exchangeable for shares of common stock at a value equal to the fair market value of the common membership units. The exchange ratio of common 223
227 membership units to shares of common stock will be one to one because we have structured Charter Communications, Inc. and Charter Communications Holding Company so that the fair market value of a share of the Class A common stock will equal the fair market value of a common membership unit. Our organizational documents achieve this result by: - limiting the assets and liabilities that Charter Communications, Inc. may hold; and - requiring the number of shares of Charter Communications, Inc. common stock outstanding at any time to equal the number of common membership units owned by Charter Communications, Inc. If we fail to comply with these provisions or they are changed, the exchange ratio may vary from one to one and will then be based on a pre-determined formula contained in the exchange agreements, Mr. Kent's option agreement and the Charter Communications Holding Company 1999 option plan. This formula will be based on the then current relative fair market values of common membership units and common stock. SPECIAL TAX ALLOCATION PROVISIONS OVERVIEW. Charter Communications Holding Company's limited liability company agreement contains a number of provisions affecting allocation of tax losses and tax profits to its members. In some situations, these provisions could result in Charter Communications, Inc. having to pay income taxes in an amount that is more than it would have had to pay if these provisions did not exist. The purpose of these provisions is to allow Mr. Allen to take advantage for tax purposes of the losses expected to be generated by Charter Communications Holding Company. We do not expect that these special tax allocation provisions will materially affect our results of operations or financial condition. SPECIAL LOSS ALLOCATION PROVISIONS. The limited liability company agreement provides that, through the end of 2003, tax losses of Charter Communications Holding Company that would otherwise have been allocated to Charter Communications, Inc. based generally on its percentage of outstanding membership units will be allocated instead to the membership units held by Vulcan Cable III Inc. and Charter Investment, Inc. We expect that the effect of these special loss allocation provisions will be that Mr. Allen, through his investment in Vulcan Cable III Inc. and Charter Investment, Inc., will receive tax savings. Except as we describe below, the special loss allocation provisions should not adversely affect Charter Communications, Inc. or its shareholders. This is because Charter Communications, Inc. would not be in a position to benefit from tax losses until Charter Communications Holding Company generates allocable tax profits, and we do not expect Charter Communications Holding Company to generate tax profits for the foreseeable future. 224
228 The special loss allocation provisions will reduce Mr. Allen's rights to receive distributions upon a liquidation of Charter Communications Holding Company if over time there are insufficient allocations to be made under the special profit allocation provisions described below to restore these distribution rights. SPECIAL PROFIT ALLOCATION PROVISIONS. The limited liability company agreement further provides that, beginning at the time Charter Communications Holding Company first becomes profitable (as determined under the applicable federal income tax rules for determining book profits), tax profits that would otherwise have been allocated to Charter Communications, Inc. based generally on its percentage of outstanding membership units will instead be allocated to Mr. Allen, through the membership units held by Vulcan Cable III Inc. and Charter Investment, Inc. We expect that these special profit allocation provisions will provide tax savings to Charter Communications, Inc. and result in additional tax costs for Mr. Allen. The special profit allocations will also have the effect of restoring over time Mr. Allen's rights to receive distributions upon a liquidation of Charter Communications Holding Company. These special profit allocations generally will continue until such time as Mr. Allen's rights to receive distributions upon a liquidation of Charter Communications Holding Company that had been reduced as a result of the special loss allocations have been fully restored. We cannot assure you that Charter Communications Holding Company will become profitable. POSSIBLE ADVERSE IMPACT FROM THE SPECIAL ALLOCATION PROVISIONS. In a number of situations, these special tax allocations could result in Charter Communications, Inc. having to pay more taxes than if the special tax allocation provisions had not been adopted. For example, the special profit allocation provisions may result in an allocation of tax profits to the membership units held by Vulcan Cable III Inc. and Charter Investment, Inc. that is less than the amount of the tax losses previously allocated to these units pursuant to the special loss allocation provisions described above. In this case, Charter Communications, Inc. could be required to pay higher taxes but only commencing at the time when Mr. Allen's rights to receive distributions upon a liquidation of Charter Communications Holding Company have been fully restored as described above. These tax payments could reduce our reported net income for the relevant period. As another example, under their exchange agreement with Charter Communications, Inc., Vulcan Cable III Inc. and Charter Investment, Inc. may exchange some or all of their membership units for Class B common stock prior to the date that the special profit allocation provisions have had the effect of fully restoring Mr. Allen's rights to receive distributions upon a liquidation of Charter Communications Holding Company. Charter Communications, Inc. will then be allocated tax profits attributable to the membership units it receives in such exchange pursuant to the special profit allocation provisions. As a result, Charter Communications, Inc. could be required to pay higher taxes in years following such an exchange of common stock for 225
229 membership units than if the special tax allocation provisions had not been adopted. These tax payments could reduce our reported net income for the relevant period. However, we do not anticipate that the special tax allocations will result in Charter Communications, Inc. having to pay taxes in an amount that is materially different on a present value basis than the taxes that would be payable had the special tax allocation provisions not been adopted, although there is no assurance that a material difference will not result. IMPACT OF MERGER AND OTHER NON-TAXABLE TRANSACTIONS; MR. ALLEN'S REIMBURSEMENT OBLIGATIONS. Mr. Allen, through Vulcan Cable III Inc. and Charter Investment, Inc., has the right to transfer his Charter Communications Holding Company membership units in a non-taxable transaction, including a merger, to Charter Communications, Inc. for common stock. Such a transaction may occur prior to the date that the special profit allocation provisions have had the effect of fully restoring Mr. Allen's rights to receive distributions upon a liquidation of Charter Communications Holding Company. In this case, the following will apply. Vulcan Cable III Inc. or Charter Investment, Inc. may elect to cause Charter Communications Holding Company to make additional special allocations in order to restore Mr. Allen's rights to receive distributions upon a liquidation of Charter Communications Holding Company. If this election is not made, or if an election is made but these additional special allocations are insufficient to restore these rights to Mr. Allen, Mr. Allen, Vulcan Cable III Inc. or Charter Investment, Inc., whichever receives the Class B common stock, will agree to make specified payments to Charter Communications, Inc. in respect of the common stock received. The payments will equal the amount that Charter Communications, Inc. actually pays in income taxes solely as a result of the allocation to it of tax profits because of the losses previously allocated to membership units transferred to it. Any of these payments would be made at the time Charter Communications, Inc. actually pays these income taxes. BRESNAN SPECIAL ALLOCATION PROVISIONS. Charter Communications Holding Company's limited liability company agreement will contain provisions for special allocations of tax losses and tax profits between the Bresnan sellers receiving membership units on the one hand and Mr. Allen, through Vulcan Cable III Inc. and Charter Investment, Inc., on the other. Because of these provisions, Charter Communications, Inc. could under some circumstances be required to pay higher taxes in years following an exchange by the Bresnan sellers of membership units for shares of Class A common stock. However, we do not anticipate that any such exchange for Class A common stock will result in our having to pay taxes in an amount that is materially different on a present value basis than the taxes that would have been payable had the special allocations not been adopted, although there is no assurance that a material difference will not result. The effect of the special loss allocations discussed above is expected to be that Mr. Allen and some of the sellers in the Bresnan transaction will receive tax savings while at the same time reducing their rights to receive distributions upon a liquidation of Charter Communications Holding Company. If and when special profit allocations occur, 226
230 their rights to receive distributions upon a liquidation of Charter Communications Holding Company will be restored over time, and they will likely incur some additional tax costs. OTHER MATERIAL TERMS OF LIMITED LIABILITY COMPANY AGREEMENT OF CHARTER COMMUNICATIONS HOLDING COMPANY GENERAL. Charter Communications Holding Company is a limited liability company that was formed on May 25, 1999. Charter Communications Holding Company has four separate classes of common membership units designated as Class A, Class B, Class C and Class D and one class of preferred membership units designated as Class A. Charter Investment, Inc. and Vulcan Cable III Inc. are the holders of the Class A common membership units. Charter Communications, Inc. will be the holder of the Class B common membership units. The Bresnan and Falcon sellers will be the holders of the Class C and Class D membership units, respectively. The Rifkin sellers are the holders of the Class A preferred membership units. Charter Communications Holding Company's limited liability company agreement contains provisions that permit each member (and its officers, directors, agents, stockholders, members, partners or affiliates) to engage in businesses that may compete with the businesses of Charter Communications Holding Company or any subsidiary. However, the directors of Charter Communications, Inc., including Mr. Allen and Mr. Kent, are subject to fiduciary duties under Delaware corporate law that generally require them to present business opportunities in the cable transmission business to Charter Communications, Inc. The limited liability company agreement restricts the business activities that Charter Communications Holding Company may engage in. See "Certain Relationships and Related Transactions -- Allocation of Business Opportunities with Mr. Allen". TRANSFER RESTRICTIONS. The limited liability company agreement restricts the ability of each member to transfer its membership interest unless specified conditions have been met. These conditions include: - the transfer will not result in the loss of any license or regulatory approval or exemption that has been obtained by Charter Communications Holding Company and is materially useful in its business as then conducted or proposed to be conducted; - the transfer will not result in a material limitation or restriction on Charter Communications Holding Company's operations; - the proposed transferee agrees in writing to be bound by the limited liability company agreement; and - except for a limited number of permitted transfers under the limited liability company agreement, the transfer has been approved by the manager in its sole discretion. 227
231 Except for a limited number of permitted transfers under the limited liability company agreement, no holder of membership units may transfer all or a portion of its membership interest unless it first gives written notice of the proposed transfer to both Charter Communications Holding Company and the holders of the Class A common membership units. Within a specified period following receipt of the notice, Charter Communications Holding Company may elect to purchase from the holder all or a portion of the holder's membership units being sold. Unless Charter Communications Holding Company elects to purchase all of these membership units, the holders of the Class A membership units may elect to purchase a portion of the holder's membership units being sold. If Charter Communications Holding Company and the holders of the Class A membership units do not agree to purchase all of the membership units being sold, the relevant holder of membership units may transfer all of these membership units to its proposed transferee. SPECIAL RESTRICTIONS ON PARTNERS OF FALCON HOLDING GROUP, L.P. TO TRANSFER MEMBERSHIP UNITS. Class D common membership units held by Falcon Holding Group, L.P. are transferable to its partners, subject to the restrictions on transfer described above. However, if any proposed transferee fails to agree to be bound by the limited liability company agreement and to represent that it is an accredited investor or if Charter Communications Holding Company reasonably determines that the transfer to this transferee would require registration under the Securities Act of 1933, as amended, then Charter Communications Holding Company must purchase for cash those Class D common membership units that are proposed to be transferred. SPECIAL REDEMPTION RIGHTS RELATING TO CLASS A PREFERRED MEMBERSHIP UNITS. The holders of Class A preferred membership units have the right under a separate redemption and put agreement to cause Charter Communications Holding Company to redeem their preferred membership units at specified redemption prices. Charter Communications Holding Company will have the right to redeem the Class A preferred membership units at specified redemption prices at any time starting 30 days after the this offering. SPECIAL RIGHTS GRANTED FORMER OWNERS OF BRESNAN. The limited liability company agreement provides that upon the closing of the Bresnan acquisition, Charter Communications, Inc. must: - provide the Bresnan sellers that are affiliates of Blackstone Group L.P. consultative rights reasonably acceptable to Charter Communications, Inc. so that, as long as these Bresnan sellers hold Class C common membership units, they may preserve their status and benefits under federal tax and labor laws, and - attempt, in good faith, to keep in place specified notes and credit facilities of a number of subsidiaries of Bresnan and substantially all of the security and collateral relating to these obligations, as long as the Bresnan sellers hold Class C common membership units. The purpose of this obligation is to preserve specified tax benefits for the Bresnan sellers that depend on these notes and credit facilities remaining outstanding. Any required repayments of Bresnan notes and credit 228
232 facilities that we may have to make, as described elsewhere in this prospectus, will not affect this obligation to keep specified notes and credit facilities in place. AMENDMENTS TO THE LIMITED LIABILITY COMPANY AGREEMENT. Any amendment to the limited liability company agreement generally may be adopted only upon the approval of a majority of the Class B common membership units. The agreement may not be amended in a manner that adversely affects the rights of any class of common membership units without the consent of holders holding a majority of the membership units of that class. REGISTRATION RIGHTS HOLDERS OF CLASS B COMMON STOCK. Charter Communications, Inc., Mr. Allen, Charter Investment, Inc., Vulcan Cable III Inc., Mr. Kent, Mr. Babcock and Mr. Wood will enter into a registration rights agreement upon the closing of this offering. The agreement will give Mr. Allen and his affiliates the right to cause us to register the shares of Class A common stock issued to them upon conversion of any shares of Class B common stock that they may hold. The agreement will give Messrs. Kent, Babcock and Wood the right to cause us to register the shares of Class A common stock issuable to them upon exchange of Charter Communications Holding Company membership units. This registration rights agreement provides that each eligible holder is entitled to unlimited "piggyback" registration rights permitting them to include their shares of Class A common stock in registration statements filed by us. These holders may also exercise their demand rights causing us, subject to specified limitations, to register their Class A shares, provided that the amount of shares subject to each demand has a market value at least equal to $50 million or, if the market value is less than $50 million, all of the Class A shares of the holders participating in the offering are included in such registration. We are obligated to pay the costs associated with all such registrations. Holders may elect to have their shares registered pursuant to a shelf registration statement provided that at the time of the election, Charter Communications, Inc. is eligible to file a registration statement on Form S-3 and the amount of shares to be registered has a market value equal to at least $100.0 million on the date of the election. Mr. Allen also has the right to cause Charter Communications, Inc. to file a shelf registration statement in connection with the resale of shares of Class A common stock then held by or issuable to specified sellers under the Rifkin, Falcon and Bresnan acquisitions that have the right to cause Mr. Allen to purchase equity interests issued to them as a result of these acquisitions. Immediately following the offering, all shares of Class A common stock issuable to the registration rights holders in exchange for Charter Communications Holding Company membership units and upon conversion of outstanding Class B common stock and conversion of Class B common stock issuable to the registration rights holders upon exchange of Charter Communications Holding Company membership units will be subject to the registration rights described above. 229
233 RIFKIN SELLERS. In connection with the Rifkin acquisition, Charter Communications, Inc. will register the resale of the Class A common stock issued in exchange for the Charter Communications Holding Company LLC Class A preferred membership units by specified Rifkin sellers on a shelf registration statement on Form S-1. These Rifkin sellers executed lockup agreements restricting the transfer of any securities exchangeable for or convertible into shares of Class A common stock for 180 days after the date of this prospectus. We anticipate that the shelf registration will remain in effect for a period of at least 18 months following the expiration of the lock-up period. FALCON SELLERS. Pursuant to the registration rights agreement Charter Communications, Inc. will enter into with specified sellers in the Falcon acquisition, these sellers are entitled to registration rights with respect to the shares of Class A common stock issuable upon exchange of Charter Communications Holding Company membership units to be issued to them as part of the consideration for the Falcon acquisition. These Falcon sellers or their permitted transferees will have "piggyback" registration rights and, beginning 180 days after the offering, up to four "demand" registration rights with respect to the Class A common stock issued upon exchange of the Charter Communications Holding Company membership units. The demand registration rights must be exercised with respect to tranches of Class A common stock worth at least $40 million at the time of notice of demand or at least $60 million at the initial public offering price. A majority of the holders of Class A common stock making a demand may also require us to satisfy our registration obligations by filing a shelf registration statement. The selling holders of Class A common stock may also exercise their piggyback rights with respect to the offering, to the extent this offering occurs following the closing of the Falcon acquisition. We may register for resale the shares of our Class A common stock issuable in exchange for common membership units issued to Falcon sellers pursuant to a shelf registration statement on Form S-1. BRESNAN SELLERS. Pursuant to the registration rights agreement Charter Communications, Inc. will enter into with specified sellers under the Bresnan acquisition, these sellers are entitled to registration rights with respect to the shares of Class A common stock issuable upon exchange of the Charter Communications Holding Company membership units to be issued in the Bresnan acquisition. We may register the shares of our Class A common stock issuable to the Bresnan sellers in exchange for these units for resale pursuant to a shelf registration statement on Form S-1. We currently are seeking the agreement by the Bresnan sellers not to transfer the shares prior to 180 days after the completion of this offering. The Bresnan sellers collectively will have unlimited "piggyback" registration rights and, beginning 180 days after this offering, up to four "demand" registration rights with respect to the Class A common stock issued in exchange for the membership units in Charter Communications Holding Company. The demand registration rights must be 230
234 exercised with respect to tranches of Class A common stock worth at least $40 million at the time of notice of demand or at least $60 million at the initial public offering price. The Bresnan sellers have agreed to be prohibited, except through the exercise of any put rights, from selling shares of Class A common stock prior to 180 days after the completion of this offering. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is ChaseMellon Shareholder Services, L.L.C. 231
235 SHARES ELIGIBLE FOR FUTURE SALE Prior to the offering, there has been no public market for the shares of Class A common stock. Upon the completion of the offering, Charter Communications, Inc. will have 170,000,000 shares of Class A common stock issued and outstanding, or 195,500,000 if the underwriters exercise their over-allotment option in full. In addition, the following shares of Class A common stock will be issuable in the future: - 324,905,052 shares of Class A common stock will be issuable upon conversion of Class B common stock issuable upon exchange of Charter Communications Holding Company membership units held by Vulcan Cable III Inc. and Charter Investment, Inc. These membership units are exchangeable for shares of Class B common stock at any time following the closing of the offering on a one-for-one basis. Shares of Class B common stock are convertible into shares of Class A common stock at any time following the closing of the offering on a one-for-one basis; - 65,818,026 shares of Class A common stock will be issuable upon the exchange of Charter Communications Holding Company membership units issued to specified sellers in our recent and pending acquisitions, assuming the relevant sellers elect to receive the maximum number of Charter Communications Holding Company membership units that they are entitled to receive; - 16,250,408 shares of Class A common stock will be issuable upon the exchange of Charter Communications Holding Company membership units that are received upon the exercise of options granted under the Charter Communications Holding Company 1999 option plan and to Charter Communications, Inc.'s chief executive officer. Charter Communications Holding Company will issue up to 5 million additional options on the date of this prospectus. Upon issuance, these membership units will be immediately exchanged for shares of Class A common stock, without any further action by the optionholder. The weighted average exercise price of all outstanding options for membership units is $20.02; and - 50,000 shares of Class A common stock will be issuable upon conversion of outstanding shares of Class B common stock on a one-for-one basis. Of the total number of our shares of Class A common stock issued or issuable as described above, 170,000,000 shares will be eligible for immediate public resale following the completion of this offering, except for any such shares held by our "affiliates". Charter Communications, Inc., all of its directors and executive officers, Charter Communications Holding Company, Charter Investment, Inc. and Vulcan Cable III Inc. have agreed not to dispose of or hedge any of their Class A common stock or securities convertible into or exchangeable for Class A common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. and except that Charter Communications, Inc. and Charter Communications Holding Company will be entitled to offer and sell convertible debt, convertible preferred or other equity securities to finance a portion of the Bresnan acquisition purchase price. The underwriters do not have any current intention to release shares of Class A common 232
236 stock or other securities subject to the lock-up. Any determination to release any shares subject to the lock-up would be based on a number of factors at the time of any such determination, including the market price of the Class A common stock, the liquidity of the trading market for the Class A common stock, general market conditions, the number of shares proposed to be sold, and the timing, purpose and terms of the proposed sale. The sellers in the Rifkin acquisition and the Bresnan acquisition who have received or will receive Charter Communications Holding Company membership units have agreed to similar restrictions. The Falcon sellers who are receiving Charter Communications Holding Company membership units will not be subject to such restrictions except for Mr. Marc Nathanson, who will execute a lock-up agreement in his capacity as a director nominee of Charter Communications, Inc. The membership units issued to the Falcon sellers will be exchangeable for shares of Class A common stock. However, such shares will not be registered and such sellers will have no right to register the stock for a period of 180 days following the closing of the offering. In addition, all of the shares of Class A common stock issued or issuable as described above, except for shares issued in the offering other than to our "affiliates", may only be sold in compliance with Rule 144 under the Securities Act of 1933, unless registered under the Securities Act of 1933 pursuant to demand or piggyback registration rights. Substantially all of the shares of Class A common stock issuable upon exchange of Charter Communications Holding Company membership units and all shares of Class A common stock issuable upon conversion of shares of our Class B common stock will have demand and piggyback registration rights attached to them, including those issuable to Mr. Allen through Charter Investment, Inc. and Vulcan Cable III Inc. The sale of a substantial number of shares of Class A common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the Class A common stock. In addition, any such sale or perception could make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that we deem appropriate. We anticipate that a registration statement on Form S-8 covering the Class A common stock that may be issued pursuant to the exercise of options under the Charter Communications Holding Company 1999 option plan will be filed promptly after completion of the offering. The shares of Class A common stock covered by the Form S-8 registration statement generally may be resold in the public market without restriction or limitation, except in the case of our affiliates who generally may only resell such shares in accordance with the provisions of Rule 144 of the Securities Act of 1933, other than the holding period requirement. 233
237 CERTAIN UNITED STATES TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS GENERAL The following is a general discussion of the material United States federal income and estate tax consequences of the ownership and disposition of our Class A common stock by a non-U.S. Holder. As used in this prospectus, the term "non-U.S. holder" is any person or entity that, for United States federal income tax purposes, is either a nonresident alien individual, a foreign corporation, a foreign partnership or a foreign trust, in each case not subject to United States federal income tax on a net basis in respect of income or gain with respect to our common stock. This discussion does not address all aspects of United States federal income and estate taxes that may be relevant to a particular non-U.S. holder in light of the holder's particular circumstances. This discussion is not intended to be applicable in all respects to all categories of non-U.S. holders, some of whom may be subject to special treatment under United States federal income tax laws, including "controlled foreign corporations," "passive foreign investment companies," and "foreign personal holding companies". Moreover, this discussion does not address United States state or local or foreign tax consequences. This discussion is based on provisions of the Internal Revenue Code of 1986, as amended, existing and proposed regulations promulgated under, and administrative and judicial interpretations of, the Internal Revenue Code in effect on the date of this prospectus. All of these authorities may change, possibly with retroactive effect or different interpretations. The following summary is included in this prospectus for general information. Accordingly, prospective investors are urged to consult their tax advisors regarding the United States federal, state, local and non-United States income and other tax consequences of acquiring, holding and disposing of shares of our common stock. An individual may be deemed to be a resident alien, as opposed to a nonresident alien, by virtue of being present in the United States for at least 31 days in the calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year. In determining whether an individual is present in the United States for at least 183 days, all of the days present in the current year, one-third of the days present in the immediately preceding year and one-sixth of the days present in the second preceding year are counted. Resident aliens are subject to United States federal income and estate tax in the same manner as United States citizens and residents. DIVIDENDS We do not anticipate paying cash dividends on our capital stock in the foreseeable future. See "Dividend Policy". In the event, however, that dividends are paid on shares of our Class A common stock, dividends paid to a non-U.S. holder of our Class A common stock generally will be subject to United States withholding tax at a 30% rate, unless an applicable income tax treaty provides for a lower withholding rate. Non-U.S. holders should consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty. 234
238 Currently, the applicable United States Treasury regulations presume, absent actual knowledge to the contrary, that dividends paid to an address in a foreign country are paid to a resident of such country for purposes of the 30% withholding tax discussed above. However, recently finalized United States Treasury regulations provide that in the case of dividends paid after December 31, 2000, United States backup withholding tax at a 31% rate will be imposed on dividends paid to non-U.S. holders if the certification or documentary evidence procedures and requirements set forth in such regulations are not satisfied directly or through an intermediary. Further, in order to claim the benefit of an applicable income tax treaty rate for dividends paid after December 31, 2000, a non-U.S. holder must comply with certification requirements set forth in the recently finalized United States Treasury regulations. The final United States Treasury regulations also provide special rules for dividend payments made to foreign intermediaries, United States or foreign wholly owned entities that are disregarded for United States federal income tax purposes and entities that are treated as fiscally transparent in the United States, the applicable income tax treaty jurisdiction, or both. Prospective investors should consult with their own tax advisors concerning the effect, if any, of these tax regulations and the recent legislation on an investment in the Class A common stock. A non-U.S. holder of Class A common stock that is eligible for a reduced rate of United States withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for a refund with the Internal Revenue Service. Dividends paid to a non-U.S. holder are taxed generally on a net income basis at regular graduated rates where such dividends are either: (1) effectively connected with the conduct of a trade or business of such holder in the United States or (2) attributable to a permanent establishment of such holder in the United States. The 30% withholding tax is not applicable to the payment of dividends if the non-U.S. Holder files Form 4224 or any successor form with the payor, or, in the case of dividends paid after December 31, 2000, such holder provides its United States taxpayer identification number to the payor. In the case of a non-U.S. holder that is a corporation, such income may also be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. GAIN ON DISPOSITION OF CLASS A COMMON STOCK A non-U.S. holder generally will not have to comply with United States federal income or withholding tax requirements in respect of gain recognized on a disposition of Class A common stock unless: (1) the gain is effectively connected with the conduct of a trade or business of the non-U.S. holder within the United States or of a partnership, trust or estate in which the non-U.S. holder is a partner or beneficiary within the United States, (2) the gain is attributable to a permanent establishment of the non-U.S. holder within the United States, 235
239 (3) the non-U.S. holder is an individual who holds the Class A common stock as a capital asset within the meaning of Section 1221 of the Internal Revenue Code, is present in the United States for 183 or more days in the taxable year of the disposition and meets certain other tax law requirements, (4) the non-U.S. holder is a United States expatriate required to pay tax pursuant to the provisions of United States tax law, or (5) we are or have been a "United States real property holding corporation" for federal income tax purposes at any time during the shorter of the five-year period preceding such disposition or the period that the non-U.S. holder holds the common stock. Generally, a corporation is a United States real property holding corporation if the fair market value of its United States real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. We believe that we are not, have not been and do not anticipate becoming, a United States real property holding corporation for United States federal income tax purposes. However, even if we were to become a United States real property holding corporation, any gain realized by a non-U.S. holder still would not be subject to United States federal income tax if our shares are regularly traded on an established securities market and the non-U.S. holder did not own, directly or indirectly, at any time during the five-year period ending on the date of sale or other disposition, more than 5% of our Class A common stock. If, however, our stock is not so treated, on a sale or disposition by a non-U.S. holder of our Class A common stock, the transferee of such stock will be required to withhold 10% of the proceeds unless we certify that either we are not and have not been a United States real property holding company or another exemption from withholding applies. A non-U.S. holder who is an individual and meets the requirements of clause (1), (2) or (4) above will be required to pay tax on the net gain derived from a sale of Class A common stock at regular graduated United States federal income tax rates. Further, a non-U.S. holder who is an individual and who meets the requirements of clause (3) above generally will be subject to a flat 30% tax on the gain derived from a sale. Thus, individual non-U.S. holders who have spent or expect to spend a short period of time in the United States should consult their tax advisors prior to the sale of Class A common stock to determine the United States federal income tax consequences of the sale. A non-U.S. holder who is a corporation and who meets the requirements of clause (1) or (2) above generally will be required to pay tax on its net gain at regular graduated United States federal income tax rates. Such non-U.S. holder may also have to pay a branch profits tax. FEDERAL ESTATE TAX For United States federal estate tax purposes, an individual's gross estate will include the Class A common stock owned, or treated as owned, by an individual. Generally, this will be the case regardless of whether such individual was a United 236
240 States citizen or a United States resident. This general rule of inclusion may be limited by an applicable estate tax or other treaty. INFORMATION REPORTING AND BACKUP WITHHOLDING TAX Under United States Treasury regulations, we must report annually to the Internal Revenue Service and to each non-U.S. holder the amount of dividends paid to such holder and the tax withheld with respect to such dividends. These information reporting requirements apply regardless of whether withholding is required. Copies of the information returns reporting such dividends and withholding may also be made available to the tax authorities in the country in which the non-U.S. holder is a resident under the provisions of an applicable income tax treaty or agreement. Currently, the 31% United States backup withholding tax generally will not apply: (1) to dividends which are paid to non-U.S. holders and are taxed at the regular 30% withholding tax rate as discussed above, or (2) before January 1, 2001, to dividends paid to a non-U.S. holder at an address outside of the United States unless the payor has actual knowledge that the payee is a U.S. holder. Backup withholding and information reporting generally will apply to dividends paid to addresses inside the United States on shares of Class A common stock to beneficial owners that are not "exempt recipients" and that fail to provide identifying information in the manner required. The recently finalized United States Treasury regulations provide that in the case of dividends paid after December 31, 2000, a non-U.S. holder generally would be subject to backup withholding tax at the rate of 31% unless (1) certification procedures, or (2) documentary evidence procedures, in the case of payments made outside the United States with respect to an offshore account are satisfied. These regulations generally presume a non-U.S. holder is subject to backup withholding at the rate of 31% and information reporting requirements unless we receive certification of the holder's non-United States status. Depending on the circumstances, this certification will need to be provided either: (1) directly by the non-U.S. holder, (2) in the case of a non-U.S. holder that is treated as a partnership or other fiscally transparent entity, by the partners, shareholders or other beneficiaries of such entity, or (3) by qualified financial institutions or other qualified entities on behalf of the non-U.S. holder. Information reporting and backup withholding at the rate of 31% generally will not apply to the payment of the proceeds of the disposition of Class A common stock by a holder to or through the United States office of a broker or through a non-United States branch of a United States broker unless the holder either certifies its status as a non-U.S. holder under penalties of perjury or otherwise establishes an exemption. The payment of the proceeds of the disposition by a non-U.S. holder of Class A common 237
241 stock to or through a non-United States office of a non-United States broker will not be subject to backup withholding or information reporting unless the non-United States broker has a connection to the United States as specified by United States federal tax law. In the case of the payment of proceeds from the disposition of Class A common stock effected by a foreign office of a broker that is a United States person or a "United States related person," existing regulations require information reporting on the payment unless: (1) the broker receives a statement from the owner, signed under penalty of perjury, certifying its non-United States status; (2) the broker has documentary evidence in its files as to the non-U.S. holder's foreign status and the broker has no actual knowledge to the contrary, and other United States federal tax law conditions are met; or (3) the beneficial owner otherwise establishes an exemption. For this purpose, a "U.S. related person" is either: (1) a "controlled foreign corporation" for United States federal income tax purposes or (2) a foreign person 50% or more of whose gross income from all sources for the three-year period ending with the close of its taxable year preceding the payment is derived from activities that are effectively connected with the conduct of a United States trade or business. After December 31, 2000, the regulations under the Internal Revenue Code will impose information reporting and backup withholding on payments of the gross proceeds from the sale or redemption of Class A common stock that is effected through foreign offices of brokers having any of a broader class of specified connections with the United States. Such information reporting and backup withholding may be avoided, however, if the applicable Internal Revenue Service certification requirements are complied with. Prospective investors should consult with their own tax advisors regarding the regulations under the Internal Revenue Code and in particular with respect to whether the use of a particular broker would subject the investor to these rules. Any amounts withheld under the backup withholding rules from a payment to a non-U.S. holder will be either refunded or credited against the holder's United States federal tax liability, provided sufficient information is furnished to the Internal Revenue Service. 238
242 LEGAL MATTERS The validity of the shares of Class A common stock offered in this prospectus will be passed upon for Charter Communications, Inc. by Paul, Hastings, Janofsky & Walker LLP, New York, New York. A number of attorneys of Paul, Hastings, Janofsky & Walker LLP intend to purchase up to 40,000 shares of Class A common stock in this offering. Certain legal matters in connection with the Class A common stock offered in this prospectus will be passed upon for the underwriters by Debevoise & Plimpton, New York, New York. EXPERTS The financial statements of Charter Communications, Inc., Charter Communications Holding Company, LLC and subsidiaries, CCA Group, CharterComm Holdings, L.P. and subsidiaries, the Greater Media Cablevision Systems, the Sonic Communications Cable Television Systems and Long Beach Acquisition Corp., included in this prospectus, to the extent and for the periods indicated in their reports, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included in this prospectus in reliance upon the authority of said firm as experts in giving said reports. The combined financial statements of TCI Falcon Systems as of September 30, 1998 and December 31, 1997 and for the nine-month period ended September 30, 1998, and for each of the years in the two-year period ended December 31, 1997, the combined financial statements of Bresnan Communications Group Systems as of December 31, 1997 and 1998, and for each of the years in the three-year period ended December 31, 1998, the consolidated financial statements of Marcus Cable Holdings, LLC as of December 31, 1998 and 1997, and for each of the years in the three-year period ended December 31, 1998, and the combined financial statements of Helicon Partners I, L.P. and affiliates as of December 31, 1997 and 1998 and for each of the years in the three-year period ended December 31, 1998, have been included herein in reliance upon the reports of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements of Renaissance Media Group LLC, the combined financial statements of the Picayune, MS, LaFourche, LA, St. Tammany, LA, St. Landry, LA, Pointe Coupee, LA, and Jackson, TN cable systems, the financial statements of Indiana Cable Associates, LTD., the financial statements of R/N South Florida Cable Management Limited Partnership, the combined financial statements of Fanch Cable Systems (comprised of components of TW Fanch-one Co. and TW Fanch-two Co.) and the consolidated financial statements of Falcon Communications, L.P., included in this prospectus, have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere in this prospectus, and are included herein in reliance upon such reports given on the authority of such firm as experts in accounting and auditing. 239
243 The audited combined financial statements of InterMedia Cable Systems (comprised of components of InterMedia Partners and InterMedia Capital Partners IV, L.P.), the audited financial statements of Rifkin Cable Income Partners L.P., the audited consolidated financial statements of Rifkin Acquisition Partners, L.L.L.P., the audited consolidated financial statements of Avalon Cable of Michigan Holdings, Inc. and subsidiaries, the audited consolidated financial statements of Cable Michigan Inc. and subsidiaries, the audited consolidated financial statements of Avalon Cable LLC and subsidiaries, the audited financial statements of Amrac Clear View, a Limited Partnership, the audited combined financial statements of The Combined Operations of Pegasus Cable Television of Connecticut, Inc. and the Massachusetts Operations of Pegasus Cable Television, Inc., included in this prospectus, have been audited by PricewaterhouseCoopers LLP, independent accountants. The entities and periods covered by these audits are indicated in their reports. The financial statements have been so included in reliance on the reports of PricewaterhouseCoopers LLP, given on the authority of said firm as experts in auditing and accounting. The financial statements of Amrac Clear View, a Limited Partnership as of December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997, included in this prospectus, have been so included in reliance on the report of Greenfield, Altman, Brown, Berger & Katz, P.C., independent accountants, given on the authority of said firm as experts in auditing and accounting. 240
244 UNDERWRITING Charter Communications, Inc., Charter Communications Holding Company and the underwriters for the U.S. offering named below have entered into an underwriting agreement with respect to the Class A common stock being offered in the United States and Canada. Subject to certain conditions, each U.S. underwriter has severally agreed to purchase the number of shares indicated in the following table. The underwriters are obligated to purchase all of these shares if any shares are purchased. Goldman, Sachs & Co., Bear, Stearns & Co. Inc., Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Salomon Smith Barney Inc., A. G. Edwards & Sons, Inc. and M. R. Beal & Company are the representatives of the U.S. underwriters. Number of U.S. Underwriters Shares ----------------- ----------- Goldman, Sachs & Co..................................... Bear, Stearns & Co. Inc................................. Morgan Stanley & Co. Incorporated....................... Donaldson, Lufkin & Jenrette Securities Corporation..... Merrill Lynch, Pierce, Fenner & Smith Incorporated...... Salomon Smith Barney Inc................................ A.G. Edwards & Sons, Inc................................ M.R. Beal & Company..................................... ----------- Total....................................... 144,500,000 =========== ---------------------- If the U.S. underwriters sell more shares than the total number set forth in the table above, the U.S. underwriters have an option to buy up to an additional 21,675,000 shares from Charter Communications, Inc. to cover such sales. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the U.S. underwriters will severally purchase shares in approximately the same proportion as set forth in the table above. The following table shows the per share and total underwriting discounts to be paid to the U.S. underwriters by Charter Communications, Inc. Such amounts are shown assuming both no exercise and full exercise of the U.S. underwriters' option to purchase additional shares. Paid by Charter Communications, Inc. ----------------------------- No Exercise Full Exercise ------------ ------------- Per share............................... $ $ Total................................... $ $ 241
245 Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover page of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $ per share from the initial public offering price. If all of the shares are not sold at the initial public offering price, the representatives may change the offering price and the other selling terms. Charter Communications, Inc. and Charter Communications Holding Company have entered into an underwriting agreement with the underwriters for the international offering of 25,500,000 shares of Class A common stock outside the United States and Canada. The terms and conditions of both offerings are the same and the sale of shares in both offerings are conditioned on each other. Goldman Sachs International, Bear, Stearns International Limited, Morgan Stanley & Co. International Limited, Donaldson, Lufkin & Jenrette International, Merrill Lynch International and Salomon Brothers International Limited are representatives of the international underwriters. Charter Communications, Inc. has granted the international underwriters an option similar to that granted the U.S. underwriters to purchase up to an aggregate of an additional 3,825,000 shares. The underwriters for both of the offerings have entered into an agreement in which they have agreed to restrictions on where and to whom they and any dealer purchasing from them may offer shares as a part of the distribution of the shares. The underwriters have also agreed that they may sell shares among each of the underwriting groups. Charter Communications, Inc., all of its directors and executive officers, Charter Communications Holding Company, Charter Investment, Inc. and Vulcan Cable III Inc. have agreed with the underwriters not to dispose of or hedge any of their Class A common stock or securities convertible into or exchangeable for Class A common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. and except that Charter Communications, Inc. and Charter Communications Holding Company will be entitled to offer and sell convertible debt, convertible preferred or other equity securities to finance a portion of the Bresnan acquisition purchase price. The Rifkin sellers and the Bresnan sellers who received or will receive Charter Communications Holding Company membership units have agreed to similar restrictions. See "Shares Eligible for Future Sale" for a discussion of certain transfer restrictions. Prior to the offering, there has been no public market for the shares. The initial public offering price will be negotiated among Charter Communications, Inc. and the representatives. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be our historical performance, estimates of our business potential and our earnings prospects, an assessment of our management and the consideration of the above factors in relation to market valuation of companies in related businesses. 242
246 The Class A common stock has been approved for quotation on the Nasdaq National Market under the symbol "CHTR". In connection with the offering, the underwriters may purchase and sell shares of Class A common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the Class A common stock while the offering is in progress. The underwriters may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions. These activities by the underwriters may stabilize, maintain or otherwise affect the market price of the Class A common stock. As a result, the price of the Class A common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they may be discontinued by the underwriters at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. The underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. We estimate that our share of the total expenses of the offering, excluding underwriting discounts, will be approximately $40 million and will be paid by Charter Communications Holding Company. Charter Communications, Inc. and Charter Communications Holding Company have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of 1933. At our request, the underwriters have reserved for sale at the initial public offering price up to 5% of the shares offered by Charter Communications, Inc. to be sold to its directors, officers, employees, employees of the entities operating the cable systems to be acquired in the pending acquisitions, and associates and sellers in the Helicon acquisition, as described in the following paragraph. The number of shares available for sale to the general public will be reduced to the extent such shares are purchased. Any of these reserved shares not so purchased will be offered by the underwriters on the same basis as the shares offered hereby. At our request, the underwriters will reserve up to $12 million of Class A common stock at the initial public offering price for sale to specified sellers of the Helicon cable systems. This would represent 666,667 shares of Class A common stock, calculated at the mid-point of the range set forth on the cover page of this prospectus. A prospectus in electronic format will be made available on the web sites maintained by one or more of the underwriters participating in this offering. The underwriters may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives of the 243
247 underwriters to underwriters that may make Internet distributions on the same basis as other allocations. Wit Capital is an on-line investment bank that will receive an allocation of shares of Class A common stock in its capacity as a syndicate member. Certain of the underwriters and their affiliates have in the past provided, and may in the future from time to time provide, investment banking and general financing and banking services to Charter Communications Holding Company and its affiliates for which they have in the past received, and may in the future receive, customary fees. Goldman Sachs Credit Partners L.P., an affiliate of Goldman, Sachs & Co., Morgan Stanley Senior Lending, Inc., an affiliate of Morgan Stanley & Co. Incorporated, and Merrill Lynch Capital Corporation, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, are among the lenders who have agreed to provide us with a bridge loan facility providing for borrowings of up to $750 million to finance required repayments of Falcon debentures and notes that we may have to repurchase as a result of the Falcon acquisition. Goldman Sachs Credit Partners L.P. is the administrative agent under the bridge loan facility. Goldman, Sachs & Co. has provided a fairness opinion to us in connection with the Broadband Partners joint venture. Goldman Sachs & Co. acted as financial adviser to Charter Investment, Inc. (formerly Charter Communications, Inc.) in connection with its acquisition by Paul G. Allen in December 1998. Goldman, Sachs & Co. and Donaldson Lufkin & Jenrette Securities Corporation acted as co-lead managers and as initial purchasers in the March 1999 Rule 144A placement of Charter Holdings' senior notes. Bear, Stearns & Co. Inc. and Salomon Smith Barney Inc. were initial purchasers in this placement. Goldman, Sachs & Co. and Bear, Stearns & Co. Inc. acted as co-dealer managers in connection with three tender offers for debt securities of Charter Holdings' subsidiaries which were made in the first quarter of 1999. Donaldson, Lufkin & Jenrette Securities Corporation, Citibank, N.A., an affiliate of Salomon Smith Barney Inc., and Goldman, Sachs & Co. are lenders and managing agents under Charter Operating's $4.1 billion senior credit facilities. Goldman, Sachs & Co., Bear, Stearns & Co. Inc., Morgan Stanley & Co. Incorporated and Merrill Lynch, Pierce, Fenner & Smith Incorporated have agreed to be lenders and managing agents under the $1.2 billion senior credit facilities being arranged in connection with the Fanch acquisition. Citibank, N.A., an affiliate of Salomon Smith Barney Inc., has agreed to be a lender and documentation agent under the Fanch credit facilities being arranged in connection with the Fanch acquisition and is also a lender under the $1.5 billion restated and amended Falcon credit facilities. The husband of Nancy B. Peretsman, a director nominee of Charter Communications, Inc., is a managing director of Morgan Stanley & Co. Incorporated. This prospectus may be used by the underwriters and other dealers in connection with offers and sales of the shares, including sales of shares initially sold by the underwriters in the offering being made outside of the United States, to persons located in the United States. 244
248 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES PAGE ----- CHARTER COMMUNICATIONS, INC. Report of Independent Public Accountants.................... F-8 Balance Sheet as of July 22, 1999........................... F-9 Notes to Financial Statement................................ F-10 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES Report of Independent Public Accountants.................... F-11 Consolidated Balance Sheet as of December 31, 1998.......... F-12 Consolidated Statement of Operations for the period from December 24, 1998 through December 31, 1998............... F-13 Consolidated Statement of Cash Flows for the period from December 24, 1998 through December 31, 1998............... F-14 Notes to Consolidated Financial Statements.................. F-15 Report of Independent Public Accountants.................... F-29 Consolidated Balance Sheet as of December 31, 1997.......... F-30 Consolidated Statement of Operations for the period from January 1, 1998 through December 23, 1998 and for the years ended December 31, 1997 and 1996.................... F-31 Consolidated Statements of Shareholder's Investment for the period from January 1, 1998 through December 23, 1998 and for the years ended December 31, 1997 and 1996............ F-32 Consolidated Statement of Cash Flows for the period from January 1, 1998 through December 23, 1998 and for the years ended December 31, 1997 and 1996.................... F-33 Notes to Consolidated Financial Statements.................. F-34 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES: Independent Auditors' Report.............................. F-44 Consolidated Balance Sheets as of December 31, 1998 and 1997.................................................... F-45 Consolidated Statements of Operations for Each of the Years in the Three-Year Period Ended December 31, 1998.................................................... F-46 Consolidated Statements of Members' Equity/Partners' Capital for Each of the Years in the Three-Year Period Ended December 31, 1998................................. F-47 Consolidated Statements of Cash Flows for Each of the Years in the Three-Year Period Ended December 31, 1998.................................................... F-48 Notes to Consolidated Financial Statements................ F-49 CCA GROUP: Report of Independent Public Accountants.................. F-60 Combined Balance Sheet as of December 31, 1997............ F-61 Combined Statements of Operations for the Period From January 1, 1998, Through December 23, 1998 and for the Years Ended December 31, 1997 and 1996.................. F-62 Combined Statements of Shareholders' Deficit for the Period From January 1, 1998, Through December 23, 1998 and for the Years Ended December 31, 1997 and 1996...... F-63 Combined Statements of Cash Flows for the Period From January 1, 1998, Through December 23, 1998 and for the Years Ended December 31, 1997 and 1996.................. F-64 Notes to Combined Financial Statements.................... F-65 CHARTERCOMM HOLDINGS, L.P.: Report of Independent Public Accountants.................. F-79 Consolidated Balance Sheet as of December 31, 1997........ F-80 Consolidated Statements of Operations for the Period From January 1, 1998 Through December 23, 1998 and for the Years Ended December 31, 1997 and 1996.................. F-81 Consolidated Statements of Partner's Capital for the Period From January 1, 1998 Through December 23, 1998 and for the Years Ended December 31, 1997 and 1996...... F-82 Consolidated Statements of Cash Flows for the Period From January 1, 1998 Through December 23, 1998 and for the Years Ended December 31, 1997 and 1996.................. F-83 Notes to Consolidated Financial Statements................ F-84 F-1
249 PAGE ----- GREATER MEDIA CABLEVISION SYSTEMS: Report of Independent Public Accountants.................. F-97 Combined Balance Sheets as of September 30, 1998 and 1997.................................................... F-98 Combined Statements of Income for the Nine Months Ended June 30, 1999 and 1998 (unaudited) and for the Years Ended September 30, 1998, 1997 and 1996................. F-99 Combined Statements of Changes in Net Assets for the Nine Months Ended June 30, 1999 (unaudited) and for the Years Ended September 30, 1996, 1997 and 1998................. F-100 Combined Statements of Cash Flows for the Nine Months Ended June 30, 1999 and 1998 (unaudited) and for the Years Ended September 30, 1998, 1997 and 1996........... F-101 Notes to Combined Financial Statements.................... F-102 RENAISSANCE MEDIA GROUP LLC: Report of Independent Auditors............................ F-108 Consolidated Balance Sheet as of December 31, 1998........ F-109 Consolidated Statement of Operations for the Year Ended December 31, 1998....................................... F-110 Consolidated Statement of Changes in Members' Equity for the Year Ended December 31, 1998........................ F-111 Consolidated Statement of Cash Flows for the Year Ended December 31, 1998....................................... F-112 Notes to Consolidated Financial Statements for the Year Ended December 31, 1998................................. F-113 PICAYUNE MS, LAFOURCHE, LA, ST. TAMMANY, LA, ST. LANDRY, LA, POINTE COUPEE, LA AND JACKSON, TN CABLE TELEVISION SYSTEMS: Report of Independent Auditors............................ F-123 Combined Balance Sheet as of April 8, 1998................ F-124 Combined Statement of Operations for the Period from January 1, 1998 through April 8, 1998................... F-125 Combined Statement of Changes in Net Assets for the Period from January 1, 1998 through April 8, 1998.............. F-126 Combined Statement of Cash Flows for the Period from January 1, 1998 through April 8, 1998................... F-127 Notes to Combined Financial Statements.................... F-128 Report of Independent Auditors............................ F-135 Combined Balance Sheets as of December 31, 1996 and 1997.................................................... F-136 Combined Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997........................ F-137 Combined Statements of Changes in Net Assets for the Years Ended December 31, 1996 and 1997........................ F-138 Combined Statements of Cash Flows for the Years Ended 1995, 1996 and 1997..................................... F-139 Notes to Combined Financial Statements.................... F-140 HELICON PARTNERS I, L.P. AND AFFILIATES: Independent Auditors' Report.............................. F-147 Combined Balance Sheets as of December 31, 1997 and 1998.................................................... F-148 Combined Statements of Operations for Each of the Years in the Three-Year Period Ended December 31, 1998........... F-149 Combined Statements of Changes in Partners' Deficit for Each of the Years in the Three-Year Period Ended December 31, 1998....................................... F-150 Combined Statements of Cash Flows for Each of the Years in the Three-Year Period Ended December 31, 1998........... F-151 Notes to Combined Financial Statements.................... F-152 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.): Report of Independent Accountants......................... F-165 Combined Balance Sheets at December 31, 1998 and 1997..... F-166 Combined Statements of Operations for the Years Ended December 31, 1998 and 1997.............................. F-167 Combined Statement of Changes in Equity for the Years Ended December 31, 1998 and 1997........................ F-168 Combined Statements of Cash Flows for the Years Ended December 31, 1998 and 1997.............................. F-169 Notes to Combined Financial Statements.................... F-170 F-2
250 PAGE ----- RIFKIN CABLE INCOME PARTNERS L.P.: Report of Independent Accountants......................... F-182 Balance Sheet at December 31, 1997 and 1998............... F-183 Statement of Operations for Each of the Three Years in the Period Ended December 31, 1998.......................... F-184 Statement of Partners' Equity (Deficit) for Each of the Three Years in the Period Ended December 31, 1998....... F-185 Statement of Cash Flows for Each of the Three Years in the Period Ended December 31, 1998.......................... F-186 Notes to Financial Statements............................. F-187 RIFKIN ACQUISITION PARTNERS, L.L.L.P.: Report of Independent Accountants......................... F-191 Consolidated Balance Sheet at December 31, 1998 and 1997.................................................... F-192 Consolidated Statement of Operations for Each of the Three Years in the Period Ended December 31, 1998............. F-193 Consolidated Statement of Cash Flows for Each of the Three Years in the Period Ended December 31, 1998............. F-194 Consolidated Statement of Partners' Capital (Deficit) for Each of the Three Years in the Period Ended December 31, 1998.................................................... F-195 Notes to Consolidated Financial Statements................ F-196 INDIANA CABLE ASSOCIATES, LTD.: Report of Independent Auditors............................ F-210 Balance Sheet as December 31, 1997 and 1998............... F-211 Statement of Operations for the Years Ended December 31, 1996, 1997 and 1998..................................... F-212 Statement of Partners' Deficit for the Years Ended December 31, 1996, 1997 and 1998........................ F-213 Statement of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998..................................... F-214 Notes to Financial Statements............................. F-215 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP: Report of Independent Auditors............................ F-219 Consolidated Balance Sheet as of December 31, 1997 and 1998.................................................... F-220 Consolidated Statement of Operations for the Years Ended December 31, 1996, 1997 and 1998........................ F-221 Consolidated Statement of Partners' Equity (Deficit) for the Years Ended December 31, 1996, 1997 and 1998........ F-222 Consolidated Statement of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998........................ F-223 Notes to Consolidated Financial Statements................ F-224 SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS: Report of Independent Public Accountants.................. F-228 Statement of Operations and Changes in Net Assets for the Period from April 1, 1998, through May 20, 1998......... F-229 Statement of Cash Flows for the Period from April 1, 1998, through May 20, 1998.................................... F-230 Notes to Financial Statements............................. F-231 LONG BEACH ACQUISITION CORP.: Report of Independent Public Accountants.................. F-234 Statement of Operations for the Period from April 1, 1997, through May 23, 1997.................................... F-235 Statement of Stockholder's Equity for the Period from April 1, 1997, through May 23, 1997..................... F-236 Statement of Cash Flows for the Period from April 1, 1997, through May 23, 1997.................................... F-237 Notes to Financial Statements............................. F-238 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES Condensed Consolidated Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998......................... F-242 Condensed Consolidated Statements of Operations for the six months ended June 30, 1999 and 1998 (unaudited)........... F-243 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998 (unaudited)........... F-244 Notes to Condensed Consolidated Financial Statements........ F-245 F-3
251 PAGE ----- MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and Six Months Ended June 30, 1998 (unaudited)............................................... F-252 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and Six Months Ended June 30, 1998 (unaudited)............................................... F-253 Notes to Condensed Consolidated Financial Statements (unaudited)............................................... F-254 RENAISSANCE MEDIA GROUP LLC: Consolidated Statement of Operations for the Four Months Ended April 30, 1999 and Six Months Ended June 30, 1998 (unaudited)............................................. F-257 Consolidated Statement of Cash Flows for the Four Months Ended April 30, 1999 and Six Months Ended June 30, 1998 (unaudited)............................................. F-258 Notes to Consolidated Financial Statements................ F-259 HELICON PARTNERS I, L.P. AND AFFILIATES: Unaudited Condensed Combined Balance Sheet as of June 30, 1999.................................................... F-262 Unaudited Condensed Combined Statements of Operations for the Six-Month Periods Ended June 30, 1998 and 1999...... F-263 Unaudited Condensed Combined Statements of Changes in Partners' Deficit for the Six-Month Period Ended June 30, 1999................................................ F-264 Unaudited Condensed Combined Statements of Cash Flows for the Six-Month Periods Ended June 30, 1998 and 1999...... F-265 Notes to Unaudited Condensed Combined Financial Statements.............................................. F-266 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.): Combined Balance Sheets as of June 30, 1999 (unaudited) and December 31, 1998................................... F-268 Combined Statements of Operations for the Six Months Ended June 30, 1999 and 1998 (unaudited)...................... F-269 Combined Statement of Changes in Equity for the Six Months Ended June 30, 1999 (unaudited) and for the Year Ended December 31, 1998....................................... F-270 Combined Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998 (unaudited)...................... F-271 Notes to Condensed Combined Financial Statements (unaudited)............................................. F-272 RIFKIN CABLE INCOME PARTNERS L.P.: Balance Sheet at December 31, 1998 and June 30, 1999 (unaudited)............................................. F-278 Statement of Operations for the Six Months Ended June 30, 1998 and 1999 (unaudited)............................... F-279 Statement of Partners' Equity for the Six Months Ended March 31, 1998 and 1999 (unaudited)..................... F-280 Statement of Cash Flows for the Six Months Ended June 30, 1998 and 1999 (unaudited)............................... F-281 Notes to Financial Statements............................. F-282 RIFKIN ACQUISITION PARTNERS, L.L.L.P.: Consolidated Balance Sheet at June 30, 1999 (unaudited) and December 31, 1998................................... F-284 Consolidated Statement Of Operations for the Six Months Ended June 30, 1999 and 1998 (unaudited)................ F-285 Consolidated Statement of Cash Flow for the Six Months Ended June 30, 1999 and 1998 (unaudited)................ F-286 Consolidated Statements of Partners' Capital (Deficit) for the Six Months Ended June 30, 1999 and 1998 (unaudited)............................................. F-287 Notes to Consolidated Financial Statements................ F-288 INDIANA CABLE ASSOCIATES, LTD.: Balance Sheet as of December 31, 1998 and June 30, 1999 (unaudited)............................................. F-290 Statement of Operations for the Six Months Ended June 30, 1998 and 1999 (unaudited)............................... F-291 Statement of Cash Flows for the Six Months Ended June 30, 1998 and 1999 (unaudited)............................... F-292 Statement of Partners' Deficit for the Six Months Ended June 30, 1999 and for the Year Ended December 31, 1998.................................................... F-293 Notes to Financial Statement (unaudited).................. F-294 F-4
252 PAGE ----- R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP Consolidated Balance Sheet as of June 30, 1999 (unaudited) and December 31, 1998................................... F-295 Consolidated Statement of Operations for the Six Months Ended June 30, 1998 and 1999 (unaudited)................ F-296 Consolidated Statement of Partners' Equity for the Six Months Ended June 30, 1999 and 1998..................... F-297 Consolidated Statement of Cash Flows for the Six Months Ended June 30, 1998 and 1999 (unaudited)................ F-298 Notes to Consolidated Financial Statement (unaudited)..... F-299 AVALON CABLE LLC AND SUBSIDIARIES Report of Independent Accountants......................... F-301 Consolidated Balance Sheet as of December 31, 1998 and 1997.................................................... F-302 Consolidated Statement of Operations for the year ended December 31, 1998 and for the period from September 4, 1997 (inception) through December 31, 1997.............. F-303 Consolidated Statements of Changes in Members' Interest from September 4, 1997 (inception) through December 31, 1998.................................................... F-304 Consolidated Statement of Cash Flows for the year ended December 31, 1998 and for the period from September 4, 1997 (inception) through December 31, 1997.............. F-305 Notes to the Consolidated Financial Statements............ F-306 AVALON CABLE LLC AND SUBSIDIARIES Consolidated Balance Sheet as of June 30, 1999 (unaudited) and December 31, 1998................................... F-320 Consolidated Statement of Operations for the six months ended June 30, 1999 and 1998 (unaudited)................ F-321 Consolidated Statement of Changes in Members' Interest for the six months ended June 30, 1999 (unaudited).......... F-322 Consolidated Statement of Cash Flows for the six months ended June 30, 1999 and 1998 (unaudited)................ F-323 Notes to Consolidated Financial Statements (unaudited).... F-324 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES Report of Independent Accountants......................... F-329 Consolidated Balance Sheets as of December 31, 1998 and 1997.................................................... F-330 Consolidated Statement of Operations for the year ended December 31, 1998 and for the period from September 4, 1997 (inception) through December 31, 1997.............. F-331 Consolidated Statement of Shareholder's Equity for the period from September 4, 1997 (inception) through December 31, 1998....................................... F-332 Consolidated Statement of Cash Flows for the year ended December 31, 1998 and for the period from September 4, 1997 (inception) through December 31, 1997.............. F-333 Notes to the Consolidated Financial Statements............ F-334 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheet as of June 30, 1999 (unaudited) and December 31, 1998................................... F-348 Consolidated Statement of Operations for the six months ended June 30, 1999 and 1998 (unaudited)................ F-349 Consolidated Statement of Changes in Shareholders' Equity for the six months ended June 30, 1999 (unaudited)............................... F-350 Consolidated Statement of Cash Flows for the six months ended March 31, 1999 and 1998 (unaudited)............... F-351 Notes to Consolidated Financial Statements (unaudited).... F-352 CABLE MICHIGAN, INC. AND SUBSIDIARIES Report of Independent Accountants......................... F-357 Consolidated Balance Sheets as of December 31, 1997 and November 5, 1998........................................ F-358 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and for the period from January 1, 1998 through November 5, 1998........................ F-359 Consolidated Statements of Changes in Shareholders' Deficit for the years ended December 31, 1996, 1997 and for the period from January 1, 1998 through November 5, 1998.................................................... F-360 Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1997 and for the period from January 1, 1998 through November 5, 1998........................ F-361 Notes to Consolidated Financial Statements................ F-362 F-5
253 PAGE ----- AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP Report of Independent Accountants......................... F-377 Balance Sheet as of May 28, 1998.......................... F-378 Statement of Operations for the period from January 1, 1998 through May 28, 1998............................... F-379 Statement of Changes in Partners' Equity (Deficit) for the period from January 1, 1998 through May 28, 1998........ F-380 Statement of Cash Flows for the period from January 1, 1998 through May 28, 1998............................... F-381 Notes to Financial Statements............................. F-382 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP Independent Auditors' Report.............................. F-386 Balance Sheets as of December 31, 1996 and 1997........... F-387 Statements of Net Earnings for the years ended December 31, 1995, 1996 and 1997................................. F-388 Statements of Changes in Partners' Equity (Deficit) for the years ended December 31, 1995, 1996 and 1997........ F-389 Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997..................................... F-390 Notes to Financial Statements............................. F-391 PEGASUS CABLE TELEVISION, INC. Report of Independent Accountants......................... F-395 Combined Balance Sheets at December 31, 1996 and 1997 and June 30, 1998........................................... F-396 Combined Statement of Operations for the years ended December 31, 1995, 1996 and 1997 and the six months ended June 30, 1998..................................... F-397 Combined Statements of Changes in Stockholder's Deficit for the three years ended December 31, 1997 and the six months ended June 30, 1998.............................. F-398 Combined Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1998..................................... F-399 Notes to Combined Financial Statements.................... F-400 FALCON COMMUNICATIONS, L.P. Report of Independent Auditors.............................. F-406 Consolidated Balance Sheets at December 31, 1997 and 1998... F-407 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1998............... F-408 Consolidated Statements of Partners' Deficit for each of the three years in the period ended December 31, 1998......... F-409 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998............... F-410 Notes to Consolidated Financial Statements.................. F-411 Condensed Consolidated Balance Sheets at December 31, 1998 and June 30, 1999 (unaudited)............................. F-433 Condensed Consolidated Statements of Operations for the six months ended June 30, 1998 and 1999 (unaudited)........... F-434 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1999 (unaudited)........... F-435 Notes to Unaudited Condensed Consolidated Financial Statements................................................ F-436 TCI FALCON SYSTEMS Independent Auditors' Report................................ F-438 Combined Balance Sheets at September 30, 1998 and December 31, 1997.................................................. F-439 Combined Statements of Operations and Parent's Investment for the period from January 1, 1998 through September 30, 1998 and for the years ended December 31, 1997 and 1996... F-440 Combined Statements of Cash Flows for the period from January 1, 1998 through September 30, 1998 and for the years ended December 31, 1997 and 1996.................... F-441 Notes to the Combined Financial Statements for the period from January 1, 1998 through September 30, 1998 and for the years ended December 31, 1997 and 1996................ F-442 F-6
254 PAGE ----- FANCH CABLE SYSTEM (comprised of components of TWFanch-one Co. and TWFanch-two Co.) Report of Independent Auditors.............................. F-449 Combined Balance Sheets as of December 31, 1998 and 1997.... F-450 Combined Statements of Operations for the years ended December 31, 1998 and 1997................................ F-451 Combined Statements of Net Assets for the years ended December 31, 1998 and 1997................................ F-452 Combined Statements of Cash Flows for the years ended December 31, 1998 and 1997................................ F-453 Notes to Combined Financial Statements...................... F-454 Combined Balance Sheets as of June 30, 1998 (unaudited) and December 31, 1998......................................... F-459 Combined Statements of Operations for the six months ended June 30, 1999 and 1998 (unaudited)............................................... F-460 Combined Statements of Net Assets for the six months ended June 30, 1999 and 1998 (unaudited)............................................... F-461 Combined Statements of Cash Flows for the six months ended June 30, 1999 and 1998 (unaudited)............................................... F-462 Notes to Combined Financial Statements at June 30, 1999 (unaudited)............................................... F-463 BRESNAN COMMUNICATIONS GROUP LLC Consolidated Balance Sheets at December 31, 1998 and June 30, 1999 (unaudited)...................................... F-466 Consolidated Statements of Operations and Member's Equity (Deficit) for the six months ended June 30, 1998 and 1999 (unaudited)............................................... F-467 Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1999 (unaudited).................. F-468 Notes to Consolidated Financial Statements at June 30, 1999 (unaudited)............................................... F-469 BRESNAN COMMUNICATIONS GROUP SYSTEMS Independent Auditors' Report................................ F-475 Combined Balance Sheets at December 31, 1997 and 1998....... F-476 Combined Statements of Operations and Parents' Investment for the years ended December 31, 1996, 1997 and 1998...... F-477 Combined Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998.......................... F-478 Notes to Combined Financial Statements at December 31, 1996, 1997 and 1998............................................. F-479 F-7
255 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Charter Communications, Inc.: We have audited the accompanying balance sheet of Charter Communications, Inc. as of July 22, 1999. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement 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 balance sheet referred to above presents fairly, in all material respects, the financial position of Charter Communications, Inc. as of July 22, 1999, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, July 22, 1999 (except with respect to the matter discussed in Note 2, as to which the date is November 4, 1999) F-8
256 CHARTER COMMUNICATIONS, INC. BALANCE SHEET JULY 22, 1999 ------------- ASSETS CASH........................................................ $100 ==== STOCKHOLDER'S EQUITY COMMON STOCK -- $.001 par value, 100 shares authorized, issued and outstanding.................................... $ -- ADDITIONAL PAID-IN CAPITAL.................................. 100 ---- Total stockholder's equity........................ $100 ==== The accompanying notes are an integral part of the balance sheet. F-9
257 CHARTER COMMUNICATIONS, INC. NOTES TO BALANCE SHEET JULY 22, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND BASIS OF PRESENTATION On July 22, 1999, Charter Investment, Inc. (Charter Investment), a company controlled by Paul G. Allen, formed a wholly owned subsidiary, Charter Communications, Inc. (CCI or the "Company"), a Delaware corporation with an initial investment of $100. The Company has no operations or cash flows other than the initial investment made by Charter Investment. Accordingly, statements of operations and cash flows are not presented. 2. SUBSEQUENT EVENT: In July 1999, the Company filed a registration statement on Form S-1 with the SEC, as amended on September 3, 1999, and further amended on September 28, 1999, October 18, 1999, November 1, 1999 and November 4, 1999 for the issuance of Class A common stock to the public (IPO). CCI will be a holding company whose sole asset will be a controlling equity interest in Charter Communications Holding Company, LLC (Charter Communications Holding Company), a direct and indirect owner of cable systems. Upon completion of the IPO, CCI intends to purchase membership units of Charter Communications Holding Company representing a 100% voting interest and an approximate 34% economic interest. As sole manager of Charter Communications Holding Company, CCI will control the business affairs of Charter Communications Holding Company. CCI's consolidated financial statements will include the accounts of Charter Communications Holding Company upon completion of the IPO. The assets and liabilities of Charter Communications Holding Company will be reflected in the consolidated financial statements of CCI at their historical carrying values and a minority interest will be recorded on the consolidated balance sheet representing that portion of the net equity of Charter Communications Holding Company not owned by CCI. F-10
258 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Charter Communications Holding Company, LLC: We have audited the accompanying consolidated balance sheet of Charter Communications Holding Company, LLC and subsidiaries as of December 31, 1998, and the related consolidated statements of operations and cash flows for the period from December 24, 1998, through December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial position of Charter Communications Holding Company, LLC and subsidiaries as of December 31, 1998, and the results of their operations and their cash flows for the period from December 24, 1998, through December 31, 1998, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, February 5, 1999 (except with respect to the matters discussed in Notes 1 and 13, as to which the date is April 19, 1999) F-11
259 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS) DECEMBER 31, 1998 ----------------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 9,573 Accounts receivable, net of allowance for doubtful accounts of $1,728..................................... 15,108 Prepaid expenses and other................................ 2,519 ---------- Total current assets................................... 27,200 ---------- INVESTMENT IN CABLE TELEVISION PROPERTIES: Property, plant and equipment............................. 716,242 Franchises, net of accumulated amortization of $5,253..... 3,590,054 ---------- 4,306,296 ---------- OTHER ASSETS................................................ 2,031 ---------- $4,335,527 ========== LIABILITIES AND MEMBERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt...................... $ 10,450 Accounts payable and accrued expenses..................... 127,586 Payables to manager of cable television systems -- related party.................................................. 4,334 ---------- Total current liabilities.............................. 142,370 ---------- LONG-TERM DEBT.............................................. 1,991,756 ---------- DEFERRED MANAGEMENT FEES -- RELATED PARTY................... 15,561 ---------- OTHER LONG-TERM LIABILITIES................................. 38,461 ---------- MEMBERS' EQUITY -- 100 UNITS ISSUED AND OUTSTANDING......... 2,147,379 ---------- $4,335,527 ========== The accompanying notes are an integral part of this consolidated statement. F-12
260 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS) PERIOD FROM DECEMBER 24, 1998, THROUGH DECEMBER 31, 1998 ------------- REVENUES.................................................... $13,713 ------- OPERATING EXPENSES: Operating costs........................................... 6,168 General and administrative................................ 966 Depreciation and amortization............................. 8,318 Stock option compensation expense......................... 845 Corporate expense charges -- related party................ 473 ------- 16,770 ------- Loss from operations................................... (3,057) ------- OTHER INCOME (EXPENSE): Interest income........................................... 133 Interest expense.......................................... (2,353) ------- (2,220) ------- Net loss............................................... $(5,277) ======= The accompanying notes are an integral part of this consolidated statement. F-13
261 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS) PERIOD FROM DECEMBER 24, 1998, THROUGH DECEMBER 31, 1998 -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (5,277) Adjustments to reconcile net loss to net cash provided by operating activities -- Depreciation and amortization.......................... 8,318 Stock option compensation expense...................... 845 Changes in assets and liabilities -- Receivables, net..................................... (8,753) Prepaid expenses and other........................... (211) Accounts payable and accrued expenses................ 10,227 Payables to manager of cable television systems...... 473 Other operating activities........................... 2,022 ---------- Net cash provided by operating activities......... 7,644 ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment................ (13,672) ---------- Net cash used in investing activities............. (13,672) ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt.............................. 14,200 ---------- Net cash provided by financing activities......... 14,200 ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 8,172 CASH AND CASH EQUIVALENTS, beginning of period.............. 1,401 ---------- CASH AND CASH EQUIVALENTS, end of period.................... $ 9,573 ========== CASH PAID FOR INTEREST...................................... $ 5,538 ========== NONCASH TRANSACTION -- Transfer of cable television operating subsidiaries from the parent company (see Note 1)........................................................ $2,151,811 ========== The accompanying notes are an integral part of this consolidated statement. F-14
262 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BASIS OF PRESENTATION Charter Communications Holding Company, LLC (CCHC), a Delaware limited liability company, was formed in 1999 as a wholly owned subsidiary of Charter Investment, Inc. (Charter), formerly Charter Communications, Inc. Charter, through its wholly owned cable television operating subsidiary, Charter Communications Properties, LLC (CCP), commenced operations with the acquisition of a cable television system on September 30, 1995. Effective December 23, 1998, through a series of transactions, Paul G. Allen acquired approximately 94% of Charter for an aggregate purchase price of $211 million, excluding $214 million in debt assumed (the "Paul Allen Transaction"). In conjunction with the Paul Allen Transaction, Charter acquired 100% of the interests it did not already own in CharterComm Holdings, LLC (CharterComm Holdings) and CCA Group (comprised of CCA Holdings Corp., CCT Holdings Corp. and Charter Communications Long Beach, Inc.), all cable television operating companies, for $2.0 billion, excluding $1.8 billion in debt assumed from unrelated third parties for fair value. Charter previously managed and owned minority interests in these companies. These acquisitions were accounted for using the purchase method of accounting, and accordingly, results of operations of CharterComm Holdings and CCA Group are included in the financial statements from the date of acquisition. In February 1999, Charter transferred all of its cable television operating subsidiaries to a wholly owned subsidiary of Charter Communications Holdings, LLC (Charter Holdings), Charter Communications Operating, LLC (Charter Operating). Charter Holdings is a wholly owned subsidiary of CCHC. This transfer was accounted for as a reorganization of entities under common control similar to a pooling of interests. As a result of the change in ownership of CCP, CharterComm Holdings and CCA Group, CCHC has applied push-down accounting in the preparation of the consolidated financial statements. Accordingly, CCHC increased its members' equity by $2.2 billion to reflect the amounts paid by Paul G. Allen and Charter. The purchase price was allocated to assets acquired and liabilities assumed based on their relative fair values, including amounts assigned to franchises of $3.6 billion. The allocation of the purchase price is based, in part, on preliminary information which is subject to adjustment upon obtaining complete valuation information of intangible assets. The valuation information is expected to be finalized in the third quarter of 1999. Management believes that finalization of the purchase price will not have a material impact on the results of operations or financial position of CCHC. On April 23, 1998, Paul G. Allen and a company controlled by Paul G. Allen, (the "Paul G. Allen Companies") purchased substantially all of the outstanding partnership interests in Marcus Cable Company L.L.C. (Marcus Cable) for $1.4 billion, excluding $1.8 billion in assumed liabilities. The owner of the remaining partnership interest retained voting control of Marcus Cable. In February 1999, Marcus Cable Holdings, LLC (Marcus Holdings) was formed and Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings on March 15, 1999. On March 31, 1999, Paul G. Allen purchased the remaining partnership interests in Marcus Cable, including voting control. On April 7, 1999, Marcus Holdings was merged into Charter Holdings and Marcus Cable was transferred to Charter Holdings. For financial reporting purposes, the merger was accounted for as an acquisition of Marcus Cable effective March 31, 1999, the date Paul G. Allen obtained voting control of Marcus Cable. Accordingly, the results of operations of Marcus Cable have not been included in the financial statements for the period ended December 31, 1998. F-15
263 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The consolidated financial statements of CCHC include the accounts of Charter Operating and CCP and the accounts of CharterComm Holdings and CCA Group and their subsidiaries since December 23, 1998 (date acquired by Charter) and are collectively referred to as the "Company" herein. All subsidiaries are wholly owned. All material intercompany transactions and balances have been eliminated. The Company derives its primary source of revenues by providing various levels of cable television programming and services to residential and business customers. As of December 31, 1998, the Company provided cable television services to customers in 20 states in the U.S. The consolidated financial statements of CCHC for periods prior to December 24, 1998, are not presented herein since, as a result of the Paul Allen Transaction and the application of push down accounting, the financial information as of December 31, 1998, and for the period from December 24, 1998, through December 31, 1998, is presented on a different cost basis than the financial information as of December 31, 1997, and for the periods prior to December 24, 1998. Such information is not comparable. CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 1998, cash equivalents consist primarily of repurchase agreements. These investments are carried at cost that 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 television 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, and equipment replacement and betterments are capitalized. Depreciation is provided on the straight-line basis over the estimated useful lives of the related assets as follows: Cable distribution systems.................................. 3-15 years 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 television systems represent management's estimate of fair value and are generally amortized using the straight-line method over a period of 15 years. 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. IMPAIRMENT OF ASSETS If facts and circumstances suggest 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 F-16
264 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 Cable television revenues from basic and premium 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 television system. As of December 31, 1998, no installation revenue has been deferred, as direct selling costs have exceeded installation revenue. Fees collected from programmers to guarantee carriage are deferred and amortized to income over the life of the contracts. Local governmental authorities impose franchise fees on the Company 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. Franchise fees collected and paid are reported as revenues. INTEREST RATE HEDGE AGREEMENTS The Company manages fluctuations in interest rates by using interest rate hedge agreements, as required by certain debt agreements. Interest rate swaps, caps and collars are accounted for as hedges of debt obligations, and accordingly, the net settlement amounts are recorded as adjustments to interest expense in the period incurred. Premiums paid for interest rate caps are deferred, included in other assets, and are amortized over the original term of the interest rate agreement as an adjustment to interest expense. The Company's interest rate swap agreements require the Company to pay a fixed rate and receive a floating rate thereby creating fixed rate debt. Interest rate caps and collars are entered into by the Company to reduce the impact of rising interest rates on floating rate debt. The Company's participation in interest rate hedging transactions involves instruments that have a close correlation with its debt, thereby managing its risk. Interest rate hedge agreements have been designed for hedging purposes and are not held or issued for speculative purposes. INCOME TAXES Income taxes are the responsibility of the individual members or partners and are not provided for in the accompanying consolidated financial statements. In addition, certain subsidiaries are corporations subject to income taxes but have no operations and, therefore, no material income tax liabilities or assets. SEGMENTS In 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." Segments have been identified based upon management responsibility. The Company operates in one segment, cable services. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported F-17
265 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 2. PRO FORMA FINANCIAL INFORMATION (UNAUDITED): In addition to the acquisitions by Charter of CharterComm Holdings and CCA Group, the Company acquired cable television systems for an aggregate purchase price, net of cash acquired, of $291,800 and $342,100 in 1998 and 1997, respectively, all prior to December 24, 1998. The Company also refinanced substantially all of its long-term debt in March 1999 (see Note 12). Unaudited pro forma operating results as though the acquisitions and refinancing discussed above, including the Paul Allen Transaction, had occurred on January 1, 1997, with adjustments to give effect to amortization of franchises, interest expense and certain other adjustments are as follows: YEAR ENDED DECEMBER 31 ---------------------- 1998 1997 --------- --------- Revenues................................................... $ 601,953 $ 550,259 Loss from operations....................................... (90,346) (129,009) Net loss................................................... (294,598) (329,323) The unaudited pro forma financial information has been presented for comparative purposes and does not purport to be indicative of the results of operations or financial position of the Company had these transactions been completed as of the assumed date or which may be obtained in the future. 3. MEMBERS' EQUITY: For the period from December 24, 1998, through December 31, 1998, members' equity consisted of the following: Balance, December 24, 1998.................................. $2,151,811 Net loss.................................................... (5,277) Stock option compensation................................... 845 ---------- Balance, December 31, 1998.................................. $2,147,379 ========== F-18
266 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consists of the following at December 31, 1998: Cable distribution systems.................................. $ 661,749 Land, buildings and leasehold improvements.................. 26,670 Vehicles and equipment...................................... 30,590 ---------- 719,009 Less -- Accumulated depreciation............................ (2,767) ---------- $ 716,242 ========== For the period from December 24, 1998, through December 31, 1998, depreciation expense was $2,767. 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following at December 31, 1998: Accrued interest............................................ $ 30,809 Franchise fees.............................................. 12,534 Programming costs........................................... 11,856 Capital expenditures........................................ 15,560 Accrued income taxes........................................ 15,205 Accounts payable............................................ 7,439 Other accrued liabilities................................... 34,183 -------- $127,586 ======== 6. LONG-TERM DEBT: Long-term debt consists of the following at December 31, 1998: Credit Agreements (including CCP, CCA Group and CharterComm Holdings)................................................. $1,726,500 Senior Secured Discount Debentures.......................... 109,152 11 1/4% Senior Notes........................................ 125,000 Current maturities.......................................... (10,450) Unamortized net premium..................................... 41,554 ---------- $1,991,756 ========== CCP CREDIT AGREEMENT CCP maintains a credit agreement (the "CCP Credit Agreement"), which provides for two term loan facilities, one with the principal amount of $60,000 that matures on June 30, 2006, and the other with the principal amount of $80,000 that matures on June 30, 2007. The CCP Credit Agreement also provides for a $90,000 revolving credit facility with a maturity date of June 30, 2006. Amounts under the CCP Credit Agreement bear interest at the LIBOR Rate or Base Rate, F-19
267 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) as defined, plus a margin up to 2.88%. The variable interest rates ranged from 7.44% to 8.19% at December 31, 1998. CC-I, CC-II COMBINED CREDIT AGREEMENT Charter Communications, LLC and Charter Communications II, LLC, subsidiaries of CharterComm Holdings, maintains a combined credit agreement (the "Combined Credit Agreement"), which provides for two term loan facilities, one with the principal amount of $200,000 that matures on June 30, 2007, and the other with the principal amount of $150,000 that matures on December 31, 2007. The Combined Credit Agreement also provides for a $290,000 revolving credit facility, with a maturity date of June 30, 2007. Amounts under the Combined Credit Agreement bear interest at the LIBOR Rate or Base Rate, as defined, plus a margin up to 2.0%. The variable interest rates ranged from 6.69% to 7.31% at December 31, 1998. A quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the unborrowed balance of the revolving credit facility. CHARTERCOMM HOLDINGS -- SENIOR SECURED DISCOUNT DEBENTURES CharterComm Holdings issued $146,820 of Senior Secured Discount Debentures (the "Debentures") for proceeds of $75,000. The Debentures are effectively subordinated to the claims and creditors of CharterComm Holdings' subsidiaries, including the lenders under the Combined Credit Agreement. The Debentures are redeemable at the Company's option at amounts decreasing from 107% to 100% of principal, plus accrued and unpaid interest to the redemption date, beginning on March 15, 2001. The issuer is required to make an offer to purchase all of the Debentures, at a purchase price equal to 101% of the principal amount, together with accrued and unpaid interest, upon a Change in Control, as defined in the Debentures Indenture. No interest is payable on the Debentures prior to March 15, 2001. Thereafter, interest on the Debentures is payable semiannually in arrears beginning September 15, 2001, until maturity on March 15, 2007. CHARTERCOMM HOLDINGS -- 11 1/4% SENIOR NOTES CharterComm Holdings issued $125,000 aggregate principal amount of 11 1/4% Senior Notes (the "11 1/4% Notes"). The Notes are effectively subordinated to the claims of creditors of CharterComm Holdings' subsidiaries, including the lenders under the Combined Credit Agreements. The 11 1/4% Notes are redeemable at the Company's option at amounts decreasing from 106% to 100% of principal, plus accrued and unpaid interest to the date of redemption, beginning on March 15, 2001. The issuer is required to make an offer to purchase all of the 11 1/4% Notes, at a purchase price equal to 101% of the principal amount, together with accrued and unpaid interest, upon a Change in Control, as defined in the 11 1/4% Notes indenture. Interest is payable semiannually on March 15 and September 15 until maturity on March 15, 2006. As of December 24, 1998, the Debentures and 11 1/4% Notes were recorded at their estimated fair values resulting in an increase in the carrying values of the debt and an unamortized net premium as of December 31, 1998. The premium will be amortized to interest expense over the estimated remaining lives of the debt using the interest method. As of December 31, 1998, the effective interest rates on the Debentures and 11 1/4% Notes were 10.7% and 9.6%, respectively. CCE-I CREDIT AGREEMENT Charter Communications Entertainment I LLC, a subsidiary of CCA Group, maintains a credit agreement (the "CCE-I Credit Agreement"), which provides for a $280,000 term loan that F-20
268 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) matures on September 30, 2006, and $85,000 fund loan that matures on March 31, 2007, and a $175,000 revolving credit facility with a maturity date of September 30, 2006. Amounts under the CCE-I Credit Agreement bear interest at either the LIBOR Rate or Base Rate, as defined, plus a margin up to 2.75%. The variable interest rates ranged from 6.88% to 8.06% at December 31, 1998. A quarterly commitment fee of between 0.375% and 0.5% per annum is payable on the unborrowed balance of the revolving credit facility. CCE-II COMBINED CREDIT AGREEMENT Charter Communications Entertainment II, LLC and Long Beach LLC, subsidiaries of CCA Group, maintain a credit agreement (the "CCE-II Combined Credit Agreement"), which provides for two term loan facilities, one with the principal amount of $100,000 that matures on March 31, 2005, and the other with the principal amount of $90,000 that matures on March 31, 2006. The CCE-II Combined Credit Agreement also provides for a $185,000 revolving credit facility, with a maturity date of March 31, 2005. Amounts under the CCE-II Combined Credit Agreement bear interest at either the LIBOR Rate or Base Rate, as defined, plus a margin up to 2.5%. The variable rates ranged from 6.56% to 7.59% at December 31, 1998. A quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the unborrowed balance of the revolving credit facility. CCE CREDIT AGREEMENT Charter Communications Entertainment, LLC, a subsidiary of CCA Group, maintains a credit agreement (the "CCE Credit Agreement") which provides for a term loan facility with the principal amount of $130,000 that matures on September 30, 2007. Amounts under the CCE Credit Agreement bear interest at the LIBOR Rate or Base Rate, as defined, plus a margin up to 3.25%. The variable interest rate at December 31, 1998, was 8.62%. CCE-II HOLDINGS CREDIT AGREEMENT CCE-II Holdings, LLC, a subsidiary of CCA Group, entered into a credit agreement (the "CCE-II Holdings Credit Agreement"), which provides for a term loan facility with the principal amount of $95,000 that matures on September 30, 2006. Amounts under the CCE-II Holdings Credit Agreement bear interest at either the LIBOR Rate or Base Rate, as defined, plus a margin up to 3.25%. The variable rate at December 31, 1998, was 8.56%. Based upon outstanding indebtedness at December 31, 1998, and the amortization of term and fund loans, and scheduled reductions in available borrowings of the revolving credit facilities, aggregate future principal payments on the total borrowings under all debt agreements at December 31, 1998, are as follows: YEAR AMOUNT - ---- ---------- 1999........................................................ $ 10,450 2000........................................................ 21,495 2001........................................................ 42,700 2002........................................................ 113,588 2003........................................................ 157,250 Thereafter.................................................. 1,652,837 ---------- $1,998,320 ========== F-21
269 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. FAIR VALUE OF FINANCIAL INSTRUMENTS: A summary of debt and the related interest rate hedge agreements at December 31, 1998, is as follows: CARRYING NOTIONAL FAIR DEBT VALUE AMOUNT VALUE - ---- ---------- ---------- ---------- Credit Agreements (including CCP, CCA Group and CharterComm Holdings)............................ $1,726,500 $ -- $1,726,500 Senior Secured Discount Debentures................. 138,102 -- 138,102 11 1/4% Senior Notes............................... 137,604 -- 137,604 INTEREST RATE HEDGE AGREEMENTS Swaps.............................................. (23,216) 1,105,000 (23,216) Caps............................................... -- 15,000 -- Collars............................................ (4,174) 310,000 (4,174) As the long-term debt under the credit agreements bears interest at current market rates, their carrying amount approximates market value at December 31, 1998. The fair values of the 11 1/4% Notes and the Debentures are based on quoted market prices. The weighted average interest pay rate for the Company's interest rate swap agreements was 7.66% at December 31, 1998. The weighted average interest rate for the Company's interest rate cap agreements was 8.55% at December 31, 1998. The weighted average interest rates for the Company's interest rate collar agreements were 8.61% and 7.31% for the cap and floor components, respectively, at December 31, 1998. The notional amounts of interest rate hedge agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the Company's exposure through its use of interest rate hedge agreements. The amounts exchanged are determined by reference to the notional amount and the other terms of the contracts. The fair value of interest rate hedge agreements generally reflects the estimated amounts that the Company would receive or pay (excluding accrued interest) to terminate the contracts on the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Dealer quotations are available for the Company's interest rate hedge agreements. Management believes that the sellers of the interest rate hedge agreements will be able to meet their obligations under the agreements. In addition, some of the interest rate hedge agreements are with certain of the participating banks under the Company's credit facilities, thereby reducing the exposure to credit loss. The Company has policies regarding the financial stability and credit standing of major counterparties. Nonperformance by the counterparties is not anticipated nor would it have a material adverse effect on the Company's consolidated financial position or results of operations. 8. RELATED-PARTY TRANSACTIONS: Charter provides 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 services are billed and charged directly to the Company's operating subsidiaries and are included in operating costs. These billings are determined based on the number of basic customers. Such costs totaled $128 for the period from December 24, 1998, F-22
270 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) through December 31, 1998. All other costs incurred by Charter on behalf of the Company are recorded as expenses in the accompanying consolidated financial statements and are included in corporate expense charges -- related party. Management believes that costs incurred by Charter on the Company's behalf and included in the accompanying financial statements are not materially different than costs the Company would have incurred as a stand alone entity. Charter utilizes a combination of excess insurance coverage and self-insurance programs for its medical, dental and workers' compensation claims. Charges are made to the Company as determined by independent actuaries at the present value of the actuarially computed present and future liabilities for such benefits. Medical coverage provides for $2,435 aggregate stop loss protection and a loss limitation of $100 per person per year. Workers' compensation coverage provides for $800 aggregate stop loss protection and a loss limitation of $150 per person per year. The Company is charged a management fee based on percentages of revenues or a flat fee plus additional fees based on percentages of operating cash flows, as stipulated in the management agreements between Charter and the operating subsidiaries. To the extent management fees charged to the Company are greater (less) than the corporate expenses incurred by Charter, the Company will record distributions to (capital contributions from) Charter. For the period from December 24, 1998, through December 31, 1998, the management fee charged to the Company approximated the corporate expenses incurred by Charter on behalf of the Company. As of December 31, 1998, management fees currently payable of $473 are included in payables to manager of cable television systems-related party. Beginning in 1999, the management fee will be based on 3.5% of revenues as permitted by the new debt agreements of the Company (see Note 13). Charter, Paul G. Allen and certain affiliates of Mr. Allen own equity interests or warrants to purchase equity interests in various entities which provide services or programming to the Company, including High Speed Access Corp. (High Speed Access), WorldGate Communications, Inc. (WorldGate), Wink Communications, Inc. (Wink), ZDTV, USA Networks, Inc. (USA Networks) and Oxygen Media Inc. (Oxygen Media). In addition, certain officers or directors of the Company also serve as directors of High Speed Access and USA Networks. The Company and its affiliates do not hold controlling interests in any of these companies. Certain of the Company's cable television subscribers receive cable modem-based internet access through High Speed Access and TV-based internet access through WorldGate. For the period from December 24, 1998, through December 31, 1998, 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 television systems from Wink, ZDTV, USA Networks and Oxygen Media. The Company pays a fee for the programming service generally based on the number of subscribers receiving the service. Such fees for the period from December 24, 1998, through December 31, 1998, were less than 1% of total operating costs. In addition, the Company receives commissions from USA Networks for home shopping sales generated by its customers. Such revenues for the period from December 24, 1998, through December 31, 1998, were less than 1% of total revenues. F-23
271 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases certain facilities and equipment under noncancelable operating leases. Leases and rental costs charged to expense for the period from December 24, 1998, through December 31, 1998, were $70. Future minimum lease payments are as follows: 1999........................................................ $2,843 2000........................................................ 2,034 2001........................................................ 1,601 2002........................................................ 626 2003........................................................ 366 Thereafter.................................................. 1,698 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 incurred for pole rental attachments for the period from December 24, 1998, through December 31, 1998, was $137. LITIGATION The Company is a party to lawsuits that arose in the ordinary course of conducting its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits will not have a material adverse effect on the Company's consolidated financial position or results of operations. REGULATION IN THE CABLE TELEVISION INDUSTRY The cable television 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 television 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 television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have 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. As of December 31, 1998, 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 F-24
272 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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, deregulates rates on the cable programming service tier (CPST). The FCC is currently developing permanent regulations to implement the rate deregulation provisions of the 1996 Telecom Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on the Company's consolidated financial position or results of operations. The FCC may further restrict the ability of cable television operators to implement rate increases or the United States Congress may enact legislation that could delay or suspend the scheduled March 1999 termination of CPST rate regulation. This continued rate regulation, if adopted, could limit the rates charged by the Company. A number of states subject cable television 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 television rates is not allowed to be more restrictive than the federal or local regulation. The Company is subject to state regulation in Connecticut. 10. EMPLOYEE BENEFIT PLANS: The Company's employees may participate in 401(k) plans (the "401(k) Plans"). Employees that qualify for participation 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 401(k) Plans totaling $20 for the period from December 24, 1998, through December 31, 1998. 11. ACCOUNTING STANDARD NOT YET IMPLEMENTED: In June 1998, the Financial Accounting Standards Board adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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. 133 is effective for fiscal years beginning after June 15, 1999. The Company has not yet quantified the impacts of adopting SFAS No. 133 on its consolidated financial statements nor has it determined the timing or method of its adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings (loss). F-25
273 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. PARENT COMPANY ONLY FINANCIAL STATEMENTS As a result of the limitations on and prohibitions of distributions, substantially all of the net assets of the consolidated subsidiaries are restricted for distribution to CCHC, the parent company. CCHC (parent company only) financial statements are presented below. CHARTER COMMUNICATIONS HOLDING COMPANY, LLC (PARENT COMPANY ONLY) BALANCE SHEET (DOLLARS IN THOUSANDS) DECEMBER 31, 1998 ----------------- ASSETS INVESTMENT IN CHARTER HOLDINGS.............................. $2,147,379 ========== MEMBERS' EQUITY MEMBERS' EQUITY............................................. $2,147,379 ========== CHARTER COMMUNICATIONS HOLDING COMPANY, LLC (PARENT COMPANY ONLY) STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS) PERIOD FROM DECEMBER 24, 1998, THROUGH DECEMBER 31, 1998 ------------------ EQUITY IN LOSS OF CHARTER HOLDINGS.......................... $ (5,277) ========== Net loss.................................................. $ (5,277) ========== CHARTER COMMUNICATIONS HOLDING COMPANY, LLC (PARENT COMPANY ONLY) STATEMENT OF MEMBERS' EQUITY (DOLLARS IN THOUSANDS) Balance, December 24, 1998.................................. $2,151,811 Net loss.................................................... (5,277) Stock option compensation................................... 845 ---------- Balance, December 31, 1998.................................. $2,147,379 ========== The investment in Charter Holdings is accounted for on the equity method. No statement of cash flows has been presented as CCHC (parent company only) had no cash flow activity. 13. SUBSEQUENT EVENTS: Through April 19, 1999, the Company has entered into definitive agreements to purchase eight cable television companies, including a swap of cable television systems, for approximately $4.6 billion. The swap of cable television systems will be recorded at the fair value of the systems exchanged. The acquisitions are expected to close no later than March 31, 2000. The acquisitions will be accounted for using the purchase method of accounting, and accordingly, F-26
274 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) results of operations of the acquired businesses will be included in the financial statements from the dates of acquisitions. In March 1999, concurrent with the issuance of $600.0 million 8.250% Senior Notes due 2007, $1.5 billion 8.625% Senior Notes due 2009 and $1.475 billion 9.920% Senior Discount Notes due 2011 (collectively, the "CCH Notes"), the Company extinguished substantially all long-term debt, excluding borrowings of the Company under its credit agreements, and refinanced substantially all existing credit agreements at various subsidiaries with a new credit agreement (the "CCO Credit Agreement") entered into by Charter Operating. The Company expects to record an extraordinary loss of approximately $8 million in conjunction with the extinguishment of substantially all long-term debt and the refinancing of its credit agreements. The CCO Credit Agreement provides for two term facilities, one with a principal amount of $1.0 billion that matures September 2008 (Term A), and the other with the principal amount of $1.85 billion that matures on March 2009 (Term B). The CCO Credit Agreement also provides for a $1.25 billion revolving credit facility with a maturity date of September 2008. Amounts under the CCO Credit Agreement bear interest at the Base Rate or the Eurodollar rate, as defined, plus a margin up to 2.75%. A quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the unborrowed balance of Term A and the revolving credit facility. On March 17, 1999, the Company borrowed $1.75 billion under Term B and invested the excess cash of $1.0 billion in short-term investments. Charter Communications Holdings Capital Corporation is a co-issuer of the CCH Notes and is a wholly owned finance subsidiary of Charter Holdings with no independent assets or operations. In accordance with an employment agreement between Charter and the President and Chief Executive Officer of Charter and a related option agreement between CCHC and the President and Chief Executive Officer of Charter, 7,044,127 options to purchase 3% of the net equity value of CCHC were issued to the President and Chief Executive Officer of Charter. The options vest over a four year period from the date of grant and expire ten years from the date of grant. In February 1999, the Company adopted an option plan providing for the grant of options to purchase up to an 10% of the aggregate equity value of the subsidiaries of CCHC as of February 1999. The option plan provides for grants of options to employees, and consultants of CCHC and its affiliates and consultants who provide services to CCHC. Options granted vest over five years from the date of grant. However, if there has not been a public offering of the equity interests of CCHC or an affiliate, vesting will occur only upon termination of employment for any reason, other than for cause or disability. 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. Following the completion of an initial public offering by Charter Communications, Inc. membership units received upon exercise of the options will be automatically exchanged for shares of Class A common stock of CCI on a one-for-one basis. Options outstanding as of March 31, 1999, are as follows: OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------- ---------------------- EXERCISE NUMBER OF REMAINING CONTRACT NUMBER OF PRICE OPTIONS LIFE (IN YEARS) OPTIONS - ---------------------- ---------------------- ---------------------- ---------------------- $20.00 16,095,008 9.8 1,761,032 F-27
275 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" to account for the option plans. Stock option compensation expense of $845 has been recorded in the financial statements since the exercise price is less than the estimated fair value of the underlying membership interests on the date of grant. Estimated fair value was determined by the Company using the valuation inherent in the Paul Allen Transaction and valuations of public companies in the cable television industry adjusted for factors specific to the Company. Compensation expense is being accrued over the vesting period of each grant that varies from four to five years. As of March 31, 1999, deferred compensation remaining to be recognized in future periods totalled $143 million. Had compensation expense for the option plans been determined based on the fair value at the grant dates under the provisions of SFAS No. 123, the Company's net loss would have been $5.5 million for the period from December 24, 1998, through December 31, 1998. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: no dividend yield, expected volatility of 44.00%, risk free rate of 5.00%, and expected option lives of 10 years. F-28
276 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Charter Communications Holding Company, LLC: We have audited the accompanying consolidated balance sheet of Charter Communications Holding Company, LLC and subsidiaries as of December 31, 1997, and the related consolidated statements of operations, shareholder's investment and cash flows for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Charter Communications Holding Company, LLC and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, February 5, 1999 F-29
277 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS) DECEMBER 31, 1997 ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 626 Accounts receivable, net of allowance for doubtful accounts of $52........................................ 579 Prepaid expenses and other................................ 32 ------- Total current assets................................... 1,237 ------- INVESTMENT IN CABLE TELEVISION PROPERTIES: Property, plant and equipment............................. 25,530 Franchises, net of accumulated amortization of $3,829..... 28,195 ------- 53,725 ------- OTHER ASSETS................................................ 849 ------- $55,811 ======= LIABILITIES AND SHAREHOLDER'S INVESTMENT CURRENT LIABILITIES: Accounts payable and accrued expenses..................... $ 3,082 Payables to manager of cable television systems -- related party.................................................. 114 ------- Total current liabilities.............................. 3,196 ------- LONG-TERM DEBT.............................................. 41,500 ------- NOTE PAYABLE TO RELATED PARTY, including accrued interest... 13,090 ------- SHAREHOLDER'S INVESTMENT: Common stock, $.01 par value, 100 shares authorized, one issued and outstanding................................. -- Paid-in capital........................................... 5,900 Accumulated deficit....................................... (7,875) ------- Total shareholder's investment......................... (1,975) ------- $55,811 ======= The accompanying notes are an integral part of these consolidated statements. F-30
278 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) PERIOD FROM JANUARY 1, YEAR ENDED 1998, THROUGH DECEMBER 31 DECEMBER 23, ------------------ 1998 1997 1996 ------------- ------- ------- REVENUES................................................. $ 49,731 $18,867 $14,881 -------- ------- ------- OPERATING EXPENSES: Operating costs........................................ 18,751 9,157 5,888 General and administrative............................. 7,201 2,610 2,235 Depreciation and amortization.......................... 16,864 6,103 4,593 Corporate expense allocation -- related party.......... 6,176 566 446 -------- ------- ------- 48,992 18,436 13,162 -------- ------- ------- Income from operations.............................. 739 431 1,719 -------- ------- ------- OTHER INCOME (EXPENSE): Interest income........................................ 44 41 20 Interest expense....................................... (17,277) (5,120) (4,415) Other, net............................................. (728) 25 (47) -------- ------- ------- (17,961) (5,054) (4,442) -------- ------- ------- Net loss............................................ $(17,222) $(4,623) $(2,723) ======== ======= ======= The accompanying notes are an integral part of these consolidated statements. F-31
279 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDER'S INVESTMENT (DOLLARS IN THOUSANDS) COMMON PAID-IN ACCUMULATED STOCK CAPITAL DEFICIT TOTAL ------ ------- ----------- -------- BALANCE, December 31, 1995................. $-- $ 1,500 $ (529) $ 971 Capital contributions.................... -- 4,400 -- 4,400 Net loss................................. -- -- (2,723) (2,723) -- ------- -------- -------- BALANCE, December 31, 1996................. -- 5,900 (3,252) 2,648 Net loss................................. -- -- (4,623) (4,623) -- ------- -------- -------- BALANCE, December 31, 1997................. -- 5,900 (7,875) (1,975) Capital contributions.................... -- 10,800 -- 10,800 Net loss................................. -- -- (17,222) (17,222) -- ------- -------- -------- BALANCE, December 23, 1998................. $-- $16,700 $(25,097) $ (8,397) == ======= ======== ======== The accompanying notes are an integral part of these consolidated statements. F-32
280 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) PERIOD FROM JANUARY 1, YEAR ENDED 1998, THROUGH DECEMBER 31 DECEMBER 23, ------------------- 1998 1997 1996 ------------- ------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (17,222) $(4,623) $ (2,723) Adjustments to reconcile net loss to net cash provided by operating activities -- Depreciation and amortization........................... 16,864 6,103 4,593 Loss on sale of cable television system................. -- 1,363 -- Amortization of debt issuance costs, debt discount and interest rate cap agreements.......................... 267 123 -- (Gain) loss on disposal of property, plant and equipment............................................. (14) 130 -- Changes in assets and liabilities, net of effects from acquisitions -- Receivables, net...................................... 10 (227) 6 Prepaid expenses and other............................ (125) 18 312 Accounts payable and accrued expenses................. 16,927 894 3,615 Payables to manager of cable television systems....... 5,288 (153) 160 Other operating activities............................ 569 -- -- --------- ------- -------- Net cash provided by operating activities............. 22,564 3,628 5,963 --------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment................ (15,364) (7,880) (5,894) Payments for acquisitions, net of cash acquired........... (167,484) -- (34,069) Proceeds from sale of cable television system............. -- 12,528 -- Other investing activities................................ (486) -- 64 --------- ------- -------- Net cash provided by (used in) investing activities... (183,334) 4,648 (39,899) --------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt.............................. 217,500 5,100 31,375 Repayments of long-term debt.............................. (60,200) (13,375) (1,000) Capital contributions..................................... 7,000 -- 4,400 Payment of debt issuance costs............................ (3,487) (12) (638) --------- ------- -------- Net cash provided by (used in) financing activities... 160,813 (8,287) 34,137 --------- ------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 43 (11) 201 CASH AND CASH EQUIVALENTS, beginning of period.............. 626 637 436 --------- ------- -------- CASH AND CASH EQUIVALENTS, end of period.................... $ 669 $ 626 $ 637 ========= ======= ======== CASH PAID FOR INTEREST...................................... $ 7,679 $ 3,303 $ 2,798 ========= ======= ======== The accompanying notes are an integral part of these consolidated statements. F-33
281 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND BASIS OF PRESENTATION Charter Communications Holding Company, LLC (CCHC), a Delaware limited liability company, was formed in 1999 as a wholly owned subsidiary of Charter Investment, Inc. (Charter), formerly Charter Communications, Inc. Charter, through its wholly owned cable television operating subsidiary, Charter Communications Properties, LLC (CCP), commenced operations with the acquisition of a cable television system on September 30, 1995. Effective December 23, 1998, through a series of transactions, Paul G. Allen acquired approximately 94% of Charter for an aggregate purchase price of $211 million, excluding $214 million in debt assumed (the "Paul Allen Transaction"). In conjunction with the Paul Allen Transaction, Charter acquired 100% of the interest it did not already own in CharterComm Holdings, LLC (CharterComm Holdings) and CCA Group (comprised of CCA Holdings Corp., CCT Holdings Corp. and Charter Communications Long Beach Inc.), all cable television operating companies, for $2.0 billion, excluding $1.8 billion in debt assumed from unrelated third parties for fair value. Charter previously managed and owned minority interests in these companies. These acquisitions were accounted for using the purchase method of accounting, and accordingly results of operations of CarterComm Holdings and CCA Group are included in the financial statements of Charter Holdings from the date of acquisition. In February 1999, Charter transferred all of its cable television operating subsidiaries to a wholly owned subsidiary of Charter Communications Holdings, LLC (Charter Holdings), Charter Communications Operating, LLC (Charter Operating). Charter Holdings is a wholly owned subsidiary of CCHC. The transfer was accounted for as a reorganization of entities under common control similar to a pooling of interests. The accompanying financial statements include the accounts of CCP, Charter's wholly owned cable operating subsidiary, representing the financial statements of CCHC and subsidiaries (the Company) for all periods presented. The accounts of CharterComm Holdings and CCA Group are not included since these companies were not owned and controlled by Charter prior to December 23, 1998. As a result of the change in ownership of CCP, CharterComm Holdings and CCA Group, the Company has applied push-down accounting in the preparation of the consolidated financial statements effective December 23, 1998. Accordingly, the financial statements of the Company for periods ended on or before December 23, 1998, are presented on a different cost basis than the financial statements for the periods after December 23, 1998 (not presented herein), and are not comparable. CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 1997, cash equivalents consist primarily of repurchase agreements. These investments are carried at cost that 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 television transmission and distribution facilities, and the cost of new customer installations. The costs of disconnecting a customer are charged F-34
282 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) to expense in the period incurred. Expenditures for repairs and maintenance are charged to expense as incurred, and equipment replacement and betterments are capitalized. Depreciation is provided on the straight-line basis over the estimated useful lives of the related assets as follows: Cable distribution systems.................................. 3-15 years Buildings and leasehold improvements........................ 5-15 years Vehicles and equipment...................................... 3-5 years In 1997, the Company shortened the useful lives from 10 years to 5 years of certain plant and equipment included in cable distribution systems associated with costs of new customer installations. As a result, additional depreciation of $550 was recorded during 1997. The estimated useful lives were shortened to be more reflective of average customer lives. 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 television systems represent management's estimate of fair value and are generally amortized using the straight-line method over a period of 15 years. 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. IMPAIRMENT OF ASSETS If facts and circumstances suggest 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 Cable television revenues from basic and premium 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 television system. As of December 31, 1997, no installation revenue has been deferred, as direct selling costs have exceeded installation revenue. Fees collected from programmers to guarantee carriage are deferred and amortized to income over the life of the contracts. Local governmental authorities impose franchise fees on the Company 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. Franchise fees collected and paid are reported as revenues. F-35
283 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INTEREST RATE HEDGE AGREEMENTS The Company manages fluctuations in interest rates by using interest rate hedge agreements, as required by certain debt agreements. Interest rate swaps, caps and collars are accounted for as hedges of debt obligations, and accordingly, the net settlement amounts are recorded as adjustments to interest expense in the period incurred. Premiums paid for interest rate caps are deferred, included in other assets, and are amortized over the original term of the interest rate agreement as an adjustment to interest expense. The Company's interest rate swap agreements require the Company to pay a fixed rate and receive a floating rate thereby creating fixed rate debt. Interest rate caps and collars are entered into by the Company to reduce the impact of rising interest rates on floating rate debt. The Company's participation in interest rate hedging transactions involves instruments that have a close correlation with its debt, thereby managing its risk. Interest rate hedge agreements have been designed for hedging purposes and are not held or issued for speculative purposes. INCOME TAXES The Company files a consolidated income tax return with Charter. Income taxes are allocated to the Company in accordance with the tax-sharing agreement between the Company and Charter. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles 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. 2. ACQUISITIONS: In 1998, the Company acquired cable television systems for an aggregate purchase price, net of cash acquired, of $228,400, comprising $167,500 in cash and $60,900 in a note payable to Seller. The excess of cost of properties acquired over the amounts assigned to net tangible assets at the date of acquisition was $207,600 and is included in franchises. In 1996, the Company acquired cable television systems for an aggregate purchase price, net of cash acquired, of $34,100. The excess of the cost of properties acquired over 2>the amounts assigned to net tangible assets at the date of acquisition was $24,300 and is included in franchises. The above acquisitions were accounted for using the purchase method of accounting, and accordingly, results of operations of the acquired assets have been included in the financial statements from the dates of acquisition. The purchase prices were allocated to tangible and intangible assets based on estimated fair values at the acquisition dates. F-36
284 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Unaudited pro forma operating results as though the acquisition discussed above, excluding the Paul Allen Transaction, had occurred on January 1, 1997, with adjustments to give effect to amortization of franchises, interest expense and certain other adjustments are as follows: PERIOD FROM JANUARY 1, 1998, THROUGH YEAR ENDED DECEMBER 23, 1998 1997 ----------------- ---------- (UNAUDITED) Revenues................................................... $ 67,007 $ 63,909 Loss from operations....................................... (7,097) (7,382) Net loss................................................... (24,058) (26,099) The unaudited pro forma information has been presented for comparative purposes and does not purport to be indicative of the results of operations had these transactions been completed as of the assumed date or which may be obtained in the future. 3. SALE OF FT. HOOD SYSTEM: In February 1997, the Company sold the net assets of the Ft. Hood system, which served customers in Texas, for an aggregate sales price of approximately $12,500. The sale of the Ft. Hood system resulted in a loss of $1,363, which is included in operating costs in the accompanying statement of operations for the year ended December 31, 1997. 4. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consists of the following at December 31, 1997: Cable distribution systems.................................. $29,061 Land, buildings and leasehold improvements.................. 447 Vehicles and equipment...................................... 1,744 ------- 31,252 Less- Accumulated depreciation.............................. (5,722) ------- $25,530 ======= For the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996, depreciation expense was $6,249, $3,898 and $2,371, respectively. F-37
285 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following at December 31, 1997: Accrued interest............................................ $ 292 Capital expenditures........................................ 562 Franchise fees.............................................. 426 Programming costs........................................... 398 Accounts payable............................................ 298 Other....................................................... 1,106 ------ $3,082 ====== 6. LONG-TERM DEBT: The Company maintained a revolving credit agreement (the "Old Credit Agreement") with a consortium of banks for borrowings up to $47,500, of which $41,500 was outstanding at December 31, 1997. In 1997, the Credit Agreement was amended to reflect the impact of the sale of a cable television system. The debt bears interest, at the Company's option, at rates based on the prime rate of the Bank of Montreal (the agent bank), or LIBOR, plus the applicable margin based upon the Company's leverage ratio at the time of the borrowings. The variable interest rates ranged from 7.44% to 7.63% at December 31, 1997. In May 1998, the Company entered into a credit agreement (the "CCP Credit Agreement"), which provides for two term loan facilities, one with the principal amount of $60,000 that matures on June 30, 2006, and the other with the principal amount of $80,000 that matures on June 30, 2007. The CCP Credit Agreement also provides for a $90,000 revolving credit facility with a maturity date of June 30, 2006. Amounts under the CCP Credit Agreement bear interest at the LIBOR Rate or Base Rate, as defined, plus a margin of up to 2.88%. Commencing March 31, 1999, and at the end of each quarter thereafter, available borrowings under the revolving credit facility shall be reduced on an annual basis by 3.5% in 1999, 7.0% in 2000, 9.0% in 2001, 10.5% in 2002 and 16.5% in 2003. Commencing March 31, 2000, and at the end of each quarter thereafter, available borrowings under the term loan shall be reduced on an annual basis by 6.0% in 2000, 8.0% in 2001, 11.0% in 2002 and 16.5% in 2003. Commencing March 31, 2000, and at the end of each quarter thereafter, available borrowings under the other term loan shall be reduced on an annual basis by 1.0% in 2000, 1.0% in 2001, 1.0% in 2002 and 1.0% in 2003. The credit agreement requires the Company and/or its subsidiaries to comply with various financial and other covenants, including the maintenance of certain operating and financial ratios. This agreement also contains substantial limitations on, or prohibitions of, distributions, additional indebtedness, liens, asset sales and certain other items. 7. NOTE PAYABLE TO RELATED PARTY: As of December 31, 1997, the Company holds a promissory note payable to CCT Holdings Corp., a company managed by Charter and acquired by Charter effective December 23, 1998. The promissory note bears interest at the rates paid by CCT Holdings Corp. on a note payable to a third party. Principal and interest are due on September 29, 2005. F-38
286 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. FAIR VALUE OF FINANCIAL INSTRUMENTS: A summary of debt and the related interest rate hedge agreements at December 31, 1997, is as follows: CARRYING NOTIONAL FAIR VALUE AMOUNT VALUE -------- -------- ------- Debt CCP Credit Agreement........................................ $41,500 $ -- $41,500 Interest Rate Hedge Agreements Caps........................................................ -- 15,000 -- Collars..................................................... -- 20,000 (74) As the long-term debt under the credit agreements bears interest at current market rates, its carrying amount approximates market value at December 31, 1997. The notional amounts of interest rate hedge agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the Company's exposure through its use of interest rate hedge agreements. The amounts exchanged are determined by reference to the notional amount and the other terms of the contracts. The fair value of interest rate hedge agreements generally reflects the estimated amounts that the Company would receive or pay (excluding accrued interest) to terminate the contracts on the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Dealer quotations are available for the Company's interest rate hedge agreements. Management believes that the sellers of the interest rate hedge agreements will be able to meet their obligations under the agreements. The Company has policies regarding the financial stability and credit standing of major counterparties. Nonperformance by the counterparties is not anticipated nor would it have a material adverse effect on the Company's financial position or results of operations. 9. INCOME TAXES: At December 31, 1997, the Company had net operating loss carryforwards of $9,594, which if not used to reduce taxable income in future periods, expire in the years 2010 through 2012. As of December 31, 1997, the Company's deferred income tax assets were offset by valuation allowances and deferred income tax liabilities resulting primarily from differences in accounting for depreciation and amortization. 10. RELATED-PARTY TRANSACTIONS: Charter provides 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 services are billed and charged directly to the Company's operating subsidiaries and are included in operating costs. These billings are determined based on the number of basic customers. Such costs totaled $437, $220 and $131, respectively for the period from January 1, 1998, through December 23, 1998, and the years ended December 31, 1997 and 1996. All other costs incurred by Charter on behalf of the Company are expensed in the accompanying financial statements and are included in corporate expense allocations -- related F-39
287 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) party. The cost of these services is allocated based on the number of basic customers. Management considers these allocations to be reasonable for the operations of the Company. Charter utilizes a combination of excess insurance coverage and self-insurance programs for its medical, dental and workers' compensation claims. Charges are made to the Company as determined by independent actuaries, at the present value of the actuarially computed present and future liabilities for such benefits. Medical coverage provides for $2,435 aggregate stop loss protection and a loss limitation of $100 per person per year. Workers' compensation coverage provides for $800 aggregate stop loss protection and a loss limitation of $150 per person per year. The Company is charged a management fee based on percentages of revenues as stipulated in the management agreement between Charter and the Company. For the period from January 1, 1998, through December 23, 1998, and the years ended December 31, 1997 and 1996, the management fee charged to the Company approximated the corporate expenses incurred by Charter on behalf of the Company. Management fees currently payable of $114 are included in payables to manager of cable television systems -- related party as of December 31, 1997. 11. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases certain facilities and equipment under noncancelable operating leases. Leases and rental costs charged to expense for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996, were $278, $130 and $91, respectively. 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 incurred for pole rental attachments for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996, was $421, $271 and $174, respectively. LITIGATION The Company is a party to lawsuits that arose in the ordinary course of conducting its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits will not have a material adverse effect on the Company's financial position or results of operations. REGULATION IN THE CABLE TELEVISION INDUSTRY The cable television 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 television 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 television industry. F-40
288 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have 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. As of December 31, 1998, 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. 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 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, deregulates rates on the cable programming service tier (CPST). The FCC is currently developing permanent regulations to implement the rate deregulation provisions of the 1996 Telecom Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on the Company's financial position or results of operations. The FCC may further restrict the ability of cable television operators to implement rate increases or the United States Congress may enact legislation that could delay or suspend the scheduled March 1999 termination of CPST rate regulation. This continued rate regulation, if adopted, could limit the rates charged by the Company. A number of states subject cable television 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 television rates is not allowed to be more restrictive than the federal or local regulation. The Company is subject to state regulation in Connecticut. 12. EMPLOYEE BENEFIT PLAN: 401(k) PLAN The Company's employees may participate in the Charter Communications, Inc. 401(k) Plan (the "401(k) Plan"). Employees that qualify for participation 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 contributes an amount equal to 50% of the first 5% of contributions by each employee. The Company contributed $74, $29 and $22 for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996, respectively. F-41
289 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) APPRECIATION RIGHTS PLAN Certain employees of Charter participate in the 1995 Charter Communications, Inc. Appreciation Rights Plan (the "Plan"). The Plan permits Charter to grant 1,500,000 units to certain key employees, of which 1,251,500 were outstanding at December 31, 1997. Units received by an employee vest at a rate of 20% per year, unless otherwise provided in the participant's Appreciation Rights Unit Agreement. The appreciation rights entitle the participants to receive payment, upon termination or change in control of Charter, of the excess of the unit value over the base value (defined as the appreciation value) for each vested unit. The unit value is based on Charter's adjusted equity, as defined in the Plan. Deferred compensation expense recorded by Charter is based on the appreciation value since the grant date and is being amortized over the vesting period. As a result of the acquisition of Charter by Paul G. Allen, the Plan was terminated, all outstanding units became 100% vested and all amounts were paid by Charter in 1999. The cost of this plan was allocated to the Company based on the number of basic customers. Management considers this allocation to be reasonable for the operations of the Company. For the period January 1, 1998, through December 23, 1998, the Company expensed $3,800, included in corporate expense allocation, for the cost of this plan. 13. PARENT COMPANY ONLY FINANCIAL STATEMENTS As a result of the limitations on and prohibitions of distributions, substantially all of the net assets of the consolidated subsidiaries are restricted for distribution to CCHC, the parent company. CCHC (parent company only) financial statements are presented below. CHARTER COMMUNICATIONS HOLDING COMPANY, LLC (PARENT COMPANY ONLY) BALANCE SHEET (DOLLARS IN THOUSANDS) DECEMBER 31, 1997 ------------ LIABILITIES INVESTMENT IN CHARTER HOLDINGS.............................. $(1,975) ======= SHAREHOLDER'S INVESTMENT Common Stock................................................ $ -- Paid-in-capital............................................. 5,900 Accumulated deficit......................................... (7,875) ------- $(1,975) ======= F-42
290 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CHARTER COMMUNICATIONS HOLDING COMPANY, LLC (PARENT COMPANY ONLY) STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS) PERIOD FROM YEAR ENDED JANUARY 1, 1998 DECEMBER 31 THROUGH ------------------ DECEMBER 23, 1998 1997 1996 ----------------- ------- ------- EQUITY IN LOSS OF CHARTER HOLDINGS.................. $(17,222) $(4,623) $(2,723) -------- ------- ------- Net loss.......................................... $(17,222) $(4,623) $(2,723) ======== ======= ======= CHARTER COMMUNICATIONS HOLDING COMPANY, LLC (PARENT COMPANY ONLY) STATEMENT OF SHAREHOLDER'S INVESTMENT (DOLLARS IN THOUSANDS) COMMON PAID-IN ACCUMULATED STOCK CAPITAL DEFICIT TOTAL ------ ------- ----------- -------- BALANCE, December 31, 1995................... $-- $ 1,500 $ (529) $ 971 Capital Contribution....................... -- 4,400 -- 4,400 Net loss -- -- (2,723) (2,723) -- ------- -------- -------- BALANCE, December 31, 1996................... -- 5,900 (3,252) 2,648 Net loss................................... -- -- (4,623) (4,623) -- ------- -------- -------- BALANCE, December 31, 1997................... -- 5,900 (7,875) (1,975) Capital Contribution....................... -- 10,800 -- 10,800 Net loss................................... -- -- (17,222) (17,222) -- ------- -------- -------- BALANCE, December 23, 1998................... $-- $16,700 $(25,097) $ (8,397) == ======= ======== ======== The investment in Charter Holdings is accounted for on the equity method. No statement of cash flows has been presented as CCHC (parent company only) had no cash flow activity. 14. ACCOUNTING STANDARD NOT YET IMPLEMENTED: In June 1998, the Financial Accounting Standards Board adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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. 133 is effective for fiscal years beginning after June 15, 1999. The Company has not yet quantified the impacts of adopting SFAS No. 133 on its consolidated financial statements nor has it determined the timing or method of its adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings (loss). F-43
291 INDEPENDENT AUDITORS' REPORT The Members Marcus Cable Holdings, LLC: We have audited the accompanying consolidated balance sheets of Marcus Cable Holdings, LLC and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, members' equity/partners' capital and cash flows for each of the years in the three-year period ended December 31, 1998. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Marcus Cable Holdings, LLC and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP Dallas, Texas February 19, 1999 (except for the fourth and seventh paragraphs of Note 1 which are as of August 25, 1999 and April 7, 1999, respectively) F-44
292 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) DECEMBER 31, ------------------------ 1998 1997 ---- ---- ASSETS - ------------------------------------------------------------------------ Current assets: Cash and cash equivalents................................. $ 813 $ 1,607 Accounts receivable, net of allowance of $1,800 in 1998 and $1,904 in 1997..................................... 16,055 23,935 Prepaid expenses and other................................ 6,094 2,105 ---------- ---------- Total current assets.............................. 22,962 27,647 Investment in cable television systems: Property, plant and equipment............................. 741,021 706,626 Franchises................................................ 783,742 945,125 Noncompetition agreements................................. 4,425 6,770 Other assets................................................ 52,928 64,300 ---------- ---------- $1,605,078 $1,750,468 ========== ========== LIABILITIES AND MEMBERS' EQUITY/PARTNERS' CAPITAL - ------------------------------------------------------------------------ Current liabilities: Current maturities of long-term debt...................... $ 77,500 $ 67,499 Accrued liabilities....................................... 66,985 68,754 ---------- ---------- Total current liabilities......................... 144,485 136,253 Long-term debt.............................................. 1,354,919 1,531,927 Other long-term liabilities................................. 1,390 2,261 Members' equity/partners' capital........................... 104,284 80,027 ---------- ---------- $1,605,078 $1,750,468 ========== ========== See accompanying notes to consolidated financial statements. F-45
293 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) YEAR ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- Revenues: Cable services................................... $ 499,265 $ 473,701 $ 432,172 Management fees -- related party................. 555 5,614 2,335 --------- --------- --------- Total revenues........................... 499,820 479,315 434,507 --------- --------- --------- Operating expenses: Selling, service and system management........... 193,725 176,515 157,197 General and administrative................................ 77,913 72,351 73,017 Transaction and severance costs.................. 135,379 -- -- Management fees -- related party................. 3,341 -- -- Depreciation and amortization.................... 215,789 188,471 166,429 --------- --------- --------- Total operating expenses................. 626,147 437,337 396,643 --------- --------- --------- Operating income (loss).................. (126,327) 41,978 37,864 --------- --------- --------- Other (income) expense: Interest expense................................. 159,985 151,207 144,376 Gain on sale of assets........................... (201,278) -- (6,442) --------- --------- --------- Total other (income) expense............. (41,293) 151,207 137,934 --------- --------- --------- Loss before extraordinary item................................... (85,034) (109,229) (100,070) Extraordinary item -- loss on early retirement of debt............................................. (9,059) -- -- --------- --------- --------- Net loss................................. $ (94,093) $(109,229) $(100,070) ========= ========= ========= See accompanying notes to consolidated financial statements. F-46
294 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY/PARTNERS' CAPITAL (IN THOUSANDS) MARCUS CLASS B CABLE GENERAL LIMITED PROPERTIES, VULCAN PARTNERS PARTNERS L.L.C. CABLE, INC. TOTAL -------- -------- ----------- ----------- ----- Balance at December 31, 1995..... $(21,396) $ 310,722 -- -- $ 289,326 Net loss....................... (200) (99,870) -- -- (100,070) -------- --------- -------- -------- --------- Balance at December 31, 1996..... (21,596) 210,852 -- -- 189,256 Net loss....................... (218) (109,011) -- -- (109,229) -------- --------- -------- -------- --------- Balance at December 31, 1997..... (21,814) 101,841 -- -- 80,027 Net loss -- January 1, 1998 to April 22, 1998.............. (224) (111,838) -- -- (112,062) Capital contributions.......... -- -- -- 118,350 118,350 Reorganization of limited partnership to limited liability company........... 22,038 9,997 (22,038) (9,997) -- Net income -- April 23, 1998 to December 31, 1998........... -- -- 683 17,286 17,969 -------- --------- -------- -------- --------- Balance at December 31, 1998..... $ -- $ -- $(21,355) $125,639 $ 104,284 ======== ========= ======== ======== ========= See accompanying notes to consolidated financial statements. F-47
295 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR ENDED DECEMBER 31, ----------------------------------- 1998 1997 1996 ---- ---- ---- Cash flows from operating activities: Net loss.................................................. $ (94,093) $(109,229) $(100,070) Adjustments to reconcile net loss to net cash provided by operating activities: Extraordinary item -- loss on early retirement of debt................................................... 9,059 -- -- Gain on sale of assets.................................. (201,278) -- (6,442) Depreciation and amortization........................... 215,789 188,471 166,429 Non cash interest expense............................... 82,416 72,657 63,278 Changes in assets and liabilities, net of working capital adjustments for acquisitions: Accounts receivable, net.............................. 7,880 (6,439) (70) Prepaid expenses and other............................ (4,017) 95 (574) Other assets.......................................... 413 (385) (502) Accrued liabilities................................... (1,769) 9,132 (3,063) --------- --------- --------- Net cash provided by operating activities:......... 14,400 154,302 118,986 --------- --------- --------- Cash flows from investing activities: Acquisition of cable systems.............................. (57,500) (53,812) (10,272) Proceeds from sale of assets, net of cash acquired and selling costs........................................... 401,432 -- 20,638 Additions to property, plant and equipment................ (224,723) (197,275) (110,639) Other..................................................... (689) -- -- --------- --------- --------- Net cash provided by (used in) investing activities:...................................... 118,520 (251,087) (100,273) --------- --------- --------- Cash flows from financing activities: Borrowings under Senior Credit Facility................... 217,750 226,000 65,000 Repayments under Senior Credit Facility................... (359,500) (131,250) (95,000) Repayments of notes and debentures........................ (109,344) -- -- Payment of debt issuance costs............................ (99) (1,725) -- Cash contributed by member................................ 118,350 -- -- Payments on other long-term liabilities................... (871) (667) (88) --------- --------- --------- Net cash provided by (used in) financing activities....................................... (133,714) 92,358 (30,088) --------- --------- --------- Net decrease in cash and cash equivalents................... (794) (4,427) (11,375) Cash and cash equivalents at the beginning of the period.... 1,607 6,034 17,409 --------- --------- --------- Cash and cash equivalents at the end of the period.......... $ 813 $ 1,607 $ 6,034 ========= ========= ========= Supplemental disclosure of cash flow information: Interest paid............................................. $ 81,765 $ 81,155 $ 83,473 ========= ========= ========= See accompanying notes to consolidated financial statements. F-48
296 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (1) ORGANIZATION AND BASIS OF PRESENTATION Marcus Cable Holdings, LLC ("MCHLLC"), a Delaware limited liability company, was formed in February 1999 as parent of Marcus Cable Company, L.L.C. ("MCCLLC"), formerly Marcus Cable Company, L.P. ("MCCLP"). MCCLP was formed as a Delaware limited partnership and was converted to a Delaware limited liability company on June 9, 1998 (See Note 3). MCHLLC and its subsidiaries (collectively, the "Company") derive their primary source of revenues by providing various levels of cable television programming and services to residential and business customers. The Company's operations are conducted through Marcus Cable Operating Company, L.L.C. ("MCOC"), a wholly-owned subsidiary of the Company. The Company operates its cable television systems primarily in Texas, Wisconsin, Indiana, California and Alabama. The accompanying consolidated financial statements include the accounts of MCHLLC, which is the predecessor of MCCLLC, and its subsidiary limited liability companies and corporations. All significant intercompany accounts and transactions have been eliminated in consolidation. On April 23, 1998, Vulcan Cable, Inc. and Paul G. Allen (collectively referred to as "Vulcan") acquired all of the outstanding limited partnership interests and substantially all of the general partner interest in MCCLP for cash payments of $1,392,000 ("the Vulcan Acquisition"). Under the terms of the purchase agreement, the owner of the remaining 0.6% general partner interest in the Company (the "Minority Interest"), which represents 100% of the voting control of the Company, could cause Vulcan to purchase the 0.6% general partner interest under certain conditions, or Vulcan could cause the Minority Interest to sell its interest to Vulcan under certain conditions, at a fair value of not less than $8,000. The accompanying consolidated financial statements do not reflect the application of purchase accounting for the Vulcan Acquisition because the Securities and Exchange Commission staff challenged such accounting treatment since, as of December 31, 1998, Vulcan had not acquired voting control of the Company. On March 31, 1999, Vulcan acquired voting control of the Company by its acquisition of the Minority Interest for cash consideration. In connection with the Vulcan Acquisition, the Company incurred transaction costs of approximately $119,345, comprised primarily of $90,200 of compensation paid to employees of the Company by Vulcan in settlement of specially designated Class B units in MCCLP ("EUnit") granted in past periods by the general partner of MCCLP, $24,000 of transaction fees paid to certain equity partners for investment banking services and $5,200 of expenses for professional fees. These transaction costs have been included in the accompanying consolidated statement of operations for the year ended December 31, 1998. Effective December 23, 1998, through a series of transactions, Paul G. Allen acquired approximately 94% of Charter Communications, Inc. ("Charter"). Beginning in October 1998, Charter managed the operations of the Company. In March 1999, Charter transferred all of its cable television operating subsidiaries to a subsidiary, Charter Communications Holdings, LLC (Charter Holdings) in connection with the issuance of Senior Notes and Senior Discount Notes totaling $3.6 billion. These operating subsidiaries were then transferred to Charter Communications Operating, LLC ("Charter Operating"). On April 7, 1999, the cable operations of the Company were transferred to Charter Operating subsequent to the purchase by Paul G. Allen of the Minority Interest. As a result of the Vulcan Acquisition, the Company recognized severance and stay-on bonus compensation of $16,034, which is included in Transaction and Severance Costs in the F-49
297 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) accompanying statement of operations for the year ended December 31, 1998. As of December 31, 1998, 35 employees and officers of the Company had been terminated and $13,634 had been paid under severance and bonus arrangements. By March 31, 1999, an additional 50 employees will be terminated. The remaining balance of $2,400 is to be paid by April 30, 1999 and an additional $400 in stay-on bonuses will be recorded as compensation in 1999 as the related services are provided. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 1998 and 1997, cash equivalents consist of certificates of deposit and money market funds. These investments are carried at cost which approximates market value. (b) 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 television transmission and distribution facilities, and the cost of new customer installation. The costs of disconnecting a customer are charged to expense in the period incurred. Expenditures for maintenance and repairs are charged to expense as incurred and equipment replacements and betterments are capitalized. Depreciation is provided by the straight-line method over the estimated useful lives of the related assets as follows: Cable distribution systems...................... 3-10 years Buildings and leasehold improvements............ 5-15 years Vehicles and equipment.......................... 3-5 years (c) FRANCHISES Costs incurred in obtaining and renewing cable franchises are deferred and amortized over the estimated 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 television systems represent management's estimate of fair value and are amortized using the straight-line method over a period of 15 years. 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. Accumulated amortization was $317,335 and $264,600 at December 31, 1998 and 1997, respectively. (d) NONCOMPETITION AGREEMENTS Noncompetition agreements are amortized using the straight-line method over the term of the respective agreements. Accumulated amortization was $20,267 and $19,144 at December 31, 1998 and 1997, respectively. (e) OTHER ASSETS Debt issuance costs are amortized to interest expense over the term of the related debt. Going concern value of acquired cable systems is amortized using the straight-line method over a period up to 10 years. F-50
298 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (f) IMPAIRMENT OF ASSETS If facts and circumstances suggest 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. (g) REVENUES Cable television revenues from basic and premium 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 television system. As of December 31, 1998 and 1997, no installation revenue has been deferred, as direct selling costs exceeded installation revenue. Management fee revenues are recognized concurrently with the recognition of revenues by the managed cable television system, or as a specified monthly amount as stipulated in the management agreement. Incentive management fee revenue is recognized upon performance of specified actions as stipulated in the management agreement. (h) INCOME TAXES Income taxes are the responsibility of the individual members and are not provided for in the accompanying financial statements. The Company's subsidiary corporations are subject to federal income tax but have had no operations and therefore, no taxable income since inception. (i) INTEREST RATE HEDGE AGREEMENTS The Company manages fluctuations in interest rates by using interest rate hedge agreements, as required by certain of its debt agreements. Interest rate swaps and caps are accounted for as hedges of debt obligations, and accordingly, the net settlement amounts are recorded as adjustments to interest expense in the period incurred. The Company's interest rate swap agreements require the Company to pay a fixed rate and receive a floating rate thereby creating thereby creating fixed rate debt. Interest rate caps are entered into by the Company to reduce the impact of rising interest rates on floating rate debt. The Company's participation in interest rate hedging transactions involves instruments that have a close correlation with its debt, thereby managing its risk. Interest rate hedge agreements have been designed for hedging purposes and are not held or issued for speculative purposes. (j) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles 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. F-51
299 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (k) ACCOUNTING STANDARD NOT IMPLEMENTED In June 1998, the Financial Accounting Standards Boards adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Financial Instruments and Hedging Activities. 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. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. The Company has not yet quantified the impacts of adopting SFAS No. 133 on its consolidated financial statements nor has it determined the timing or method of its adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility of earnings (loss). (3) CAPITAL STRUCTURE PARTNERS' CAPITAL (a) CLASSES OF PARTNERSHIP INTERESTS The MCCLP partnership agreement (the "Partnership Agreement") provided for Class B Units and Convertible Preference Units. Class B Units consisted of General Partner Units ("GP Units") and Limited Partner Units ("LP Units"). To the extent that GP Units had the right to vote, GP Units voted as Class B Units together with Class B LP Units. Voting rights of Class B LP Units were limited to items specified under the Partnership Agreement. Prior to the dissolution of the Partnership on June 9, 1998, there were 18,848.19 GP Units and 294,937.67 Class B LP Units outstanding. The Partnership Agreement also provided for the issuance of a class of Convertible Preference Units. These units were entitled to a general distribution preference over the Class B LP Units and were convertible into Class B LP Units. The Convertible Preference Units could vote together with Class B Units as a single class, and the voting percentage of each Convertible Preference Unit, at a given time, was based on the number of Class B LP Units into which such Convertible Preference Unit is then convertible. MCCLP had issued 7,500 Convertible Preference Units with a distribution preference and conversion price of two thousand dollars per unit. The Partnership Agreement permitted the General Partner, at its sole discretion, to issue up to 31,517 Employee Units (classified as Class B Units) to key individuals providing services to the Company. Employee Units were not entitled to distributions until such time as all units have received certain distributions as calculated under provisions of the Partnership Agreement ("subordinated thresholds"). At December 31, 1997 28,033.20 Employee Units were outstanding with a subordinated threshold ranging from $1,600 to $1,750 per unit (per unit amounts in whole numbers). In connection with the Vulcan Acquisition, the amount paid to EUnit holders of $90,200 was recognized as Transaction and Severance Costs in the year ended December 31, 1998. F-52
300 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (b) ALLOCATION OF INCOME AND LOSS TO PARTNERS MCCLP incurred losses from inception. Losses were allocated as follows: (1) First, among the partners whose capital accounts exceed their unreturned capital contributions in proportion to such excesses until each such partner's capital account equals its unreturned capital contribution; and (2) Next, to the holders of Class B Units in accordance with their unreturned capital contribution percentages. The General Partner was allocated a minimum of 0.2% to 1% of income or loss at all times, depending on the level of capital contributions made by the partners. MEMBERS' EQUITY Upon completion of the Vulcan Acquisition, Vulcan collectively owned 99.4% of MCCLP through direct ownership of all LP Units and through 80% ownership of Marcus Cable Properties, Inc. ("MCPI"), the general partner of Marcus Cable Properties, L.P. ("MCPLP"), the general partner of MCCLP. The Minority Interest owned the voting common stock, or the remaining 20% of MCPI. In July 1998, Vulcan contributed $20,000 in cash to the Company relating to certain employee severance arrangements. On June 9, 1998, MCCLP was converted into a Delaware limited liability company with two members: Vulcan Cable, Inc., with 96.2% ownership, and Marcus Cable Properties, L.L.C. ("MCPLLC") (formerly MCPLP), with 3.8% ownership. Vulcan Cable, Inc. owns approximately 25.6% and MCPI owns approximately 74.4% of MCPLLC, with Vulcan's interest in MCPI unchanged. As there was no change in ownership interests, the historical partners' capital balances at June 9, 1998 were transferred to and became the initial equity of MCCLLC, and thus the accompanying statement of members' equity has been presented as if the conversion of MCCLP into MCCLLC occurred on April 23, 1998, the date of the Vulcan Acquisition (see Note 1). As of December 31, 1998, MCCLLC has 100 issued and outstanding membership units. Income and losses of MCCLLC are allocated to the members in accordance with their ownership interests. Members are not personally liable for obligations of MCCLLC. (4) ACQUISITIONS AND DISPOSITIONS In 1998, the Company acquired cable television systems in the Birmingham, Alabama area for a purchase price of $57,500. The excess of the cost of properties acquired over the amounts assigned to net tangible assets and noncompetition agreements as of the date of acquisition was approximately $44,603 and is included in franchises. Additionally, in 1998, the Company completed the sale of certain cable television systems for an aggregate net sales price of $401,432, resulting in a total gain of $201,278. In 1997, the Company acquired cable television systems in the Dallas-Ft. Worth, Texas area for a purchase price of $35,263. The excess of the cost of properties acquired over the amounts assigned to net tangible assets as of the date of acquisition was $15,098 and is included in franchises. Additionally, in July 1997, the Company completed an exchange of cable television systems in Indiana and Wisconsin. According to the terms of the trade agreement, in addition to the contribution of its systems, the Company paid $18,549. F-53
301 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 1996, the Company acquired cable television systems in three separate transactions for an aggregate purchase price of $10,272. The excess of the cost of properties acquired over the amounts assigned to net tangible assets as of the date of acquisition was $4,861 and is included in franchises. Additionally, in 1996, the Company completed the sale of cable television systems in Washington, D.C. for a sale price of $20,638. The sale resulted in a gain of $6,442. The above acquisitions were accounted for using the purchase method of accounting and, accordingly, results of operations of the acquired assets have been included in the accompanying consolidated financial statements from the dates of acquisition. The purchase prices were allocated to tangible and intangible assets based on estimated fair market values at the dates of acquisition. The cable system trade discussed above was accounted for as a nonmonetary exchange and, accordingly, the additional cash contribution was allocated to tangible and intangible assets based on recorded amounts of the nonmonetary assets relinquished. Unaudited pro forma operating results as though 1998 and 1997 acquisitions and divestitures discussed above had occurred on January 1, 1997, with adjustments to give effect to amortization of franchises, interest expense and certain other adjustments are as follows for the years ended December 31, 1998 and 1997: 1998 1997 ---- ---- (UNAUDITED) Revenues........................................... $ 457,929 $ 421,665 Operating income (loss)............................ (148,472) 9,064 Net loss........................................... (150,841) (142,143) (5) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following at December 31: 1998 1997 ---- ---- Cable distribution systems........................ 996,804 $ 878,721 Vehicles and other................................ 40,243 37,943 Land and buildings................................ 18,861 17,271 ---------- --------- 1,055,908 933,935 Accumulated depreciation.......................... (314,887) (227,309) ---------- --------- $ 741,021 $ 706,626 ========== ========= Depreciation expense for the years ended December 31, 1998, 1997 and 1996 was $129,663, $96,220, and $72,281, respectively. (6) OTHER ASSETS Other assets consist of the following at December 31, 1998 and 1997: 1998 1997 ------- ------- Debt issuance costs.................................... $41,079 $45,225 Going concern value.................................... 37,274 37,274 Other.................................................. 677 1,090 ------- ------- 79,030 83,589 Accumulated amortization............................... (26,102) (19,289) ------- ------- $52,928 $64,300 ======= ======= F-54
302 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7) ACCRUED LIABILITIES Accrued liabilities consist of the following at December 31, 1998 and 1997: 1998 1997 ------- ------- Accrued operating liabilities.......................... $26,334 $27,923 Accrued programming costs.............................. 9,539 9,704 Accrued franchise fees................................. 8,907 10,131 Accrued property taxes................................. 4,586 5,125 Accrued interest....................................... 3,752 7,949 Other accrued liabilities.............................. 13,867 7,922 ------- ------- $66,985 $68,754 ======= ======= (8) LONG-TERM DEBT The Company has outstanding the following borrowings on long-term debt arrangements at December 31, 1998 and 1997: 1998 1997 ---------- ---------- Senior Credit Facility............................ $ 808,000 $ 949,750 13 1/2% Senior Subordinated Discount Notes........ 383,236 336,304 14 1/4% Senior Discount Notes..................... 241,183 213,372 11 7/8% Senior Debentures......................... -- 100,000 ---------- ---------- 1,432,419 1,599,426 Less current maturities........................... 77,500 67,499 ---------- ---------- $1,354,919 $1,531,927 ========== ========== The Company, through MCOC, maintains a senior credit facility ("Senior Credit Facility"), which provides for two term loan facilities, one with a principal amount of $490,000 that matures on December 31, 2002 ("Tranche A") and the other with a principal amount of $300,000 million that matures on April 30, 2004 ("Tranche B"). The Senior Credit Facility provides for scheduled amortization of the two term loan facilities which began in September 1997. The Senior Credit Facility also provides for a $360,000 revolving credit facility ("Revolving Credit Facility"), with a maturity date of December 31, 2002. Amounts outstanding under the Senior Credit Facility bear interest at either the: i) Eurodollar rate, ii) prime rate, or iii) CD base rate or Federal Funds rate, plus a margin of up to 2.25%, which is subject to certain quarterly adjustments based on the ratio of MCOC's total debt to annualized operating cash flow, as defined. The variable interest rates ranged from 6.23% to 7.75% and 5.97% to 8.00% at December 23, 1998, and December 31, 1997, respectively. A quarterly commitment fee ranging from 0.250% to 0.375% per annum is payable on the unused commitment under the Senior Credit Facility. On October 16, 1998, the Company entered into an agreement to amend its Senior Credit Facility. The amendment provides for, among other items, a reduction in the permitted leverage and cash flow ratios, a reduction in the interest rate charge under the Senior Credit Facility and a change in the restriction related to the use of cash proceeds from asset sales to allow such proceeds to be used to redeem the 11 7/8% Senior Debentures. In 1995, the Company issued $299,228 of 14 1/4% Senior Discount Notes due December 15, 2005 (the "14 1/4% Notes") for net proceeds of $150,003. The 14 1/4% Notes are unsecured and rank pari passu to the 11 7/8% Debentures (defined below). The 14 1/4% Notes are redeemable at the option of MCHLLC at amounts decreasing from 107% to 100% of par beginning on June 15, 2000. No interest is payable until December 15, 2000. Thereafter interest is payable semi- F-55
303 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) annually until maturity. The discount on the 14 1/4% Notes is being accreted using the effective interest method. The unamortized discount was $85,856 at December 31, 1997. In 1994, the Company, through MCOC, issued $413,461 face amount of 13 1/2% Senior Subordinated Discount Notes due August 1, 2004 (the "13 1/2% Notes") for net proceeds of $215,000. The 13 1/2% Notes are unsecured, are guaranteed by MCHLLC and are redeemable, at the option of MCOC, at amounts decreasing from 105% to 100% of par beginning on August 1, 1999. No interest is payable on the 13 1/2% Notes until February 1, 2000. Thereafter, interest is payable semi-annually until maturity. The discount on the 13 1/2% Notes is being accreted using the effective interest method. The unamortized discount was $77,157 at December 31, 1997. In 1993, the Company issued $100,000 principal amount of 11 7/8% Senior Debentures due October 1, 2005 (the "11 7/8% Debentures"). The 11 7/8% Debentures were unsecured and were redeemable at the option of the Company on or after October 1, 1998 at amounts decreasing from 105.9% to 100% of par at October 1, 2002, plus accrued interest, to the date of redemption. Interest on the 11 7/8% Debentures was payable semi-annually each April 1 and October 1 until maturity. On July 1, 1998, $4,500 face amount of the 14 1/4% Notes and $500 face amount of the 11 7/8% Notes were tendered for gross tender payments of $3,472 and $520 respectively. The payments resulted in a gain on the retirement of the debt of $753. On December 11, 1998, the 11 7/8% Notes were redeemed for a gross payment of $107,668, including accrued interest. The redemption resulted in a loss on the retirement of the debt of $9,059. The 14 1/4% Notes, 13 1/2% Notes, 11 7/8% Debentures and Senior Credit Facility are all unsecured and require the Company and/or its subsidiaries to comply with various financial and other covenants, including the maintenance of certain operating and financial ratios. These debt instruments also contain substantial limitations on, or prohibitions of, distributions, additional indebtedness, liens, asset sales and certain other items. (9) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying and fair values of the Company's significant financial instruments as of December 31, 1998 and 1997 are as follows: 1998 1997 ------------------- ------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- ----- -------- ----- Senior Credit Facility......................... $808,000 $808,000 $949,750 $949,750 13 1/2% Notes.................................. 383,236 418,629 336,304 381,418 14 1/4% Notes.................................. 241,183 279,992 213,372 258,084 11 7/8% Debentures............................. -- -- 100,000 108,500 The carrying amount of the Senior Credit Facility approximates fair value as the outstanding borrowings bear interest at market rates. The fair values of the 14 1/4% Notes, 13 1/2% Notes, and 11 7/8% Debentures, are based on quoted market prices. The Company had interest rate swap agreements covering a notional amount of $500,000 at December 31, 1998 and 1997. The fair value of such swap agreements was ($5,761) at December 31, 1998. The weighted average interest pay rate for the interest rate swap agreements was 5.7% at December 31, 1998, and 1997. Certain of these agreements allow for optional extension by the counterparty or for automatic extension in the event that one month LIBOR exceeds a stipulated rate on any monthly reset date. Approximately $100,000 notional amount included in the $500,000 F-56
304 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) notional amount described above is also modified by an interest rate cap agreement which resets monthly. The notional amounts of the interest rate hedge agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the Company's exposure through its use of interest rate hedge agreements. The amounts exchanged are determined by reference to the notional amount and the other terms of the contracts. The fair values of the interest rate hedge agreements generally reflect the estimated amounts that the Company would receive or (pay) (excluding accrued interest) to terminate the contracts on the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Dealer quotations are available for the Company's interest rate hedge agreements. Management believes that the sellers of the interest rate hedge agreements will be able to meet their obligations under the agreements. In addition, some of the interest rate hedge agreements are with certain of the participating banks under the Company's Senior Credit Facility thereby reducing the exposure to credit loss. The Company has policies regarding the financial stability and credit standing of the major counterparties. Nonperformance by the counterparties is not anticipated nor would it have a material adverse effect on the Company's consolidated financial position or results of operations. (10) RELATED PARTY TRANSACTIONS The Company and Charter entered into a management agreement on October 6, 1998 whereby Charter began to manage the day-to-day operations of the Company. In consideration for the management consulting services provided by Charter, Marcus pays Charter an annual fee equal to 3% of the gross revenues of the cable system operations, plus expenses. From October 6, 1998 to December 31, 1998, management fees under this agreement were $3,341. Prior to the consummation of the Vulcan Acquisition, affiliates of Goldman Sachs owned limited partnership interests in MCCLP. Maryland Cable Partners, L.P. ("Maryland Cable"), which was controlled by an affiliate of Goldman Sachs, owned the Maryland Cable systems. MCOC managed the Maryland Cable systems under the Maryland Cable Agreement. Pursuant to such agreement, MCOC earned a management fee equal to 4.7% of the revenues of Maryland Cable. Effective January 31, 1997, Maryland Cable was sold to a third party. Pursuant to the Maryland Cable Agreement, MCOC recognized incentive management fees of $5,069 during the twelve months ended December 31, 1997 in conjunction with the sale. Although MCOC is no longer involved in the active management of the Maryland Cable systems, MCOC has entered into an agreement with Maryland Cable to oversee the activities, if any, of Maryland Cable through the liquidation of the partnership. Pursuant to such agreement, MCOC earns a nominal monthly fee. During the year ended December 31, 1998, MCOC earned total management fees of $555. Including the incentive management fees noted above, during the years ended December 31, 1997 and 1996, MCOC earned total management fees of $5,614 and $2,335, respectively. (11) EMPLOYEE BENEFIT PLAN The Company sponsors a 401(k) plan for its employees whereby employees that qualify for participation under the 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 matches participant contributions up to a maximum of 2% of a participant's salary. For F-57
305 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the years ended December 31, 1998, 1997 and 1996, the Company made contributions to the plan of $765, $761 and $480, respectively. (12) COMMITMENTS AND CONTINGENCIES LEASES The Company leases certain facilities and equipment under noncancelable operating leases. Lease and rental costs charged to expense for the years ended December 31, 1998, 1997 and 1996 were $3,394, $3,230, and $2,767, respectively. 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 attachments for the years ended December 31, 1998, 1997 and 1996 were $4,081, $4,314, and $4,008, respectively. REGULATION IN THE CABLE TELEVISION INDUSTRY The cable television 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 television 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 television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have 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. As of December 23, 1998, the amount returned 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. 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 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, deregulates rates on the cable programming service tier (CPST). The FCC is currently developing permanent regulations to implement the rate deregulation provisions of the 1996 Telecom Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on the Company's financial position or results of operations. F-58
306 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The FCC may further restrict the ability of cable television operators to implement rate increases or the United States Congress may enact legislation that could delay or suspend the scheduled March 1999 termination of CPST rate regulation. This continued rate regulation, if adopted, could limit the rates charged by the Company. A number of states subject cable television 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 television rates is not allowed to be more restrictive than the federal or local regulation. LITIGATION In Alabama, Indiana, Texas and Wisconsin, customers have filed punitive class action lawsuits on behalf of all person residing in those respective states who are or were potential customers of the Company's cable television service, and who have been charged a processing fee for delinquent payment of their cable bill. The actions challenge the legality of the processing fee and seek declaratory judgment, injunctive relief and unspecified damages. In Alabama and Wisconsin, the Company has entered into joint speculation and case management orders with attorneys for plaintiffs. A Motion to Dismiss is pending in Indiana. The Company intends to vigorously defend the actions. At this stage of the actions, the Company is not able to project the expenses of defending the actions or the potential outcome of the actions, including the impact on the consolidated financial position or results of operations. The Company is also party to lawsuits which are generally incidental to its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits will not have a material adverse effect on the Company's consolidated financial position or results of operations. (13) SUBSEQUENT EVENT (UNAUDITED) In March 1999, concurrent with the issuance of Senior Notes and Senior Discount Notes, the combined company (Charter and the Company, see note 1) extinguished all long-term debt, excluding borrowings of Charter and the Company under their respective credit agreements, and refinanced all existing credit agreements at various subsidiaries of the Company and Charter with a new credit agreement entered into by a wholly owned subsidiary of the combined company. F-59
307 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To CCA Group: We have audited the accompanying combined balance sheet of CCA Holdings Corp., CCT Holdings Corp. and Charter Communications Long Beach, Inc. (collectively CCA Group) and subsidiaries as of December 31, 1997, and the related combined statements of operations, shareholders' deficit and cash flows for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of CCA Group and subsidiaries as of December 31, 1997, and the combined results of their operations and their cash flows for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, February 5, 1999 F-60
308 CCA GROUP COMBINED BALANCE SHEET -- DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 4,501 Accounts receivable, net of allowance for doubtful accounts of $926....................................... 9,407 Prepaid expenses and other................................ 1,988 Deferred income tax asset................................. 5,915 ---------- Total current assets.............................. 21,811 ---------- RECEIVABLE FROM RELATED PARTY, including accrued interest... 13,090 ---------- INVESTMENT IN CABLE TELEVISION PROPERTIES: Property, plant and equipment............................. 352,860 Franchises, net of accumulated amortization of $132,871... 806,451 ---------- 1,159,311 ---------- OTHER ASSETS................................................ 13,731 ---------- $1,207,943 ========== LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Current maturities of long-term debt...................... $ 25,625 Accounts payable and accrued expenses..................... 48,554 Payables to manager of cable television systems -- related party.................................................. 1,975 ---------- Total current liabilities......................... 76,154 ---------- DEFERRED REVENUE............................................ 1,882 ---------- DEFERRED INCOME TAXES....................................... 117,278 ---------- LONG-TERM DEBT, less current maturities..................... 758,795 ---------- DEFERRED MANAGEMENT FEES.................................... 4,291 ---------- NOTES PAYABLE, including accrued interest................... 348,202 ---------- SHAREHOLDERS' DEFICIT: Common stock.............................................. 1 Additional paid-in capital................................ 128,499 Accumulated deficit....................................... (227,159) ---------- Total shareholders' deficit....................... (98,659) ---------- $1,207,943 ========== The accompanying notes are an integral part of these combined statements. F-61
309 CCA GROUP COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) PERIOD FROM JANUARY 1, YEAR ENDED 1998, THROUGH DECEMBER 31 DECEMBER 23, -------------------- 1998 1997 1996 ------------- ---- ---- REVENUES.............................................. $ 324,432 $289,697 $233,392 --------- -------- -------- EXPENSES: Operating costs..................................... 135,705 122,917 102,977 General and administrative.......................... 28,440 26,400 18,687 Depreciation and amortization....................... 136,689 116,080 96,547 Management fees -- related parties.................. 17,392 11,414 8,634 --------- -------- -------- 318,226 276,811 226,845 --------- -------- -------- Income from operations........................... 6,206 12,886 6,547 --------- -------- -------- OTHER INCOME (EXPENSE): Interest income..................................... 4,962 2,043 1,883 Interest expense.................................... (113,824) (108,122) (88,999) Other, net.......................................... (294) 171 (2,504) --------- -------- -------- (109,156) (105,908) (89,620) --------- -------- -------- Net loss......................................... $(102,950) $(93,022) $(83,073) ========= ======== ======== The accompanying notes are an integral part of these combined statements. F-62
310 CCA GROUP COMBINED STATEMENTS OF SHAREHOLDERS' DEFICIT (DOLLARS IN THOUSANDS) ADDITIONAL COMMON PAID-IN ACCUMULATED STOCK CAPITAL DEFICIT TOTAL ------ ---------- ----------- ----- BALANCE, December 31, 1995................. $ 1 $ 99,999 $ (51,064) $ 48,936 Net loss................................. -- -- (83,073) (83,073) --- -------- --------- --------- BALANCE, December 31, 1996................. 1 99,999 (134,137) (34,137) Capital contributions.................... -- 28,500 -- 28,500 Net loss................................. -- -- (93,022) (93,022) --- -------- --------- --------- BALANCE, December 31, 1997................. 1 128,499 (227,159) (98,659) Capital contributions.................... -- 5,684 -- 5,684 Net loss................................. -- -- (102,950) (102,950) --- -------- --------- --------- BALANCE, December 23, 1998................. $ 1 $134,183 $(330,109) $(195,925) === ======== ========= ========= The accompanying notes are an integral part of these combined statements. F-63
311 CCA GROUP COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) PERIOD FROM JANUARY 1, YEAR ENDED 1998, THROUGH DECEMBER 31 DECEMBER 23, --------------------- 1998 1997 1996 ------------- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................................... $(102,950) $(93,022) $ (83,073) Adjustments to reconcile net loss to net cash provided by operating activities -- Depreciation and amortization................... 136,689 116,080 96,547 Amortization of debt issuance costs and non cash interest cost................................. 44,701 49,107 39,927 (Gain) loss on sale of property, plant and equipment..................................... 511 (156) 1,257 Changes in assets and liabilities, net of effects from acquisitions -- Accounts receivable, net...................... 4,779 222 (1,393) Prepaid expenses and other.................... 243 (175) 216 Accounts payable and accrued expenses......... 3,849 8,797 3,855 Payables to manager of cable television systems, including deferred management fees....................................... 3,485 784 448 Deferred revenue.............................. 1,336 559 (236) Other operating activities.................... 5,583 (3,207) 1,372 --------- -------- --------- Net cash provided by operating activities..... 98,226 78,989 58,920 --------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment......... (95,060) (82,551) (56,073) Payments for acquisitions, net of cash acquired.... -- (147,187) (122,017) Other investing activities......................... (2,898) (1,296) 54 --------- -------- --------- Net cash used in investing activities........... (97,958) (231,034) (178,036) --------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt....................... 300,400 162,000 127,000 Repayments of long-term debt....................... (64,120) (39,580) (13,100) Payments of debt issuance costs.................... (8,442) (3,360) (3,126) Repayments under notes payable..................... (230,994) -- -- Capital contributions.............................. -- 28,500 -- --------- -------- --------- Net cash provided by (used in) financing activities.................................... (3,156) 147,560 110,774 --------- -------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS............ (2,888) (4,485) (8,342) CASH AND CASH EQUIVALENTS, beginning of period....... 4,501 8,986 17,328 --------- -------- --------- CASH AND CASH EQUIVALENTS, end of period............. $ 1,613 $ 4,501 $ 8,986 ========= ======== ========= CASH PAID FOR INTEREST............................... $ 179,781 $ 49,687 $ 51,434 ========= ======== ========= The accompanying notes are an integral part of these combined statements. F-64
312 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND BASIS OF PRESENTATION CCA Group consists of CCA Holdings Corp. (CCA Holdings), CCT Holdings Corp. (CCT Holdings) and Charter Communications Long Beach, Inc. (CC-LB), all Delaware corporations (collectively referred to as "CCA Group" or the "Company") and their subsidiaries. The combined financial statements of each of these companies have been combined by virtue of their common ownership and management. All material intercompany transactions and balances have been eliminated. CCA Holdings commenced operations in January 1995 in connection with consummation of the Crown Transaction (as defined below). The accompanying financial statements include the accounts of CCA Holdings; its wholly-owned subsidiary, CCA Acquisition Corp. (CAC); CAC's wholly-owned subsidiary, Cencom Cable Entertainment, Inc. (CCE); and Charter Communications Entertainment I, L.P. (CCE-I), which is controlled by CAC through its general partnership interest. Through December 23, 1998, CCA Holdings was approximately 85% owned by Kelso Investment Associates V, L.P., an investment fund, together with an affiliate (collectively referred to as "Kelso" herein) and certain other individuals and approximately 15% by Charter Communications, Inc. (Charter), manager of CCE-I's cable television systems. CCT Holdings was formed on January 6, 1995. CCT Holdings commenced operations in September 1995 in connection with consummation of the Gaylord Transaction (as defined below). The accompanying financial statements include the accounts of CCT Holdings and Charter Communications Entertainment II, L.P. (CCE-II), which is controlled by CCT Holdings through its general partnership interest. Through December 23, 1998, CCT Holdings was owned approximately 85% by Kelso and certain other individuals and approximately 15% by Charter, manager of CCE-II's cable television systems. In January 1995, CAC completed the acquisition of certain cable television systems from Crown Media, Inc. (Crown), a subsidiary of Hallmark Cards, Incorporated (Hallmark) (the "Crown Transaction"). On September 29, 1995, CAC and CCT Holdings entered into an Asset Exchange Agreement whereby CAC exchanged a 1% undivided interest in all of its assets for a 1.22% undivided interest in certain assets to be acquired by CCT Holdings from an affiliate of Gaylord Entertainment Company, Inc. (Gaylord). Effective September 30, 1995, CCT Holdings acquired certain cable television systems from Gaylord (the "Gaylord Transaction"). Upon execution of the Asset Purchase Agreement, CAC and CCT Holdings entered into a series of agreements to contribute the assets acquired under the Crown Transaction to CCE-I and certain assets acquired in the Gaylord acquisition to CCE-II. Collectively, CCA Holdings and CCT Holdings own 100% of CCE-I and CCE-II. CC-LB was acquired by Kelso and Charter in May 1997. The accompanying financial statements include the accounts of CC-LB and its wholly owned subsidiary, Long Beach Acquisition Corp. (LBAC) from the date of acquisition. Through December 23, 1998, CC-LB was owned approximately 85% by Kelso and certain other individuals and approximately 15% by Charter, manager of LBAC's cable television systems. Effective December 23, 1998, Paul G. Allen acquired 94% of Charter through a series of transactions. In conjunction with Mr. Allen's acquisition, Charter acquired 100% of the outstanding stock of CCA Holdings, CCT Holdings and CC-LB on December 23, 1998. F-65
313 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) In 1998, CCE-I provided cable television service to customers in Connecticut, Illinois, Massachusetts, Missouri and New Hampshire, CCE-II provided cable television service to customers in California and LBAC provided cable television service to customers in Long Beach, California, and certain surrounding areas. CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 1997, cash equivalents consist primarily of repurchase agreements. These investments are carried at cost that 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 television transmission and distribution facilities, and the cost of new customer installation. The costs of disconnecting a residence are charged to expense in the period incurred. Expenditures for repairs and maintenance are charged to expense as incurred, and equipment replacement costs and betterments are capitalized. Depreciation is provided on the straight-line basis over the estimated useful lives of the related assets as follows: Cable distribution systems.................................. 3-15 years Buildings and leasehold improvements........................ 5-15 years Vehicles and equipment...................................... 3-5 years In 1997, the Company shortened the estimated useful lives of certain property, plant and equipment for depreciation purposes. As a result, additional depreciation of $8,123 was recorded during 1997. 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 television systems represent management's estimate of fair value and are amortized using the straight-line method over 15 years. OTHER ASSETS Debt issuance costs are amortized to interest expense over the term of the related debt. The interest rate cap costs are being amortized over the terms of the agreement, which approximates three years. INCOME TAXES Income taxes are recorded in accordance with SFAS No. 109, "Accounting for Income Taxes." USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported F-66
314 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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. 2. ACQUISITIONS: In 1997, CC-LB acquired the stock of LBAC for an aggregate purchase price, net of cash acquired, of $147,200. In connection with the completion of this acquisition, LBAC recorded $55,900 of deferred income tax liabilities resulting from differences between the financial reporting and tax basis of certain assets acquired. The excess of the cost of properties acquired over the amounts assigned to net tangible assets at the date of acquisition was $190,200 and is included in franchises. In 1996, the Company acquired cable television systems in three separate transactions for an aggregate purchase price, net of cash acquired, of $122,000. The excess of the cost of properties acquired over the amounts assigned to net tangible assets at the dates of acquisition was $100,200 and is included in franchises. The above acquisitions were accounted for using the purchase method of accounting, and accordingly, results of operations of the acquired assets have been included in the financial statements from the dates of the acquisitions. Unaudited pro forma operating results for the 1997 acquisitions as though the acquisitions had been made on January 1, 1997, with pro forma adjustments to give effect to amortization of franchises, interest expense and certain other adjustments as follows: YEAR ENDED DECEMBER 31, 1997 (UNAUDITED) ------------- Revenues.................................................... $303,797 Income from operations...................................... 14,108 Net loss.................................................... (94,853) The unaudited pro forma information has been presented for comparative purposes and does not purport to be indicative of the results of operations had these transactions been completed as of the assumed date or which may be obtained in the future. 3. RECEIVABLE FROM RELATED PARTY: In connection with the transfer of certain assets acquired in the Gaylord Transaction to Charter Communications Properties, Inc. (CCP), Charter Communications Properties Holding Corp. (CCP Holdings), the parent of CCP and a wholly owned subsidiary of Charter, entered into a $9,447 promissory note with CCT Holdings. The promissory note bears interest at the rates paid by CCT Holdings on the Gaylord Seller Note. Principal and interest are due on September 29, 2005. Interest income has been accrued based on an average rate of interest over the life of the Gaylord Seller Note, which approximates 15.4% and totaled $1,899 for the period from January 1, 1998, through December 23, 1998, and $1,806 and $1,547 for the years ended December 31, 1997 and 1996, respectively. As of December 31, 1997, interest receivable totaled $3,643. F-67
315 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 4. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consists of the following at December 31, 1997: Cable distribution systems.................................. $ 426,241 Land, buildings and leasehold improvements.................. 15,443 Vehicles and equipment...................................... 24,375 --------- 466,059 Less -- Accumulated depreciation............................ (113,199) --------- $ 352,860 ========= Depreciation expense for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996, was $72,914, $59,599 and $39,575, respectively. 5. OTHER ASSETS: Other assets consists of the following at December 31, 1997: Debt issuance costs......................................... $13,416 Note receivable............................................. 2,100 Other....................................................... 1,342 ------- 16,858 Less -- Accumulated amortization............................ (3,127) ------- $13,731 ======= 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following at December 31, 1997: Accrued interest............................................ $ 8,389 Franchise fees.............................................. 6,434 Programming expenses........................................ 5,855 Accounts payable............................................ 4,734 Public education and governmental costs..................... 4,059 Salaries and related benefits............................... 3,977 Capital expenditures........................................ 3,629 Other....................................................... 11,477 ------- $48,554 ======= F-68
316 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 7. LONG-TERM DEBT: Long-term debt consists of the following at December 31, 1997: CCE-I: Term loans................................................ $274,120 Fund loans................................................ 85,000 Revolving credit facility................................. 103,800 -------- 462,920 -------- CCE-II: Term loans................................................ 105,000 Revolving credit facility................................. 123,500 -------- 228,500 -------- LBAC: Term loans................................................ 85,000 Revolving credit facility................................. 8,000 -------- 93,000 -------- Total debt........................................ 784,420 Less -- Current maturities.................................. (25,625) -------- Total long-term debt.............................. $758,795 ======== CCE-I CREDIT AGREEMENT CCE-I maintains a credit agreement (the "CCE-I Credit Agreement"), which provides for a $280,000 term loan that matures on September 30, 2006, an $85,000 fund loan that matures on March 31, 2007, and a $175,000 revolving credit facility with a maturity date of September 30, 2006. Amounts under the CCE-I Credit Agreement bear interest at either the LIBOR Rate or Base Rate, as defined, plus a margin of up to 2.75%. The variable interest rate ranged from 6.88% to 8.06% at December 23, 1998, and from 7.63% to 8.50% and 7.63% to 8.38% at December 31, 1997 and 1996, respectively. Commencing June 30, 2002, and at the end of each calendar quarter thereafter, available borrowings under the revolving credit facility and the term loan shall be reduced on an annual basis by 12.0% in 2002 and 15.0% in 2003. Commencing June 30, 2002, and at the end of each calendar quarter thereafter, the available borrowings for the fund loan shall be reduced on an annual basis by 0.75% in 2002 and 1.0% in 2003. A quarterly commitment fee of between 0.375% and 0.5% per annum is payable on the unborrowed balance of the revolving credit facility. COMBINED CREDIT AGREEMENT CCE-II and LBAC maintain a credit agreement (the "Combined Credit Agreement") which provides for two term loan facilities, one with the principal amount of $100,000 that matures on March 31, 2005, and the other with the principal amount of $90,000 that matures on March 31, 2006. The Combined Credit Agreement also provides for a $185,000 revolving credit facility, with a maturity date of March 31, 2005. Amounts under the Combined Credit Agreement bear interest at either the LIBOR Rate or Base Rate, as defined, plus a margin of up to 2.5%. The variable interest rate ranged from 6.56% to 7.59% at December 23, 1998, and from 7.50% to 8.38% at December 31, 1997, respectively. F-69
317 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Commencing March 31, 2001, and at the end of each quarter thereafter, available borrowings under the revolving credit facility and one term loan shall be reduced on an annual basis by 5.0% in 2001, 15.0% in 2002 and 18.0% in 2003. Commencing in December 31, 1999, and at the end of each quarter thereafter, available borrowings under the other term loan shall be reduced on annual basis by 0.5% in 1999, 0.8% in 2000, 1.0% in 2001, 1.0% in 2002 and 1.0% in 2003. A quarterly commitment fee of between 0.25% and 0.375% per annum, based upon the intercompany indebtedness of the Company, is payable on the unborrowed balance of the revolving credit facility. CCE CREDIT AGREEMENT In October 1998, Charter Communications Entertainment, L.P. (CCE L.P.), a 98% direct and indirect owner of CCE-I and CCE-II and indirectly owned subsidiary of the Company, entered into a credit agreement (the "CCE L.P. Credit Agreement") which provides for a term loan facility with the principal amount of $130,000 that matures on September 30, 2007. Amounts under the CCE L.P. Credit Agreement bear interest at the LIBOR Rate or Base Rate, as defined, plus a margin of up to 3.25%. The variable interest rate at December 23, 1998, was 8.62%. Commencing June 30, 2002, and the end of each calendar quarter thereafter, the available borrowings for the term loan shall be reduced on an annual basis by 0.75% in 2002 and 1.0% in 2003. CCE-II HOLDINGS CREDIT AGREEMENT CCE-II Holdings, LLC (CCE-II Holdings), a wholly owned subsidiary of CCE L.P. and the parent of CCE-II, entered into a credit agreement (the "CCE-II Holdings Credit Agreement") in November 1998, which provides for a term loan facility with the principal amount of $95,000 that matures on September 30, 2006. Amounts under the CCE-II Holdings Credit Agreement bear interest at either the LIBOR Rate or Base Rate, as defined, plus a margin of up to 3.25%. The variable rate at December 23, 1998, was 8.56%. Commencing June 30, 2002, and at the end of each quarter thereafter, available borrowings under the revolving credit facility and one term loan shall be reduced on an annual basis by 0.5% in 2002 and 1.0% in 2003. The credit agreements require the Company to comply with various financial and nonfinancial covenants, including the maintenance of annualized operating cash flow to fixed charge ratio, as defined, not to exceed 1.0 to 1.0. These debt instruments also contain substantial limitations on, or prohibitions of, distributions, additional indebtedness, liens asset sales and certain other items. 8. NOTES PAYABLE: Notes payable consists of the following at December 31, 1997: HC Crown Note............................................... $ 82,000 Accrued interest on HC Crown Note........................... 36,919 Gaylord Seller Note......................................... 165,688 Accrued interest on Gaylord Seller Note..................... 63,595 -------- Total............................................. $348,202 ======== In connection with the Crown Transaction, the Company entered into an $82,000 senior subordinated loan agreement with a subsidiary of Hallmark, HC Crown Corp., and pursuant to F-70
318 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) such loan agreement issued a senior subordinated note (the "HC Crown Note"). The HC Crown Note was an unsecured obligation. The HC Crown Note was limited in aggregate principal amount to $82,000 and has a stated maturity date of December 31, 1999 (the "Stated Maturity Date"). Interest has been accrued at 13% per annum, compounded semiannually, payable upon maturity. In October 1998, the Crown Note and accrued interest was paid in full. In connection with the Gaylord Transaction, CCT Holdings entered into a $165,700 subordinated loan agreement with Gaylord (the "Gaylord Seller Note"). Interest expense has been accrued based on an average rate of interest over the life of the Gaylord Seller Note, which approximated 15.4%. In connection with the Gaylord Transaction, CCT Holdings, CCE L.P. and Gaylord entered into a contingent payment agreement (the "Contingent Agreement"). The Contingent Agreement indicates CCE L.P. will pay Gaylord 15% of any amount distributed to CCT Holdings in excess of the total of the Gaylord Seller Note, Crown Seller Note and $450,000. In conjunction with the Paul G. Allen acquisition of Charter and the Company, Gaylord was paid an additional $132,000 pursuant to the Contingent Agreement and the Gaylord Seller Note was paid in full. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS: A summary of debt and the related interest rate hedge agreements at December 31, 1997, is as follows: 1997 -------------------------------- CARRYING NOTIONAL FAIR VALUE AMOUNT VALUE -------- -------- ----- DEBT Debt under credit agreements............................ $784,420 $ -- $784,420 HC Crown Note (including accrued interest).............. 118,919 -- 118,587 Gaylord Seller Note (including accrued interest)........ 229,283 -- 214,074 INTEREST RATE HEDGE AGREEMENTS Swaps................................................... -- 405,000 (1,214) Caps.................................................... -- 120,000 -- Collars................................................. -- 190,000 (437) As the long-term debt under the credit agreements bear interest at current market rates, their carrying amount approximates fair market value at December 31, 1997. Fair value of the HC Crown Note is based upon trading activity at December 31, 1997. Fair value of the Gaylord Seller Note is based on current redemption value. The weighted average interest pay rate for the Company's interest rate swap agreements was 7.82% at December 31, 1997. The weighted average interest rate for the Company's interest rate cap agreements was 8.49% at December 31, 1997. The weighted average interest rates for the Company's interest rate collar agreements were 9.04% and 7.57% for the cap and floor components, respectively, at December 31, 1997. The notional amounts of interest rate hedge agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the Company's exposure through its use of interest rate hedge agreements. The amounts exchanged are determined by reference to the notional amount and the other terms of the contracts. F-71
319 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The fair value of interest rate hedge agreements generally reflects the estimated amounts that the Company would receive or pay (excluding accrued interest) to terminate the contracts on the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Dealer quotations are available for the Company's interest rate hedge agreements. Management believes that the sellers of the interest rate hedge agreements will be able to meet their obligations under the agreements. In addition, some of the interest rate hedge agreements are with certain of the participating banks under the Company's Senior Credit Facility thereby reducing the exposure to credit loss. The Company has policies regarding the financial stability and credit standing of major counterparties. Nonperformance by the counterparties is not anticipated nor would it have a material adverse effect on the results of operations or the financial position of the Company. 10. COMMON STOCK: The Company's common stock consist of the following at December 31, 1997: CCA Holdings: Common stock -- Class A, voting, $.01 par value, 100,000 shares authorized; 75,515 shares issued and outstanding............................................ $ 1 Common stock -- Class B, voting, $.01 par value, 20,000 shares authorized; 4,300 shares issued and outstanding............................................ -- Common stock -- Class C, nonvoting, $.01 par value, 5,000 shares authorized; 185 shares issued and outstanding... -- --- 1 --- CCT Holdings: Common stock -- Class A, voting, $.01 par value, 20,000 shares authorized; 16,726 shares issued and outstanding............................................ -- Common stock -- Class B, voting, $.01 par value, 4,000 shares authorized; 3,000 shares issued and outstanding............................................ -- Common stock -- Class C, nonvoting, $.01 par value, 1,000 shares authorized; 275 shares issued and outstanding... -- --- CC-LB: Common stock -- Class A, voting, $.01 par value, 31,000 shares authorized, 27,850 shares issued and outstanding............................................ -- Common stock -- Class B, voting, $.01 par value, 2,000 shares authorized, 1,500 shares issued and outstanding............................................ -- Common stock -- Class C, nonvoting, $.01 par value, 2,000 shares authorized, 650 shares issued and outstanding... -- --- Total common stock................................ $ 1 === CCA HOLDINGS The Class A Voting Common Stock (CCA Class A Common Stock) and Class C Nonvoting Common Stock (CCA Class C Common Stock) have certain preferential rights upon liquidation of CCA Holdings. In the event of liquidation, dissolution or "winding up" of CCA Holdings, holders of CCA Class A and Class C Common Stock are entitled to a preference of $1,000 per share. After such amount is paid, holders of Class B Voting Common Stock (CCA Class B Common Stock) are entitled to receive $1,000 per share. Thereafter, Class A and Class C shareholders shall ratably receive the remaining proceeds. F-72
320 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) If upon liquidation, dissolution or "winding up" the assets of CCA Holdings are insufficient to permit payment to Class A and Class C shareholders for their full preferential amounts, all assets of CCA Holdings shall then be distributed ratably to Class A and Class C shareholders. Furthermore, if the proceeds from liquidation are inadequate to pay Class B shareholders their full preferential amounts, the proceeds are to be distributed on a pro rata basis to Class B shareholders. Upon the occurrence of any Conversion Event (as defined within the Amended and Restated Certificate of Incorporation) Class C shareholders may convert any or all of their outstanding shares into the same number of Class A shares. Furthermore, CCA Holdings may automatically convert outstanding Class C shares into the same number of Class A shares. CCA Holdings is restricted from making cash dividends on its common stock until the balance outstanding under the HC Crown Note is repaid. Charter and Kelso entered into a Stockholders' Agreement providing for certain restrictions on the transfer, sale or purchase of CCA Holdings' common stock. CCT HOLDINGS The Class A Voting Common Stock (CCT Class A Common Stock) and Class C Nonvoting Common Stock (CCT Class C Common Stock) have certain preferential rights upon liquidation of CCT Holdings. In the event of liquidation, dissolution or "winding up" of CCT Holdings, holders of CCT Class A Common Stock and Class C Common Stock are entitled to a preference of $1,000 per share. After such amount is paid, holders of Class B Voting Common Stock (CCT Class B Common Stock) are entitled to receive $1,000 per share. Thereafter, Class A and Class C shareholders shall ratably receive the remaining proceeds. If upon liquidation, dissolution or "winding up" the assets of CCT Holdings are insufficient to permit payment to Class A Common Stock and Class C shareholders for their full preferential amount, all assets of the Company shall then be distributed ratably to Class A and Class C shareholders. Furthermore, if the proceeds from liquidation are inadequate to pay Class B shareholders their full preferential amount, the proceeds are to be distributed on a pro rata basis to Class B shareholders. Upon the occurrence of any Conversion Event (as defined within the Amended and Restated Certificate of Incorporation), Class C shareholders may convert any or all of their outstanding shares into the same number of Class A shares. Furthermore, CCT Holdings may automatically convert outstanding Class C shares into the same number of Class A shares. CCT Holdings is restricted from making cash dividends on its common stock until the balance outstanding under the note payable to seller is repaid. Charter and Kelso entered into a Stockholders' Agreement providing for certain restrictions on the transfer, sale or purchase of CCT Holdings' common stock. CC-LB The Class A Voting Common Stock (CC-LB Class A Common Stock) and Class C Nonvoting Common Stock (CC-LB Class C Common Stock) have certain preferential rights upon liquidation of CC-LB. In the event of liquidation, dissolution or "winding up" of CC-LB, holders of CC-LB Class A Common Stock and Class C Common Stock are entitled to a preference of $1,000 per share. After such amount is paid, holders of Class B Voting Common Stock (CC-LB F-73
321 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Class B Common Stock) are entitled to receive $1,000 per share. Thereafter, Class A, Class B and Class C shareholders shall ratably receive the remaining proceeds. If upon liquidation, dissolution or "winding up" the assets of CC-LB are insufficient to permit payment to Class A and Class C shareholders for their full preferential amount, all assets of the Company shall then be distributed ratably to Class A and Class C shareholders. Furthermore, if the proceeds from liquidation are inadequate to pay Class B shareholders their full preferential amount, the proceeds are to be distributed on a pro rata basis to Class B shareholders. CC-LB Class C Common Stock may be converted into CC-LB Class A Common Stock upon the transfer of CC-LB Class C Common Stock to a person not affiliated with the seller. Furthermore, CC-LB may automatically convert outstanding Class C shares into the same number of Class A shares. 11. RELATED PARTY TRANSACTIONS: Charter provides management services to the Company under the terms of a contract which provides for annual base fees equal to $9,277 and $9,485 for the period from January 1, 1998, through December 23, 1998, and for the year ended December 31, 1997, respectively, plus an additional fee equal to 30% of the excess, if any, of operating cash flow (as defined in the management agreement) over the projected operating cash flow. Payment of the additional fee is deferred due to restrictions provided within the Company's credit agreements. Deferred management fees bear interest at 8.0% per annum. The additional fees for the periods from January 1, 1998, through December 23, 1998, and the years ended December 31, 1997 and 1996, totaled $2,160, $1,990 and $1,255, respectively. In addition, the Company receives financial advisory services from an affiliate of Kelso, under terms of a contract which provides for fees equal to $1,064 and $1,113 per annum as of January 1, 1998, through December 23, 1998, and December 31, 1997, respectively. Management and financial advisory service fees currently payable of $2,281 are included in payables to manager of cable television systems -- related party at December 31, 1997. The Company pays certain acquisition advisory fees to an affiliate of Kelso and Charter, which typically equal approximately 1% of the total purchase price paid for cable television systems acquired. Total acquisition fees paid to the affiliate of Kelso for the period from January 1, 1998, through December 23, 1998, were $-0-. Total acquisition fees paid to the affiliate of Kelso in 1997 and 1996 were $-0- and $1,400, respectively. Total acquisition fees paid to Charter for the period from January 1, 1998, through December 23, 1998, were $-0-. Total acquisition fees paid to Charter in 1997 and 1996 were $-0- and $1,400, respectively. The Company and all entities managed by Charter collectively utilize a combination of insurance coverage and self-insurance programs for medical, dental and workers' compensation claims. Medical coverage provides for $2,435 aggregate stop loss protection and a loss limitation of $100 per person per year. Workers' compensation coverage provides for $800 aggregate stop loss protection and a loss limitation of $150 per person per year. Charges are determined by independent actuaries at the present value of the actuarially computed present and future liabilities for such benefits. The Company is allocated its share of the charges monthly based upon its total number of employees, historical claims and medical cost trend rates. Management considers this allocation to be reasonable for the operations of the Company. For the period from January 1, 1998, through December 23, 1998, the Company expensed $1,950 relating to insurance allocations. During 1997 and 1996, the Company expensed $1,689 and $2,065, respectively, relating to insurance allocations. F-74
322 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Beginning in 1996, the Company and other entities managed by Charter employed the services of Charter's National Data Center (the "National Data Center"). The National Data Center performs certain customer billing services and provides computer network, hardware and software support to the Company and other affiliated entities. The cost of these services is allocated based on the number of customers. Management considers this allocation to be reasonable for the operations of the Company. For the period from January 1, 1998, through December 23, 1998, the Company expensed $843 relating to these services. During 1997 and 1996, the Company expensed $723 and $466 relating to these services, respectively. CCE-I maintains a regional office. The regional office performs certain operational services on behalf of CCE-I and other affiliated entities. The cost of these services is allocated to CCE-I and affiliated entities based on their number of customers. Management considers this allocation to be reasonable for the operations of CCE-I. From the period January 1, 1998, through December 23, 1998, the Company expensed $1,926 relating to these services. During 1997 and 1996, CCE-I expensed $861 and $799, respectively, relating to these services. 12. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases certain facilities and equipment under noncancelable operating leases. Lease and rental costs charged to expense for the period from January 1, 1998, through December 23, 1998, was $2,222. Rent expense incurred under these leases during 1997 and 1996 was $1,956 and $1,704, respectively. 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 expensed incurred for pole attachments for the period from January 1, 1998, through December 23, 1998, was $2,430. Rent expense incurred for pole attachments during 1997 and 1996 was $2,601 and $2,330, respectively. LITIGATION The Company is a party to lawsuits that arose in the ordinary course of conducting its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits will not have a material adverse effect on the Company's consolidated financial position or results of operations. 13. REGULATION IN THE CABLE TELEVISION INDUSTRY: The cable television 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 television 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 television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in F-75
323 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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. As of December 23, 1998, 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. 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 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, deregulates rates on the cable programming service tier (CPST). The FCC is currently developing permanent regulations to implement the rate deregulation provisions of the 1996 Telecom Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on the Company's financial position or results of operations. The FCC may further restrict the ability of cable television operators to implement rate increases or the United States Congress may enact legislation that could delay or suspend the scheduled March 1999 termination of CPST rate regulation. This continued rate regulation, if adopted, could limit the rates charged by the Company. A number of states subject cable television 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 television rates is not allowed to be more restrictive than the federal or local regulation. The Company is subject to state regulation in Connecticut. 14. INCOME TAXES: Deferred tax assets and liabilities are recognized for the estimated future tax consequence attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using the enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Deferred income tax expense or benefit is the result of changes in the liability or asset recorded for deferred taxes. A valuation allowance must be established for any portion of a deferred tax asset for which it is more likely than not that a tax benefit will not be realized. For the period from January 1, 1998, through December 23, 1998, and the years ended December 31, 1997 and 1996, no current provision (benefit) for income taxes was recorded. The effective income tax rate is less than the federal rate of 35% primarily due to providing a valuation allowance on deferred income tax assets. F-76
324 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Deferred taxes are comprised of the following at December 31, 1997: Deferred income tax assets: Accounts receivable....................................... $ 252 Other assets.............................................. 7,607 Accrued expenses.......................................... 4,740 Deferred revenue.......................................... 624 Deferred management fees.................................. 1,654 Tax loss carryforwards.................................... 80,681 Tax credit carryforward................................... 1,360 Valuation allowance....................................... (40,795) --------- Total deferred income tax assets.................. 56,123 --------- Deferred income tax liabilities: Property, plant and equipment............................. (38,555) Franchise costs........................................... (117,524) Other..................................................... (11,407) --------- Total deferred income tax liabilities............. (167,486) --------- Net deferred income tax liability................. $(111,363) ========= At December 31, 1997, the Company had net operating loss (NOL) carryforwards for regular income tax purposes aggregating $204,400, which expire in various years from 1999 through 2012. Utilization of the NOLs carryforwards is subject to certain limitations. 15. EMPLOYEE BENEFIT PLANS: The Company's employees may participate in the Charter Communications, Inc. 401(k) Plan (the "401(k) Plan"). Employees that qualify for participation 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 contributes an amount equal to 50% of the first 5% of contributions by each employee. For the period from January 1, 1998, through December 23, 1998, the Company contributed $585 to the 401(k) plan. During 1997 and 1996, the Company contributed approximately $499 and $435 to the 401(k) Plan, respectively. Certain employees of the Company are participants in the 1996 Charter Communications/ Kelso Group Appreciation Rights Plan (the "Plan"). The Plan covers certain key employees and consultants within the group of companies and partnerships controlled by affiliates of Kelso and managed by Charter. The Plan permits the granting of up to 1,000,000 units, of which 705,000 were outstanding at December 31, 1997. Unless otherwise provided in a particular instance, units vest at a rate of 20% per annum. The Plan entitles participants to receive payment of the appreciated unit value for vested units, upon the occurrence of certain events specified in the Plan (i.e. change in control, employee termination) The units do not represent a right to an equity interest to any entities within the CCA Group. Compensation expense is based on the appreciated unit value and is amortized over the vesting period. As a result of the acquisition of Charter and the Company, the Plan was terminated, all outstanding units became 100% vested and all amounts were paid by Charter in 1999. For the period from January 1, 1998, through December 23, 1998, the Company recorded $5,684 of expense, included in management fees, and a contribution from Charter related to the Appreciation Rights Plan. F-77
325 CCA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 16. ACCOUNTING STANDARD NOT YET IMPLEMENTED: In June 1998, the Financial Accounting Standards Board adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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. 133 is effective for fiscal years beginning after June 15, 1999. The Company has not yet quantified the impacts of adopting SFAS No. 133 on its consolidated financial statements nor has it determined the timing or method of its adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings (loss). 17. SUBSEQUENT EVENT: Subsequent to December 23, 1998, CCA Holdings, CCT Holdings and CC-LB converted to limited liability companies and are now known as CCA Holdings LLC, CCT Holdings LLC and Charter Communications Long Beach, LLC, respectively. F-78
326 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To CharterComm Holdings, L.P.: We have audited the accompanying consolidated balance sheet of CharterComm Holdings, L.P. and subsidiaries as of December 31, 1997, and the related consolidated statements of operations, partners' capital and cash flows for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CharterComm Holdings, L.P. and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, February 5, 1999 F-79
327 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET -- DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 2,742 Accounts receivable, net of allowance for doubtful accounts of $330....................................... 3,158 Prepaid expenses and other................................ 342 -------- Total current assets.............................. 6,242 -------- INVESTMENT IN CABLE TELEVISION PROPERTIES: Property, plant and equipment............................. 235,808 Franchises, net of accumulated amortization of $119,968... 480,201 -------- 716,009 -------- OTHER ASSETS................................................ 16,176 -------- $738,427 ======== LIABILITIES AND PARTNERS' CAPITAL CURRENT LIABILITIES: Current maturities of long-term debt...................... $ 5,375 Accounts payable and accrued expenses..................... 30,507 Payables to manager of cable television systems -- related party.................................................. 1,120 -------- Total current liabilities......................... 37,002 -------- DEFERRED REVENUE............................................ 1,719 -------- LONG-TERM DEBT, less current maturities..................... 666,662 -------- DEFERRED MANAGEMENT FEES.................................... 7,805 -------- DEFERRED INCOME TAXES....................................... 5,111 -------- REDEEMABLE PREFERRED LIMITED UNITS -- 577.81 units, issued and outstanding.................................... 20,128 -------- PARTNERS' CAPITAL: General Partner........................................... -- Common Limited Partners -- 220.24 units issued and outstanding............................................ -- -------- Total partners' capital........................... -- -------- $738,427 ======== The accompanying notes are an integral part of these consolidated statements. F-80
328 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) PERIOD FROM JANUARY 1, 1998, YEAR ENDED THROUGH DECEMBER 31 DECEMBER 23, -------------------- 1998 1997 1996 ------------ ---- ---- REVENUES.............................................. $196,801 $175,591 $120,280 -------- -------- -------- OPERATING EXPENSES: Operating costs..................................... 83,745 75,728 50,970 General and administrative.......................... 14,586 12,607 9,327 Depreciation and amortization....................... 86,741 76,535 53,133 Management fees -- related party.................... 14,780 8,779 6,014 -------- -------- -------- 199,852 173,649 119,444 -------- -------- -------- Income (loss) from operations.................... (3,051) 1,942 836 -------- -------- -------- OTHER INCOME (EXPENSE): Interest income..................................... 211 182 233 Interest expense.................................... (66,121) (61,498) (41,021) Other, net.......................................... (1,895) 17 (468) -------- -------- -------- (67,805) (61,299) (41,256) -------- -------- -------- Loss before extraordinary item................... (70,856) (59,357) (40,420) EXTRAORDINARY ITEM -- Loss on early retirement of debt................................................ (6,264) -- -- -------- -------- -------- Net loss......................................... (77,120) (59,357) (40,420) REDEMPTION PREFERENCE ALLOCATION: Special Limited Partner units....................... -- -- (829) Redeemable Preferred Limited units.................. -- -- (4,081) NET LOSS ALLOCATED TO REDEEMABLE PREFERRED LIMITED UNITS............................................... 20,128 2,553 4,063 -------- -------- -------- Net loss applicable to partners' capital accounts....................................... $(56,992) $(56,804) $(41,267) ======== ======== ======== NET LOSS ALLOCATION TO PARTNERS' CAPITAL ACCOUNTS: General Partner..................................... $(56,992) $(21,708) $(38,391) Common Limited Partners............................. -- (35,096) (2,876) -------- -------- -------- $(56,992) $(56,804) $(41,267) ======== ======== ======== The accompanying notes are an integral part of these consolidated statements. F-81
329 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DOLLARS IN THOUSANDS) COMMON GENERAL LIMITED PARTNER PARTNERS TOTAL ------- -------- ----- BALANCE, December 31, 1995.............................. $ 29,396 $ 2,202 $ 31,598 Capital contributions................................. 30,703 2,300 33,003 Allocation of net loss................................ (38,391) (2,876) (41,267) -------- -------- -------- BALANCE, December 31, 1996.............................. 21,708 1,626 23,334 Capital contributions................................. -- 33,470 33,470 Allocation of net loss................................ (21,708) (35,096) (56,804) -------- -------- -------- BALANCE, December 31, 1997.............................. -- -- -- Capital contributions................................. 4,920 -- 4,920 Allocation of net loss................................ (56,992) -- (56,992) -------- -------- -------- BALANCE, December 23, 1998.............................. $(52,072) $ -- $(52,072) ======== ======== ======== The accompanying notes are an integral part of these consolidated statements. F-82
330 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) PERIOD FROM JANUARY 1, 1998, THROUGH YEAR ENDED DECEMBER 31, DECEMBER 23, ----------------------- 1998 1997 1996 ------------ ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.............................................. $ (77,120) $ (59,357) $ (40,420) Adjustments to reconcile net loss to net cash provided by operating activities -- Extraordinary item -- Loss on early retirement of debt............................................. 6,264 -- -- Depreciation and amortization...................... 86,741 76,535 53,133 Amortization of debt issuance costs, debt discount and interest rate cap agreements................. 14,563 14,212 9,564 Loss on disposal of property, plant and equipment........................................ 1,714 203 367 Changes in assets and liabilities, net of effects from acquisition -- Accounts receivable, net......................... 2,000 369 (303) Prepaid expenses and other....................... (203) 943 245 Accounts payable and accrued expenses............ (1,970) 3,988 9,911 Payables to manager of cable television systems, including deferred management fees............ 9,456 3,207 3,479 Deferred revenue................................. 770 (82) 452 Other operating activities....................... 5,378 -- -- --------- --------- --------- Net cash provided by operating activities........ 47,593 40,018 36,428 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment............ (85,044) (72,178) (48,324) Payments for acquisitions, net of cash acquired....... (5,900) (159,563) (145,366) Other investing activities............................ 5,280 1,577 (2,089) --------- --------- --------- Net cash used in investing activities.............. (85,664) (230,164) (195,779) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt.......................... 547,400 231,250 260,576 Repayments of long-term debt.......................... (505,300) (67,930) (34,401) Partners' capital contributions....................... -- 29,800 -- Payment of debt issuance costs........................ (3,651) (3,593) (11,732) Payment of Special Limited Partnership units.......... -- -- (43,243) Repayments of note payable -- related party........... -- -- (15,000) Payments for interest rate cap agreements............. -- -- (35) --------- --------- --------- Net cash provided by financing activities.......... 38,449 189,527 156,165 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 378 (619) (3,186) CASH AND CASH EQUIVALENTS, beginning of period.......... 2,742 3,361 6,547 --------- --------- --------- CASH AND CASH EQUIVALENTS, end of period................ $ 3,120 $ 2,742 $ 3,361 ========= ========= ========= CASH PAID FOR INTEREST.................................. $ 61,559 $ 42,538 $ 28,860 ========= ========= ========= The accompanying notes are an integral part of these consolidated statements. F-83
331 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND BASIS OF PRESENTATION CharterComm Holdings, L.P. (CharterComm Holdings) was formed in March 1996 with the contributions of Charter Communications Southeast Holdings, L.P. (Southeast Holdings), Charter Communications, L.P. (CC-I) and Charter Communications II, L.P. (CC-II). This contribution was accounted for as a reorganization under common control and, accordingly, the consolidated financial statements and notes have been restated to include the results and financial position of Southeast Holdings, CC-I and CC-II. Through December 23, 1998, CharterComm Holdings was owned 75.3% by affiliates of Charterhouse Group International, Inc., a privately owned investment firm (collectively referred to herein as "Charterhouse"), indirectly owned 5.7% by Charter Communications, Inc. (Charter), manager of the Partnership's (as defined below) cable television systems, and owned 19.0% primarily by other institutional investors. Effective December 23, 1998, Paul G. Allen acquired 94% of Charter through a series of transactions. In conjunction with Mr. Allen's acquisition, Charter acquired 100% of the outstanding partnership interests in CharterComm Holdings on December 23, 1998. The accompanying consolidated financial statements include the accounts of CharterComm Holdings and its subsidiaries collectively referred to as the "Partnership" herein. All significant intercompany balances and transactions have been eliminated in consolidation. In 1998, the Partnership through its subsidiaries provided cable television service to customers in Alabama, Georgia, Kentucky, Louisiana, North Carolina, South Carolina and Tennessee. CASH EQUIVALENTS The Partnership considers all highly liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 1997, cash equivalents consist primarily of repurchase agreements. These investments are carried at cost that 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 television transmission and distribution facilities, and the cost of new customer installation. 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, and equipment replacement and betterments are capitalized. Depreciation is provided on the straight-line basis over the estimated useful lives of the related assets as follows: Cable distribution systems.................................. 3-15 years Buildings and leasehold improvements........................ 5-15 years Vehicles and equipment...................................... 3-5 years F-84
332 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In 1997, the Partnership shortened the estimated useful lives of certain property, plant and equipment for depreciation purposes. As a result, an additional $4,775 of depreciation was recorded during 1997. 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 television systems represent management's estimate of fair value and are generally amortized using the straight-line method over a period of 15 years. In addition, approximately $100,000 of franchise rights are being amortized over a period of 3 to 11 years. OTHER ASSETS Debt issuance costs are being amortized to interest expense over the term of the related debt. The interest rate cap costs are being amortized over the terms of the agreement, which approximates three years. IMPAIRMENT OF ASSETS If facts and circumstances suggest 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 Cable television revenues from basic and premium 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 television system. As of December 31, 1997, no installation revenue has been deferred, as direct selling costs exceeded installation revenue. Fees collected from programmers to guarantee carriage are deferred and amortized to income over the life of the contracts. Local governmental authorities impose franchise fees on the Partnership ranging up to a federally mandated maximum of 5.0% of gross revenues. On a monthly basis, such fees are collected from the Partnership's customers and are periodically remitted to local franchises. Franchise fees collected and paid are reported as revenue. INTEREST RATE HEDGE AGREEMENTS The Partnership manages fluctuations in interest rates by using interest rate hedge agreements, as required by certain debt agreements. Interest rate swaps, caps and collars are accounted for as hedges of debt obligations, and accordingly, the net settlement amounts are recorded as adjustments to interest expense in the period incurred. Premiums paid for interest rate caps are deferred, included in other assets, and are amortized over the original term of the interest rate agreement as an adjustment to interest expense. F-85
333 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Partnership's interest rate swap agreements require the Partnership to pay a fixed rate and receive a floating rate thereby creating fixed rate debt. Interest rate caps and collars are entered into by the Partnership to reduce the impact of rising interest rates on floating rate debt. The Partnership's participation in interest rate hedging transactions involves instruments that have a close correlation with its debt, thereby managing its risk. Interest rate hedge agreements have been designed for hedging purposes and are not held or issued for speculative purposes. OTHER INCOME (EXPENSE) Other, net includes gain and loss on disposition of property, plant and equipment, and other miscellaneous items, all of which are not directly related to the Partnership's primary line of business. In 1996, the Partnership recorded $367 of nonoperating losses for its portion of insurance deductibles pertaining to damage caused by hurricanes to certain cable television systems. INCOME TAXES Income taxes are the responsibility of the partners and are not provided for in the accompanying financial statements except for Peachtree Cable TV, Inc. (Peachtree), an indirect wholly owned subsidiary, which is a C corporation and for which taxes are presented in accordance with SFAS No. 109. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles 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. 2. ACQUISITIONS: In 1998, the Partnership acquired cable television systems in one transaction for a purchase price net of cash acquired, of $5,900. The excess cost of properties acquired over the amounts assigned to net tangible assets at the date of acquisition was $5,000 and is included in franchises. In 1997, the Partnership acquired cable television systems in three separate transactions for an aggregate purchase price, net of cash acquired, of $159,600. The excess of the cost of properties acquired over the amounts assigned to net tangible assets at the date of acquisition was $126,400 and is included in franchises. In 1996, the Partnership acquired cable television systems in three separate transactions for an aggregate purchase price, net of cash acquired, of $145,400. The excess of the cost of properties acquired over the amounts assigned to net tangible assets at the date of acquisition was $118,200 and is included in franchises. The above acquisitions were accounted for using the purchase method of accounting, and accordingly, results of operations of the acquired assets have been included in the financial statements from the dates of acquisition. F-86
334 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Unaudited pro forma operating results for the 1997 acquisitions as though the acquisitions had been made on January 1, 1997, with pro forma adjustments to give effect to amortization of franchises, interest expense and certain other adjustments are as follows. YEAR ENDED DECEMBER 31, 1997 ------------ (UNAUDITED) Revenues.................................................... $182,770 Income from operations...................................... 2,608 Net loss.................................................... (61,389) The unaudited pro forma information does not purport to be indicative of the results of operations had these transactions been completed as of the assumed date or which may be obtained in the future. 3. DISTRIBUTIONS AND ALLOCATIONS: For financial reporting purposes, redemption preference allocations, profits and losses are allocated to partners in accordance with the liquidation provision of the applicable partnership agreement. As stated in the Partnership Agreement, the Partnership may make distributions to the partners out of all available funds at such times and in such amounts as the General Partner may determine in its sole discretion. 4. REDEEMABLE PREFERRED LIMITED UNITS: As of December 31, 1995, certain Redeemable Preferred Limited Partner units of CC-I and CC-II were outstanding. During 1996, the Partnership issued certain Redeemable Preferred Limited Partner units of CharterComm Holdings. The Preferred Limited Partners' preference return has been reflected as an addition to the Redeemable Preferred Limited Partner units, and the decrease has been allocated to the General Partner and Common Limited Partner consistent with the liquidation and distribution provisions in the partnership agreements. At December 23, 1998, the balance related to the CharterComm Holdings Preferred Limited Partner units was as follows: Contribution, March 1996.................................... $ 20,052 1996 redemption preference allocation..................... 2,629 Allocation of net loss.................................... -- -------- Balance, December 31, 1996.................................. 22,681 1997 redemption preference allocation..................... -- Allocation of net loss.................................... (2,553) -------- Balance, December 31, 1997.................................. 20,128 1998 redemption preference allocation..................... -- Allocation of net loss.................................... (20,128) -------- Balance, December 23, 1998.................................. $ -- ======== F-87
335 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The 1998 and 1997 redemption preference allocations of $4,617 and $4,020, respectively, have not been reflected in the Preferred Limited Partners' capital accounts since the General Partner and Common Limited Partners' capital accounts have been reduced to $-0-. 5. SPECIAL LIMITED PARTNER UNITS (CC-I): Prior to March 28, 1996, certain Special Limited Partner units of CC-I were outstanding. CC-I's profits were allocated to the Special Limited Partners until allocated profits equaled the unrecovered preference amount (preference amounts range from 6% to 17.5% of the unrecovered initial cost of the partnership units and unrecovered preference amounts per annum). When there was no profit to allocate, the preference return was reflected as a decrease in Partners' Capital. In accordance with a purchase agreement and through the use of a capital contribution from Charter Communications Southeast, L.P. (Southeast), a wholly owned subsidiary of Southeast Holdings, resulting from the proceeds of the Notes (see Note 9), CC-I paid the Special Limited Partners $43,243 as full consideration for their partnership interests on March 28, 1996. 6. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consists of the following at December 31, 1997: Cable distribution systems.................................. $274,837 Land, buildings and leasehold improvements.................. 5,439 Vehicles and equipment...................................... 14,669 -------- 294,945 Less -- Accumulated depreciation............................ (59,137) -------- $235,808 ======== Depreciation expense for the period from January 1, 1998, through December 23, 1998, and for the years ended December 31, 1997 and 1996, was $44,307, $33,634 and $16,997, respectively. 7. OTHER ASSETS: Other assets consist of the following at December 31, 1997: Debt issuance costs......................................... $18,385 Other assets................................................ 3,549 ------- 21,934 Less -- Accumulated amortization............................ (5,758) ------- $16,176 ======= As a result of the payment and termination of the CC-I Credit Agreement and CC-II Credit Agreement (see Note 9), debt issuance costs of $6,264 were written off as an extraordinary loss on early retirement of debt for the period from January 1, 1998, through December 23, 1998. F-88
336 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following at December 31, 1997: Accrued interest............................................ $ 9,804 Franchise fees.............................................. 3,524 Programming costs........................................... 3,391 Accounts payable............................................ 2,479 Capital expenditures........................................ 2,099 Salaries and related benefits............................... 2,079 Other....................................................... 7,131 ------- $30,507 ======= 9. LONG-TERM DEBT: Long-term debt consists of the following at December 31, 1997: Senior Secured Discount Debentures.......................... $146,820 11 1/4% Senior Notes........................................ 125,000 Credit Agreements: CC-I...................................................... 112,200 CC-II..................................................... 339,500 -------- 723,520 Less: Current maturities........................................ (5,375) Unamortized discount...................................... (51,483) -------- $666,662 ======== SENIOR SECURED DISCOUNT DEBENTURES On March 28, 1996, Southeast Holdings and CharterComm Holdings Capital Corporation (Holdings Capital), a wholly owned subsidiary of Southeast Holdings (collectively the "Debentures Issuers"), issued $146,820 of Senior Secured Discount Debentures (the "Debentures") for proceeds of $75,000. Proceeds from the Debentures were used to pay fees and expenses related to the issuance of the Debentures and the balance of $72,400 was a capital contribution to Southeast. The Debentures are secured by all of Southeast Holdings' ownership interest in Southeast and rank pari passu in right and priority of payment to all other existing and future indebtedness of the Debentures Issuers. The Debentures are effectively subordinated to the claims of creditors of Southeast Holdings' subsidiaries, including the Combined Credit Agreement (as defined herein). The Debentures are redeemable at the Debentures Issuers' option at amounts decreasing from 107% to 100% of principal, plus accrued and unpaid interest to the redemption date, beginning on March 15, 2001. The Debentures Issuers are required to make an offer to purchase all of the Debentures, at a purchase price equal to 101% of the principal amount, together with accrued and unpaid interest, upon a Change in Control, as defined in the Debentures Indenture. No interest is payable on the Debentures prior to March 15, 2001. Thereafter, interest on the Debentures is payable semiannually in arrears beginning September 15, 2001, until maturity on March 15, 2007. The discount on the Debentures is being accreted F-89
337 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) using the effective interest method at an interest rate of 14% from the date of issuance to March 15, 2001. 11 1/4% SENIOR NOTES Southeast and CharterComm Capital Corporation (Southeast Capital), a wholly owned subsidiary of Southeast (collectively the "Notes Issuers"), issued $125,000 aggregate principal amount of 11 1/4% Senior Notes (the "Notes"). The Notes are senior unsecured obligations of the Notes Issuers and rank pari passu in right and priority of payment to all other existing and future indebtedness of the Notes Issuers. The Notes are effectively subordinated to the claims of creditors of Southeast's subsidiaries, including the lenders under the Combined Credit Agreement. The Notes are redeemable at the Notes Issuers' option at amounts decreasing from 105.625% to 100% of principal, plus accrued and unpaid interest to the date of redemption, beginning on March 15, 2001. The Notes Issuers are required to make an offer to purchase all of the Notes, at a purchase price equal to 101% of the principal amount, together with accrued and unpaid interest, upon a Change in Control, as defined in the Notes Indenture. Interest is payable semiannually on March 15 and September 15 until maturity on March 15, 2006. Southeast and Southeast Holdings are holding companies with no significant assets other than their direct and indirect investments in CC-I and CC-II. Southeast Capital and Holdings Capital were formed solely for the purpose of serving as co-issuers and have no operations. Accordingly, the Notes Issuers and Debentures Issuers must rely upon distributions from CC-I and CC-II to generate funds necessary to meet their obligations, including the payment of principal and interest on the Notes and Debentures. COMBINED CREDIT AGREEMENT In June 1998, CC-I and CC-II (the "Borrowers") replaced their existing credit agreements and entered into a combined credit agreement (the "Combined Credit Agreement"), which provides for two term loan facilities, one with the principal amount of $200,000 that matures on June 30, 2007, and the other with the principal amount of $150,000 that matures on December 31, 2007. The Combined Credit Agreement also provides for a $290,000 revolving credit facility, with a maturity date of June 30, 2007. Amounts under the Combined Credit Agreement bear interest at the LIBOR Rate or Base Rate, as defined, plus a margin of up to 2.0%. The variable interest rates ranged from 6.69% to 7.31% at December 23, 1998. Commencing March 31, 2002, and at the end of each calendar quarter thereafter, the available borrowings for the revolving credit facility and the $200,000 term loan shall be reduced on an annual basis by 11.0% in 2002 and 14.6% in 2003. Commencing March 31, 2002, and at the end of each calendar quarter thereafter, the available borrowings for the $150,000 term loan shall be reduced on an annual basis by 1.0% in 2002 and 1.0% in 2003. A quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the unborrowed balance of the revolving credit facility. The Debentures, Notes and Combined Credit Agreement require the Partnership to comply with various financial and nonfinancial covenants including the maintenance of a ratio of debt to annualized operating cash flow, as defined, not to exceed 5.25 to 1 at December 23, 1998. These debt instruments also contain substantial limitations on, or prohibitions of, distributions, additional indebtedness, liens, asset sales and certain other items. F-90
338 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CC-I CREDIT AGREEMENT CC-I maintained a credit agreement (the "CC-I Credit Agreement") with a consortium of banks for borrowings up to $127,200, consisting of a revolving line of credit of $63,600 and a term loan of $63,600. Interest accrued, at CC-I's option, at rates based upon the Base Rate, as defined in the CC-I Credit Agreement, LIBOR, or prevailing bid rates of certificates of deposit plus the applicable margin based upon CC-I's leverage ratio at the time of the borrowings. The variable interest rates ranged from 7.75% to 8.00% and 7.44% to 7.50% at December 31, 1997 and 1996, respectively. In June 1998, the CC-I Credit Agreement was repaid and terminated in conjunction with the establishment of the Combined Credit Agreement. CC-II CREDIT AGREEMENT CC-II maintained a credit agreement (the "CC-II Credit Agreement") with a consortium of banks for borrowings up to $390,000, consisting of a revolving credit facility of $215,000, and two term loans totaling $175,000. Interest accrued, at CC-II's option, at rates based upon the Base Rate, as defined in the CC-II Credit Agreement, LIBOR, or prevailing bid rates of certificates of deposit plus the applicable margin based upon CC-II's leverage ratio at the time of the borrowings. The variable interest rates ranged from 7.63% to 8.25% and 7.25% to 8.125% at December 31, 1997 and 1996, respectively. In June 1998, the CC-II Credit Agreement was repaid and terminated in conjunction with the establishment of the Combined Credit Agreement. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS: A summary of debt and the related interest rate hedge agreements at December 31, 1997, is as follows: CARRYING NOTIONAL FAIR VALUE AMOUNT VALUE -------- -------- ----- DEBT Senior Secured Discount Debentures.............. $ 95,337 $ -- $115,254 11 1/4% Senior Notes............................ 125,000 -- 136,875 CC-I Credit Agreement........................... 112,200 -- 112,200 CC-II Credit Agreement.......................... 339,500 -- 339,500 INTEREST RATE HEDGE AGREEMENTS CC-I: Swaps......................................... -- 100,000 (797) CC-II: Swaps......................................... -- 170,000 (1,030) Caps.......................................... -- 70,000 -- Collars....................................... -- 55,000 (166) As the CC-I and CC-II Credit Agreements bear interest at current market rates, their carrying amounts approximate fair market values at December 31, 1997. The fair value of the Notes and the Debentures is based on current redemption value. F-91
339 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The weighted average interest pay rate for CC-I interest rate swap agreements was 8.07% at December 31, 1997. The weighted average interest pay rate for CC-II interest rate swap agreements was 8.03% at December 31, 1997. The weighted average interest rate for CC-II interest cap agreements was 8.48% at December 31, 1997. The weighted average interest rates for CC-II interest rate collar agreements were 9.01% and 7.61% for the cap and floor components, respectively, at December 31, 1997. The notional amounts of interest rate hedge agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the Partnership's exposure through its use of interest rate hedge agreements. The amounts exchanged are determined by reference to the notional amount and the other terms of the contracts. The fair value of interest rate hedge agreements generally reflects the estimated amounts that the Partnership would receive or pay (excluding accrued interest) to terminate the contracts on the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Dealer quotations are available for the Partnership's interest rate hedge agreements. Management believes that the sellers of the interest rate hedge agreements will be able to meet their obligations under the agreements. In addition, some of the interest rate hedge agreements are with certain of the participating banks under the Partnership's credit facilities thereby reducing the exposure to credit loss. The Partnership has policies regarding the financial stability and credit standing of major counterparties. Nonperformance by the counterparties is not anticipated nor would it have a material adverse effect on the results of operations or the financial position of the Partnership. 11. INCOME TAXES: The book value of the Partnership's net assets (excluding Peachtree) exceeds its tax reporting basis by $2,919 as of December 31, 1997. As of December 31, 1997, temporary differences and carryforwards that gave rise to deferred income tax assets and liabilities for Peachtree are as follows: Deferred income tax assets: Accounts receivable....................................... $ 4 Accrued expenses.......................................... 29 Deferred management fees.................................. 111 Deferred revenue.......................................... 24 Tax loss carryforwards.................................... 294 Tax credit carryforwards.................................. 361 ------- Total deferred income tax assets.................. 823 ------- Deferred income tax liabilities: Property, plant and equipment............................. (1,372) Franchises and other assets............................... (4,562) ------- Total deferred income tax liabilities............. (5,934) ------- Net deferred income tax liability................. $(5,111) ======= F-92
340 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. RELATED PARTY TRANSACTIONS: Charter provides management services to the Partnership under the terms of contracts which provide for fees equal to 5% of the Partnership's gross service revenues. The debt agreements prohibit payment of a portion of such management fees (40% for both CC-I and CC-II) until repayment in full of the outstanding indebtedness. The remaining 60% of management fees, are paid quarterly through December 31, 1998. Thereafter, the entire fee may be deferred if a multiple of EBITDA, as defined, does not exceed outstanding indebtedness of CC-I and CC-II. In addition, payments due on the Notes and Debentures shall be paid before any deferred management fees are paid. Expenses recognized under the contracts for the period from January 1, 1998, through December 23, 1998, were $9,860. Expenses recognized under the contracts during 1997 and 1996 were $8,779 and $6,014, respectively. Management fees currently payable of $1,432 are included in payables to manager of cable television systems -- related party at December 31, 1997. The Partnership and all entities managed by Charter collectively utilize a combination of insurance coverage and self-insurance programs for medical, dental and workers' compensation claims. Medical coverage provides for $2,435 aggregate stop loss protection and a loss limitation of $100 per person per year. Workers' compensation coverage provides for $800 aggregate stop loss protection and a loss limitation of $150 per person per year. Charges are determined by independent actuaries at the present value of the actuarially computed present and future liabilities for such benefits. The Partnership is allocated its share of the charges monthly based upon its total number of employees, historical claims and medical cost trend rates. Management considers this allocation to be reasonable for the operations of the Partnership. For the period from January 1, 1998, through December 23, 1998, the Partnership expensed $1,831 relating to insurance allocations. During 1997 and 1996, the Partnership expensed $1,524 and $1,136, respectively, relating to insurance allocations. The Partnership employs the services of Charter's National Data Center (the "National Data Center"). The National Data Center performs certain customer billing services and provides computer network, hardware and software support for the Partnership and other entities managed by Charter. The cost of these services is allocated based on the number of basic customers. Management considers this allocation to be reasonable for the operations of the Partnership. For the period from January 1, 1998, through December 23, 1998, the Partnership expensed $685 relating to these services. During 1997 and 1996, the Partnership expensed $606 and $345, respectively, relating to these services. CC-I, CC-II and other entities managed by Charter maintain regional offices. The regional offices perform certain operational services. The cost of these services is allocated based on number of basic customers. Management considers this allocation to be reasonable for the operations of the Partnership. For the period from January 1, 1998, through December 23, 1998, the Partnership expensed $3,009 relating to these services. During 1997 and 1996, the Partnership expensed $1,992 and $1,294, respectively, relating to these services. The Partnership pays certain acquisition advisory fees to Charter and Charterhouse for cable television systems acquired. Total acquisition fees paid to Charter for the period from January 1, 1998, through December 23, 1998, were $-0-. Total acquisition fees paid to Charter in 1997 and 1996 were $982 and $1,738, respectively. Total acquisition fees paid to Charterhouse for the period from January 1, 1998, through December 23, 1998, were $-0-. Total acquisition fees paid to Charterhouse in 1997 and 1996 were $982 and $1,738, respectively. F-93
341 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During 1997, the ownership of CharterComm Holdings changed as a result of CharterComm Holdings receiving a $25,000 cash contribution from an institutional investor, a $3,000 cash contribution from Charterhouse and a $2,000 cash contribution from Charter, as well as the transfer of assets and liabilities of a cable television system through a series of transactions initiated by Charter and Charterhouse. Costs of $200 were incurred in connection with the cash contributions. These contributions were contributed to Southeast Holdings which, in turn, contributed them to Southeast. 13. COMMITMENTS AND CONTINGENCIES: LEASES The Partnership leases certain facilities and equipment under noncancelable operating leases. Lease and rental costs charged to expense for the period from January 1, 1998, through December 23, 1998, was $642. Rent expense incurred under leases during 1997 and 1996 was $615 and $522, respectively. The Partnership also rents utility poles in its operations. Generally, pole rentals are cancelable on short notice, but the Partnership anticipates that such rentals will recur. Rent expense incurred for pole rental attachments for the period from January 1, 1998, through December 23, 1998, was $3,261. Rent expense incurred for pole attachments during 1997 and 1996 was $2,930 and $2,092, respectively. LITIGATION The Partnership is a party to lawsuits that arose in the ordinary course of conducting its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits will not have a material adverse effect on the Partnership's consolidated financial position or results of operations. REGULATION IN THE CABLE TELEVISION INDUSTRY The cable television 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 television 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 television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have 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 F-94
342 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) maximum permitted rates. As of December 23, 1998, the amount returned 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. 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 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, deregulates rates on the cable programming service tier (CPST). The FCC is currently developing permanent regulations to implement the rate deregulation provisions of the 1996 Telecom Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on the Company's financial position or results of operations. The FCC may further restrict the ability of cable television operators to implement rate increases or the United States Congress may enact legislation that could delay or suspend the scheduled March 1999 termination of CPST rate regulation. This continued rate regulation, if adopted, could limit the rates charged by the Company. A number of states subject cable television 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 television rates is not allowed to be more restrictive than the federal or local regulation. 14. EMPLOYEE BENEFIT PLANS: The Partnership's employees may participate in Charter Communications, Inc. 401(k) Plan (the "401(k) Plan"). Employees that qualify for participation 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 Partnership contributes an amount equal to 50% of the first 5% of contributions by each employee. For the period from January 1, 1998, through December 23, 1998, the Partnership contributed $305. During 1997 and 1996, the Partnership contributed $262 and $149, respectively. Certain Partnership employees participate in the 1996 Charter Communications/ Charterhouse Group Appreciation Rights Plan (the "Appreciation Rights Plan"). The Appreciation Rights Plan covers certain key employees and consultants within the group of companies and partnerships controlled by Charterhouse and managed by Charter. The Plan permits the granting of up to 1,000,000 units, of which 925,000 were outstanding at December 31, 1997. Unless otherwise provided in a particular instance, units vest at a rate of 20% per annum. The Plan entitles participants to receive payment of the appreciated unit value for vested units, upon the occurrence of certain events specified in the Plan (i.e. change in control, employee termination). The units do not represent a right to an equity interest in CharterComm Holdings. F-95
343 CHARTERCOMM HOLDINGS, L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Compensation expense is based on the appreciated unit value and is amortized over the vesting period. As a result of the acquisition of Charter and the Partnership, the Plan was terminated, all outstanding units became 100% vested and all amounts were paid by Charter in 1999. For the period from January 1, 1998, through December 23, 1998, the Partnership recorded $4,920 of expense, included in management fees, and a contribution from Charter related to the Appreciation Rights Plan. 15. ACCOUNTING STANDARD NOT YET IMPLEMENTED: In June 1998, the Financial Accounting Standards Board adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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. 133 is effective for fiscal years beginning after June 15, 1999. The Partnership has not yet quantified the impacts of adopting SFAS No. 133 on its consolidated financial statements nor has it determined the timing or method of its adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings (loss). 16. SUBSEQUENT EVENT: Subsequent to December 31, 1998, CharterComm Holdings, L.P. and all of its subsidiaries converted to limited liability companies and are now known as CharterComm Holdings LLC and subsidiaries. F-96
344 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Greater Media, Inc.: We have audited the accompanying combined balance sheets of Greater Media Cablevision Systems (see Note 1) (collectively, the "Combined Systems") included in Greater Media, Inc., as of September 30, 1998 and 1997, and the related combined statements of income, changes in net assets, and cash flows for each of the three years in the period ended September 30, 1998. These combined financial statements are the responsibility of management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Combined Systems, as of September 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Roseland, New Jersey March 2, 1999 F-97
345 GREATER MEDIA CABLEVISION SYSTEMS (SEE NOTE 1) COMBINED BALANCE SHEETS (IN THOUSANDS) SEPTEMBER 30, ------------------ 1998 1997 ---- ---- Current assets: Cash and cash equivalents................................. $ 4,080 $ 3,680 Accounts receivable (less allowance for doubtful accounts of $308 (unaudited), $244 and $337).................... 2,755 2,739 Prepaid expenses and other current assets................. 2,746 1,949 ------- ------- Total current assets.............................. 9,581 8,368 Property and equipment, net................................. 54,468 41,971 Intangible assets, net...................................... 2,690 1,647 Other assets................................................ 77 103 ------- ------- Total assets...................................... $66,816 $52,089 ======= ======= Current liabilities: Accounts payable and accrued expenses..................... $ 7,125 $ 5,299 Customers' prepayments and deferred installation revenue................................................ 1,910 1,815 ------- ------- Total current liabilities......................... 9,035 7,114 Other long-term liabilities................................. 3,650 3,920 Net assets.................................................. 54,131 41,055 ------- ------- Total liabilities and net assets.................. $66,816 $52,089 ======= ======= The accompanying notes are an integral part of these combined balance sheets. F-98
346 GREATER MEDIA CABLEVISION SYSTEMS (SEE NOTE 1) COMBINED STATEMENTS OF INCOME (IN THOUSANDS) NINE MONTHS ENDED JUNE 30, YEAR ENDED SEPTEMBER 30, ------------------ --------------------------- 1999 1998 1998 1997 1996 ---- ---- ---- ---- ---- (UNAUDITED) NET REVENUES............................ $62,469 $57,536 $77,127 $73,436 $66,816 ------- ------- ------- ------- ------- OPERATING EXPENSES: Operating expenses.................... 26,248 24,262 32,665 31,115 29,460 General and administrative............ 9,150 8,282 10,869 11,211 10,321 Corporate charges..................... 3,175 2,898 3,888 3,696 3,365 Depreciation and amortization......... 7,398 5,717 8,183 7,368 7,353 ------- ------- ------- ------- ------- 45,971 41,159 55,605 53,390 50,499 ------- ------- ------- ------- ------- Income from operations............. 16,498 16,377 21,522 20,046 16,317 OTHER INCOME (EXPENSES): Interest expense, net................... (705) (308) (504) (307) (764) Other................................... (365) 34 (532) (957) (366) ------- ------- ------- ------- ------- INCOME BEFORE PROVISION IN LIEU OF INCOME TAXES.......................... 15,428 16,103 20,486 18,782 15,187 Provision in lieu of income taxes (Note 6).................................... 6,646 6,247 8,008 7,964 5,987 ------- ------- ------- ------- ------- Net income.............................. $ 8,782 $ 9,856 $12,478 $10,818 $ 9,200 ======= ======= ======= ======= ======= The accompanying notes are an integral part of these combined statements. F-99
347 GREATER MEDIA CABLEVISION SYSTEMS (SEE NOTE 1) COMBINED STATEMENTS OF CHANGES IN NET ASSETS (IN THOUSANDS) TOTAL ----- Balance, September 30, 1995................................. $ 42,185 Net income................................................ 9,200 Provision in lieu of income taxes......................... 5,987 Net payments to affiliates................................ (17,038) -------- Balance, September 30, 1996................................. 40,334 Net income................................................ 10,818 Provision in lieu of income taxes......................... 7,964 Net payments to affiliates................................ (18,061) -------- Balance, September 30, 1997................................. 41,055 Net income................................................ 12,478 Provision in lieu of income taxes......................... 8,008 Net payments to affiliates................................ (7,410) -------- Balance, September 30, 1998................................. $ 54,131 ======== The accompanying notes are an integral part of these combined statements. F-100
348 GREATER MEDIA CABLEVISION SYSTEMS (SEE NOTE 1) COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS) NINE MONTHS ENDED JUNE 30, YEAR ENDED SEPTEMBER 30, ------------------- ---------------------------- 1999 1998 1998 1997 1996 ---- ---- ---- ---- ---- (UNAUDITED) Net income................................. $ 8,782 $ 9,856 $12,478 $10,818 $ 9,200 Adjustments to reconcile net income to net cash provided by operating activities: Provision in lieu of income taxes........ 6,646 6,247 8,008 7,964 5,987 Depreciation and amortization............ 7,398 5,717 8,183 7,368 7,353 (Gain) loss on sale of fixed assets...... 465 171 300 715 274 Changes in assets and liabilities: Accounts receivable, prepaid expenses and other assets.......................... (1,431) (4,045) (813) (1,115) (498) Other assets............................. 10 31 24 (30) (11) Accounts payable and accrued expenses.... (178) 144 1,825 (440) (1,900) Customers' prepayments and deferred installation revenue.................. 242 (7) 96 367 94 Customers' deposits and deferred revenue............................... (24) (174) (270) (69) 466 -------- -------- ------- ------- -------- Net cash provided by operating activities............................... 21,910 17,940 29,831 25,578 20,965 -------- -------- ------- ------- -------- Cash flow from investing activities: Capital expenditures....................... (13,797) (15,700) (21,049) (7,587) (5,122) Proceeds from disposition of property and equipment................................ -- 250 72 -- 128 Purchase of licenses....................... (512) (49) (1,044) (99) -- -------- -------- ------- ------- -------- Net cash used in investing activities...... (14,309) (15,499) (22,021) (7,686) (4,994) -------- -------- ------- ------- -------- Cash flow from financing activities: Net payments to affiliates................. (34) (3,941) (7,410) (18,061) (17,038) -------- -------- ------- ------- -------- Net increase (decrease) in cash and cash equivalents.............................. 7,567 (1,500) 400 (169) (1,067) Cash and cash equivalents, beginning of year..................................... 4,080 3,680 3,680 3,849 4,916 -------- -------- ------- ------- -------- Cash and cash equivalents, end of year..... $ 11,647 $ 2,180 $ 4,080 $ 3,680 $ 3,849 ======== ======== ======= ======= ======== Supplemental disclosure of cash flow information: Non-affiliate interest paid during the year.................................. $ 264 $ 42 $ 296 $ 155 $ 447 ======== ======== ======= ======= ======== The accompanying notes are an integral part of these combined statements. F-101
349 GREATER MEDIA CABLEVISION SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS (IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION, BASIS OF PRESENTATION AND OPERATIONS Greater Media Cablevision Systems is the owner and operator of the following Massachusetts-based cable television systems: Auburn, Boylston, Chicopee, Dudley, East Longmeadow, Easthampton, Grafton, Hampden, Holden, Leicester, Ludlow, Millbury, Northborough, Northbridge, Oxford, Paxton, Southampton, Southborough, Southbridge, Spencer, Sturbridge, Upton, Webster, West Boylston, West Brookfield, Westborough, Wilbraham and Worcester ("the Combined Systems"). The Combined Systems are wholly-owned by Greater Media Cablevision, Inc. ("the Company"). The combined financial statements do not include the accounts of Greater Philadelphia Cablevision, Inc. or Greater Philadelphia Cablevision Limited Partnership (the "Philadelphia System"), which are also wholly-owned by the Company. The Company is a wholly-owned subsidiary of Greater Media, Inc. ("the Parent"). In February 1999, the Parent and the Company entered into an agreement ("Sales Agreement") to sell the net assets of the Company including the Combined Systems but excluding the Philadelphia Systems to Charter Communications Holdings, LLC. Significant intercompany accounts and transactions between the Combined Systems have been eliminated in the combined financial statements. Significant accounts and transactions with the Parent and other affiliates are disclosed as related party transactions (See Note 7). The Combined Systems primarily provide cable television services to subscribers in central and western Massachusetts. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. PROPERTY AND EQUIPMENT Maintenance and repair costs are expensed when incurred. For financial reporting purposes, depreciation is provided on the straight-line method based on the following estimated useful lives: CLASSIFICATION YEARS -------------- ----- Land improvements........................................... 20 Buildings................................................... 15-40 Furniture, fixtures and equipment........................... 3-15 Trunk and distribution systems.............................. 7-12 INTANGIBLE ASSETS Intangible assets consist primarily of goodwill amortized over forty years and costs incurred in obtaining and renewing cable franchises which are amortized over the life of the respective franchise agreements. REVENUES Cable revenues from basic and premium services are recognized when the related services are provided. F-102
350 GREATER MEDIA CABLEVISION SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. QUARTERLY RESULTS The financial statements included herein as of December 31, 1998 and for the three months ended December 31, 1998 and 1997 have been prepared by the Company without audit. In the opinion of management, all adjustments have been made which are of a normal recurring nature necessary to present fairly the Combined Systems' financial position as of December 31, 1998 and the results of operations, changes in net assets and cash flows for the three months ended December 31, 1998 and 1997. Certain information and footnote disclosures have been condensed or omitted for these periods. The results for interim periods are not necessarily indicative of results for the entire year. 2. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid and other current assets consist of the following at September 30: 1998 1997 ---- ---- Franchise grant.......................................... $1,445 $ 604 Corporate business tax................................... 1,015 882 Other.................................................... 286 463 ------ ------ Prepaid expenses and other current assets................ $2,746 $1,949 ====== ====== 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following at September 30: 1998 1997 ---- ---- Land and land improvements........................... $ 1,229 $ 1,134 Buildings............................................ 4,521 4,521 Furniture, fixtures and equipment.................... 5,503 4,822 Trunk and distribution systems....................... 109,253 97,042 Construction in progress............................. 9,026 4,450 -------- -------- 129,532 111,969 Accumulated depreciation............................. (75,064) (69,998) -------- -------- Property and equipment, net.......................... $ 54,468 $ 41,971 ======== ======== Depreciation expense for the years ended September 30, 1998, 1997 and 1996 was $8,081, $7,337, and $7,314, respectively. Construction in progress results primarily from costs to upgrade the systems to fiber optic technologies in the areas served by the Combined Systems. F-103
351 GREATER MEDIA CABLEVISION SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 4. INTANGIBLE ASSETS Intangible assets consist of the following at September 30: 1998 1997 ---- ---- Franchise agreements..................................... $3,230 $2,883 Customer lists........................................... 1,751 1,751 Organization expenses.................................... 146 146 Goodwill................................................. 2,260 1,510 Covenant not to compete.................................. 40 40 ------ ------ 7,427 6,330 Accumulated amortization................................. 4,737 4,683 ------ ------ Intangible assets, net................................... $2,690 $1,647 ====== ====== Amortization expense for the years ended September 30, 1998, 1997 and 1996 was $102, $31 and $39, respectively. 5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following at September 30: 1998 1997 ---- ---- Accounts payable......................................... $4,733 $3,544 Rate refund liability.................................... 923 481 Programming expenses..................................... 586 557 Other.................................................... 883 717 ------ ------ $7,125 $5,299 ====== ====== 6. INCOME TAXES The Combined Systems are included in the consolidated federal income tax return of the Parent. However, the Parent is responsible for tax payments applicable to the Combined Systems. The combined financial statements reflect a provision in lieu of income taxes as if the combined systems were filing on a separate company basis. Accordingly, the Combined Systems have included the provision in lieu of income taxes as a component of net assets for all periods presented. The provision in lieu of income taxes approximates the amount of tax computed using U.S. statutory rates, after reflecting state income tax expense of $2,053, $1,924 and $1,486, for 1998, 1997 and 1996, respectively. As the Sales Agreement represents a sale of assets, Charter Communications Holdings, LLC will have new tax basis in the Combined Systems' assets and liabilities acquired. 7. RELATED PARTY TRANSACTIONS The Company and each of its subsidiaries are guarantors of the Parent Company's debt. F-104
352 GREATER MEDIA CABLEVISION SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The combined statements include the charge for certain corporate expenses incurred by the Parent on behalf of the Combined Systems. Such charges amounted to $3,888, $3,696, and $3,365 for the three years ended September 30, 1998, 1997 and 1996. Management believes that these costs are reasonable and reflect costs of doing business that the Combined Systems would have incurred on a stand-alone basis. The Combined Systems charge an affiliate interest on certain balances, aggregating $15,000 per year, at an annual rate of 12%. Interest income on such balances amounted to $1,800 for each of the three years in the period ended September 30, 1998. In addition, the Combined Systems are required to pay the Parent interest on certain balances, at an annual rate of 12%. Interest expense on such balances amounted to $2,340 for each of these years in the period ended September 30, 1998, all which were due during the periods presented. The amounts described above and certain non-interest bearing amounts due affiliates are included in Net Assets in the Combined Systems balance sheet. As a result of the Sales Agreement, such amounts will be assumed by the Parent. The interest income and expense have been netted in the accompanying statement of operations. 8. EMPLOYEE BENEFIT PLAN 401(k) PLAN The Combined Systems' employees participate in the Greater Media, Inc. 401(k) Plan (the "401(k) Plan"). Employees that qualify for participation can contribute up to 12% of their salary, on a before tax basis, subject to a maximum contribution limit as determined by the Internal Revenue Service. The Parent contributes an amount equal to 50% of the participant's contribution, limited to the lessor of 3% of the participant's compensation or $1 per year. The Combined Systems expense relating to the 401(k) Plan was $140, $127, and $96 in 1998, 1997, and 1996, respectively. PENSION Employees of the Combined Systems participate in a pension plan sponsored by the Parent. The Combined Systems allocable share of the pension expense amounted to $105, $204 and $217 during the years ended September 30, 1998, 1997 and 1996, respectively. As a result of the Sales Agreement, the Combined Systems' employees will be fully vested with respect to their plan benefits, although no additional benefits will accrue to such employees in the future. In addition, the Parent will be responsible for the allocable pension liability ($838 at September 30, 1998) and will continue to administer the plan on behalf of the Combined Systems' employees after the sale is consummated. 9. COMMITMENTS AND CONTINGENCIES LEASES The Company leases certain facilities and equipment under noncancellable operating leases. Leases and rental costs charged to expense for the years ended September 30, 1998, 1997 and 1996, was $2,124, $2,133 and $1,636, respectively. Rent expense incurred under leases for the F-105
353 GREATER MEDIA CABLEVISION SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) years ended September 30, 1998, 1997 and 1996, was $678, $665 and $660, respectively. Future minimum lease payments are as follows: 1999................................................. $ 690 2000................................................. 618 2001................................................. 524 2002................................................. 402 2003................................................. 396 Thereafter........................................... 3,267 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 incurred for pole rental attachments for the years ended September 30, 1998, 1997 and 1996, was $1,008, $840 and $578, respectively. LITIGATION The Company is party to lawsuits 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 will not have a material adverse effect on the Company's combined financial position or results of operations. REGULATION IN THE CABLE TELEVISION INDUSTRY The cable television 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 television 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 television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have 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. The Company may be required to refund additional amounts in the future. The Combined Systems believe that they have 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 a company is unable to justify its basic rates. The Combined Systems are unable to estimate at this time the amount of refunds, if any, that may be payable by the Combined Systems in the event certain of its rates are successfully F-106
354 GREATER MEDIA CABLEVISION SYSTEMS NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) challenged by franchising authorities or found to be unreasonable by the FCC. The Combined Systems do not believe that the amount of any such refunds would have a material adverse effect on their financial position or results of operations. 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, deregulates rates on the cable programming service tier (CPST). The FCC is currently developing permanent regulations to implement the rate deregulation provisions of the 1996 Telecom Act. The Combined Systems cannot predict the ultimate effect of the 1996 Telecom Act on their financial position or results of operations. The FCC may further restrict the ability of cable television operators to implement rate increases or the United States Congress may enact legislation that could delay or suspend the scheduled March 1999 termination of CPST rate regulation. This continued rate regulation, if adopted, could limit the rates charged by the Combined Systems. A number of states subject cable television 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 television rates is not allowed to be more restrictive than the federal or local regulation. The Combined Systems are subject to state regulation in Massachusetts. 10. SUBSEQUENT EVENT (UNAUDITED) On June 30, 1999, Charter Communications Entertainment I, LLC, an indirect subsidiary of Charter Communications Holdings Company, LLC purchased the Combined Systems for an aggregate purchase price of $500 million plus a working capital adjustment. Effective with this change of ownership, the Combined Systems will be managed by Charter Investment, Inc. F-107
355 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-108
356 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-109
357 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-110
358 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-111
359 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-112
360 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-113
361 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-114
362 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 F-115
363 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) 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. 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 F-116
364 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) 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 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 F-117
365 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) 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. 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 F-118
366 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) Agent for the Notes. In connection with these services the Morgan Stanley Entities received customary fees and expense reimbursement. (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. F-119
367 RENAISSANCE MEDIA GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1998 (ALL DOLLAR AMOUNTS IN THOUSANDS) 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 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-120
368 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-121
369 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-122
370 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-123
371 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-124
372 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-125
373 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-126
374 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-127
375 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-128
376 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-129
377 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 F-130
378 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) amount of assets and liabilities for financial statements and income tax purposes, as determined under enacted tax laws and rates. 2. EMPLOYEE BENEFIT PLANS Following the CVI Merger, the Combined Systems began participation in the Time Warner Cable Pension Plan (the "Pension Plan"), a non-contributory defined benefit pension plan, and the Time Warner Cable Employee Savings Plan (the "Savings Plan") which are administered by a committee appointed by the Board of Representatives of Time Warner Entertainment Company, L.P. ("TWE"), an affiliate of Time Warner, and which cover substantially all employees. Benefits under the Pension Plan are determined based on formulas which reflect an employee's years of service and compensation levels during the employment period. Pension expense for the 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-131
379 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-132
380 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-133
381 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-134
382 REPORT OF INDEPENDENT AUDITORS To the Board of Directors of TWI Cable Inc. We have audited the accompanying combined balance sheets of the Picayune MS, Lafourche LA, St. Tammany LA, St. Landry LA, Pointe Coupee LA, and Jackson TN cable television systems, (collectively, the "Combined Systems") included in TWI Cable, Inc. ("TWI Cable"), as of December 31, 1996 and 1997, the related combined statements of operations, changes in net assets and cash flows for the years then ended. In addition, we have audited the combined statement of operations and cash flows for the year ended December 31, 1995 of the Predecessor Combined Systems. These combined financial statements are the responsibility of the Combined Systems' or the Predecessor's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Combined Systems, included in TWI Cable or the Predecessor, at December 31, 1996 and 1997, and the combined results of their operations and their cash flows for the years ended December 31, 1995, 1996 and 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP New York, New York March 16, 1998 F-135
383 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) COMBINED BALANCE SHEETS (IN THOUSANDS) DECEMBER 31, -------------------- 1996 1997 ---- ---- ASSETS Cash and cash equivalents................................... $ 570 $ 1,371 Receivables, less allowance of $71 and $116 for the years ended December 31, 1996 and 1997, respectively............ 794 1,120 Prepaid expenses and other assets........................... 45 183 Property, plant and equipment, net.......................... 36,966 36,944 Cable television franchises, net............................ 209,952 198,913 Goodwill and other intangibles, net......................... 51,722 50,383 -------- -------- Total assets...................................... $300,049 $288,914 ======== ======== LIABILITIES AND NET ASSETS Accounts payable............................................ $ 1,640 $ 652 Accrued programming expenses................................ 847 904 Accrued franchise fees...................................... 736 835 Subscriber advance payments and deposits.................... 66 407 Deferred income taxes....................................... 58,340 60,601 Other liabilities........................................... 945 969 -------- -------- Total liabilities................................. 62,574 64,368 Total net assets.................................. 237,475 224,546 -------- -------- Total liabilities and net assets.................. $300,049 $288,914 ======== ======== See accompanying notes to combined financial statements. F-136
384 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS) YEAR ENDED DECEMBER 31, --------------------------------------------- 1995 1996 1997 ---- ---- ---- (PREDECESSOR) (INCLUDED IN TWI CABLE INC.) REVENUES............................................ $43,549 $47,327 $50,987 COSTS AND EXPENSES: Operating and programming........................... 13,010 12,413 12,101 Selling, general and administrative................. 9,977 12,946 13,823 Depreciation and amortization....................... 17,610 18,360 18,697 (Gain) loss on disposal of fixed assets............. -- (244) 620 ------- ------- ------- Total costs and expenses.................. 40,597 43,475 45,241 ------- ------- ------- Operating income.................................... 2,952 3,852 5,746 Interest expense.................................... 11,871 -- -- ------- ------- ------- (Loss) income before income tax (benefit) expense... (8,919) 3,852 5,746 Income tax (benefit) expense........................ (3,567) 1,502 2,262 ------- ------- ------- Net (loss) income................................... $(5,352) $ 2,350 $ 3,484 ======= ======= ======= See accompanying notes to combined financial statements. F-137
385 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) COMBINED STATEMENTS OF CHANGES IN NET ASSETS (IN THOUSANDS) Contribution by Parent...................................... $250,039 Repayment of advances from Parent......................... (47,895) Advances from Parent...................................... 32,981 Net income................................................ 2,350 -------- Balance at December 31, 1996................................ 237,475 Repayment of advances from Parent......................... (50,661) Advances from Parent...................................... 34,248 Net income................................................ 3,484 -------- Balance at December 31, 1997................................ $224,546 ======== See accompanying notes to combined financial statements. F-138
386 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS) YEAR ENDED DECEMBER 31, ------------------------------------------- 1995 1996 1997 ---- ---- ---- (PREDECESSOR) (INCLUDED IN TWI CABLE INC.) OPERATING ACTIVITIES: Net (loss) income..................................... $(5,352) $ 2,350 $ 3,484 Adjustments for noncash and nonoperating items: Income tax (benefit) expense..................... (3,567) 1,502 2,262 Depreciation and amortization.................... 17,610 18,360 18,697 (Gain) loss on disposal of fixed assets................................ -- (244) 620 Changes in operating assets and liabilities: Receivables, prepaids and other assets...................................... (196) 944 (464) Accounts payable, accrued expenses and other liabilities................................. (972) 176 (466) Other balance sheet changes.................... -- -- (529) ------- --------- -------- Net cash provided by operations....................... 7,523 23,088 23,604 INVESTING ACTIVITIES: Purchase of Predecessor cable systems, net of cash acquired............................................ -- (249,473) -- Capital expenditures.................................. (7,376) (8,170) (6,390) ------- --------- -------- Net cash used in investing activities................. (7,376) (257,643) (6,390) FINANCING ACTIVITIES: Advance from Parent for purchase of Predecessor....... -- 250,039 -- Net repayment of advances from Parent................. -- (14,914) (16,413) ------- --------- -------- Net cash provided by (used in) financing activities... -- 235,125 (16,413) INCREASE IN CASH AND CASH EQUIVALENTS................. 147 570 801 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...... 419 0 570 ------- --------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD............ $ 566 $ 570 $ 1,371 ======= ========= ======== See accompanying notes to combined financial statements. F-139
387 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) NOTES TO COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS The cable television systems operating in the metropolitan areas of Picayune, Mississippi; Lafourche, Louisiana; St. Tammany, Louisiana; St. Landry, Louisiana; Pointe Coupee, Louisiana; and Jackson, Tennessee (the "Combined Systems") are principally engaged in the cable television business under non-exclusive franchise agreements, which expire at various times beginning in 1999. The Combined Systems' operations consist primarily of selling video programming which is distributed to subscribers for a monthly fee through a network of coaxial and fiber-optic cables. Prior to January 4, 1996, the Combined Systems were included in certain subsidiaries of Cablevision Industries Corporation ("CVI"). On January 4, 1996, CVI merged into a wholly owned subsidiary of Time Warner Inc. (the "CVI Merger"). On October 1, 1996, Time Warner Inc. ("Time Warner") completed a reorganization amongst certain of its wholly owned cable television subsidiaries whereby CVI was renamed TWI Cable Inc. ("TWI Cable"). BASIS OF PRESENTATION TWI Cable has committed to sell the Combined Systems to Renaissance Media Holdings LLC ("Renaissance") pursuant to an Asset Purchase Agreement with Renaissance, dated November 14, 1997. Accordingly, the accompanying combined financial statements of the Combined Systems reflect the "carved out" historical financial position, results of operations, cash flows and changes in net assets of the operations of the Combined Systems as if they had been operating as a separate company. Effective as of January 1, 1996, the Combined Systems' financial statements reflect the new basis of accounting arising from Time Warner's merger with CVI. Based on Time Warner's allocation of the purchase price, the assets and liabilities of the Combined Systems were revalued resulting in goodwill allocated to the Combined Systems of approximately $52,971,000, which is being amortized over its estimated life of 40 years. In addition, approximately $220,981,000 was allocated to cable television franchises and other intangible assets, which is being amortized over periods up to 20 years. The Combined Systems' financial statements through December 31, 1995 reflect the historical cost of their assets and liabilities and results of their operations. The combined statements have been adjusted to include the allocation of certain corporate expenses incurred by Time Warner Cable and/or TWI Cable on the Combined Systems' behalf, based upon the number of Combined System subscribers managed by Time Warner Cable and the ratio of Combined System subscribers to total TWI Cable subscribers, respectively. These allocations reflect all costs of doing business that the Combined Systems would have incurred on a stand alone basis as disclosed in Note 3. Management believes that these allocations are reasonable. 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-140
388 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. Prior to January 1997, franchise fees were not separately itemized on customers' bills. Such fees were considered part of the monthly charge for basic services and equipment, and therefore were reported as revenue and expense in the Combined Systems' financial results. Management began the process of itemizing such fees on all customers' bills beginning in January 1997. In conjunction with itemizing these charges, the Combined Systems began separately collecting the franchise fee on all revenues subject to franchise fees. As a result, such fees are no longer included as revenue or as franchise fee expense. The net effect of this change is a reduction in 1997 revenue and franchise fee expense of approximately $1,500,000 versus the comparable period in 1996. ADVERTISING COSTS Advertising costs are expensed upon the first exhibition of the related advertisements. Advertising expense amounted to $308,000, $632,000 and $510,000 for the years ended 1995, 1996 and 1997, respectively. 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 F-141
389 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) such cash receipts over payments is included in net assets. Amounts shown as cash represent the Combined Systems' net cash receipts not transferred to the centralized account as of December 31, 1996 and 1997. The average net intercompany payable balances were $173,348,000 and $170,438,000 for the years ended December 31, 1996 and 1997, respectively. For purposes of this statement, cash and cash equivalents includes all highly liquid investments purchased with original maturities of three months or less. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Additions to property, plant and equipment generally include material, labor, overhead and interest. Depreciation is provided on the straight-line method over estimated useful lives as follows: Buildings and improvements.................................. 5-20 years Cable television equipment.................................. 5-15 years Furniture, fixtures and other equipment..................... 3-10 years Property, plant and equipment consist of: DECEMBER 31, ------------------ 1996 1997 ---- ---- Land and buildings.......................................... $ 2,003 $ 2,265 Cable television equipment.................................. 32,324 39,589 Furniture, fixtures and other equipment..................... 1,455 2,341 Construction in progress.................................... 5,657 1,028 ------- ------- 41,439 45,223 Less accumulated depreciation............................... (4,473) (8,279) ------- ------- Total............................................. $36,966 $36,944 ======= ======= INTANGIBLE ASSETS During 1996 and 1997, the Combined Systems amortized goodwill over periods up to 40 years and cable television franchises over periods up to 20 years, both using the straight-line method. Prior to the CVI Merger, goodwill and cable television franchises were amortized over 15 years using the straight-line method. For the years ended 1995, 1996, and 1997, amortization of goodwill amounted to $8,199,000, $1,325,000, and $1,325,000, respectively, and amortization of cable television franchises amounted to $1,284,000, $11,048,000, and $11,048,000, respectively. Accumulated amortization of intangible assets at December 31, 1996 and 1997 amounted to $12,373,000 and $24,746,000, respectively. 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 F-142
390 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) 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. 2. EMPLOYEE BENEFIT PLANS Following the CVI Merger, the Combined Systems began participation in the Time Warner Cable Pension Plan (the "Pension Plan"), a non-contributory defined benefit pension plan, and the Time Warner Cable Employee Savings Plan (the "Savings Plan") which are administered by a committee appointed by the Board of Representatives of Time Warner Entertainment Company, L.P. ("TWE"), an affiliate of Time Warner, and which cover substantially all employees. Benefits under the Pension Plan are determined based on formulas which reflect an employee's years of service and compensation levels during the employment period. Pension expense for the years ended December 31, 1996 and 1997 totaled $184,000 and $192,000, respectively. The Combined Systems' contributions to the Savings Plan are limited to 6.67% of an employee's eligible compensation during the plan year. The Board of Representatives of TWE has the right in any year to set the maximum amount of the Combined Systems' contribution. Defined contribution plan expense for the years ended December 31, 1996 and 1997 totaled $107,000 and $117,000, respectively. Prior to the CVI Merger, substantially all employees were eligible to participate in a profit sharing plan or a defined contribution plan. The profit sharing plan provided that the Combined Systems may contribute, at the discretion of their board of directors, an amount up to 15% of compensation for all eligible participants out of its accumulated earnings and profits, as defined. Profit sharing expense amounted to approximately $31,000 for the year ended December 31, 1995. The defined contribution plan contained a qualified cash or deferred arrangement pursuant to Internal Revenue Code Section 401(k). This plan provided that eligible employees may contribute from 2% to 10% of their compensation to the plan. The Combined Systems matched contributions of up to 4% of the employees' compensation. The expense for this plan amounted to approximately $96,000 for the year ended December 31, 1995. The Combined Systems have no material obligations for other post retirement benefits. F-143
391 PICAYUNE MS, LAFOURCHE LA, ST. TAMMANY LA, ST. LANDRY LA, POINTE COUPEE LA, AND JACKSON TN CABLE TELEVISION SYSTEMS (INCLUDED IN TWI CABLE INC.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 3. RELATED PARTIES 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' 1996 and 1997 operating expenses are charges for programming and promotional services provided by Home Box Office, Turner Broadcasting System, Inc. and other affiliates of Time Warner. These charges are based on customary rates and are in the ordinary course of business. For the year ended December 31, 1996 and 1997, these charges totaled $3,260,000 and $3,458,000, respectively. Accrued related party expenses for these programming and promotional services included in accrued programming expenses approximated $327,000 and $291,000 for the years ended December 31, 1996 and 1997, respectively. There were no such programming and promotional service related party transactions in 1995. MANAGEMENT FEES TWI Cable entered into a management service arrangement with Time Warner Cable ("TWC"), pursuant to which TWC is responsible for the management and operation of TWI Cable, which includes the Combined Systems. The management fees paid to TWC by TWI Cable are based on an allocation of the corporate expenses of TWC's cable division in proportion to the respective number of subscribers of all cable systems managed by TWC's cable division. The allocation of the TWI Cable management fee to the Combined Systems approximated $1,432,000 and $1,715,000 for the years ended December 31, 1996 and 1997, respectively. Other divisional expenses allocated to the Combined Systems approximated $1,301,000 and $1,067,000 for the years ended December 31, 1996 and 1997, respectively. 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 (benefit) for income F-144
392 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) taxes has been calculated on a separate company basis. The components of the provision (benefit) for income taxes are as follows: YEAR ENDED DECEMBER 31, --------------------------- 1995 1996 1997 ---- ---- ---- (IN THOUSANDS) FEDERAL: Current............................. $ -- $ -- $ -- Deferred............................ (2,881) 1,213 1,826 STATE: Current............................. -- -- -- Deferred............................ (686) 289 436 ------- ------ ------ Net provision (benefit) for income taxes............................ $(3,567) $1,502 $2,262 ======= ====== ====== The Combined Systems did not, and will not, have a tax sharing agreement with either Time Warner, TWI Cable or CVI. Therefore, the Combined Systems have not and will not be compensated for the utilization of the Combined Systems' tax losses, by Time Warner, TWI Cable or CVI. In addition, the Combined Systems have not and will not be required to make payments to either Time Warner or TWI Cable for the current tax provision of the Combined Systems. The differences between the income tax provision (benefit) expected at the U.S. federal statutory income tax rate and the total income tax provision (benefit) are due to nondeductible goodwill amortization and state taxes. Significant components of the Combined Systems' deferred tax assets and liabilities, as calculated on a separate company basis, are as follows: YEAR ENDED DECEMBER 31, ------------------------ 1996 1997 ---- ---- (IN THOUSANDS) DEFERRED TAX LIABILITIES: Amortization............................... $61,266 $58,507 Depreciation............................... 3,576 4,060 ------- ------- Total gross deferred tax liabilities...................... 64,842 62,567 ------- ------- DEFERRED TAX ASSETS: Tax loss carryforwards..................... 6,474 1,920 Allowance for doubtful accounts............ 28 46 ------- ------- Total deferred tax assets.......... 6,502 1,966 ------- ------- Net deferred tax liability................. $58,340 $60,601 ======= ======= On a separate company basis, the Combined Systems have tax loss carryforwards of approximately $4.8 million at December 31, 1997. 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). F-145
393 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) 6. COMMITMENTS AND CONTINGENCIES The Combined Systems had rental expense of approximately $642,000, $824,000, and $843,000 for the years ended December 31, 1995, 1996 and 1997, respectively, 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 $22 million). This agreement with the FCC, which extends to the Combined Systems, will be assumed by Renaissance as it relates to the Combined Systems in accordance with the Asset Purchase Agreement. 7. OTHER LIABILITIES Other liabilities consist of: DECEMBER 31, ------------ 1996 1997 ---- ---- (IN THOUSANDS) Compensation................................................ $217 $250 Data Processing Costs....................................... 100 90 Sales and other taxes....................................... 101 90 Copyright Fees.............................................. 85 83 Pole Rent................................................... 66 63 Other....................................................... 376 393 ---- ---- Total.................................................. $945 $969 ==== ==== 8. SUBSEQUENT EVENT (UNAUDITED) The sale of the Combined Systems, in connection with the Asset Purchase Agreement with Renaissance, closed on April 9, 1998 at the purchase price of $309,500,000. F-146
394 INDEPENDENT AUDITORS' REPORT The Partners Helicon Partners I, L.P.: We have audited the accompanying combined balance sheets of Helicon Partners I, L.P. and affiliates as of December 31, 1997 and 1998, and the related combined statements of operations, changes in partners' deficit, and cash flows for each of the years in the three-year period ended December 31, 1998. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Helicon Partners I, L.P. and affiliates as of December 31, 1997 and 1998 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP New York, New York March 26, 1999 F-147
395 HELICON PARTNERS I, L.P. AND AFFILIATES COMBINED BALANCE SHEETS DECEMBER 31, 1997 AND 1998 1997 1998 ------------- ------------- ASSETS (NOTES 8 AND 9) Cash and cash equivalents (note 2)..................... $ 4,372,281 $ 5,130,561 Receivables from subscribers........................... 1,439,720 1,631,931 Prepaid expenses and other assets...................... 2,205,794 3,469,228 Property, plant and equipment, net (notes 3, 4, and 11).................................................. 80,104,377 86,737,580 Intangible assets and deferred costs, net (notes 3 and 5)................................................... 85,066,665 94,876,847 ------------- ------------- Total assets................................. $ 173,188,837 $ 191,846,147 ============= ============= LIABILITIES AND PARTNERS' DEFICIT Liabilities: Accounts payable..................................... $ 7,416,901 $ 8,037,193 Accrued expenses..................................... 1,539,116 1,589,240 Subscriptions received in advance.................... 1,018,310 819,564 Accrued interest..................................... 3,760,360 3,742,456 Due to principal owner (note 7)...................... 5,000,000 5,000,000 Senior secured notes (note 8)........................ 115,000,000 115,000,000 Loans payable to banks (note 9)...................... 85,776,641 120,266,922 12% subordinated notes, net of unamortized discount of $2,889,541 in 1997 and $2,543,869 in 1998 (note 10)............................................... 37,249,948 42,672,085 Redeemable partnership interests (note 10)........... 6,437,142 16,253,906 Other notes payable (note 11)........................ 5,747,076 5,448,804 Due to affiliates, net (note 6)...................... 71,474 247,042 ------------- ------------- Total liabilities............................ 269,016,968 319,077,212 ------------- ------------- Commitments (notes 8, 9, 10, 11 and 13) Partners' deficit (note 12): Preferred limited partners........................... 7,649,988 8,567,467 Accumulated partners' deficit........................ (103,477,119) (135,797,532) Less capital contribution receivable................. (1,000) (1,000) ------------- ------------- Total partners' deficit...................... (95,828,131) (127,231,065) ------------- ------------- Total liabilities and partners' deficit...... $ 173,188,837 $ 191,846,147 ============= ============= See accompanying notes to combined financial statements. F-148
396 HELICON PARTNERS I, L.P. AND AFFILIATES COMBINED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 1996 1997 1998 ------------ ------------ ------------ Revenues.................................... $ 42,061,537 $ 59,957,434 $ 75,576,810 ------------ ------------ ------------ Operating expenses: Operating expenses (note 13).............. 11,395,509 17,408,265 22,687,850 General and administrative expenses (notes 6 and 13).............................. 7,244,663 9,762,931 13,365,824 Marketing expenses........................ 1,235,553 2,266,627 3,521,893 Depreciation and amortization............. 12,556,023 19,411,813 24,290,088 Management fee charged by affiliate (note 6)..................................... 2,103,077 2,997,872 3,496,271 Corporate and other expenses.............. 426,672 549,222 602,987 ------------ ------------ ------------ Total operating expenses.......... 34,961,497 52,396,730 67,964,913 ------------ ------------ ------------ Operating income.......................... 7,100,040 7,560,704 7,611,897 ------------ ------------ ------------ Interest expense (note 7)................... (17,418,266) (23,586,227) (27,633,714) Interest income............................. 563,362 154,037 92,967 ------------ ------------ ------------ (16,854,904) (23,432,190) (27,540,747) ------------ ------------ ------------ Loss before extraordinary item............ (9,754,864) (15,871,486) (19,928,850) ------------ ------------ ------------ Extraordinary item -- write-off of deferred financing costs (note 9).................. -- -- (1,657,320) ------------ ------------ ------------ Net loss.................................. $ (9,754,864) $(15,871,486) $(21,586,170) ============ ============ ============ See accompanying notes to combined financial statements. F-149
397 HELICON PARTNERS I, L.P. AND AFFILIATES COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 PARTNERS' DEFICIT ------------------------- PREFERRED CLASS A CAPITAL LIMITED GENERAL LIMITED CONTRIBUTION PARTNERS PARTNER PARTNERS RECEIVABLE TOTAL ---------- --------- ------------- ------------ ------------- Balance at December 31, 1995... $ -- $(307,994) $ (67,144,287) $(1,000) $ (67,453,281) Issuance of preferred limited partnership interests (note 10).......................... 6,250,000 (62,500) (6,187,500) -- -- Partner capital contributions (note 10).................... -- 1,500 -- -- 1,500 Distribution of additional preferred partnership interests (note 10).......... 558,430 (5,584) (552,846) -- -- Net loss....................... -- (97,549) (9,657,315) -- (9,754,864) ---------- --------- ------------- ------- ------------- Balance at December 31, 1996... 6,808,430 (472,127) (83,541,948) (1,000) (77,206,645) Distribution of additional preferred partnership interests (note 10).......... 841,558 (8,416) (833,142) -- -- Accretion of redeemable partnership interests (note 10).......................... -- (27,500) (2,722,500) -- (2,750,000) Net loss....................... -- (158,715) (15,712,771) -- (15,871,486) ---------- --------- ------------- ------- ------------- Balance at December 31, 1997... 7,649,988 (666,758) (102,810,361) (1,000) (95,828,131) Distribution of additional preferred partnership interests (note 10).......... 917,479 (9,175) (908,304) -- -- Accretion of redeemable partnership interests (note 10).......................... -- (98,168) (9,718,596) -- (9,816,764) Net loss....................... -- (215,861) (21,370,309) -- (21,586,170) ---------- --------- ------------- ------- ------------- Balance at December 31, 1998... $8,567,467 $(989,962) $(134,807,570) $(1,000) $(127,231,065) ========== ========= ============= ======= ============= See accompanying notes to combined financial statements. F-150
398 HELICON PARTNERS I, L.P. AND AFFILIATES COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 1996 1997 1998 ------------ ------------ ------------ Cash flows from operating activities: Net loss.................................................. $ (9,754,864) $(15,871,486) $(21,586,170) Adjustments to reconcile net loss to net cash provided by operating activities: Extraordinary item...................................... -- -- 1,657,320 Depreciation and amortization........................... 12,556,023 19,411,813 24,290,088 Gain on sale of equipment............................... (20,375) (1,069) (29,323) Interest on 12% subordinated notes paid through the issuance of additional notes.......................... 1,945,667 4,193,819 4,961,241 Interest on other notes payable added to principal...... 168,328 185,160 -- Amortization of debt discount and deferred financing costs................................................. 2,115,392 849,826 919,439 Change in operating assets and liabilities, net of acquisitions: Decrease (increase) in receivables from subscribers... 176,432 (496,146) (79,535) Increase in prepaid expenses and other assets......... (269,156) (976,491) (1,255,018) Increase in financing costs incurred.................. (4,525,331) (434,000) (2,200,000) Increase in accounts payable and accrued expenses..... 2,182,762 2,957,524 681,037 Increase (decrease) in subscriptions received in advance............................................ 119,277 325,815 (208,803) Increase (decrease) in accrued interest............... 1,613,630 376,158 (17,904) ------------ ------------ ------------ Total adjustments.................................. 16,062,649 26,392,409 28,718,542 ------------ ------------ ------------ Net cash provided by operating activities.......... 6,307,785 10,520,923 7,132,372 ------------ ------------ ------------ Cash flows from investing activities: Purchases of property, plant and equipment................ (8,987,766) (15,824,306) (13,538,978) Proceeds from sale of equipment........................... 21,947 23,270 118,953 Cash paid for net assets of cable television systems acquired................................................ (35,829,389) (70,275,153) (26,063,284) Cash paid for net assets of internet businesses acquired................................................ (40,000) (993,760) -- Increase in intangible assets and deferred costs.......... (127,673) (308,759) (183,018) ------------ ------------ ------------ Net cash used in investing activities.............. (44,962,881) (87,378,708) (39,666,327) ------------ ------------ ------------ Cash flows from financing activities: Capital contributions..................................... 1,500 -- -- Decrease in restricted cash............................... -- 1,000,000 -- Proceeds from issuance of 12% subordinated notes and redeemable partnership interests........................ 34,000,000 -- -- Proceeds from bank loans.................................. 8,900,000 77,285,000 104,000,000 Repayment of bank loans................................... (952,777) (1,505,581) (69,509,719) Repayment of other notes payable.......................... (527,514) (1,145,989) (1,362,995) Advances to affiliates.................................... (3,207,996) (3,412,411) (8,856,491) Repayments of advances to affiliates...................... 3,479,336 2,986,778 9,021,440 ------------ ------------ ------------ Net cash provided by financing activities.......... 41,692,549 75,207,797 33,292,235 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents...................................... 3,037,453 (1,649,988) 758,280 Cash and cash equivalents at beginning of year.............. 2,984,816 6,022,269 4,372,281 ------------ ------------ ------------ Cash and cash equivalents at end of year.................... $ 6,022,269 $ 4,372,281 $ 5,130,561 ============ ============ ============ Supplemental cash flow information: Interest paid............................................. $ 11,575,250 $ 17,981,264 $ 21,770,938 ============ ============ ============ Other non-cash items: Acquisition of property, plant and equipment through issuance of other notes payable....................... $ 1,222,000 $ 917,815 $ 1,025,319 ============ ============ ============ Issuance of notes payable in connection with the acquisition of cable television and internet systems, net of imputed interest............................... $ 569,500 $ 1,914,479 -- ============ ============ ============ See accompanying notes to combined financial statements. F-151
399 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998 1. ORGANIZATION AND NATURE OF BUSINESS Helicon Partners I, L.P. ("the Partnership") was organized as a limited partnership on November 30, 1994 under the laws of the State of Delaware. On April 8, 1996, Baum Investments, Inc. acquired a 1% general partnership interest in the Partnership through an initial capital contribution of $1,500 and the existing limited partners of The Helicon Group, L.P. ("THGLP"), formed in 1993, exchanged their limited partnership interests in THGLP for all Class A Common Limited Partnership Interests and Preferred Limited Partnership Interests in the Partnership. As a result of this exchange, THGLP became 99% owned by the Partnership. The Partnership now owns all of the limited partnership interests in THGLP and Baum Investments, Inc. continues to be the general partner of THGLP and to own a 1% general partnership interest in THGLP. The Partnership also owns a 99% interest and THGLP a 1% interest in HPI Acquisition Co., LLC ("HPIAC"), a Delaware limited liability company formed on February 7, 1996. The Partnership also owned an 89% limited partnership interest and Baum Investments, Inc. a 1% general partnership interest in Helicon OnLine, L. P. ("HOL"), a Delaware limited partnership formed May 31, 1997. On June 29, 1998, the net assets of HOL were transferred to THGLP in settlement of the inter-company loans THGLP had made to HOL. The Partnership, THGLP, HPIAC and HOL are referred to collectively herein as the Company. On March 22, 1999, Helicon Partners I, L. P. (HPI), Baum Investments, Inc. and all the holders of partnership interests in HPI entered into a purchase agreement by and among Charter Communications, Inc, Charter Communications, LLC and Charter Helicon, LLC (collectively the "Charter Entities") providing for the sale of all such partnership interests and Helicon Corp.'s interest in the management agreements with THGLP and HPIAC to the Charter Entities. The sale price is $550 million which amount will be reduced by any outstanding indebtedness assumed by the Charter Entities. The Company operates cable television systems located in Pennsylvania, West Virginia, North Carolina, South Carolina, Louisiana, Vermont, New Hampshire, Georgia and Tennessee. The Company also offers a broad range of Internet access service, including dial-up access, dedicated high speed access, both two-way and asymmetrical ("Hybrid"), high speed cable modem access, World Wide Web design and hosting services and other value added services such as paging and private network systems within the Company's cable service and contiguous areas. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) PRINCIPLES OF COMBINATION The accompanying financial statements include the accounts of the Partnership, THGLP and HPIAC and HOL which have been combined because of common ownership and control. They also reflect the accounts of THGLP's subsidiary, Helicon Capital Corp. ("HCC"), which has nominal assets and no operations since its incorporation. All intercompany accounts and transactions have been eliminated in combination. b) PARTNERSHIP PROFITS, LOSSES AND DISTRIBUTIONS Under the terms of the partnership agreements of the Partnership and THGLP, profits, losses and distributions will be made to the general and Class A Limited Partners pro-rata based on their respective partnership interest. F-152
400 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Holders of Preferred Limited Partnership Interests are entitled to an aggregate preference on liquidation of $6,250,000 plus cumulative in-kind distributions of additional Preferred Limited Partnership interests at an annual rate of 12%. c) REVENUE RECOGNITION Revenue is recognized as services are provided to subscribers. Subscription revenues billed in advance for services are deferred and recorded as income in the period in which services are rendered. d) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are carried at cost and are depreciated using the straight-line method over the estimated useful lives of the respective assets. e) INTANGIBLE ASSETS AND DEFERRED COSTS Intangible assets and deferred costs are carried at cost and are amortized using the straight-line method over the estimated useful lives of the respective assets. The Company periodically reviews the amortization periods of their intangible assets and deferred costs. The Company evaluates whether there has been a permanent impairment in the value of these assets by considering such factors including projected undiscounted cash flows, current market conditions and changes in the cable television industry that would impact the recoverability of such assets, among other things. f) INCOME TAXES No provision for Federal or state income taxes has been made in the accompanying combined financial statements since any liability for such income taxes is that of the partners and not of the Partnership or its affiliates. Certain assets have a basis for income tax purposes that differs from the carrying value for financial reporting purposes, primarily due to differences in depreciation methods. As a result of these differences, at December 31, 1997 and 1998 the net carrying value of these assets for financial reporting purposes exceeded the net basis for income tax purposes by approximately $22 million and $27 million respectively. g) CASH AND CASH EQUIVALENTS Cash and cash equivalents, consisting of amounts on deposit in money market accounts, checking accounts and certificates of deposit, were $4,372,281 and $5,130,561 at December 31, 1997 and 1998, respectively. h) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities to prepare these combined financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. i) INTEREST RATE CAP AGREEMENTS The cost paid is amortized over the life of the agreements. F-153
401 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) j) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and Cash Equivalents, Receivables, Accounts Payable and Accrued Expenses The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, current receivables, notes receivable, accounts payable, and accrued expenses approximate fair values. Senior Secured Notes and Long-term Debt For the Senior Secured Notes, fair values are based on quoted market prices. The fair market value at December 31, 1997 and 1998 was approximately $123,000,000 and $120,000,000, respectively. For long-term debt, their values approximate carrying value due to the short-term maturity of the debt and/or fluctuating interest. Comprehensive Income On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and net unrealized gains (losses) on securities and is presented in the consolidated statements of stockholder's equity and comprehensive income. The Statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. The Company has no items that qualify as comprehensive income. 3. ACQUISITIONS Cable Acquisitions On January 31, 1995, THGLP acquired a cable television system, serving approximately 1,100 (unaudited) subscribers in the Vermont communities of Bradford, South Royalton and Chelsea. The aggregate purchase price was approximately $350,000 and was allocated to the net assets acquired which included property and equipment and intangible assets. In June and July, 1996, HPIAC completed the acquisitions of all the operating assets of the cable television systems, serving approximately 26,000 (unaudited) subscribers, in the areas of Jasper and Skyline, Tennessee and Summerville, Trenton, Menlo, Decatur and Chatsworth, Georgia (collectively referred to as the Tennessee cluster). The aggregate purchase price of $36,398,889, including acquisition costs of $742,837, was allocated to the net assets acquired based on their estimated fair value. Such allocation is summarized as follows: Land.................................................... $ 25,000 Cable television system................................. 17,876,244 Other property, plant and equipment..................... 185,000 Subscriber lists........................................ 17,474,762 Noncompete agreement.................................... 1,000 Other intangible assets................................. 742,837 Other net operating items............................... 94,046 ----------- Total aggregate purchase price.......................... $36,398,889 =========== F-154
402 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) A portion of the purchase price was paid through the issuance of notes to the sellers of one of the systems totaling $750,000. Such notes were reported net of imputed interest of $180,500 computed at 9% per annum (see note 11). On January 16, 1997, HPIAC acquired an adjacent cable television system serving approximately 2,256 (unaudited) subscribers in the communities of Ten Mile and Hamilton, Tennessee. The aggregate purchase price was approximately $2,960,294 and was allocated to the net assets acquired which included property, equipment and intangible assets, based on their estimated fair value. On January 31, 1997, THGLP acquired a cable television system, serving approximately 823 (unaudited) subscribers in the West Virginia counties of Wirt and Wood. The aggregate purchase price was approximately $1,053,457, and was allocated to the net assets acquired which included property, equipment and intangible assets, based on their estimated fair value. On April 18, 1997, HPIAC acquired a cable television system serving approximately 839 (unaudited) subscribers in the communities of Charleston and Calhoun, Tennessee. The aggregate purchase price was approximately $1,055,693 and was allocated to the net assets acquired which included property and equipment and intangible assets, based on their estimated fair value. On June 26, 1997, HPIAC acquired the net assets of cable television systems serving approximately 21,500 (unaudited) subscribers primarily in the North Carolina communities of Avery County and surrounding areas and in the South Carolina community of Anderson County. The aggregate purchase price was approximately $45,258,279, including acquisition costs of $547,235, and was allocated to the net assets acquired which included property, plant, equipment and intangible assets, based on their estimated fair value. On June 26, 1997, THGLP acquired the net assets of a cable television system serving approximately 11,000 (unaudited) subscribers in the North Carolina communities of Watauga County, Blowing Rock, Beech Mountain and the town of Boone. The aggregate purchase price was $19,947,430 and was allocated to the net assets acquired which included, property, plant, equipment and intangible assets, based on their estimated fair value. The aggregate purchase price of the 1997 cable acquisitions was $70,275,153 and was allocated to the net assets acquired based on their estimated fair market value as follows: Land...................................................... $ 158,500 Cable television system................................... 21,320,900 Vehicles.................................................. 1,473,600 Computer equipment........................................ 240,000 Subscriber lists.......................................... 46,925,173 Organization and other costs.............................. 688,816 Other net operating items................................. (531,836) ----------- Total aggregate purchase price............................ $70,275,153 =========== On December 31, 1998, HPIAC acquired the net assets of cable television systems serving approximately 11,225 (unaudited) subscribers primarily in the North Carolina community of Roanoke Rapids. The aggregate purchase price was $26,063,284 including acquisition costs of F-155
403 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) $535,875 and was allocated to the net assets acquired, which included, property, equipment and intangible assets, based on their estimated fair value. Land...................................................... $ 250,000 Cable television system................................... 4,258,000 Other property, plant and equipment....................... 1,103,375 Subscriber lists.......................................... 19,805,000 Organization and other costs.............................. 535,875 Other net operating items................................. 111,034 ----------- Total aggregate purchase price............................ $26,063,284 =========== Internet Acquisitions On March 22, 1996, THGLP acquired the net assets of a telephone dial-up internet access provider ("ISP") serving approximately 350 (unaudited) customers in and around the area of Uniontown, Pennsylvania. The aggregate purchase price was approximately $40,000. On April 1, 1997, the Partnership acquired the net assets of a telephone dial-up ISP serving approximately 2,500 (unaudited) customers in and around the area of Uniontown, Pennsylvania. The aggregate purchase price was $757,029. On May 31, 1997, the Partnership acquired the net assets of a telephone dial-up ISP serving approximately 1,800 (unaudited) customers in and around the area of Uniontown, Pennsylvania. The aggregate purchase price was $213,629. On November 14, 1997, HOL acquired the net assets of a telephone dial-up ISP serving approximately 1,744 (unaudited) customers in and around the area of Johnstown, Pennsylvania. The aggregate purchase price was $348,927. On December 17, 1997, HOL acquired the net assets of a telephone dial-up ISP serving 1,571 (unaudited) customers in and around the area of Plainfield, Vermont. The aggregate purchase price was $497,307. On December 17, 1997, HOL acquired the net assets of a telephone dial-up ISP serving approximately 2,110 (unaudited) customers in and around the area of Wells River, Vermont. The aggregate purchase price was $673,170. The aggregate purchase price of the 1997 ISP acquisitions was $2,490,062 and was allocated to the net assets acquired, based on their estimated fair value. Such allocation is summarized as follows: Internet service equipment................................. $ 237,064 Customer lists............................................. 1,409,768 Non-compete Agreement...................................... 883,097 Other intangible assets.................................... 35,000 Other net operating items.................................. (74,867) ---------- Total aggregate purchase price............................. $2,490,062 ========== F-156
404 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) A portion of the purchase price was paid through the issuance of notes to the Sellers totaling $1,801,000. Such notes were reported net of imputed interest of $304,698 computed at 9% per annum (see Note 11). The operating results relating to the above acquisitions, effective with their acquisition dates, are included in the accompanying combined financial statements. 4. PROPERTY, PLANT AND EQUIPMENT, NET Property, plant and equipment, net is summarized as follows at December 31: ESTIMATED USEFUL 1997 1998 LIFE IN YEARS ------------ ------------ ---------------- Land........................... $ 121,689 $ 320,689 -- Cable television system........ 124,684,403 140,441,324 5 to 20 Internet service equipment..... 1,281,362 2,483,602 2 to 3 Office furniture and fixtures..................... 677,672 728,253 5 and 10 Vehicles....................... 3,536,358 4,570,990 3 and 5 Building....................... 805,525 1,585,384 5 and 10 Building and leasehold Improvements................. 398,843 445,820 1 to 5 Computers...................... 3,232,355 4,159,506 3 to 5 ------------ ------------ 134,738,207 154,735,568 Less accumulated depreciation.. (54,633,830) (67,997,988) ------------ ------------ $ 80,104,377 $ 86,737,580 ============ ============ 5. INTANGIBLE ASSETS AND DEFERRED COSTS Intangible assets and deferred costs are summarized as follows at December 31: ESTIMATED USEFUL 1997 1998 LIFE IN YEARS ------------ ------------ ---------------- Covenants not-to-compete......... $ 14,270,120 $ 14,270,120 5 Franchise agreements............. 19,650,889 19,650,889 9 to 17 Goodwill......................... 1,703,760 1,703,760 20 Subscriber lists................. 82,292,573 102,097,574 6 to 10 Financing costs.................. 9,414,809 9,291,640 8 to 10 Organization and other costs..... 3,631,650 4,306,777 5 to 10 ------------ ------------ 130,963,801 151,320,760 Less accumulated amortization.... (45,897,136) (56,443,913) ------------ ------------ $ 85,066,665 $ 94,876,847 ============ ============ F-157
405 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 6. TRANSACTIONS WITH AFFILIATES Amounts due from/to affiliates result from management fees, expense allocations and temporary non-interest bearing loans. The affiliates are related to the Company through common-ownership. The Partnership is managed by Helicon Corp., an affiliated management company. During 1996, 1997 and 1998, the Partnership was charged management fees of $2,103,077, $2,997,872, and $3,496,271, respectively. In 1997 and 1998, $2,685,172 and $3,231,362 of the management fees were paid and $312,700 and $172,476 were deferred, in accordance with the terms of the Partnership's credit agreements, respectively. Management fees are calculated based on the gross revenues of the systems. Additionally, during 1996, 1997 and 1998, THGLP was also charged $980,000, $713,906, and $1,315,315, respectively, for certain costs incurred by this related party on their behalf. In May 1997, immediately after the formation of HOL, HPI sold 10% of its limited partner interest in HOL to certain employees of Helicon Corp. Such interests were sold at HPI's proportionate carrying value of HOL of $83,631 in exchange for notes receivable from these individuals. These notes are due upon the liquidation of HOL or the sale of all or substantially all of its assets. On June 26, 1998, the notes were cancelled in consideration of the return by the Helicon employees of their 10% limited partnership interests. 7. DUE TO PRINCIPAL OWNER Mr. Theodore Baum, directly or indirectly, is the principal owner of 96.17% of the general and limited partnership interests of the Partnership (the "Principal Owner"). Due to Principal Owner consists of $5,000,000 at December 31, 1997 and 1998 payable by THGLP. Beginning on November 3, 1993, interest on the $5,000,000 due to the Principal Owner did not accrue and in accordance with the provisions of the Senior Secured Notes was not paid for twenty four months. Interest resumed on November 3, 1995 (see Note 8). The principal may only be repaid thereafter subject to the passage of certain limiting tests under the covenants of the Senior Secured Notes. Prior to the issuance of the Senior Secured Notes, amounts due to Principal Owner bore interest at varying rates per annum based on the prime rate and were due on demand. Interest expense includes $521,701 in 1996 and $530,082 in 1997 and $524,880 in 1998 related to this debt. 8. SENIOR SECURED NOTES On November 3, 1993, THGLP and HCC (the "Issuers"), through a private placement offering, issued $115,000,000 aggregate principal amount of 11% Senior Secured Notes due 2003 (the "Senior Secured Notes"), secured by substantially all the assets of THGLP. The Senior Secured Notes were issued at a substantial discount from their principal amount and generated net proceeds to the Issuers of approximately $105,699,000. Interest is payable on a semi-annual basis in arrears on November 1 and May 1, beginning on May 1, 1994. Until November 1, 1996 the Senior Secured Notes bore interest at the rate of 9% per annum. After November 1, 1996, the Senior Secured Notes bear interest at the rate of 11% per annum. The discount on the Senior Secured Notes has been amortized over the term of the Senior Secured Notes so as to result in an effective interest rate of 11% per annum. F-158
406 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The Senior Secured Notes may be redeemed at the option of the Issuers in whole or in part at any time on or after November 1, 1997 at the redemption price of 108% reducing ratably to 100% of the principal amount, in each case together with accrued interest to the redemption date. The Issuers are required to redeem $25,000,000 principal amount of the Senior Secured Notes on each of November 1, 2001 and November 1, 2002. The indenture under which the Senior Secured Notes were issued contains various restrictive covenants, the more significant of which are, limitations on distributions to partners, the incurrence or guarantee of indebtedness, the payment of management fees, other transactions with officers, directors and affiliates, and the issuance of certain types of equity interests or distributions relating thereto. 9. LOANS PAYABLE TO BANKS On July 12, 1996, HPIAC entered into $85,000,000 of senior secured credit facilities ("Facilities") with a group of banks and The First National Bank of Chicago, as agent. The Facilities were comprised of a $55,000,000 senior secured two and one-half year revolving credit facility, converting on December 31, 1998 to a five and one-half year amortizing term loan due June 30, 2004 ("Facility A"); and, a $30,000,000 senior secured, amortizing, multiple draw nine year term loan facility due June 30, 2005 ("Facility B"). The Facilities financed certain permitted acquisitions, transaction expenses and general corporate purposes. Interest on outstanding borrowings was payable at specified margins over either LIBOR or the higher of the corporate base rate of The First National Bank of Chicago or the rates on overnight Federal funds transactions with members of the Federal Reserve System. The margins varied based on the Company's total leverage ratio, as defined, at the time of an advance. As of December 31, 1997, the amounts outstanding were $30,000,000 under Facility B and $35,500,000 outstanding under Facility A. Interest was payable at LIBOR plus 3.50% for Facility B and LIBOR plus 3.00% for Facility A. In addition, HPIAC paid a commitment fee of .5% of the unused balance of the Facilities. On December 15, 1998, the Facilities were repaid in full together with accrued interest thereon from the proceeds of the new credit agreements (see below). In connection with the early retirement of the aforementioned bank debt, HPIAC wrote off related unamortized deferred financing costs totaling $1,657,320. Such amount has been classified as an extraordinary item in the accompanying 1998 combined statement of operations. In connection with the aforementioned Facilities, HPIAC entered into an interest rate cap agreement to reduce its exposure to interest rate risk. Interest rate cap transactions generally involve the exchange of fixed and floating rate interest payment obligations and provide for a ceiling on interest to be paid, respectively, without the exchange of the underlying notional principal amount. These types of transactions involve risk of counterpart nonperformance under the terms of the contract. At December 31, 1997, HPIAC had cap agreements with aggregate notional amounts of $42,500,000 expiring through March 29, 2000. On December 15, 1998, in connection with the early retirement of the related bank debt, the cap agreements were terminated and HPIAC wrote off the unamortized costs of these cap agreements. On December 15, 1998, HPIAC entered into credit agreements with a group of banks and Paribas, as agent, providing maximum borrowings of $110,000,000 (the 1998 Credit Facilities). The agreements include (i) a senior secured Credit Agreement consisting of a $35,000,000 A Term Loan, maturing on December 31, 2005, $45,000,000 B Term Loan, maturing on December 31, 2006 and a $10,000,000 Revolving Commitment, maturing on December 31, 2005 F-159
407 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) and (ii) a Loan Agreement consisting of a $20,000,000 Hybrid Facility, maturing on December 31, 2007. As of December 31, 1998, the A Term Loan, B Term Loan and Hybrid Facility were fully drawn down and there was nothing outstanding under the Revolving Commitment. The principal cash payments required under the Company's credit agreements for the fiscal years ended December 31, 1999, 2000, 2001, 2002 and 2003 are estimated to aggregate $0, $812,500, $3,950,000, $5,700,000 and $7,450,000, respectively. Interest is payable at LIBOR plus an applicable margin, which is based on a ratio of loans outstanding to annualized EBITDAM, as defined in the agreement and can not exceed 3.00% for A Term Loan and Revolving Commitments, 3.25% for B Term Loan and 4.50% for the Hybrid Facility. In addition, the Company pays a commitment fee of .50% of the unused balance of the Revolving Commitment. The 1998 Credit Facilities are secured by a first perfected security interest in all of the assets of HPIAC and a pledge of all equity interests of HPIAC. The credit agreement contains various restrictive covenants that include the achievement of certain financial ratios relating to interest, fixed charges, leverage, limitations on capital expenditures, incurrence or guarantee of indebtedness, other transactions with affiliates and distributions to members. In addition, management fees in the aggregate cannot exceed 5% of gross revenues of HPIAC. On June 26, 1997, THGLP entered into a $20,000,000 senior secured credit facility with Banque Paribas, as Agent (the 1997 Credit Facility). On January 5, 1999, the 1997 Credit Facility was restated and amended. The facility is non-amortizing and is due November 1, 2000. Borrowings under the facility financed the acquisition of certain cable television assets in North Carolina (see note 3). Interest on the $20,000,000 outstanding is payable at specified margins over either LIBOR or the rate of interest publicly announced in New York City by The Chase Manhattan Bank from time to time as its prime commercial lending rate. The margins vary based on the THGLP's total leverage ratio, as defined, at the time of an advance. Currently interest is payable at LIBOR plus 2.75%. The 1997 Credit Facility is secured by a first perfected security interest in all of the assets of the Partnership and a pledge of all equity interests of the THGLP. The credit agreement contains various restrictive covenants that include the achievement of certain financial ratios relating to interest, fixed charges, leverage, limitations on capital expenditures, incurrence or guarantee of indebtedness, transactions with affiliates, distributions to members and management fees which accrue at 5% of gross revenues. Also included in loans payable to banks is a mortgage note of $266,922 payable to a bank that is secured by THGLP's office building in Vermont. The interest is payable at Prime plus 1% and the mortgage note is due March 1, 2012. F-160
408 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Principal payments on the mortgage note are summarized as follows at December 31, 1998: YEAR ENDING DECEMBER 31 AMOUNT - ----------------------- -------- 1999........................................................ $ 10,581 2000........................................................ 11,631 2001........................................................ 12,786 2002........................................................ 14,055 2003 and thereafter......................................... 217,869 -------- $266,922 ======== 10. SUBORDINATED NOTES AND REDEEMABLE PARTNERSHIP INTERESTS In April 1996 the Partnership sold to unrelated investors, $34,000,000 aggregate principal amount of its 12% Subordinated Notes (the "Subordinated Notes") and warrants to purchase 2,419.1 units (the "Units") of Class B Common Limited Partnership Interests representing in the aggregate 24.191% of the outstanding limited partner interests of the Partnership on a fully diluted basis (the "Warrants"). Of the $34,000,000 of gross proceeds, $3,687,142 was determined to be the value of the Warrants, and $30,312,858 was allocated to the Subordinated Notes. The discount on the Subordinated Notes is being amortized over the term of these Notes. The Subordinated Notes are subordinated to the senior indebtedness of the Partnership and are due April 1, 2004. Interest is payable semi-annually on each October 1 and April 1 in cash or through the issuance of additional Subordinated Notes, at the option of the Partnership. In October 1996, April 1997, October 1997, April 1998 and October 1998, the Partnership elected to satisfy interest due through the issuance of $1,945,667, $2,156,740, $2,037,079, $2,408,370 and $2,552,871, respectively, additional Subordinated Notes. After September 2001, a holder or holders of no less than 33 1/3% of the aggregate principal amount of the Subordinated Notes can require the Partnership to repurchase their Subordinated Notes at a price equal to the principal amount thereof plus accrued interest. The Partnership has an option to redeem the Subordinated Notes at 102% of the aggregate principal amount after the fifth anniversary of their issuance, at 101% of the aggregate principal amount after the sixth anniversary of issuance and at 100% of the aggregate principal amount after the seventh anniversary of issuance. Holders of the Warrants have the right to acquire the Units at any time for a price of $1,500 per Unit. After September 2001, a holder or holders of at least 33 1/3% of the Warrants can require the Partnership to either purchase their Warrants at their interest in the Net Equity Value of the Partnership or seek a purchaser for all of the assets or equity interests of the Partnership. Net Equity Value pursuant to the terms of the underlying agreements is the estimated amount of cash that would be available for distribution to the Partnership interests upon a sale of all of the assets of the Partnership and its subsequent dissolution and liquidation. The Net Equity Value is the amount agreed to by the Partnership and 66 2/3% of the holders of the Subordinated Notes and Warrants or, absent such agreement, determined through a specified appraisal process. The Partnership estimated the Net Equity Value of the Warrants to be approximately $43,250,000 at December 31, 1998 and $16,750,000 at December 31, 1997. Such estimate as of December 31, 1998 reflects the amount that the holders of the warrants have agreed to accept for their interests assuming the proposed sale of all of the interests of the partnership is consummated (see note 14). The increase in the estimated Net Equity Value over the original F-161
409 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) carrying value of the Warrants is being accreted evenly over the period beginning with the date of the increase and September 2001. Such accretion is being reflected in the accompanying financial statements as an increase in the carrying value of the Warrants and a corresponding reduction in the carrying value of the capital accounts of the General and Class A Limited Partners. The agreements underlying the Subordinated Notes and the Warrants contain various restrictive covenants that include limitations on incurrence or guarantee of indebtedness, transactions with affiliates, and distributions to partners. In addition, management fees in the aggregate cannot exceed 5% of gross revenues of the Partnership. 11. OTHER NOTES PAYABLE Other Notes payable consists of the following at December 31: 1997 1998 ---------- ---------- Promissory note in consideration for acquisition of a cable television system, accruing interest at 10% per annum on principal and accrued interest which is added to principal on certain specified dates; interest becomes payable on January 1, 1998 and the principal is payable in full on August 20, 2000 $2,036,765 $2,036,765 Non-interest bearing promissory notes issued in connection with the acquisition of a cable television system. Principal payments begin on July 16, 1997, in the amount of $70,000 and four installments in the amount of $170,000 on each July 16 thereafter. Such notes are reported net of imputed interest of $141,116 and $101,732 in 1997 and 1998, respectively, computed at 9% per annum 538,884 408,268 Non-interest bearing promissory notes issued in connection with the acquisitions of the internet businesses. Principal payments are due in January, February, and March of each year and continue quarterly thereafter through June, 2001. Such notes are reported net of imputed interest of $180,727 and $146,441 in the 1997 and 1998, respectively, computed at 9% per annum 1,398,478 1,021,474 Installment notes, collateralized by vehicles and other equipment and payable in monthly installments, at interest rates between 5.5% to 14.25% per annum, through January, 2003 1,772,949 1,982,297 ---------- ---------- $5,747,076 $5,448,804 ========== ========== F-162
410 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Principal payments due on the above notes payable are summarized as follows at December 31, 1998: YEAR ENDING DECEMBER 31 AMOUNT - ----------------------- ---------- 1999..................................................... $1,337,476 2000..................................................... 3,276,529 2001..................................................... 678,349 2002..................................................... 140,944 2003..................................................... 15,506 ---------- $5,448,804 ========== 12. PARTNERS' DEFICIT During 1993, the Principal Owner contributed a $6,500,000 unsecured, non-interest bearing personal promissory note due on demand to the general partner of THGLP. Additionally, the Principal Owner contributed to THGLP an unsecured, non-interest bearing personal promissory note in the aggregate principal amount of $24,000,000 (together with the $6,500,000 note, the "Baum Notes"). The Baum Notes have been issued for the purpose of THGLP's credit enhancement. Although the Baum Notes are unconditional, they do not become payable except (i) in increasing amounts presently up to $19,500,000 and in installments thereafter to a maximum of $30,500,000 on December 16, 1996 and (ii) at such time after such dates as THGLP's creditors shall have exhausted all claims against THGLP's assets. 13. COMMITMENTS The Partnership and affiliates leases telephone and utility poles on an annual basis. The leases are self renewing. Pole rental expense for the years ended December 31, 1996, 1997 and 1998 was $609,075, $873,264 and $982,306, respectively. In connection with certain lease and franchise agreements, the Partnership, from time to time, issues security bonds. The Partnership and affiliates utilizes certain office space under operating lease agreements which expire at various dates through August 2013 and contain renewal options. At December 31, 1998 the future minimum rental commitments under such leases were as follows: YEAR ENDING DECEMBER 31 - ----------------------- 1999..................................................... $ 166,825 2000..................................................... 142,136 2001..................................................... 141,727 2002..................................................... 147,912 2003..................................................... 151,412 Thereafter............................................... 1,418,017 ---------- $2,168,029 ========== Office rent expense was $102,801 in 1996, $203,506 in 1997 and $254,955 in 1998. F-163
411 HELICON PARTNERS I, L.P. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 14. SUBSEQUENT EVENTS On March 22, 1999, Helicon Partners I, L. P. (HPI), Baum Investments, Inc. and all the holders of partnership interests in HPI entered into a purchase agreement by and among Charter Communications, Inc, Charter Communications, LLC and Charter Helicon, LLC (collectively the "Charter Entities") providing for the sale of all such partnership interests and Helicon Corp.'s interest in the management agreements with THGLP and HPIAC to the Charter Entities. The sale price is $550 million which amount will be reduced by any outstanding indebtedness assumed by the Charter Entities. F-164
412 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of InterMedia Partners and InterMedia Capital Partners IV, L.P. In our opinion, the accompanying combined balance sheets and the related combined statements of operations, of changes in equity and of cash flows present fairly, in all material respects, the financial position of InterMedia Cable Systems (comprised of components of InterMedia Partners and InterMedia Capital Partners IV, L.P.), at December 31, 1998 and 1997, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the management of InterMedia Partners and InterMedia Capital Partners IV, L.P.; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP San Francisco, California April 20, 1999 F-165
413 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) COMBINED BALANCE SHEETS (DOLLARS IN THOUSANDS) DECEMBER 31, ------------------- 1998 1997 -------- -------- ASSETS Accounts receivable, net of allowance for doubtful accounts of $899 and $680, respectively............................ $ 14,425 $ 13,017 Receivables from affiliates................................. 5,623 1,719 Prepaid expenses............................................ 423 626 Other current assets........................................ 350 245 -------- -------- Total current assets.............................. 20,821 15,607 Intangible assets, net...................................... 255,356 283,562 Property and equipment, net................................. 218,465 179,681 Deferred income taxes....................................... 12,598 14,221 Other non-current assets.................................... 2,804 1,140 -------- -------- Total assets...................................... $510,044 $494,211 ======== ======== LIABILITIES AND EQUITY Accounts payable and accrued liabilities.................... $ 19,230 $ 20,934 Deferred revenue............................................ 11,104 8,938 Payables to affiliates...................................... 3,158 2,785 Income taxes payable........................................ 285 -------- -------- Total current liabilities......................... 33,492 32,942 Note payable to InterMedia Partners IV, L.P................. 396,579 387,213 Deferred channel launch revenue............................. 4,045 2,104 -------- -------- Total liabilities................................. 434,116 422,259 -------- -------- Commitments and contingencies............................... Mandatorily redeemable preferred shares..................... 14,184 13,239 Equity...................................................... 61,744 58,713 -------- -------- Total liabilities and equity...................... $510,044 $494,211 ======== ======== See accompanying notes to combined financial statements. F-166
414 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, ------------------- 1998 1997 -------- -------- REVENUES Basic and cable services.................................... $125,920 $112,592 Pay services................................................ 23,975 24,467 Other services.............................................. 26,167 25,519 -------- -------- 176,062 162,578 COSTS AND EXPENSES Program fees................................................ 39,386 33,936 Other direct expenses....................................... 16,580 16,500 Selling, general and administrative expenses................ 30,787 29,181 Management and consulting fees.............................. 3,147 2,870 Depreciation and amortization............................... 85,982 81,303 -------- -------- 175,882 163,790 -------- -------- Profit/(loss) from operations............................... 180 (1,212) -------- -------- OTHER INCOME (EXPENSE) Interest expense............................................ (25,449) (28,458) Gain on sale/exchange of cable systems...................... 26,218 10,006 Interest and other income................................... 341 429 Other expense............................................... (3,188) (1,431) -------- -------- (2,078) (19,454) Loss before income tax benefit (expense).................... (1,898) (20,666) Income tax benefit (expense)................................ (1,623) 4,026 -------- -------- NET LOSS.................................................... $ (3,521) $(16,640) ======== ======== See accompanying notes to combined financial statements. F-167
415 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) COMBINED STATEMENT OF CHANGES IN EQUITY (DOLLARS IN THOUSANDS) Balance at December 31, 1996................................ $ 69,746 Net loss.................................................... (16,640) Accretion for mandatorily redeemable preferred shares....... (882) Net contributions from parent............................... 6,489 -------- Balance at December 31, 1997................................ 58,713 Net loss.................................................... (3,521) Accretion for mandatorily redeemable preferred shares....... (945) Net cash contributions from parent.......................... 6,350 In-kind contribution from parent............................ 1,147 -------- Balance at December 31, 1998................................ $ 61,744 ======== See accompanying notes to combined financial statements. F-168
416 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) FOR THE YEAR ENDED DECEMBER 31, -------------------- 1998 1997 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss.................................................. $ (3,521) $(16,640) Adjustments to reconcile net loss to cash flows from operating activities: Depreciation and amortization.......................... 85,982 81,303 Loss and disposal of fixed assets...................... 3,177 504 Gain on sale/exchange of cable systems................. (26,218) (10,006) Changes in assets and liabilities: Accounts receivable.................................. (1,395) (2,846) Receivables from affiliates.......................... (3,904) (639) Prepaid expenses..................................... 203 (251) Other current assets................................. (106) (10) Deferred income taxes................................ 1,623 (4,311) Other non-current assets............................. (517) (58) Accounts payable and accrued liabilities............. (2,073) 4,436 Deferred revenue..................................... 1,208 1,399 Payables to affiliates............................... 373 469 Accrued interest..................................... 25,449 28,458 Deferred channel launch revenue...................... 2,895 2,817 -------- -------- Cash flows from operating activities.............. 83,176 84,625 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment.................... (72,673) (87,253) Sale/exchange of cable systems......................... (398) 11,157 Intangible assets...................................... (372) (506) -------- -------- Cash flows from investing activities.............. (73,443) (76,602) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net contributions from parent.......................... 6,350 6,489 Net repayment of borrowings............................ (16,083) (14,512) -------- -------- Cash flows from financing activities.............. (9,733) (8,023) -------- -------- Net change in cash.......................................... -- -- -------- -------- CASH AT BEGINNING OF PERIOD................................. -- -- -------- -------- CASH AT END OF PERIOD....................................... $ -- $ -- ======== ======== See accompanying notes to combined financial statements. F-169
417 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. BASIS OF PRESENTATION THE CHARTER TRANSACTIONS InterMedia Partners, a California limited partnership ("IP-I"), and InterMedia Capital Partners IV, L.P., a California limited partnership, ("ICP-IV", together with IP-I, "InterMedia") are affiliated through common control and management. Robin Media Group, Inc., a Nevada corporation, ("RMG") is a majority owned subsidiary of ICP-IV. On April 20, 1999, InterMedia and certain of its affiliates entered into agreements (the "Agreements") with affiliates of Charter Communications, Inc. ("Charter") to sell and exchange certain of their cable television systems ("the Charter Transactions"). Specifically, ICP-IV and its affiliates have agreed to sell certain of their cable television systems in Tennessee and Gainsville, Georgia through a combination of asset sales and the sale of its equity interests in RMG, and to exchange their systems in and around Greenville and Spartanburg, South Carolina for Charter systems located in Indiana, Kentucky, Utah and Montana. Immediately upon Charter's acquisition of RMG, IP-I will exchange its cable television systems in Athens, Georgia, Asheville and Marion, North Carolina and Cleveland, Tennessee for RMG's cable television systems located in middle Tennessee. The Charter Transactions are expected to close during the third or fourth quarter of 1999. The cable systems retained by Charter upon consummation of the Charter Transactions, together with RMG, are referred to as the "InterMedia Cable Systems," or the "Systems." PRESENTATION The accompanying combined financial statements represent the financial position of the InterMedia Cable Systems as of December 31, 1998 and 1997 and the results of their operations and their cash flows for the years then ended. The Systems being sold or exchanged do not individually or collectively comprise a separate legal entity. Accordingly, the combined financial statements have been carved-out from the historical accounting records of InterMedia. CARVE-OUT METHODOLOGY Throughout the periods covered by the combined financial statements, the individual cable systems were operated and accounted for separately. However, the Charter Transactions exclude certain systems (the "Excluded Systems") which were operated as part of the Marion, North Carolina and western Tennessee systems throughout 1997 and 1998. For purposes of carving out and excluding the results of operations and financial position of the Excluded Systems from the combined financial statements, management has estimated the revenues, expenses, assets and liabilities associated with each Excluded System based on the ratio of each Excluded System's basic subscribers to the total basic subscribers served by the Marion, North Carolina and western Tennessee systems, respectively. Management believes the basis used for these allocations is reasonable. The Systems' results of operations are not necessarily indicative of future operating results or the results that would have occurred if the Systems were a separate legal entity. Management and consulting fees represent an allocation of management fees charged to IP-I and ICP-IV by InterMedia Capital Management, a California limited partnership ("ICM") and F-170
418 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) InterMedia Management, Inc. ("IMI"), respectively. Prior to January 1, 1998, InterMedia Capital Management IV, L.P. ("ICM-IV") provided such management and consulting services to ICP-IV. ICM and ICM-IV are limited partners of IP-I and ICP-IV, respectively. IMI is the managing member of each of the general partners of IP-I and ICP-IV. These fees are charged at a fixed amount per annum and have been allocated to the Systems based upon the allocated contributed capital of the individual systems as compared to the total contributed capital of InterMedia's subsidiaries. As more fully described in Note 9 -- "Related Party Transactions," certain administrative services are also provided by IMI and are charged to all affiliates based on relative basic subscriber percentages. CASH AND INTERCOMPANY ACCOUNTS Under InterMedia's centralized cash management system, cash requirements of its individual operating units were generally provided directly by InterMedia and the cash generated or used by the Systems was transferred to/from InterMedia, as appropriate, through intercompany accounts. The intercompany account balances between InterMedia and the individual operating units, except RMG's intercompany note payable to InterMedia Partners IV, L.P. ("IP-IV") as described in Note 7 -- "Note Payable to InterMedia Partners IV, L.P." are not intended to be settled. Accordingly, the balances, other than RMG's note payable to IP-IV, are included in equity and all net cash generated from operations, investing activities and financing activities have been included in the Systems' net contribution from parent in the combined statements of cash flows. IP-I and ICP-IV or its subsidiaries maintain all external debt to fund and manage InterMedia's operations on a centralized basis. The combined financial statements present only the debt and related interest expense of RMG, which is assumed and repaid by Charter pursuant to the Charter Transactions. See Note 7 -- "Note Payable to InterMedia Partners IV, L.P." Debt, unamortized debt issue costs and interest expense related to the financing of the cable systems not owned by RMG have not been allocated to the InterMedia Cable Systems. As such, the level of debt, unamortized debt issue costs and related interest expense presented in the combined financial statements are not representative of the debt that would be required or interest expense incurred if InterMedia Cable Systems were a separate legal entity. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES REVENUE RECOGNITION Cable television service revenue is recognized in the period in which services are provided to customers. Deferred revenue generally represents revenue billed in advance and deferred until cable service is provided. PROPERTY AND EQUIPMENT Additions to property and equipment, including new customer installations, are recorded at cost. Self-constructed fixed assets include materials, labor and overhead. Costs of disconnecting and reconnecting cable service are expensed. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures for major renewals and improvements are capitalized. Capitalized fixed assets are written down to recoverable values whenever recover- F-171
419 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) ability through operations or sale of the systems becomes doubtful. Gains and losses on disposal of property and equipment are included in the Systems' statements of operations when the assets are sold or retired from service. Depreciation is computed using the double-declining balance method over the following estimated useful lives: YEARS ------ Cable television plant...................................... 5 - 10 Buildings and improvements.................................. 10 Furniture and fixtures...................................... 3 - 7 Equipment and other......................................... 3 - 10 INTANGIBLE ASSETS The Systems have franchise rights to operate cable television systems in various towns and political subdivisions. Franchise rights are being amortized over the lesser of the remaining franchise lives or the base ten and twelve-year terms of IP-I and ICP-IV, respectively. The remaining lives of the franchises range from one to eighteen years. Goodwill represents the excess of acquisition costs over the fair value of net tangible and franchise assets acquired and liabilities assumed and is being amortized on a straight-line basis over the base ten or twelve-year term of IP-I and ICP-IV, respectively. Capitalized intangibles are written down to recoverable values whenever recoverability through operations or sale of the systems becomes doubtful. Each year, the Systems evaluate the recoverability of the carrying value of their intangible assets by assessing whether the projected cash flows, including projected cash flows from sale of the systems, is sufficient to recover the unamortized costs of these assets. INCOME TAXES Income taxes reported in InterMedia Cable Systems' combined financial statements represent the tax effects of RMG's results of operations. RMG as a corporation is the only entity within InterMedia Cable Systems which reports a provision/benefit for income taxes. No provision or benefit for income taxes is reported by any of the other cable systems within the InterMedia Cable Systems structure because these systems are currently owned by various partnerships, and, as such, the tax effects of these cable systems' results of operations accrue to the partners. RMG accounts for income taxes using the asset and liability approach which requires the recognition of deferred tax assets and liabilities for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. F-172
420 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles 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 these estimates. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of receivables, payables, deferred revenue and accrued liabilities approximates fair value due to their short maturity. NEW ACCOUNTING PRONOUNCEMENT In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (FAS 130), which establishes standards for reporting and disclosure of comprehensive income and its components. FAS 130 is effective for fiscal years beginning after December 15, 1997 and requires reclassification of financial statements for earlier periods to be provided for comparative purposes. The Systems' total comprehensive loss for all periods presented herein did not differ from those amounts reported as net loss in the combined statement of operations. 3. SALE AND EXCHANGE OF CABLE PROPERTIES SALE On December 5, 1997, RMG sold its cable television assets serving approximately 7,400 (unaudited) basic subscribers in and around Royston and Toccoa, Georgia. The sale resulted in a gain, calculated as follows: Proceeds from sale.......................................... $11,212 Net book value of assets sold............................... (1,206) ------- Gain on sale................................................ $10,006 ======= EXCHANGE On December 31, 1998, certain of the Systems' cable television assets located in and around western and eastern Tennessee ("Exchanged Assets"), serving approximately 10,600 (unaudited) basic subscribers, plus cash of $398 were exchanged for other cable television assets located in and around western and eastern Tennessee, serving approximately 10,000 (unaudited) basic subscribers. F-173
421 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) The cable television assets received have been recorded at fair market value, allocated as follows: Property and equipment...................................... $ 5,141 Franchise rights............................................ 24,004 ------- Total............................................. $29,145 ======= The exchange resulted in a gain of $26,218 calculated as the difference between the fair value of the assets received and the net book value of the Exchanged Assets less cash paid of $398. 4. INTANGIBLE ASSETS Intangible assets consist of the following: DECEMBER 31, -------------------- 1998 1997 --------- -------- Franchise rights............................................ $ 332,157 $302,308 Goodwill.................................................... 58,505 58,772 Other....................................................... 345 6,392 --------- -------- 391,007 367,472 Accumulated amortization.................................... (135,651) (83,910) --------- -------- $ 255,356 $283,562 ========= ======== 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following: DECEMBER 31, ------------------- 1998 1997 -------- -------- Land........................................................ $ 1,068 $ 1,898 Cable television plant...................................... 231,937 138,117 Building and improvements................................... 5,063 4,657 Furniture and fixtures...................................... 3,170 2,009 Equipment and other......................................... 25,396 21,808 Construction-in-progress.................................... 18,065 49,791 -------- -------- 284,699 218,280 Accumulated depreciation.................................... (66,234) (38,599) -------- -------- $218,465 $179,681 ======== ======== F-174
422 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following: DECEMBER 31, ----------------- 1998 1997 ------- ------- Accounts payable............................................ $ 1,780 $ 2,996 Accrued program costs....................................... 1,897 1,577 Accrued franchise fees...................................... 4,676 4,167 Accrued copyright fees...................................... 406 762 Accrued capital expenditures................................ 5,215 5,179 Accrued payroll costs....................................... 1,784 1,789 Accrued property and other taxes............................ 862 1,851 Other accrued liabilities................................... 2,610 2,613 ------- ------- $19,230 $20,934 ======= ======= 7. NOTE PAYABLE TO INTERMEDIA PARTNERS IV, L.P. RMG's note payable to IP-IV consists of the following: DECEMBER 31, ------------------- 1998 1997 -------- -------- Intercompany revolving credit facility, $1,200,000 commitment as of December 31, 1998, interest currently at 6.86% payable on maturity, matures December 31, 2006........................................ $396,579 $387,213 ======== ======== RMG's debt is outstanding under an intercompany revolving credit facility executed with IP-IV. The revolving credit facility currently provides for $1,200,000 of available credit. RMG's intercompany revolving credit facility requires repayment of the outstanding principal and accrued interest on the earlier of (i) December 31, 2006, or (ii) acceleration of any of IP-IV's obligations to repay under its bank debt outstanding under its revolving credit facility ("IP-IV Revolving Credit Facility") and term loan agreement ("IP-IV Term Loan", together with the IP-IV Revolving Credit Facility, the "IP-IV Bank Facility") dated July 30, 1996. Interest rates under RMG's intercompany revolving credit facility are calculated monthly and are referenced to those made available under the IP-IV Bank Facility. Interest rates ranged from 6.84% to 7.92% during 1998. Charter has an obligation to assume and repay RMG's intercompany revolving credit facility pursuant to the Charter Transactions. Advances under the IP-IV Bank Facility are available under interest rate options related to the base rate of the administrative agent for the IP-IV Bank Facility ("ABR") or LIBOR. Effective October 20, 1997, pursuant to an amendment to the IP-IV Bank Facility, interest rates on F-175
423 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) borrowings under the IP-IV Term Loan vary from LIBOR plus 1.75% to LIBOR plus 2.00% or ABR plus 0.50% to ABR plus 0.75% based on IP-IV's ratio of debt outstanding to annualized quarterly operating cash flow ("Senior Debt Ratio"). Interest rates vary on borrowings under the IP-IV Revolving Credit Facility from LIBOR plus 0.625% to LIBOR plus 1.50% or ABR to ABR plus 0.25% based on IP-IV's Senior Debt Ratio. Prior to the amendment, interest rates on borrowings under the IP-IV Term Loan were at LIBOR plus 2.375% or ABR plus 1.125%; and, interest rates on borrowings under the IP-IV Revolving Credit Facility varied from LIBOR plus 0.75% to LIBOR plus 1.75% or ABR to ABR plus 0.50% based on IP-IV's Senior Debt Ratio. The IP-IV Bank Facility requires quarterly payment of fees on the unused portion of the IP-IV Revolving Credit Facility of 0.375% per annum when the Senior Debt Ratio is greater than 4.0:1.0 and at 0.25% when the Senior Debt Ratio is less than or equal to 4.0:1.0. The terms and conditions of RMG's intercompany debt agreement are not necessarily indicative of the terms and conditions which would be available if the Systems were a separate legal entity. 8. MANDATORILY REDEEMABLE PREFERRED SHARES RMG has Redeemable Preferred Stock outstanding at December 31, 1998 and 1997, which has an annual dividend of 10.0% and participates in any dividends paid on the common stock at 10.0% of the dividend per share paid on the common stock. The Redeemable Preferred Stock bears a liquidation preference of $12,000 plus any accrued but unpaid dividends at the time of liquidation and is mandatorily redeemable on September 30, 2006 at the liquidation preference amount. Under the Agreements, upon consummation of the Charter Transactions, Charter has an obligation to redeem RMG's Redeemable Preferred Stock at the liquidation preference amount. 9. RELATED PARTY TRANSACTIONS ICM and IMI provide certain management services to IP-I and ICP-IV, respectively, for per annum fixed fees, of which 20% per annum is deferred and payable in each following year in order to support InterMedia's debt. Prior to January 1, 1998, ICM-IV provided such management services to ICP-IV. InterMedia's management fees for the years ended December 31, 1998 and 1997 amounted to $5,410, and $6,395, respectively, of which $3,147 and $2,870, respectively, has been charged to the Systems. IMI has entered into agreements with both IP-I and ICP-IV to provide accounting and administrative services at cost. Under the terms of the agreements, the expenses associated with rendering these services are charged to the Systems and other affiliates based upon relative basic subscriber percentages. Management believes this method to be reflective of the actual cost. During 1998 and 1997, IMI administrative fees charged to the Systems totaled $3,657 and $4,153, respectively. Receivable from affiliates at December 31, 1998 and 1997 includes $52 and $1,080, respectively, of advances to IMI, net of administrative fees charged by IMI and operating expenses paid by IMI on behalf of the Systems. IP-I is majority-owned, and ICP-IV is owned in part, by Tele-Communications, Inc. ("TCI"). As affiliates of TCI, IP-I and ICP-IV are able to purchase programming services from a subsidiary of TCI. Management believes that the overall programming rates made available through this relationship are lower than the Systems could obtain separately. Such volume rates may not F-176
424 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) continue to be available in the future should TCI's ownership interest in InterMedia significantly decrease. Program fees charged by the TCI subsidiary to the Systems for the years ended December 31, 1998 and 1997 amounted to $30,884 and $26,815, respectively. Payable to affiliates includes programming fees payable to the TCI subsidiary of $2,918 and $2,335 at December 31, 1998 and 1997, respectively. On January 1, 1998 an affiliate of TCI entered into agreements with InterMedia to manage the Systems' advertising business and related services for an annual fixed fee per advertising sales subscriber as defined by the agreements. In addition to the annual fixed fee TCI is entitled to varying percentage shares of the incremental growth in annual cash flows from advertising sales above specified targets. Management fees charged by the TCI subsidiary for the year ended December 31, 1998 amount to $292. Receivable from affiliates at December 31, 1998 includes $3,437 of receivable from TCI for advertising sales. As part of its normal course of business the Systems are involved in transactions with affiliates of InterMedia which own and operate cable television systems. Such transactions include purchases and sales of inventories used in construction of cable plant at cost. Receivable from affiliates at December 31, 1998 and 1997 includes $2,134 and $639, respectively, of receivables from affiliated systems. Payable to affiliates at December 31, 1998 and 1997 includes $208 and $181, respectively, of payables to affiliated systems. 10. CABLE TELEVISION REGULATION Cable television legislation and regulatory proposals under consideration from time to time by Congress and various federal agencies have in the past, and may in the future, materially affect the Systems and the cable television industry. The cable industry is currently regulated at the federal and local levels under the Cable Act of 1984, the Cable Act of 1992 ("the 1992 Act"), the Telecommunications Act of 1996 (the "1996 Act") and regulations issued by the Federal Communications Commission ("FCC") in response to the 1992 Act. FCC regulations govern the determination of rates charged for basic, expanded basic and certain ancillary services, and cover a number of other areas including customer services and technical performance standards, the required transmission of certain local broadcast stations and the requirement to negotiate retransmission consent from major network and certain local television stations. Among other provisions, the 1996 Act eliminated rate regulation on the expanded basic tier effective March 31, 1999. Current regulations issued in conjunction with the 1992 Act empower the FCC and/or local franchise authorities to order reductions of existing rates which exceed the maximum permitted levels and to require refunds measured from the date a complaint is filed in some circumstances or retroactively for up to one year in other circumstances. Management believes it has made a fair interpretation of the 1992 Act and related FCC regulations in determining regulated cable television rates and other fees based on the information currently available. However, complaints have been filed with the FCC on rates for certain franchises and certain local franchise authorities have challenged existing and prior rates. Further complaints and challenges could be forthcoming, some of which could apply to revenue recorded in 1998, 1997 and prior years. Management believes that the effect, if any, of these complaints and challenges will not be material to the Systems' financial position or results of operations. F-177
425 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) Many aspects of regulation at the federal and local levels are currently the subject of judicial review and administrative proceedings. In addition, the FCC is required to conduct rulemaking proceedings to implement various provisions of the 1996 Act. It is not possible at this time to predict the ultimate outcome of these reviews or proceedings or their effect on the Systems. 11. COMMITMENTS AND CONTINGENCIES The Systems are committed to provide cable television services under franchise agreements with remaining terms of up to eighteen years. Franchise fees of up to 5% of gross revenues are payable under these agreements. Current FCC regulations require that cable television operators obtain permission to retransmit major network and certain local television station signals. The Systems have entered into long-term retransmission agreements with all applicable stations in exchange for in-kind and/or other consideration. InterMedia has been named in purported and certified class actions in various jurisdictions concerning late fee charges and practices. Certain cable systems owned by InterMedia charge late fees to customers who do not pay their cable bills on time. These late fee cases challenge the amount of the late fees and the practices under which they are imposed. The Plaintiffs raise claims under state consumer protection statutes, other state statutes, and common law. Plaintiffs generally allege that the late fees charged by InterMedia's cable systems, including the Systems in the States of Tennessee, South Carolina and Georgia are not reasonably related to the costs incurred by the cable systems as a result of the late payment. Plaintiffs seek to require cable systems to reduce their late fees on a prospective basis and to provide compensation for alleged excessive late fee charges for past periods. These cases are either at the early stages of the litigation process or are subject to a case management order that sets forth a process leading to mediation. Based upon the facts available management believes that, although no assurances can be given as to the outcome of these actions, the ultimate disposition of these matters should not have a material adverse effect upon the financial condition of the Systems. Under existing Tennessee laws and regulations, the Systems pay an Amusement Tax in the form of a sales tax on programming service revenues generated in Tennessee in excess of charges for the basic and expanded basic levels of service. Under the existing statute, only the service charges or fees in excess of the charges for the "basic cable" television service package are exempt from the Amusement Tax. Related regulations clarify the definition of basic cable to include two tiers of service, which InterMedia's management and other operators in Tennessee have interpreted to mean both the basic and expanded basic level of services. The Tennessee Department of Revenue ("TDOR") has proposed legislation which would replace the Amusement Tax under the existing statute with a new sales tax on all cable service revenues in excess of twelve dollars per month. The new tax would be computed at a rate approximately equal to the existing effective tax rate. Unless InterMedia and other cable operators in Tennessee support the proposed legislation, the TDOR has suggested that it would assess additional taxes on prior years' expanded basic service revenues. The TDOR can issue an assessment for prior periods up to three years. Management estimates that the amount of such an assessment for the Systems, if made for all F-178
426 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) periods not previously audited, would be approximately $5.4 million. InterMedia's management believes that it is possible but not likely that the TDOR can make such an assessment and prevail in defending it. InterMedia's management believes it has made a valid interpretation of the current Tennessee statute and regulations and that it has properly determined and paid all sales taxes due. InterMedia further believes that the legislative history of the current statute and related regulations, as well as the TDOR's history of not making assessments based on audits of prior periods, support InterMedia's interpretation. InterMedia and other cable operators in Tennessee are aggressively defending their past practices on calculation and payment of the Amusement Tax and are discussing with the TDOR modifications to their proposed legislation which would clarify the statute and would minimize the impact of such legislation on the Systems' results of operations. The Systems are subject to other claims and litigation in the ordinary course of business. In the opinion of management, the ultimate outcome of any existing litigation or other claims will not have a material effect on the Systems' financial position or results of operations. The Systems have entered into pole rental agreements and lease certain of its facilities and equipment under non-cancelable operating leases. Minimum rental commitments at December 31, 1998 for the next five years and thereafter under non-cancelable operating leases related to the Systems are as follows: 1999........................................................ $155 2000........................................................ 144 2001........................................................ 136 2002........................................................ 35 2003........................................................ 7 ---- $477 ==== Rent expense, including pole rental agreements, for the years ended December 31, 1998 and 1997 was $2,817 and $2,828, respectively. 12. INCOME TAXES Income tax (expense) benefit consists of the following: DECEMBER 31, ---------------- 1998 1997 ------- ------ Current federal............................................. $ -- $ (285) Deferred federal............................................ (1,454) 3,813 Deferred state.............................................. (169) 498 ------- ------ $(1,623) $4,026 ======= ====== F-179
427 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) Deferred income taxes relate to temporary differences as follows: DECEMBER 31, -------------------- 1998 1997 -------- --------- Property and equipment.................................... $ (7,258) $ (6,786) Intangible assets......................................... (12,930) (8,336) -------- --------- (20,188) (15,122) Loss carryforward - federal............................... 31,547 29,058 Loss carryforward - state................................. 297 -- Other..................................................... 942 285 -------- --------- $ 12,598 $ 14,221 ======== ========= At December 31, 1998, RMG had net operating loss carryforwards for federal income tax purposes aggregating $92,785, which expire through 2018. RMG is a loss corporation as defined in Section 382 of the Internal Revenue Code. Therefore, if certain substantial changes in RMG's ownership should occur, there could be a significant annual limitation on the amount of loss carryforwards which can be utilized. InterMedia's management has not established a valuation allowance to reduce the deferred tax assets related to RMG's unexpired net operating loss carryforwards. Due to an excess of appreciated asset value over the tax basis of RMG's net assets, management believes it is more likely than not that the deferred tax assets related to unexpired net operating losses will be realized. A reconciliation of the tax benefit computed at the statutory federal rate and the tax (expense) benefit reported in the accompanying combined statements of operations is as follows: DECEMBER 31, ------------------ 1998 1997 ------- -------- Tax benefit at federal statutory rate....................... $ 626 $ 4,454 State taxes, net of federal benefit......................... 73 498 Goodwill amortization....................................... (2,309) (2,056) Realization of acquired tax benefit......................... -- 346 Other....................................................... (13) 784 ------- -------- $(1,623) $ 4,026 ======= ======== 13. CHANNEL LAUNCH REVENUE During the years ended December 31, 1998 and 1997, the Systems were credited $2,646 and $5,072, respectively, representing their share of payments received by IP-I and ICP-IV from certain programmers to launch and promote their new channels. Also, during 1998 the Systems recorded a receivable from a programmer, of which $1,791 remains outstanding at December 31, 1998, for the launch and promotion of its new channel. Of the total amount credited the Systems recognized advertising revenue of $586 and $1,182 during the year ended December 31, 1998 F-180
428 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS) and 1997, respectively, for advertisements provided by the Systems to promote the new channels. The remaining payments and receivable credited from the programmers are being amortized over the respective terms of the program agreements which range between five and ten years. For the years ended December 31, 1998 and 1997, the Systems amortized and recorded as other service revenue $956 and $894 respectively. 14. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS In connection with RMG's sale of its cable television assets located in Royston and Toccoa, Georgia in December 1997, as described in Note 3 -- "Sale and Exchange of Cable Properties," net cash proceeds received were as follows: Proceeds from sale.......................................... $11,212 Receivable from buyer....................................... (55) ------- Net proceeds received from buyer.................. $11,157 ======= In connection with the exchange of certain cable assets in and around western and eastern Tennessee on December 31, 1998, as described in Note 3, the Systems paid cash of $398. In December 1998, IP-IV contributed its 4.99% partner interest in a limited partnership to RMG. The book value of the investment at the time of the contribution was $1,147. Total accretion on RMG's Redeemable Preferred Stock for the years ended December 31, 1998 and 1997 amounted to $945 and $882, respectively. 15. EMPLOYEE BENEFIT PLANS The Systems participate in the InterMedia Partners Tax Deferred Savings Plan which covers all full-time employees who have completed at least six months of employment. The plan provides for a base employee contribution of 1% and a maximum of 15% of compensation. The Systems' matching contributions under the plan are at the rate of 50% of the employee's contribution, up to a maximum of 5% of compensation. F-181
429 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Rifkin Cable Income Partners L.P. In our opinion, the accompanying balance sheet and the related statements of operations, of partners' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Rifkin Cable Income Partners L.P. (the "Partnership") at December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP Denver, Colorado March 19, 1999 F-182
430 RIFKIN CABLE INCOME PARTNERS L. P. BALANCE SHEET 12/31/97 12/31/98 ----------- ----------- ASSETS Cash and cash equivalents.................................. $ 381,378 $ 65,699 Customer accounts receivable, net of allowance for doubtful accounts of $12,455 in 1997 and $18,278 in 1998.......... 49,585 51,523 Other receivables.......................................... 123,828 133,278 Prepaid expenses and deposits.............................. 81,114 70,675 Property, plant and equipment, at cost: Cable television transmission and distribution systems and related equipment................................. 8,536,060 8,758,525 Land, buildings, vehicles and furniture and fixtures..... 618,671 623,281 ----------- ----------- 9,154,731 9,381,806 Less accumulated depreciation............................ (3,847,679) (4,354,685) ----------- ----------- Net property, plant and equipment..................... 5,307,052 5,027,121 Franchise costs and other intangible assets, net of accumulated amortization of $1,819,324 in 1997 and $2,033,405 in 1998....................................... 2,005,342 1,772,345 ----------- ----------- Total assets..................................... $ 7,948,299 $ 7,120,641 =========== =========== LIABILITIES AND PARTNERS' EQUITY Accounts payable and accrued liabilities................... $ 365,392 $ 396,605 Customer deposits and prepayments.......................... 177,307 126,212 Interest payable........................................... 58,093 -- Long-term debt............................................. 4,914,000 -- Interpartnership debt...................................... -- 2,865,426 ----------- ----------- Total liabilities................................ 5,514,792 3,388,243 Commitments and contingencies (Notes 4 and 8) Partners' equity: General partner.......................................... 263,171 822,837 Limited partners......................................... 2,170,336 2,909,561 ----------- ----------- Total partner's equity........................... 2,433,507 3,732,398 ----------- ----------- Total liabilities and partners' equity........... $ 7,948,299 $ 7,120,641 =========== =========== The accompanying notes are an integral part of the financial statements. F-183
431 RIFKIN CABLE INCOME PARTNERS L.P. STATEMENT OF OPERATIONS YEARS ENDED ------------------------------------ 12/31/96 12/31/97 12/31/98 ---------- ---------- ---------- REVENUE: Service............................................ $4,104,841 $4,491,983 $4,790,052 Installation and other............................. 206,044 239,402 345,484 ---------- ---------- ---------- Total revenue............................ 4,310,885 4,731,385 5,135,536 COSTS AND EXPENSES: Operating expense.................................. 643,950 691,700 671,968 Programming expense................................ 787,124 879,939 1,077,540 Selling, general and administrative expense........ 683,571 663,903 622,774 Depreciation....................................... 535,559 602,863 628,515 Amortization....................................... 377,749 332,770 199,854 Management fees.................................... 215,544 236,569 256,777 Loss (gain) on disposal of assets.................. 1,530 2,980 (2,138) ---------- ---------- ---------- Total costs and expenses................. 3,245,027 3,410,724 3,455,290 ---------- ---------- ---------- Operating income................................... 1,065,858 1,320,661 1,680,246 Interest expense................................... 533,294 448,530 362,439 ---------- ---------- ---------- Net income before extraordinary item............... 532,564 872,131 1,317,807 Extraordinary item -- Loss on early retirement of debt (Note 1).................................... -- -- 18,916 ---------- ---------- ---------- Net income......................................... $ 532,564 $ 872,131 $1,298,891 ========== ========== ========== The accompanying notes are an integral part of the financial statements. F-184
432 RIFKIN CABLE INCOME PARTNERS L.P. STATEMENT OF PARTNERS' EQUITY (DEFICIT) GENERAL LIMITED PARTNER PARTNERS TOTAL --------- ---------- ---------- Partners' equity (deficit), December 31, 1995... $(299,131) $1,427,630 $1,128,499 Net income...................................... 229,471 303,093 532,564 Equity distribution............................. (42,953) (56,734) (99,687) --------- ---------- ---------- Partners' equity (deficit), December 31, 1996... (112,613) 1,673,989 1,561,376 Net income...................................... 375,784 496,347 872,131 --------- ---------- ---------- Partners' equity, December 31, 1997............. 263,171 2,170,336 2,433,507 Net income...................................... 559,666 739,225 1,298,891 --------- ---------- ---------- Partners' equity December 31, 1998.............. $ 822,837 $2,909,561 $3,732,398 ========= ========== ========== The partners' capital accounts for financial reporting purposes vary from the tax capital accounts. The accompanying notes are an integral part of the financial statements. F-185
433 RIFKIN CABLE INCOME PARTNERS L.P. STATEMENT OF CASH FLOWS YEARS ENDED -------------------------------------- 12/31/96 12/31/97 12/31/98 ----------- ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................... $ 532,564 $ 872,131 $ 1,298,891 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............. 913,308 935,633 828,369 Amortization of deferred loan cost........ 18,970 18,970 14,228 Loss on early retirement of debt.......... -- -- 18,916 Loss (gain) on disposal of fixed assets... 1,530 2,980 (2,138) Decrease (increase) in customer accounts receivables............................. 521 (5,729) (1,938) Increase in other receivables............. (45,274) (56,059) (9,450) Decrease in prepaid expense and other..... 40,737 13,230 10,439 Increase (decrease) in accounts payable and accrued liabilities................. (207,035) 61,625 31,213 Increase (decrease) in customer deposits and prepayment.......................... 673 (63,524) (51,095) Increase (decrease) in interest payable... 35,638 (3,145) (58,093) ----------- ---------- ----------- Net cash provided by operating activities........................... 1,291,632 1,776,112 2,079,342 ----------- ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment... (824,359) (679,394) (415,534) Additions to other intangible assets, net of refranchises.............................. -- (112) -- Net proceeds from the sale of assets......... 18,255 57,113 69,087 Sales tax related to Florida assets sold in 1994...................................... (14,694) -- -- ----------- ---------- ----------- Net cash used in investing activities... (820,798) (622,393) (346,447) ----------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from interpartnership debt.......... -- -- 4,265,426 Payments of long-term debt................... (715,000) (871,000) (4,914,000) Payments of interpartnership debt............ -- -- (1,400,000) Partners' capital distributions.............. (99,687) -- -- ----------- ---------- ----------- Net cash used in financing activities... (814,687) (871,000) (2,048,574) ----------- ---------- ----------- Net increase (decrease) in cash and cash equivalents.................................. (343,853) 282,719 (315,679) Cash and cash equivalents at beginning of period....................................... 442,512 98,659 381,378 ----------- ---------- ----------- Cash and cash equivalents at end of period..... $ 98,659 $ 381,378 $ 65,699 =========== ========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid................................ $ 455,124 $ 431,722 $ 406,304 =========== ========== =========== The accompanying notes are an integral part of the financial statements. F-186
434 RIFKIN CABLE INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Rifkin Cable Income Partners L.P. (the "Partnership") was formed in 1986 as a limited partnership under the laws of the State of Delaware. The Partnership owns, operates and develops cable television systems in Missouri and New Mexico. Rifkin Cable Management Partners L.P., an affiliate of Rifkin & Associates, Inc. (Note 3), is the general partner of the Partnership. The Partnership Agreement (the "Agreement") establishes the respective rights, obligations and interests of the partners. The Agreement provides that net income or loss, certain capital events, and cash distributions (all as defined in the Agreement) are generally allocated 43% to the general partner and 57% to the limited partners. ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP During 1998, Interlink Communications Partners, LLLP ("ICP") agreed to purchase all of the interests of the Partnership. ICP acquired the limited partner interests, effective December 31, 1998, and is currently in the process of obtaining the necessary consents to transfer all of the Partnership's franchises to ICP. Once obtained, ICP will then purchase the general partner interest in the Partnership, and the Partnership will, by operation of law, be consolidated into ICP. REVENUE RECOGNITION Customer fees are recorded as revenue in the period the service is provided. The cost to acquire the rights to the programming generally is recorded when the product is initially available to be viewed by the customer. ADVERTISING AND PROMOTION EXPENSES Advertising and promotion expenses are charged to income during the year in which they are incurred and were not significant for the periods shown. PROPERTY, PLANT AND EQUIPMENT Additions to property, plant and equipment are recorded at cost, which in the case of assets constructed includes amounts for material, labor, overhead and capitalized interest, if applicable. Upon sale or retirement of an asset, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is recognized. Depreciation expense is calculated using the straight-line method over the estimated useful lives of the assets as follows: Buildings................................................. 21-30 years Cable television transmission and distribution systems and related equipment....................................... 3-15 years Vehicles and furniture and fixtures....................... 3-5 years FRANCHISE COSTS Franchise costs are amortized using the straight-line method over the remaining lives of the franchises as of the date they were acquired, ranging from eight to twenty-five years. The F-187
435 RIFKIN CABLE INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) carrying value of intangibles is assessed for recoverability by management based on an analysis of undiscounted expected future cash flows. The Partnership's management believes that there has been no impairment thereof as of December 31, 1998. OTHER INTANGIBLE ASSETS Loan costs of the Partnership have been deferred and have been amortized to interest expense utilizing the straight-line method over the term of the related debt. Use of the straight-line method approximates the results of the application of the interest method. The net amount remaining at December 31, 1997 was $37,886. On December 30, 1998, the loan with a financial institution was paid in full (Note 2). The related deferred loan costs and associated accumulated amortization were written off and an extraordinary loss of $18,916 was recorded. CASH AND CASH EQUIVALENTS All highly liquid debt instruments purchased with an original maturity of three months or less are considered to be cash equivalents. INCOME TAXES No provision for Federal or State income taxes is necessary in the financial statements of the Partnership, because as a partnership, it is not subject to Federal or State income tax as the tax effect of its activities accrues to the partners. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENT In April 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-5 "Reporting on the Costs of Start-Up Activities," which requires the Partnership to expense all start up costs related to opening a new facility, introduction of anew product or service, or conducting business with a new class of customer or in a new territory. This standard is effective for the Partnership's 1999 fiscal year. Management believes that SOP 98-5 will have no material effect on its financial position or the results of operations. RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION Certain reclassifications have been made to the 1996 and 1997 financial statements to conform with the 1998 financial statement presentation. 2. DEBT The Partnership had a term loan with a financial institution which required varying quarterly payments. At December 31, 1997, the term loan had a balance of $4,914,000. At December 30, F-188
436 RIFKIN CABLE INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 1998, the term loan had a balance of $4,216,875; at that date, the total balance and accrued interest were paid in full. On that same date, the Partnership obtained a new interpartnership loan with ICP (Note 1). Borrowing under the interpartnership loan, as well as interest and principle payments are due at the discretion of the management of ICP, resulting in no minimum required annual principle payments. The balance of the interpartnership loan at December 31, 1998 was $2,865,426. The effective interest rate at December 31, 1998 was 8.5%. 3. MANAGEMENT AGREEMENT The Partnership has entered into a management agreement with Rifkin and Associates, Inc. (Rifkin). The management agreement provides that Rifkin shall act as manager of the Partnership's CATV systems, and shall be entitled to annual compensation of 5% of the Partnership's CATV revenues, net of certain CATV programming costs. Effective September 1, 1998, Rifkin conveyed its CATV management business to R & A Management, LLC (RML). The result of this transaction included the conveyance of the Rifkin management agreement (Rifkin Agreement) to RML (RML Agreement). Expenses incurred pursuant to the Rifkin Agreement and the RML Agreement are disclosed in total on the Statement of Operations. 4. COMMITMENTS AND RENTAL EXPENSE The Partnership leases certain real and personal property under noncancelable operating leases expiring through the year 2001. Future minimum lease payments under such noncancelable leases as of December 31, 1998 are: $30,000 for each year 1999, 2000 and 2001, totaling $90,000. Total rental expense for the years ended December 31, 1996, 1997 and 1998 was $60,323, $68,593 and $68,776, respectively, including $27,442, $36,822 and $36,716, respectively, relating to cancelable pole rental agreements. 5. RETIREMENT BENEFITS The Partnership has a 401(k) plan for its employees that have been employed by the Partnership for at least one year. Employees of the Partnership can contribute up to 15% of their salary, on a before-tax basis, with a maximum 1998 contribution of $10,000 (as set by the Internal Revenue Service). The Partnership matches participant contributions up to a maximum of 50% of the first 3% of a participant's salary contributed. All participant contributions and earnings are fully vested upon contribution and Partnership contributions and earnings vest 20% per year of employment with the Partnership, becoming fully vested after five years. The Partnership's matching contributions for the years ended December 31, 1996, 1997 and 1998 were $2,693, $3,653 and $2,680, respectively. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The Partnership has a number of financial instruments, none of which are held for trading purposes. The following method and assumptions were used by the Partnership to estimate the fair values of financial instruments as disclosed herein: Cash and Cash Equivalents, Customer Accounts Receivable, Other Receivables, Accounts Payable and Accrued Liabilities and Customer Deposits and Prepayments: The carrying value amount approximates fair value because of the short period to maturity. F-189
437 RIFKIN CABLE INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Debt: The carrying value amount approximates the fair value because the Partnership's interpartnership debt was obtained on December 30, 1998. 7. CABLE REREGULATION Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the Cable Act) and has amended it at various times since. The total effects of the present law are, at this time, still unknown. However, one provision of the present law further redefines a small cable system, and exempts these systems from rate regulation on the upper tiers of cable service. The Partnership is awaiting an FCC rulemaking implementing the present law to determine whether its systems qualify as small cable systems. 8. LITIGATION The Partnership could possibly be named as defendant in various actions and proceedings arising from the normal course of business. In all such cases, the Partnership will vigorously defend itself against the litigation and, where appropriate, will file counterclaims. Although the eventual outcome of potential lawsuits cannot be predicted, it is management's opinion that any such lawsuit will not result in liabilities that would have a material affect on the Partnership's financial position or results of operations. F-190
438 REPORT OF INDEPENDENT ACCOUNTANTS To the Partners of Rifkin Acquisition Partners, L.L.L.P. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, partners' capital (deficit) and cash flows present fairly, in all material respects, the financial position of Rifkin Acquisition Partners, L.L.L.P. and its subsidiaries (the "Company") at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PRICEWATERHOUSECOOPERS LLP Denver, Colorado March 19, 1999 F-191
439 RIFKIN ACQUISITION PARTNERS, L.L.L.P. CONSOLIDATED BALANCE SHEET 12/31/98 12/31/97 ------------ ------------ ASSETS Cash and cash equivalents................................ $ 2,324,892 $ 1,902,555 Customer accounts receivable, net of allowance for doubtful accounts of $444,839 in 1998 and $425,843 in 1997................................................... 1,932,140 1,371,050 Other receivables........................................ 5,637,771 4,615,089 Prepaid expenses and other............................... 2,398,528 1,753,257 Property, plant and equipment at cost: Cable television transmission and distribution systems and related equipment............................... 149,376,914 131,806,310 Land, buildings, vehicles and furniture and fixtures... 7,421,960 7,123,429 ------------ ------------ 156,798,874 138,929,739 Less accumulated depreciation.......................... (35,226,773) (26,591,458) ------------ ------------ Net property, plant and equipment.............. 121,572,101 112,338,281 Franchise costs and other intangible assets, net of accumulated amortization of $67,857,545 in 1998 and $53,449,637 in 1997.................................... 183,438,197 180,059,655 ------------ ------------ Total assets................................... $317,303,629 $302,039,887 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Accounts payable and accrued liabilities................. $ 11,684,594 $ 11,690,894 Customer deposits and prepayments........................ 1,676,900 1,503,449 Interest payable......................................... 7,242,954 7,384,509 Deferred tax liability, net.............................. 7,942,000 12,138,000 Notes payable............................................ 224,575,000 229,500,000 ------------ ------------ Total liabilities.............................. 253,121,448 262,216,852 Commitments and contingencies (Notes 8 and 14) Redeemable partners' interests........................... 10,180,400 7,387,360 Partners' capital (deficit): General partner........................................ (1,991,018) (1,885,480) Limited partners....................................... 55,570,041 34,044,912 Preferred equity interest.............................. 422,758 276,243 ------------ ------------ Total partners' capital.................................. 54,001,781 32,435,675 ------------ ------------ Total liabilities and partners' capital........ $317,303,629 $302,039,887 ============ ============ The accompanying notes are an integral part of the consolidated financial statements. F-192
440 RIFKIN ACQUISITION PARTNERS, L.L.L.P. CONSOLIDATED STATEMENT OF OPERATIONS YEARS ENDED ----------------------------------------- 12/31/98 12/31/97 12/31/96 ----------- ------------ ------------ REVENUE: Service....................................... $82,498,638 $ 78,588,503 $ 66,433,321 Installation and other........................ 7,422,675 5,736,412 4,852,124 ----------- ------------ ------------ Total revenue....................... 89,921,313 84,324,915 71,285,445 COSTS AND EXPENSES: Operating expense............................. 13,305,376 14,147,031 10,362,671 Programming expense........................... 18,020,812 15,678,977 14,109,527 Selling, general and administrative expense... 13,757,090 12,695,176 11,352,870 Depreciation.................................. 15,109,327 14,422,631 11,725,246 Amortization.................................. 22,104,249 24,208,169 23,572,457 Management fees............................... 3,147,246 2,951,372 2,475,381 Loss on disposal of assets.................... 3,436,739 7,834,968 1,357,180 ----------- ------------ ------------ Total costs and expenses............ 88,880,839 91,938,324 74,955,332 ----------- ------------ ------------ Operating income (loss)....................... 1,040,474 (7,613,409) (3,669,887) Gain from the sale of assets (Note 4)......... (42,863,060) -- -- Interest expense.............................. 23,662,248 23,765,239 21,607,174 ----------- ------------ ------------ Income (loss) before income taxes............. 20,241,286 (31,378,648) (25,277,061) Income tax benefit............................ (4,177,925) (5,335,000) (3,645,719) ----------- ------------ ------------ Net income (loss)............................. $24,419,211 $(26,043,648) $(21,631,342) =========== ============ ============ The accompanying notes are an integral part of the consolidated financial statements. F-193
441 RIFKIN ACQUISITION PARTNERS, L.L.L.P. CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED ------------------------------------------ 12/31/98 12/31/97 12/31/96 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................... $ 24,419,211 $(26,043,648) $(21,631,342) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.................... 37,213,576 38,630,800 35,297,703 Amortization of deferred loan costs.............. 989,760 989,760 970,753 Gain on sale of assets (Note 4).................. (42,863,060) -- -- Loss on disposal of fixed assets................. 3,436,739 7,834,968 1,357,180 Deferred tax benefit............................. (4,196,000) (5,335,000) (3,654,000) Increase in customer accounts receivables........ (300,823) (186,976) (117,278) Increase in other receivables.................... (474,599) (1,992,714) (994,681) (Increase) decrease in prepaid expenses and other.......................................... (684,643) 23,015 (494,252) Increase in accounts payable and accrued liabilities.................................... 34,073 1,753,656 3,245,736 Increase (decrease) in customer deposits and prepayments.................................... (86,648) 231,170 164,824 Increase (decrease) in interest payable.......... (141,555) 600,248 6,692,988 ------------ ------------ ------------ Net cash provided by operating activities... 17,346,031 16,505,279 20,837,631 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of cable systems, net (Note 3).......... (2,212,958) (19,359,755) (71,797,038) Additions to property, plant and equipment.......... (26,354,756) (28,009,253) (16,896,582) Additions to cable television franchises, net of retirements...................................... (151,695) 72,162 (1,182,311) Net proceeds from the sale of cable systems (Note 4)............................................... 16,533,564 -- -- Net proceeds from the other sales of assets......... 247,216 306,890 197,523 ------------ ------------ ------------ Net cash used in investing activities....... (11,938,629) (46,989,956) (89,678,408) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from isssuance of senior subordinated notes............................................ -- -- 125,000,000 Proceeds from long-term bank debt................... 22,500,000 38,000,000 18,000,000 Deferred loan costs................................. -- -- (6,090,011) Payments of long-term bank debt..................... (27,425,000) (7,000,000) (82,000,000) Partners' capital contributions..................... -- -- 15,000,000 Equity distributions to partners.................... (60,065) -- -- ------------ ------------ ------------ Net cash provided by (used in) financing activities................................ (4,985,065) 31,000,000 69,909,989 ------------ ------------ ------------ Net increase in cash.................................. 422,337 515,323 1,069,212 Cash and cash equivalents at beginning of period...... 1,902,555 1,387,232 318,020 ------------ ------------ ------------ Cash and cash equivalents at end of period............ $ 2,324,892 $ 1,902,555 $ 1,387,232 ============ ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid....................................... $ 22,737,443 $ 22,098,732 $ 13,866,995 ============ ============ ============ Noncash investing activities: Proceeds from the sale of Michigan assets held in escrow......................................... $ 500,000 $ -- $ -- ============ ============ ============ Trade value related to the trade sale of Tennessee assets............................... $ 46,668,000 $ -- $ -- ============ ============ ============ Trade value related to trade acquisition of Tennessee assets............................... $(46,668,000) $ -- $ -- ============ ============ ============ The accompanying notes are an integral part of the consolidated financial statements. F-194
442 RIFKIN ACQUISITION PARTNERS, L.L.L.P. CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIT) PREFERRED GENERAL LIMITED EQUITY INTEREST PARTNER PARTNERS TOTAL --------------- ----------- ------------ ------------ Partners' capital (deficit) at December 31, 1995............. $ 562,293 $(1,085,311) $ 69,421,043 $ 68,898,025 Partners' capital contributions................. -- 150,000 14,850,000 15,000,000 Accretion of redeemable partners' interest............ -- (157,730) (1,104,110) (1,261,840) Net loss........................ (129,788) (216,313) (21,285,241) (21,631,342) --------- ----------- ------------ ------------ Partners' capital (deficit) at December 31, 1996............. 432,505 (1,309,354) 61,881,692 61,004,843 Accretion of redeemable partners' interest............ -- (315,690) (2,209,830) (2,525,520) Net loss........................ (156,262) (260,436) (25,626,950) (26,043,648) --------- ----------- ------------ ------------ Partners' capital (deficit) at December 31, 1997............. 276,243 (1,885,480) 34,044,912 32,435,675 Accretion of redeemable partners' interest............ -- (349,130) (2,443,910) (2,793,040) Net income...................... 146,515 244,192 24,028,504 24,419,211 Partners' equity distribution... -- (600) (59,465) (60,065) --------- ----------- ------------ ------------ Partners' capital (deficit) at December 31, 1998............. $ 422,758 $(1,991,018) $ 55,570,041 $ 54,001,781 ========= =========== ============ ============ The Partners' capital accounts for financial reporting purposes vary from the tax capital accounts. The accompanying notes are an integral part of the consolidated financial statements. F-195
443 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL INFORMATION Rifkin Acquisition Partners, L.L.L.P. ("the Partnership") was formed pursuant to the laws of the State of Colorado. The Partnership and its subsidiaries are hereinafter referred to on a consolidated basis as the "Company." The Company owns, operates, and develops cable television systems in Georgia, Tennessee, and Illinois. Rifkin Acquisition Management, L.P., an affiliate of Rifkin & Associates, Inc. (Note 7), is the general partner of the Partnership ("General Partner"). The Partnership operates under a limited liability limited partnership agreement (the "Partnership Agreement") which establishes contribution requirements, enumerates the rights and responsibilities of the partners and advisory committee, provides for allocations of income, losses and distributions, and defines certain items relating thereto. The Partnership Agreement provides that net income or loss, certain defined capital events, and cash distributions, all as defined in the Partnership Agreement, are generally allocated 99% to the limited partners and 1% to the general partner. BASIS OF PRESENTATION The consolidated financial statements include the accounts of the following entities: - - Rifkin Acquisition Partners, L.L.L.P. - Cable Equities of Colorado, Ltd. (CEC) - - Cable Equities of Colorado - Cable Equities, Inc. (CEI) Management Corp. (CEM) - Rifkin Acquisition Capital Corp. (RACC) The financial statements for 1997 and 1996 also included the following entities: - - Rifkin/Tennessee, Ltd. (RTL) - FNI Management Corp. (FNI) Effective January 1, 1998, both the RTL and FNI entities were dissolved and the assets were transferred to the Partnership. All significant intercompany accounts and transactions have been eliminated. REVENUE AND PROGRAMMING Customer fees are recorded as revenue in the period the service is provided. The cost to acquire the rights to the programming generally is recorded when the product is initially available to be viewed by the customer. ADVERTISING AND PROMOTION EXPENSES Advertising and promotion expenses are charged to income during the year in which they are incurred and were not significant for the periods shown. PROPERTY, PLANT AND EQUIPMENT Additions to property, plant and equipment are recorded at cost, which in the case of assets constructed, includes amounts for material, labor, overhead and interest, if applicable. Upon sale or retirement of an asset, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is recognized. Capitalized interest was not significant for the periods shown. F-196
444 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Depreciation expense is calculated using the straight-line method over the estimated useful lives of the assets as follows: Buildings................................................. 27-30 years Cable television transmission and distribution systems and related equipment....................................... 3-15 years Vehicles and furniture and fixtures....................... 3-5 years Expenditures for maintenance and repairs are expensed as incurred. FRANCHISE COSTS Franchise costs are amortized using the straight-line method over the remaining lives of the franchises as of the date they were acquired, ranging from one to twenty years. The carrying value of franchise costs is assessed for recoverability by management based on an analysis of undiscounted future expected cash flows from the underlying operations of the Company. Management believes that there has been no impairment thereof as of December 31, 1998. OTHER INTANGIBLE ASSETS Certain loan costs have been deferred and are amortized to interest expense utilizing the straight-line method over the remaining term of the related debt. Use of the straight-line method approximates the results of the application of the interest method. The net amounts remaining at December 31, 1998 and 1997 were $6,176,690 and $7,166,450, respectively. CASH AND CASH EQUIVALENTS All highly liquid debt instruments purchased with an original maturity of three months or less are considered to be cash equivalents. REDEEMABLE PARTNERS' INTERESTS The Partnership Agreement provides that if a certain partner dies or becomes disabled, that partner (or his personal representative) shall have the option, exercisable by notice given to the partners at any time within 270 days after his death or disability (except that if that partner dies or becomes disabled prior to August 31, 2000, the option may not be exercised until August 31, 2000 and then by notice by that partner or his personal representative given to the partners within 270 days after August 31, 2000) to sell, and require the General Partner and certain trusts controlled by that partner to sell, and the Partnership to purchase, up to 50% of the partnership interests owned by any of such partners and certain current and former members of management of Rifkin & Associates, Inc. that requests to sell their interest, for a purchase price equal to the fair market value of those interests determined by appraisal in accordance with the Partnership Agreement. Accordingly, the current fair value of such partnership interests have been reclassified outside of partners' capital. USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles 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 F-197
445 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENT In April 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-5 "Reporting on the Costs of Start-Up Activities," which requires the Partnership to expense all start up costs related to organizing a new business. This new standard also includes one-time activities related to opening a new facility, introduction of a new product or service, or conducting business with a new class of customer or in a new territory. This standard is effective for the Partnership's 1999 fiscal year. Management believes that SOP 98-5 will have no material effect on its financial position or the results of operations. RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION Certain reclassifications have been made to the 1997 and 1996 financial statements to conform with the 1998 financial statement presentation. Such reclassification had no effect on the net loss as previously stated. 2. SUBSEQUENT EVENT On February 12, 1999, the Company signed a letter of intent for the partners to sell all of their partnership interests to Charter Communications ("Charter"). The Company and Charter are expected to sign a purchase agreement and complete the sale during the third quarter of 1999. 3. ACQUISITION OF CABLE PROPERTIES 1998 ACQUISITIONS At various times during the second half of 1998, the Company completed three separate acquisitions of cable operating assets. Two of the acquisitions serve communities in Gwinnett County, Georgia (the "Georgia Systems"). These acquisitions were accounted for using the purchase method of accounting. The third acquisition resulted from a trade of the Company's systems serving the communities of Paris and Piney Flats, Tennessee for the operating assets of another cable operator serving primarily the communities of Lewisburg and Crossville, Tennessee (the "Tennessee Trade"). The trade was for cable systems that are similar in size and was accounted for based on fair market value. Fair market value was established at $3,000 per customer relinquished, which was based on recent sales transactions of similar cable systems. The transaction included the payment of approximately $719,000, net, of additional cash (Note 4). F-198
446 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The combined purchase price was allocated based on estimated fair values from an independent appraisal to property, plant and equipment and franchise cost as follows (dollars in thousands): GEORGIA TENNESSEE SYSTEMS TRADE TOTAL ------- --------- ------- Fair value of assets relinquished (Note 4)............ $ -- $46,668 $46,668 Cash paid............................................. 1,392 719 2,111 Acquisition Costs (appraisal, transfer fees and direct costs).............................................. 26 76 102 ------ ------- ------- Total acquisition cost................................ $1,418 $47,463 $48,881 ====== ======= ======= Allocation: Current assets........................................ $ (2) $ 447 $ 445 Current liabilities................................... (1) (397) (398) Property, plant and equipment......................... 333 11,811 12,144 Franchise Cost........................................ 1,088 35,602 36,690 ------ ------- ------- Total cost allocated.................................. $1,418 $47,463 $48,881 ====== ======= ======= The fair value of assets relinquished from the Tennessee Trade was treated as a noncash transaction on the Consolidated Statement of Cash Flows. The cash acquisition costs were funded by proceeds from the Company's reducing revolving loan with a financial institution. The following combined pro forma information presents a summary of consolidated results of operations for the Company as if the Tennessee Trade acquisitions had occurred at the beginning of 1997, with pro forma adjustments to show the effect on depreciation and amortization for the acquired assets, management fees on additional revenues and interest expense on additional debt (dollars in thousands): YEARS ENDED ----------------------- 12/31/98 12/31/97 -------- ----------- (UNAUDITED) Total revenues.................................. $89,921 $ 84,325 Net income (loss)............................... 19,447 (29,631) The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the Tennessee Trade actually been acquired on January 1, 1997. 1997 ACQUISITIONS On April 1, 1997, the Company acquired the cable operating assets of two cable systems serving the Tennessee communities of Shelbyville and Manchester (the "Manchester Systems"), for an aggregate purchase price of approximately $19.7 million of which $495,000 was paid as escrow in 1996. The acquisition was accounted for using the purchase method of accounting, and was funded by proceeds from the Company's reducing revolving loan with a financial institution. No pro forma information giving the effect of the acquisitions is shown due to the results being immaterial. F-199
447 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1996 ACQUISITIONS On March 1, 1996, the Company acquired certain cable operating assets ("Mid-Tennessee Systems") from Mid-Tennessee CATV, L.P., and on April 1, 1996 acquired the cable operating assets ("RCT Systems") from Rifkin Cablevision of Tennessee, Ltd. Both Mid-Tennessee CATV, L.P. and Rifkin Cablevision of Tennessee, Ltd. were affiliates of the General Partner. The acquisition costs were funded by $15 million of additional partner contributions and the remainder from a portion of the proceeds received from the issuance of $125 million of 11 1/8% Senior Subordinated Notes due 2006 (see Note 6). The acquisitions were recorded using the purchase method of accounting. The results of operations of the Mid-Tennessee Systems have been included in the consolidated financial statements since March 1, 1996, and the results of the RCT Systems have been included in the consolidated financial statements since April 1, 1996. The combined purchase price was allocated based on estimated fair values from an independent appraisal to property, plant and equipment and franchise cost as follows (dollars in thousands): Cash paid, net of acquired cash............................. $71,582 Acquisition costs (appraisal, transfer fees, and direct costs).................................................... 215 ------- Total acquisition cost...................................... $71,797 ======= Allocation: Current assets.............................................. $ 624 Current liabilities......................................... (969) Property, plant and equipment............................... 24,033 Franchise cost and other intangible assets.................. 48,109 ------- Total cost allocated........................................ $71,797 ======= The following combined pro forma information presents a summary of consolidated results of operations for the Company as if the Mid-Tennessee Systems and the RCT Systems acquisitions had occurred at the beginning of 1996, with pro forma adjustments to show the effect on depreciation and amortization for the acquired assets, management fees on additional revenues and interest expense on additional debt (dollars in thousands): YEAR ENDED ----------- 12/31/96 ----------- (UNAUDITED) Total revenues............................................. $ 74,346 Net loss................................................... (22,558) The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the Mid-Tennessee Systems and the RCT Systems actually been acquired on January 1, 1996. 4. SALE OF ASSETS On February 4, 1998, the Company sold all of its operating assets in the state of Michigan (the "Michigan Sale") to another cable operator for cash. In addition, on December 31, 1998, F-200
448 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the Company traded certain cable systems in Tennessee (the "Tennessee Trade") for similar-sized cable systems (Note 3). Both sales resulted in a gain recognized by the Company as follows (dollars in thousands): MICHIGAN TENNESSEE SALE TRADE TOTAL -------- --------- ------- Fair value of assets relinquished............. $ -- $46,668 $46,668 Original cash proceeds........................ 16,931 -- 16,931 Adjustments for value of assets and liabilities assumed......................... 120 (17) 103 ------- ------- ------- Net proceeds.................................. 17,051 46,651 63,702 Net book value of assets sold................. 11,061 9,778 20,839 ------- ------- ------- Net gain from sale............................ $ 5,990 $36,873 $42,863 ======= ======= ======= The Michigan Sale proceeds amount includes $500,000 that is currently being held in escrow. This amount and the fair value of assets relinquished, related to the Tennessee Trade, were both treated as noncash transactions on the Consolidated Statement of Cash Flows. The cash proceeds from the Michigan Sale were used by the Company to reduce its revolving and term loans with a financial institution. 5. INCOME TAXES Although the Partnership is not a taxable entity, two corporations (the "subsidiaries") are included in the consolidated financial statements. These subsidiaries are required to pay taxes on their taxable income, if any. F-201
449 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following represents a reconciliation of pre-tax losses as reported in accordance with generally accepted accounting principles and the losses attributable to the partners and included in their individual income tax returns: YEAR ENDED YEAR ENDED YEAR ENDED 12/31/98 12/31/97 12/31/96 ------------ ------------ ------------ Pre-tax income (loss) as reported....... $ 20,241,286 $(31,378,648) $(25,277,061) (Increase) decrease due to: Separately taxed book results of corporate subsidiaries............. 9,397,000 15,512,000 9,716,000 Effect of different depreciation and amortization methods for tax and book purposes...................... (1,360,000) (2,973,000) (3,833,000) Additional tax gain from the sale of Michigan(Note 4)...................... 2,068,000 -- -- Book gain from trade sale of Tennessee assets(Note 4)........................ (36,873,000) -- -- Additional tax loss from dissolution of FNI stock............................. (7,235,000) -- -- Other................................... 81,714 (45,052) (22,539) ------------ ------------ ------------ Tax loss attributed to the partners..... $(13,680,000) $(18,884,700) $(19,416,600) ============ ============ ============ The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. As a result of a change in control in 1995, the book value of the Company's net assets was increased to reflect their fair market value. In connection with this revaluation, a deferred income tax liability in the amount of $22,801,000 was established to provide for future taxes payable on the revised valuation of the net assets. A deferred tax benefit of $4,196,000, $5,335,000 and $3,654,000 was recognized for the years ended December 31, 1998, 1997 and 1996, respectively, reducing the liability to $7,942,000. Deferred tax assets (liabilities) were comprised of the following at December 31, 1998 and 1997: 12/31/98 12/31/97 ------------ ------------ Deferred tax assets resulting from loss carryforwards.......................... $ 11,458,000 $ 9,499,000 Deferred tax liabilities resulting from depreciation and amortization.......... (19,400,000) (21,637,000) ------------ ------------ Net deferred tax liability............... $ (7,942,000) $(12,138,000) ============ ============ F-202
450 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of December 31, 1998 and 1997, the subsidiaries have net operating loss carryforwards ("NOLs") for income tax purposes of $30,317,000 and $25,264,000, respectively, substantially all of which are limited. The NOLs will expire at various times between the years 2000 and 2013. In 1998, one of the corporate entities was dissolved. The existing NOL's were used to offset taxable income down to $87,751, resulting in a current tax for 1998 of $18,075. Under the Internal Revenue Code of 1986, as amended (the "Code"), the subsidiaries generally would be entitled to reduce their future federal income tax liabilities by carrying the unused NOLs forward for a period of 15 years to offset their future income taxes. The subsidiaries' ability to utilize any NOLs in future years may be restricted, however, in the event the subsidiaries undergo an "ownership change" as defined in Section 382 of the Code. In the event of an ownership change, the amount of NOLs attributable to the period prior to the ownership change that may be used to offset taxable income in any year thereafter generally may not exceed the fair market value of the subsidiary immediately before the ownership change (subject to certain adjustments) multiplied by the applicable long-term, tax exempt rate published by the Internal Revenue Service for the date of the ownership change. Two of the subsidiaries underwent an ownership change on September 1, 1995 pursuant to Section 382 of the Code. As such, the NOLs of the subsidiaries are subject to limitation from that date forward. It is the opinion of management that the NOLs will be released from this limitation prior to their expiration dates and, as such, have not been limited in their calculation of deferred taxes. The provision for income tax expense (benefit) differs from the amount which would be computed by applying the statutory federal income tax rate of 35% to pre-tax income before extraordinary loss as a result of the following: YEARS ENDED ----------------------------------------- 12/31/98 12/31/97 12/31/96 ------------ ------------ ----------- Tax expense (benefit) computed at statutory rate...................................... $ 7,084,450 $(10,982,527) $(8,846,971) Increase (decrease) due to: Tax benefit (expense) for non-corporate loss................................... (10,373,252) 5,900,546 5,446,721 Permanent differences between financial statement income and taxable income.... (36,200) 84,500 48,270 State income tax.......................... (247,000) (377,500) (252,590) Tax benefit from dissolved corporation.... (148,925) -- -- Other..................................... (456,998) 39,981 (41,149) ------------ ------------ ----------- Income Tax Benefit........................ $ (4,177,925) $ (5,335,000) $(3,645,719) ============ ============ =========== F-203
451 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. NOTES PAYABLE Debt consisted of the following: DECEMBER 31, DECEMBER 31, 1998 1997 ------------ ------------ Senior Subordinated Notes................ $125,000,000 $125,000,000 Tranche A Term Loan...................... 21,575,000 25,000,000 Tranche B Term Loan...................... 40,000,000 40,000,000 Reducing Revolving Loan.................. 35,000,000 36,500,000 Senior Subordinated Debt................. 3,000,000 3,000,000 ------------ ------------ $224,575,000 $229,500,000 ============ ============ The Notes and loans are collateralized by substantially all of the assets of the Company. On January 26, 1996, the Company and its wholly-owned subsidiary, RACC (the "Issuers"), co-issued $125,000,000 of 11 1/8% Senior Subordinated Notes (the "Notes") to institutional investors. These notes were subsequently exchanged on June 18, 1996 for publicly registered notes with identical terms. Interest on the Notes is payable semi-annually on January 15 and July 15 of each year. The Notes, which mature on January 15, 2006, can be redeemed in whole or in part, at the Issuers' option, at any time on or after January 15, 2001, at redeemable prices contained in the Notes plus accrued interest. In addition, at any time on or prior to January 15, 1999, the Issuers, at their option, may redeem up to 25% of the principle amount of the Notes issued to institutional investors of not less than $25,000,000. At December 31, 1998 and 1997, all of the Notes were outstanding (see also Note 10). The Company has a $25,000,000 Tranche A term loan with a financial institution. This loan requires quarterly payments of $1,875,000 plus interest commencing on March 31, 2000. Any unpaid balance is due March 31, 2003. The agreement requires that what it defines as excess proceeds from the sale of a cable system be used to retire Tranche A term debt. As a result of the Michigan sale (Note 4), there was $3,425,000 of excess proceeds used to pay principal in 1998. The interest rate on the Tranche A term loan is either the bank's prime rate plus .25% to 1.75% or LIBOR plus 1.5% to 2.75%. The specific rate is dependent upon the senior funded debt ratio which is recalculated quarterly. The weighted average effective interest rate at December 31, 1998 and 1997 was 7.59% and 8.24%, respectively. In addition, the Company has a $40,000,000 Tranche B term loan, which requires principal payments of $2,000,000 on March 31, 2002, $18,000,000 on March 31, 2003, and $20,000,000 on March 31, 2004. The Tranche B term loan bears an interest rate of 9.75% and is payable quarterly. The Company also has a reducing revolving loan providing for borrowing up to $20,000,000 at the Company's discretion, subject to certain restrictions, and an additional $60,000,000 available to finance acquisitions subject to certain restrictions. On March 4, 1998, the reducing revolving loan agreement was amended to revise the scheduled reduction in revolving commitments. The additional financing amounts available at December 31, 1998 and 1997 were $45,000,000 and $52,500,000, respectively. At December 31, 1998, the full $20,000,000 available had been borrowed, and $15,000,000 had been drawn against the $45,000,000 commitment. At F-204
452 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1997, the full $20,000,000 available had been borrowed, and $16,500,000 had been drawn against the $52,500,000 commitment. The amount available for borrowing will decrease annually during its term with changes over the four years following December 31, 1998 as follows: 1999 -- $2,500,000 reduction per quarter, and 2000 through 2002 -- $3,625,000 per quarter. Any unpaid balance is due on March 31, 2003. The revolving loan bears an interest rate of either the bank's prime rate plus .25% to 1.75% or LIBOR plus 1.5% to 2.75%. The specific rate is dependent upon the senior funded debt ratio which is recalculated quarterly. The weighted average effective interest rates at December 31, 1998 and 1997 was 8.08% and 8.29%, respectively. The reducing revolving loan includes a commitment fee of 1/2% per annum on the unborrowed balance. Certain mandatory prepayments may also be required, commencing in fiscal 1997, on the Tranche A term loan, the Tranche B term loan, and the reducing revolving credit based on the Company's cash flow calculations, proceeds from the sale of a cable system or equity contributions. Based on the 1998 calculation and the Michigan sale, $3,425,000 of prepayments were required. Optional prepayments are allowed, subject to certain restrictions. The related loan agreement contains covenants limiting additional indebtedness, dispositions of assets, investments in securities, distribution to partners, management fees and capital expenditures. In addition, the Company must maintain certain financial levels and ratios. At December 31, 1998, the Company was in compliance with these covenants. The Company also has $3,000,000 of senior subordinated debt payable to a Rifkin Partner. The debt has a scheduled maturity, interest rate and interest payment schedule identical to that of the Notes, as discussed above. Based on the outstanding debt as of December 31, 1998, the minimum aggregate maturities for the five years following 1998 are none in 1999, $7,500,000 in 2000, $16,500,000 in 2001, $23,075,000 in 2002 and $29,500,000 in 2003. 7. RELATED PARTY TRANSACTIONS The Company entered into a management agreement with Rifkin & Associates, Inc. (Rifkin). The management agreement provides that Rifkin will act as manager of the Company's CATV systems and be entitled to annual compensation of 3.5% of the Company's revenue. Effective September 1, 1998, Rifkin conveyed its CATV management business to R & A Management, LLC (RML). The result of this transaction included the conveyance of the Rifkin management agreement (Rifkin Agreement) to RML (RML Agreement). Expenses incurred pursuant to the Rifkin Agreement and the RML Agreement are disclosed in total on the Consolidated Statement of Operations. The Company is associated with a company to purchase certain cable television programming at a discount. Rifkin acted as the agent and held the deposit funds required for the Company to participate. Effective September 1, 1998, Rifkin conveyed this contract and deposit amount to RML. The deposit amount recorded at December 31, 1998 and 1997 was $2,139,274 and $1,225,274, respectively. The Company subsequently received $1,225,274 of the December 31, 1998 balance. The Company paid approximately $550,000 to a law firm in connection with the public offering in 1996. A partner of this law firm is a relative of one of the Company's partners. F-205
453 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. COMMITMENTS AND RENTAL EXPENSE The Company leases certain real and personal property under noncancelable operating leases expiring through the year 2007. Future minimum lease payments under such noncancelable leases as of December 31, 1998 are: $316,091 in 1999; $249,179 in 2000; $225,768 in 2001; $222,669 in 2002; and $139,910 in 2003; and $344,153 thereafter, totaling $1,497,770. Total rental expense and the amount included therein which pertains to cancelable pole rental agreements were as follows for the periods indicated: TOTAL CANCELABLE RENTAL POLE RENTAL PERIOD EXPENSE EXPENSE - ------ ---------- ----------- Year Ended December 31, 1998................. $1,592,080 $1,109,544 Year Ended December 31, 1997................. $1,577,743 $1,061,722 Year Ended December 31, 1996................. $1,294,084 $ 874,778 9. COMPENSATION PLANS AND RETIREMENT PLANS EQUITY INCENTIVE PLAN In 1996, the Company implemented an Equity Incentive Plan (the "Plan") in which certain Rifkin & Associates' executive officers and key employees, and certain key employees of the Company are eligible to participate. Plan participants in the aggregate, have the right to receive (i) cash payments of up to 2.0% of the aggregate value of all partnership interests of the Company (the "Maximum Incentive Percentage"), based upon the achievement of certain annual Operating Cash Flow (as defined in the Plan) targets for the Company for each of the calendar years 1996 through 2000, and (ii) an additional cash payment equal to up to 0.5% of the aggregate value of all partnership interests of the Company (the "Additional Incentive Percentage"), based upon the achievement of certain cumulative Operating Cash Flow targets for the Company for the five-year period ended December 31, 2000. Subject to the achievement of such annual targets and the satisfaction of certain other criteria based on the Company's operating performance, up to 20% of the Maximum Incentive Percentage will vest in each such year; provided, that in certain events vesting may accelerate. Payments under the Plan are subject to certain restrictive covenants contained in the Notes. No amounts are payable under the Plan except upon (i) the sale of substantially all of the assets or partnership interests of the Company or (ii) termination of a Plan participant's employment with Rifkin & Associates or the Company, as applicable, due to (a) the decision of the Advisory Committee to terminate such participant's employment due to disability, (b) the retirement of such participant with the Advisory Committee's approval or (c) the death of such Participant. The value of amounts payable pursuant to clause (i) above will be based upon the aggregate net proceeds received by the holders of all of the partnership interests in the Company, as determined by the Advisory Committee, and the amounts payable pursuant to clause (ii) above will be based upon the Enterprise Value determined at the time of such payment. For purposes of the Plan, Enterprise Value generally is defined as Operating Cash Flow for the immediately preceding calendar year times a specified multiple and adjusted based on the Company's working capital. The amount expensed for the years ended December 31, 1998, 1997 and 1996 relating to this plan were $1,119,996, $859,992 and $660,000, respectively. F-206
454 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RETIREMENT BENEFITS The Company has a 401(k) plan for employees that have been employed by the Company for at least one year. Employees of the Company can contribute up to 15% of their salary, on a before-tax basis, with a maximum 1998 contribution of $10,000 (as set by the Internal Revenue Service). The Company matches participant contributions up to a maximum of 50% of the first 3% of a participant's salary contributed. 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. The Company's matching contributions for the years ended December 31, 1998, 1997 and 1996 were $50,335, $72,707 and $42,636, respectively. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company has a number of financial instruments, none of which are held for trading purposes. The following method and assumptions were used by the Company to estimate the fair values of financial instruments as disclosed herein: Cash and Cash Equivalents, Customer Accounts Receivable, Other Receivables, Accounts Payable and Accrued Liabilities and Customer Deposits and Prepayments: The carrying value amount approximates fair value because of the short period to maturity. Debt: The fair value of bank debt is estimated based on interest rates for the same or similar debt offered to the Company having the same or similar remaining maturities and collateral requirements. The fair value of public Senior Subordinated Notes is based on the market quoted trading value. The fair value of the Company's debt is estimated at $236,137,500 and is carried on the balance sheet at $224,575,000. 11. CABLE REREGULATION Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the Cable Act) and has amended it at various times since. The total effects of the present law are, at this time, still unknown. However, one provision of the present law further redefines a small cable system, and exempts these systems from rate regulation on the upper tiers of cable service. The Partnership is awaiting an FCC rulemaking implementing the present law to determine whether its systems qualify as small cable systems. 12. SUMMARIZED FINANCIAL INFORMATION CEM, CEI and CEC (collective, the "Guarantors") are all wholly-owned subsidiaries of the Company and, together with RACC, constitute all of the Partnership's direct and indirect subsidiaries. As discussed in Note 1, RTL and FNI were dissolved on January 1, 1998 and the assets were transferred to the Company, however, prior thereto, RTL and FNI, as wholly-owned subsidiaries of the Company, were Guarantors. Each of the Guarantors provides a full, unconditional, joint and several guaranty of the obligations under the Notes discussed in Note 6. Separate financial statements of the Guarantors are not presented because management has determined that they would not be material to investors. F-207
455 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables present summarized financial information of the Guarantors on a combined basis as of December 31, 1998 and 1997 and for the years ended December 31, 1998, and 1997 and 1996. 12/31/98 12/31/97 BALANCE SHEET ------------ ------------ Cash............................ $ 373,543 $ 780,368 Accounts and other receivables, net........................... 3,125,830 3,012,571 Prepaid expenses................ 791,492 970,154 Property, plant and equipment net........................... 48,614,536 66,509,120 Franchise costs and other intangible assets, net........ 56,965,148 103,293,631 Accounts payable and accrued liabilities................... 22,843,354 18,040,588 Other liabilities............... 980,536 1,122,404 Deferred taxes payable.......... 7,942,000 12,138,000 Notes payable................... 140,050,373 167,200,500 Equity (deficit)................ (61,945,714) (23,935,648) YEAR ENDED YEAR ENDED YEAR ENDED 12/31/98 12/31/97 12/31/96 STATEMENTS OF OPERATIONS ------------ ------------ ------------ Total revenue................... $ 29,845,826 $ 47,523,592 $ 42,845,044 Total costs and expenses........... (31,190,388) (53,049,962) (43,578,178) Interest expense................ (14,398,939) (17,868,497) (16,238,221) Income tax benefit.............. 4,177,925 5,335,000 3,645,719 ------------ ------------ ------------ Net loss........................ $(11,565,576) $(18,059,867) $(13,325,636) ============ ============ ============ 13. QUARTERLY INFORMATION (UNAUDITED) The following interim financial information of the Company presents the 1998 and 1997 consolidated results of operations on a quarterly basis (in thousands): QUARTERS ENDED 1998 ------------------------------------------------ MARCH 31(A) JUNE 30 SEPT. 30 DEC. 31(B) ----------- ------- -------- ---------- Revenue........................ $22,006 $22,296 $22,335 $23,284 Operating income (loss)........ 295 511 (1,522) 1,756 Net income (loss).............. 1,437 (4,458) (5,907) 33,347 - ------------------------- (a) First quarter includes a $5,900 gain from the sale of Michigan assets (Note 4). (b) Fourth quarter includes a $36,873 gain from the trade sale of certain Tennessee assets (Note 4). F-208
456 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) QUARTERS ENDED 1997 ------------------------------------------ MARCH 31 JUNE 30 SEPT. 30 DEC. 31 -------- ------- -------- ------- Revenue............................. $19,337 $21,331 $21,458 $22,199 Operating loss...................... (1,220) (2,818) (2,777) (798) Net loss............................ (5,998) (6,890) (8,127) (5,029) 14. LITIGATION The Company could possibly be named as defendant in various actions and proceedings arising from the normal course of business. In all such cases, the Company will vigorously defend itself against the litigation and, where appropriate, will file counterclaims. Although the eventual outcome of potential lawsuits cannot be predicted, it is management's opinion that any such lawsuit will not result in liabilities that would have a material affect on the Company's financial position or results of operations. F-209
457 REPORT OF INDEPENDENT AUDITORS The Partners Indiana Cable Associates, Ltd. We have audited the accompanying balance sheet of Indiana Cable Associates, Ltd. as of December 31, 1997 and 1998, and the related statements of operations, partners' deficit and cash flows for the years ended December 31, 1996, 1997 and 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Indiana Cable Associates, Ltd. at December 31, 1997 and 1998, and the results of its operations and its cash flows for the years ended December 31, 1996, 1997 and 1998 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Denver, Colorado February 19, 1999 F-210
458 INDIANA CABLE ASSOCIATES, LTD. BALANCE SHEET DECEMBER 31, 1997 AND 1998 1997 1998 ----------- ----------- ASSETS (PLEDGED) Cash and cash equivalents.................................. $ 82,684 $ 108,619 Customer accounts receivable, less allowance for doubtful accounts of $18,311 in 1997 and $24,729 in 1998.......... 87,154 85,795 Other receivables.......................................... 257,236 295,023 Prepaid expenses and deposits.............................. 172,614 152,575 Property, plant and equipment, at cost: Buildings................................................ 78,740 91,682 Transmission and distribution systems and related equipment............................................. 10,174,650 11,336,892 Office furniture and equipment........................... 144,137 161,327 Spare parts and construction inventory................... 435,554 742,022 ----------- ----------- 10,833,081 12,331,923 Less accumulated depreciation............................ 7,624,570 8,008,158 ----------- ----------- Net property, plant and equipment..................... 3,208,511 4,323,765 Other assets, at cost less accumulated amortization (Note 3)....................................................... 5,817,422 5,083,029 ----------- ----------- Total assets..................................... $ 9,625,621 $10,048,806 =========== =========== LIABILITIES AND PARTNERS' DEFICIT Liabilities: Accounts payable and accrued liabilities................. $ 718,716 $ 897,773 Customer prepayments..................................... 50,693 47,458 Interest payable......................................... 32,475 -- Long-term debt (Note 4).................................. 10,650,000 -- Interpartnership debt (Note 4)........................... -- 9,606,630 ----------- ----------- Total liabilities................................ 11,451,884 10,551,861 Commitments (Notes 5 and 6) Partners' deficit: General partner.......................................... (66,418) (20,106) Limited partner.......................................... (1,759,845) (482,949) ----------- ----------- Total partners' deficit.................................... (1,826,263) (503,055) ----------- ----------- Total liabilities and partners' deficit.......... $ 9,625,621 $10,048,806 =========== =========== See accompanying notes. F-211
459 INDIANA CABLE ASSOCIATES, LTD. STATEMENT OF OPERATIONS YEARS ENDED ------------------------------------ 12/31/96 12/31/97 12/31/98 ---------- ---------- ---------- REVENUE: Service............................................ $6,272,049 $6,827,504 $7,165,843 Installation and other............................. 538,158 622,699 773,283 ---------- ---------- ---------- Total revenue............................ 6,810,207 7,450,203 7,939,126 COSTS AND EXPENSES: Operating expense.................................. 989,456 1,142,932 974,617 Programming expense................................ 1,474,067 1,485,943 1,727,089 Selling, general and administrative expense........ 1,112,441 1,142,247 1,128,957 Depreciation....................................... 889,854 602,554 537,884 Amortization....................................... 718,334 718,335 707,539 Management fees.................................... 340,510 372,510 396,956 Loss on disposal of assets......................... 6,266 639 74,714 ---------- ---------- ---------- Total costs and expenses................. 5,530,928 5,465,160 5,547,756 ---------- ---------- ---------- Operating income................................... 1,279,279 1,985,043 2,391,370 Interest expense................................... 1,361,415 1,292,469 970,160 ---------- ---------- ---------- Net income (loss) before extraordinary item........ (82,136) 692,574 1,421,210 Extraordinary item--loss on early retirement of debt (Note 3 and 4).............................. -- -- 98,002 ---------- ---------- ---------- Net income (loss).................................. $ (82,136) $ 692,574 $1,323,208 ========== ========== ========== See accompanying notes. F-212
460 INDIANA CABLE ASSOCIATES, LTD. STATEMENT OF PARTNERS' DEFICIT GENERAL LIMITED PARTNERS PARTNERS TOTAL -------- ----------- ----------- Partners' deficit at December 31, 1995......... $(87,783) $(2,348,918) $(2,436,701) Net loss for the year ended December 31, 1996...................................... (2,875) (79,261) (82,136) -------- ----------- ----------- Partners' deficit at December 31, 1996......... (90,658) (2,428,179) (2,518,837) Net income for the year ended December 31, 1997...................................... 24,240 668,334 692,574 -------- ----------- ----------- Partners' deficit at December 31, 1997......... (66,418) (1,759,845) (1,826,263) Net income for the year ended December 31, 1998...................................... 46,312 1,276,896 1,323,208 -------- ----------- ----------- Partners' deficit at December 31, 1998......... $(20,106) $ (482,949) $ (503,055) ======== =========== =========== The partners' capital accounts for financial reporting purposes vary from the tax capital accounts. See accompanying notes. F-213
461 INDIANA CABLE ASSOCIATES, LTD. STATEMENT OF CASH FLOWS YEARS ENDED ------------------------------------------ 12/31/96 12/31/97 12/31/98 ----------- ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................. $ (82,136) $ 692,574 $ 1,323,208 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.................. 1,608,188 1,320,889 1,245,423 Amortization of deferred loan costs............ 48,764 72,922 23,149 Loss on disposal of assets..................... 6,266 639 74,714 Loss on write-off of deferred loan cost associated with early retirement of debt..... -- -- 95,832 Decrease (increase) in customer accounts receivable................................... (13,110) 1,536 1,359 Increase in other receivables.................. (80,843) (108,256) (37,787) Decrease (increase) in prepaid expenses and deposits..................................... (53,259) (5,928) 20,039 Increase (decrease) in accounts payable and accrued liabilities.......................... (190,357) (147,971) 179,057 Increase (decrease) in customer prepayments.... 16,355 (13,190) (3,235) Decrease in interest payable................... (12,314) (39,471) (32,475) ----------- ----------- ------------ Net cash provided by operating activities.............................. 1,247,554 1,773,744 2,889,284 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment........ (675,244) (592,685) (1,732,831) Proceeds from sale of assets...................... 227,025 23,662 4,979 ----------- ----------- ------------ Net cash used in investing activities..... (448,219) (569,023) (1,727,852) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt...................... 2,000,000 1,450,000 10,636,421 Proceeds from interpartnership debt............... -- -- 9,606,630 Deferred loan cost................................ (70,000) (29,776) (92,127) Payments of long-term debt........................ (2,200,000) (3,100,000) (21,286,421) ----------- ----------- ------------ Net cash used in financing activities..... (270,000) (1,679,776) (1,135,497) ----------- ----------- ------------ Net increase (decrease) in cash and cash equivalents....................................... 529,335 (475,055) 25,935 Cash and cash equivalents at beginning of year...... 28,404 557,739 82,684 ----------- ----------- ------------ Cash and cash equivalents at end of year............ $ 557,739 $ 82,684 $ 108,619 =========== =========== ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid..................................... $ 1,324,965 $ 1,258,078 $ 947,606 =========== =========== ============ See accompanying notes. F-214
462 INDIANA CABLE ASSOCIATES, LTD. NOTES TO FINANCIAL STATEMENTS 1. GENERAL INFORMATION GENERAL INFORMATION: Indiana Cable Associates, Ltd. (the "Partnership"), a Colorado limited partnership, was organized in March 1987 for the purpose of acquiring and operating cable television systems and related operations in Indiana and Illinois. For financial reporting purposes, Partnership profits or losses are allocated 3.5% to the general partners and 96.5% to the limited partners. Limited partners are not required to fund any losses in excess of their capital contributions. ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP: Interlink Communications Partners, LLLP ("ICP") agreed to purchase all of the interests of the Partnership. ICP acquired all of the limited partner interests, effective December 31, 1998, and is currently in the process of obtaining the necessary consents to transfer all of the Partnership's franchises to ICP. Once these are obtained, ICP will then purchase the general partner interest in the Partnership, and the Partnership will, by operation of law, be consolidated into ICP. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PROPERTY, PLANT AND EQUIPMENT: The Partnership records additions to property, plant and equipment at cost, which in the case of assets constructed includes amounts for material, labor, overhead and capitalized interest, if applicable. For financial reporting purposes, the Partnership uses the straight-line method of depreciation over the estimated useful lives of the assets as follows: Buildings and improvements................................. 5-30 years Transmission and distribution systems and related equipment................................................ 3-15 years Office furniture and equipment............................. 5 years OTHER ASSETS: Other assets are carried at cost and are amortized on a straight-line basis over the following lives: Franchises -- the terms of the franchises (10-19 1/2 years) Goodwill -- the term of the Partnership agreement (12 3/4 years) Deferred loan costs -- the term of the debt (1-6 years) Organization costs -- 5 years F-215
463 INDIANA CABLE ASSOCIATES, LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES: No provision for the payment or refund of income taxes has been provided for the Partnership since the partners are responsible for reporting their distributive share of Partnership net income or loss in their personal capacities. CASH AND CASH EQUIVALENTS: The Partnership considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. REVENUE RECOGNITION: Customer fees are recorded as revenue in the period the service is provided. FAIR VALUE OF FINANCIAL INVESTMENTS: The carrying values of cash and cash equivalents, customer accounts receivable, accounts payable and interpartnership debt approximate fair value. USE OF ESTIMATES: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. IMPACT OF YEAR 2000 (UNAUDITED): The Partnership recognizes that certain of its time-sensitive computer programs and product distribution equipment may be affected by conversion to the year 2000. During 1998, management began their evaluation of the information systems, product distribution facilities, and vendor and supplier readiness. To date, considerable progress has been made to complete the evaluation process, to integrate and test compliance installations, and to prepare contingency plans. In addition, third party suppliers are either fully compliant or are expected to be compliant by December 31, 1999. Management expects to have all systems compliant, or have a contingency plan in effect that will result in minimal impact on the operations. NEW ACCOUNTING PRONOUNCEMENT: In April 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-5 "Reporting on the Costs of Start-Up Activities," which requires the Partnerships to expense all start-up costs related to organizing a new business. This new standard also includes one-time activities related to opening a new facility, introduction of a new product or service, or conducting business with a new class of customer or in a new territory. This standard is effective for the Partnerships' 1999 fiscal year. Organization costs are all fully amortized resulting in SOP 98-5 having no material effect on its financial position or the results of operations. RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION: Certain reclassifications have been made to the 1996 and 1997 financial statements to conform with the 1998 financial statement presentation. Such reclassifications had no effect on the net income or loss as previously stated. F-216
464 INDIANA CABLE ASSOCIATES, LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. OTHER ASSETS At December 31, 1997 and 1998, other assets consisted of the following: 1997 1998 ----------- ----------- Franchises......................................... $13,144,332 $12,996,580 Goodwill........................................... 378,336 378,336 Deferred loan costs................................ 26,854 -- Organization costs................................. 63,393 63,393 ----------- ----------- 13,612,915 13,438,309 Less accumulated amortization...................... 7,795,493 8,355,280 ----------- ----------- $ 5,817,422 $ 5,083,029 =========== =========== On December 31, 1997, the loan agreement with a financial institution was amended (Note 4). At that time, the original loan's costs, which were fully amortized, and the accumulated amortization were written off. The bank loan amendment required the payment of additional loan costs which will be amortized over the remaining term of the bank loan. On August 31, 1998, the loan with a financial institution and the subordinated debt loan with two investor groups were paid in full (Note 4). The related deferred loan costs and associated accumulated amortization were written off and $9,263 was recorded as an extraordinary loss. On December 30, 1998, the new loan agreement with a financial institution was paid in full (Note 4). The related deferred loan costs and associated accumulated amortization were written off and $86,569 was recorded as an extraordinary loss. 4. DEBT The Partnership had a revolving credit agreement with a financial institution which provided for borrowing up to $7,000,000 with a maturity date of December 31, 1997, at which time the balance of the loan was $4,650,000. On December 31, 1997, the credit agreement was amended to reduce the amount available to borrow to $5,200,000 and extend the maturity date to December 31, 1998. The Partnership also had subordinated term notes with two investors totalling $6,000,000 at December 31, 1997. Total outstanding loans at December 31, 1997 were $10,650,000. On August 31, 1998, the revolving credit loan and subordinated term notes had a balance of $3,450,000 and $6,000,000, respectively; at that date, the total balance of $10,650,000 and accrued interest were paid in full. On that same date, the Partnership obtained a new credit agreement with a financial institution. The new credit agreement provided for a senior term note payable in the amount of $7,500,000 and a revolving credit loan which provided for borrowing up to $7,500,000. At December 30, 1998, the term note and revolving credit had a balance of $7,500,000 and $1,950,000, respectively; at that date, the total balance of $9,450,000 and accrued interest were paid in full. The Partnership also incurred a LIBOR break fee of $2,170 in conjunction with the retirement of debt which was recorded as an extraordinary item. Also on December 30, 1998, the Partnership obtained a new interpartnership loan agreement with ICP (Note 1). Borrowing under the interpartnership loan, as well as interest and principal payments are due at the discretion of the management of ICP, resulting in no minimum required annual principal payments. The balance of the interpartnership loan at December 31, 1998 was $9,606,630. The effective interest rate at December 31, 1998 was 8.5%. F-217
465 INDIANA CABLE ASSOCIATES, LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 5. MANAGEMENT AGREEMENT The Partnership has entered into a management agreement with Rifkin and Associates, Inc., (Rifkin) whose sole stockholder is affiliated with a general partner of the Partnership. The agreement provides that Rifkin shall manage the Partnership and shall receive annual compensation equal to 2 1/2% of gross revenues and an additional 2 1/2% if a defined cash flow level is met. Effective September 1, 1998, Rifkin conveyed its CATV management business to R & A Management, LLC (RML). The result of this transaction was the conveyance of the Rifkin management agreement (Rifkin Agreement) to RML (RML Agreement). Expenses incurred pursuant to the Rifkin Agreement and the RML Agreement are disclosed on the Statement of Operations. 6. LEASE COMMITMENTS At December 31, 1998, the Partnership had lease commitments under long-term operating leases as follows: 1999........................................................ $27,408 2000........................................................ 6,300 2001........................................................ 2,700 2002........................................................ 1,500 2003........................................................ 1,500 Thereafter.................................................. 10,500 ------- Total............................................. $49,908 ======= Rent expense, including pole rent, was as follows for the periods indicated: TOTAL RENTAL PERIOD EXPENSE - ------ -------- Year Ended December 31, 1996................................ $105,590 Year Ended December 31, 1997................................ 98,693 Year Ended December 31, 1998................................ 104,155 7. RETIREMENT BENEFITS The Partnership has a 401(k) plan for its employees that have been employed by the Partnership for at least one year. Employees of the Partnership can contribute up to 15% of their salary, on a before-tax basis, with a maximum 1998 contribution of $10,000 (as set by the Internal Revenue Service). The Partnership matches participant contributions up to a maximum of 50% of the first 3% of a participant's salary contributed. All participant contributions and earnings are fully vested upon contribution and Partnership contributions and earnings vest 20% per year of employment with the Partnership, becoming fully vested after five years. The Partnership's matching contributions for the years ended December 31, 1996, 1997 and 1998 were $4,723, $8,769 and $8,639, respectively. F-218
466 REPORT OF INDEPENDENT AUDITORS The Partners R/N South Florida Cable Management Limited Partnership We have audited the accompanying consolidated balance sheet of R/N South Florida Cable Management Limited Partnership as of December 31, 1997 and 1998, and the related consolidated statements of operations, partners' equity (deficit) and cash flows for the years ended December 31, 1996, 1997 and 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of R/N South Florida Cable Management Limited Partnership at December 31, 1997 and 1998, and the consolidated results of its operations and its cash flows for the years ended December 31, 1996, 1997 and 1998 in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Denver, Colorado February 19, 1999 F-219
467 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997 AND 1998 1997 1998 ASSETS (PLEDGED) ----------- ----------- Cash and cash equivalents.................................. $ 362,619 $ 678,739 Customer accounts receivable, less allowance for doubtful accounts of $85,867 in 1997 and $84,474 in 1998.......... 569,296 455,339 Other receivables.......................................... 1,180,507 1,691,593 Prepaid expenses and deposits.............................. 416,455 393,022 Property, plant and equipment, at cost: Transmission and distribution system and related equipment................................................ 22,836,588 27,981,959 Office furniture and equipment............................. 704,135 755,398 Leasehold improvements..................................... 546,909 549,969 Construction in process and spare parts inventory.......... 718,165 744,806 ----------- ----------- 24,805,797 30,032,132 Less accumulated depreciation.............................. 9,530,513 11,368,764 ----------- ----------- Net property, plant and equipment................ 15,275,284 18,663,368 Other assets, at cost less accumulated amortization (Note 2)....................................................... 6,806,578 5,181,012 ----------- ----------- Total assets..................................... $24,610,739 $27,063,073 =========== =========== LIABILITIES AND PARTNERS' EQUITY (DEFICIT) Liabilities: Accounts payable and accrued liabilities................... $ 2,994,797 $ 2,356,540 Interest payable........................................... 287,343 -- Customer prepayments....................................... 699,332 690,365 Long-term debt (Note 3).................................... 29,437,500 -- Interpartnership debt (Note 3)............................. -- 31,222,436 ----------- ----------- Total liabilities................................ 33,418,972 34,269,341 Commitments (Notes 4 and 5) Partners' equity (deficit): General partner.......................................... (96,602) (81,688) Limited partner.......................................... (9,582,050) (8,104,718) Special limited partner.................................. 870,419 980,138 ----------- ----------- Total partners' equity (deficit)........................... (8,808,233) (7,206,268) ----------- ----------- Total liabilities and partners' deficit.......... $24,610,739 $27,063,073 =========== =========== See accompanying notes. F-220
468 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP CONSOLIDATED STATEMENT OF OPERATIONS YEARS ENDED --------------------------------------- 12/31/96 12/31/97 12/31/98 ----------- ----------- ----------- REVENUES: Service......................................... $16,615,767 $17,520,883 $18,890,202 Installation and other.......................... 1,732,681 2,425,742 3,158,742 ----------- ----------- ----------- 18,348,448 19,946,625 22,048,944 COSTS AND EXPENSES: Operating expense............................... 2,758,704 3,489,285 3,707,802 Programming expense............................. 4,075,555 4,014,850 4,573,296 Selling, general and administrative expense..... 3,979,002 4,087,845 4,537,535 Depreciation.................................... 1,787,003 1,912,905 2,256,765 Amortization.................................... 1,350,195 1,287,588 1,293,674 Management fees................................. 733,938 797,863 881,958 Loss on disposal of assets...................... 373,860 513,177 178,142 ----------- ----------- ----------- Total costs and expenses.............. 15,058,257 16,103,513 17,429,172 ----------- ----------- ----------- Operating income................................ 3,290,191 3,843,112 4,619,772 Interest expense................................ 2,528,617 2,571,976 2,583,338 ----------- ----------- ----------- Net income before extraordinary item............ 761,574 1,271,136 2,036,434 Extraordinary item -- loss on early retirement of debt (Note 2).............................. -- -- 434,469 ----------- ----------- ----------- Net income...................................... $ 761,574 $ 1,271,136 $ 1,601,965 =========== =========== =========== See accompanying notes. F-221
469 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP CONSOLIDATED STATEMENT OF PARTNERS' EQUITY (DEFICIT) SPECIAL GENERAL LIMITED LIMITED PARTNERS PARTNERS PARTNERS TOTAL --------- ------------ -------- ------------ Partners' equity (deficit) at December 31, 1995............................ $(115,526) $(11,456,616) $731,199 $(10,840,943) Net income for the year ended December 31, 1996................ 7,090 702,324 52,160 761,574 --------- ------------ -------- ------------ Partners' equity (deficit) at December 31, 1996............................ (108,436) (10,754,292) 783,359 (10,079,369) Net income for the year ended December 31, 1997................ 11,834 1,172,242 87,060 1,271,136 --------- ------------ -------- ------------ Partners' equity (deficit) at December 31, 1997............................ (96,602) (9,582,050) 870,419 (8,808,233) Net income for the year ended December 31, 1998................ 14,914 1,477,332 109,719 1,601,965 --------- ------------ -------- ------------ Partners' equity (deficit) at December 31, 1998............................ $ (81,688) $ (8,104,718) $980,138 $ (7,206,268) ========= ============ ======== ============ The partners' capital accounts for financial reporting purposes vary from the tax capital accounts. See accompanying notes. F-222
470 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED ------------------------------------------ 12/31/96 12/31/97 12/31/98 ----------- ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................... $ 761,574 $ 1,271,136 $ 1,601,965 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......... 3,137,198 3,200,493 3,550,439 Amortization of deferred loan cost.... 68,898 79,108 89,788 Loss on early retirement of debt...... -- -- 434,469 Loss on disposal of assets............ 373,860 513,177 178,142 Decrease (increase) in customer accounts receivable................. 1,420 (152,229) 113,957 Increase in other receivables......... (377,553) (506,325) (511,086) Decrease (increase) in prepaid expenses and deposits............... (114,720) 115,734 23,433 Increase (decrease) in accounts payable and accrued liabilities..... 122,512 513,839 (638,257) Increase (decrease) in customer prepayments......................... 362 208,021 (8,967) Increase (decrease) in interest payable............................. 180 16,207 (287,343) ----------- ----------- ------------ Net cash provided by operating activities.................... 3,973,731 5,259,161 4,546,540 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment............................. (4,000,631) (4,288,776) (5,915,434) Additions to other assets, net of refranchises.......................... (10,600) (164,560) (186,790) Proceeds from the sale of assets......... 16,674 70,865 92,443 ----------- ----------- ------------ Net cash used in investing activities.................... (3,994,557) (4,382,471) (6,009,781) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt............. 2,750,000 3,850,000 5,550,000 Proceeds from interpartnership debt...... -- -- 31,222,436 Payments of long-term debt............... (2,604,913) (4,562,500) (34,987,500) Deferred loan costs...................... -- (132,727) (5,575) ----------- ----------- ------------ Net cash provided by (used in) financing activities.......... 145,087 (845,227) 1,779,361 ----------- ----------- ------------ Net increase in cash and cash equivalents.............................. 124,261 31,463 316,120 Cash and cash equivalents at beginning of the year................................. 206,895 331,156 362,619 ----------- ----------- ------------ Cash and cash equivalents at end of year... $ 331,156 $ 362,619 $ 678,739 =========== =========== ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid............................ $ 2,412,038 $ 2,441,662 $ 2,780,893 =========== =========== ============ See accompanying notes F-223
471 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION AND ORGANIZATION: The accompanying consolidated financial statements include the accounts of R/N South Florida Cable Management Limited Partnership (the "Partnership") and its substantially wholly-owned subsidiary Rifkin/Narragansett South Florida CATV Limited Partnership (the "Operating Partnership"). Each partnership is a Florida Limited Partnership. The Partnership was organized in 1988 for the purpose of being the general partner to the Operating Partnership which is engaged in the installation, ownership, operation and management of cable television systems in Florida. In 1992, the Partnership adopted an amendment to the Partnership agreement (the "Amendment") and entered into a Partnership Interest Purchase Agreement whereby certain Special Limited Partnership interests were issued in the aggregate amount of $1,250,000. These new Special Limited Partners are affiliated with the current General and Limited Partners of the Partnership. The Amendment provides for the methods under which the gains, losses, adjustments and distributions are allocated to the accounts of the Special Limited Partners. For financial reporting purposes, partnership profits or losses are allocated to the limited partners, special limited partners and general partners in the following ratios: 92.22%, 6.849% and .931%, respectively. Limited partners and special limited partners are not required to fund any losses in excess of their capital contributions. ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP: InterLink Communications Partners, LLLP ("ICP") agreed to purchase all of the interests of the Partnerships. ICP acquired all of the limited partner interests of the Operating Partnership, effective December 31, 1998, and is currently in the process of obtaining the necessary consents to transfer all of the Operating Partnership's franchises to ICP. Once obtained, ICP will then purchase the general partner interest, and the Partnership, by operation of law, will consolidate into ICP. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment additions are recorded at cost, which in the case of assets constructed includes amounts for material, labor, overhead and capitalized interest, if applicable. For financial reporting purposes, the Operating Partnership uses the straight-line method of depreciation over the estimated useful lives of the assets as follows: Transmission and distribution systems and related equipment............................................... 15 years Office furniture and equipment............................ 3-15 years Leasehold improvements.................................... 5-8 years OTHER ASSETS: Other assets are carried at cost and are amortized on a straight-line basis over the following lives: Franchises................... -- the terms of the franchises (3-13 years) Goodwill..................... -- 40 years Organization costs........... -- 5 years Deferred loan costs.......... -- the term of the debt (8 years) F-224
472 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INCOME TAXES: No provision for the payment or refund of income taxes has been provided since the partners are responsible for reporting their distributive share of partnerships net income or loss in their personal capacities. CASH AND CASH EQUIVALENTS: The Partnerships consider all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. REVENUE RECOGNITION: Customer fees are recorded as revenue in the period the service is provided. FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying values of cash and cash equivalents, customer accounts receivable, accounts payable and interpartnership debt approximate fair value. USE OF ESTIMATES: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. IMPACT OF YEAR 2000 (UNAUDITED): The Partnerships recognize that certain of its time-sensitive computer programs and product distribution equipment may be affected by conversion to the year 2000. During 1998, management began their evaluation of the information systems, product distribution facilities, and vendor and supplier readiness. To date, considerable progress has been made to complete the evaluation process, to integrate and test compliance installations, and to prepare contingency plans. In addition, third party suppliers are either fully compliant or are expected to be compliant by December 31, 1999. Management expects to have all systems compliant, or have a contingency plan in effect that will result in minimal impact on the operations. NEW ACCOUNTING PRONOUNCEMENT: In April 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-5 "Reporting on the costs of Start-Up Activities," which requires the Partnerships to expense all start-up costs related to organizing a new business. This new standard also includes one-time activities related to opening a new facility, introduction of a new product or service, or conducting business with a new class of customer or in a new territory. This standard is effective for the Partnerships' 1999 fiscal year. The organization costs are fully amortized, resulting in SOP 98-5 having no material effect on its financial position or the results of operations. RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION: Certain reclassifications have been made to the 1996 and 1997 financial statements to conform with the 1998 financial statement presentation. Such reclassifications had no effect on the net income as previously stated. F-225
473 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. OTHER ASSETS At December 31, 1997 and 1998, other assets consisted of the following: 1997 1998 ----------- ----------- Franchises and other....................... $14,348,984 $14,535,774 Goodwill................................... 3,429,845 3,429,845 Deferred loan costs........................ 694,819 -- Organization costs......................... 23,218 23,218 ----------- ----------- 18,496,866 17,988,837 Less accumulated amortization.............. 11,690,288 12,807,825 ----------- ----------- $ 6,806,578 $ 5,181,012 =========== =========== On December 30, 1998, the Partnerships' loan with a financial institution was paid in full (Note 3). The related deferred loan costs and associated accumulated amortization were written off and an extraordinary loss of $434,469 was recorded. 3. DEBT The Partnerships had senior term note payable and a revolving credit loan agreement with a financial institution. The senior term note payable was a $29,500,000 loan which required varying quarterly payments which commenced on September 30, 1996. On June 30, 1997, the loan agreement was amended to defer the June 30, 1997 and September 30, 1997 principal payments and restructured the required principal payment amounts due through December 31, 2003. The revolving credit loan provided for borrowing up to $3,000,000 at the discretion of the Partnerships. On June 30, 1997, the loan agreement was amended to increase the amount provided for borrowing under the revolving credit loan to $3,750,000. At December 31, 1997, the term notes and the revolving credit loan had a balance of $28,387,500 and $1,050,000, respectively, with a total balance of $29,437,500. At December 30, 1998, the term notes and the revolving credit loan had a balance of $27,637,500 and $3,300,000, respectively; at that date, the total balance of $30,937,500 and accrued interest were paid in full. Also on December 30, 1998, the Partnerships obtained a new interpartnership loan agreement with ICP (Note 1). Borrowing under the interpartnership loan, as well as interest and principal payments are due at the discretion of the management of ICP, resulting in no minimum required annual principal payments. The balance of the interpartnership loan at December 31, 1998 was $31,222,436. The effective interest rate at December 31, 1998 was 8.5%. 4. MANAGEMENT AGREEMENT The Partnerships have entered into a management agreement with Rifkin & Associates, Inc. (Rifkin). The management agreement provides that Rifkin shall manage the Operating Partnership and shall be entitled to annual compensation of 4% of gross revenues. Effective September 1, 1998, Rifkin conveyed its CATV management business to R & A Management, LLC (RML). The result of this transaction was the conveyance of the Rifkin management agreement (Rifkin Agreement) to RML (RML Agreement). Expenses incurred pursuant to the Rifkin Agreement and the RML Agreement are disclosed on the Consolidated Statement of Operations. F-226
474 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. LEASE COMMITMENTS At December 31, 1998, the Operating Partnership had lease commitments under long-term operating leases as follows: 1999........................................................ $195,437 2000........................................................ 189,643 2001........................................................ 116,837 -------- Total............................................. $501,917 ======== Rent expense, including pole rent, was as follows for the periods indicated: TOTAL RENTAL PERIOD EXPENSE - ------ -------- Year Ended December 31, 1996............................... $262,231 Year Ended December 31, 1997............................... 279,655 Year Ended December 31, 1998............................... 295,107 6. RETIREMENT BENEFITS The Operating Partnership has a 401(k) plan for its employees that have been employed by the Operating Partnership for at least one year. Employees of the Operating Partnership can contribute up to 15% of their salary, on a before-tax basis, with a maximum 1998 contribution of $10,000 (as set by the Internal Revenue Service). The Operating Partnership matches participant contributions up to a maximum of 50% of the first 3% of a participant's salary contributed. All participant contributions and earnings are fully vested upon contribution and Operating Partnership contributions and earnings vest 20% per year of employment with the Operating Partnership, becoming fully vested after five years. The Operating Partnership's matching contributions for the years ended December 31, 1996, 1997 and 1998 were $15,549, $23,292 and $20,652, respectively. F-227
475 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Charter Communications Holdings, LLC: We have audited the accompanying statements of operations and changes in net assets and cash flows of Sonic Communications Cable Television Systems for the period from April 1, 1998, through May 20, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 results of operations and cash flows of Sonic Communications Cable Television Systems for the period from April 1, 1998, through May 20, 1998, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, February 5, 1999 F-228
476 SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS FOR THE PERIOD FROM APRIL 1, 1998, THROUGH MAY 20, 1998 REVENUES.................................................... $ 6,343,226 ----------- OPERATING EXPENSES: Operating costs........................................... 1,768,393 General and administrative................................ 1,731,471 Depreciation and amortization............................. 1,112,057 ----------- 4,611,921 ----------- Income from operations................................. 1,731,305 INTEREST EXPENSE............................................ 289,687 ----------- Income before provision for income taxes............... 1,441,618 PROVISION IN LIEU OF INCOME TAXES........................... 602,090 ----------- Net income............................................. 839,528 NET ASSETS, April 1, 1998................................... 55,089,511 ----------- NET ASSETS, May 20, 1998.................................... $55,929,039 =========== The accompanying notes are an integral part of this statement. F-229
477 SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS STATEMENT OF CASH FLOWS FOR THE PERIOD FROM APRIL 1, 1998, THROUGH MAY 20, 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 839,528 Adjustments to reconcile net loss to net cash provided by operating activities -- Depreciation and amortization.......................... 1,112,057 Changes in assets and liabilities -- Accounts receivable, net............................. 49,980 Prepaid expenses and other........................... 171,474 Accounts payable and accrued expenses................ (1,479,682) ----------- Net cash provided by operating activities......... 693,357 ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment................ (470,530) Payments of franchise costs............................... (166,183) ----------- Net cash used in investing activities............. (636,713) ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt................................ (41,144) ----------- Net cash used in financing activities............. (41,144) NET INCREASE IN CASH AND CASH EQUIVALENTS................... 15,500 ----------- CASH AND CASH EQUIVALENTS, beginning of period.............. 532,238 ----------- CASH AND CASH EQUIVALENTS, end of period.................... $ 547,738 =========== The accompanying notes are an integral part of this statement. F-230
478 SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND BASIS OF PRESENTATION Sonic Communications Cable Television Systems (the Company) operates cable television systems in California and Utah. Effective May 21, 1998, the Company's net assets were acquired by Charter Communications Holdings, LLC. CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. PROPERTY, PLANT AND EQUIPMENT The Company depreciates its cable distribution systems using the straight-line method over estimated useful lives of 5 to 15 years for systems acquired on or after April 1, 1981. Systems acquired before April 1, 1981, are depreciated using the declining balance method over estimated useful lives of 8 to 20 years. Vehicles, machinery, office, and data processing equipment and buildings are depreciated using the straight-line or declining balance method over estimated useful lives of 3 to 25 years. Capital leases and leasehold improvements are amortized using the straight-line or declining balance method over the shorter of the lease term or the estimated useful life of the asset. INTANGIBLES The excess of amounts paid over the fair values of tangible and identifiable intangible assets acquired in business combinations are amortized using the straight-line method over the life of the franchise. Identifiable intangible assets such as franchise rights, noncompete agreements and subscriber lists are amortized using the straight-line method over their useful lives, generally 3 to 15 years. REVENUES Cable television revenues from basic and premium 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 television system. As of May 20, 1998, no installation revenue has been deferred, as direct selling costs exceeded installation revenue. INTEREST EXPENSE Interest expense relates to a note payable to a stockholder of the Company, which accrues interest at 7.8% per annum. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported F-231
479 SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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. 2. COMMITMENTS AND CONTINGENCIES: FRANCHISES The Company has committed to provide cable television services under franchise agreements with various governmental bodies for remaining terms up to 13 years. Franchise fees of up to 5% of gross revenues are payable under these agreements. LEASES The Company leases certain facilities and equipment under noncancelable operating leases. Leases and rental costs charged to expense for the period from April 1, 1998, through May 20, 1998, were $59,199. 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 incurred for pole rental attachments for the period from April 1, 1998, through May 20, 1998, was $64,159. 3. INCOME TAXES: The results of the Company are included in the consolidated federal income tax return of its parent, Sonic Enterprises, Inc., which is responsible for tax payments applicable to the Company. The financial statements reflect a provision in lieu of income taxes as if the Company was filing on a separate company basis. Accordingly, the Company has included the provision in lieu of income taxes in the accompanying statement of operations. The provision in lieu of income taxes approximates the amount of tax computed using U.S. statutory rates, after reflecting state income tax expense of $132,510 for the period from April 1, 1998, through May 20, 1998. 4. REGULATION IN THE CABLE TELEVISION INDUSTRY: The cable television 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 television 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 to judicial proceeding and administrative or legislative proposals. Legislation and regulations continue to change, and the Company cannot predict the impact of future developments on the cable television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have established rate regulations. F-232
480 SONIC COMMUNICATIONS CABLE TELEVISION SYSTEMS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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. For the period from April 1, 1998, through May 20, 1998, 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 ownership 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 are unable to justify its basic 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 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, deregulates rates on the cable programming service tier (CPST). The FCC is currently developing permanent regulations to implement the rate deregulation provisions of the 1996 Telecom Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on the Company's financial position or results of operations. The FCC may further restrict the ability of cable television operators to implement rate increases or the United States Congress may enact legislation that could delay or suspend the scheduled March 1999 termination of CPST rate regulation. This continued rate regulation, if adopted, could limit the rates charged by the Systems. A number of states subject cable television 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 television rates is not allowed to be more restrictive than the federal or local regulation. F-233
481 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Long Beach Acquisition Corp.: We have audited the accompanying statements of operations, stockholder's equity and cash flows of Long Beach Acquisition Corp. (a Delaware corporation) for the period from April 1, 1997, through May 23, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 results of operations and cash flows of Long Beach Acquisition Corp. for the period from April 1, 1997, through May 23, 1997, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri, July 31, 1998 F-234
482 LONG BEACH ACQUISITION CORP. STATEMENT OF OPERATIONS FOR THE PERIOD FROM APRIL 1, 1997, THROUGH MAY 23, 1997 SERVICE REVENUES............................................ $ 5,313,282 ----------- EXPENSES: Operating costs........................................... 1,743,493 General and administrative................................ 1,064,841 Depreciation and amortization............................. 3,576,166 Management fees -- related parties........................ 230,271 ----------- 6,614,771 ----------- Loss from operations................................... (1,301,489) INTEREST EXPENSE............................................ 753,491 ----------- Net loss............................................... $(2,054,980) =========== The accompanying notes are an integral part of this statement. F-235
483 LONG BEACH ACQUISITION CORP. STATEMENT OF STOCKHOLDER'S EQUITY FOR THE PERIOD FROM APRIL 1, 1997, THROUGH MAY 23, 1997 CLASS A, SENIOR VOTING REDEEMABLE ADDITIONAL TOTAL COMMON PREFERRED PAID-IN ACCUMULATED STOCKHOLDER'S STOCK STOCK CAPITAL DEFICIT EQUITY -------- ----------- ----------- ------------ ------------- BALANCE, April 1, 1997........... $100 $11,000,000 $33,258,723 $(51,789,655) $(7,530,832) Net loss................ -- -- -- (2,054,980) (2,054,980) ---- ----------- ----------- ------------ ----------- BALANCE, May 23, 1997............ $100 $11,000,000 $33,258,723 $(53,844,635) $(9,585,812) ==== =========== =========== ============ =========== The accompanying notes are an integral part of this statement. F-236
484 LONG BEACH ACQUISITION CORP. STATEMENT OF CASH FLOWS FOR THE PERIOD FROM APRIL 1, 1997, THROUGH MAY 23, 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $(2,054,980) Adjustments to reconcile net loss to net cash provided by operating activities- Depreciation and amortization.......................... 3,576,166 Changes in assets and liabilities, net of effects from acquisition- Accounts receivable, net............................. (830,725) Prepaid expenses and other........................... (19,583) Accounts payable and accrued expenses................ (528,534) Other current liabilities............................ 203,282 ----------- Net cash provided by operating activities......... 345,626 ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment................ (596,603) ----------- Net cash used in investing activities............. (596,603) ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS................... (250,977) CASH AND CASH EQUIVALENTS, beginning of period.............. 3,544,462 ----------- CASH AND CASH EQUIVALENTS, end of period.................... $ 3,293,485 =========== CASH PAID FOR INTEREST...................................... $ 1,316,462 =========== The accompanying notes are an integral part of this statement. F-237
485 LONG BEACH ACQUISITION CORP. NOTES TO FINANCIAL STATEMENTS MAY 23, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND BASIS OF PRESENTATION Long Beach Acquisition Corp. (LBAC or the "Company") was a wholly owned corporation of KC Cable Associates, L.P., a partnership formed through a joint venture agreement between Kohlberg, Kravis, Roberts & Co. (KKR) and Cablevision Industries Corporation (CVI). The Company was formed to acquire cable television systems serving Long Beach, California, and surrounding areas. On May 23, 1997, the Company executed a stock purchase agreement with Charter Communications Long Beach, Inc. (CC-LB) whereby CC-LB purchased all of the outstanding stock of the Company for an aggregate purchase price, net of cash acquired, of $150.9 million. Concurrent with this stock purchase, CC-LB was acquired by Charter Communications, Inc. (Charter) and Kelso Investment Associates V, L.P., an investment fund (Kelso). As of May 23, 1997, LBAC provided cable television service to subscribers in southern California. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. 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 installation. 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, and equipment replacement costs and betterments are capitalized. Depreciation is provided on a straight-line basis over the estimated useful life of the related asset as follows: Leasehold improvements.................................. Life of respective lease Cable systems and equipment............................. 5-10 years Subscriber devices...................................... 5 years Vehicles................................................ 5 years Furniture, fixtures and office equipment................ 5-10 years FRANCHISES Franchises include the assigned fair value of the franchise from purchased cable television systems. These franchises are amortized on a straight-line basis over six years, the remaining life of the franchise at acquisition. INTANGIBLE ASSETS Intangible assets include goodwill, which is amortized over fifteen years; subscriber lists, which are amortized over seven years; a covenant not to compete which is amortized over five F-238
486 LONG BEACH ACQUISITION CORP. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) years; organization costs which are amortized over five years and debt issuance costs which are amortized over ten years, the life of the loan. IMPAIRMENT OF ASSETS If facts and circumstances suggest 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 Cable television revenues from basic and premium 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 average estimated period that customers are expected to remain connected to the cable television system. As of May 23, 1997, no installation revenue has been deferred, as direct selling costs have exceeded installation service revenues. INCOME TAXES LBAC's income taxes are recorded in accordance with SFAS No. 109, "Accounting for Income Taxes." USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles 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. 2. STOCKHOLDER'S EQUITY: For the period from April 1, 1997, through May 23, 1997, stockholder's equity consisted of the following: Stockholder's (deficit) equity: Common stock -- Class A, voting $1 par value, 100 shares authorized, issued and outstanding..................... $ 100 Common stock -- Class B, nonvoting, $1 par value, 1,000 shares authorized, no shares issued.................... -- Senior redeemable preferred stock, no par value, 110,000 shares authorized, issued and outstanding, stated at redemption value....................................... 11,000,000 Additional paid-in capital................................ 33,258,723 Accumulated deficit....................................... (53,844,635) ------------ Total stockholder's (deficit) equity................... $ (9,585,812) ============ F-239
487 LONG BEACH ACQUISITION CORP. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. INTEREST EXPENSE: The Company has the option of paying interest at either the Base Rate of the Eurodollar rate, as defined, plus a margin which is based on the attainment of certain financial ratios. The weighted average interest rate for the period from April 1, 1997, through May 23, 1997, was 7.3%. 4. REGULATION IN THE CABLE TELEVISION INDUSTRY: The cable television 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 television 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 to judicial proceeding and administrative or legislative proposals. Legislation and regulations continue to change, and the Company cannot predict the impact of future developments on the cable television industry. The 1992 Cable Act and the FCC's rules implementing that act generally have increased the administrative and operational expenses of cable television systems and have resulted in additional regulatory oversight by the FCC and local or state franchise authorities. The Cable Acts and the corresponding FCC regulations have 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. As of May 23, 1997, 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 ownership 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 are unable to justify its basic 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 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, deregulates rates on the cable programming service tier (CPST). The FCC is currently developing permanent regulations to implement the rate deregulation provisions of the 1996 Telecom Act. The Company cannot predict the ultimate effect of the 1996 Telecom Act on the Company's financial position or results of operations. The FCC may further restrict the ability of cable television operators to implement rate increases or the United States Congress may enact legislation that could delay or suspend the scheduled March 1999 termination of CPST rate regulation. This continued rate regulation, if adopted, could limit the rates charged by the Company. F-240
488 LONG BEACH ACQUISITION CORP. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) A number of states subject cable television 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 television rates is not allowed to be more restrictive than the federal or local regulation. 5. RELATED-PARTY TRANSACTIONS: The Company has entered into a management agreement (the "Management Agreement") with CVI under which CVI manages the operations of the Company for an annual management fee equal to 4% of gross operating revenues, as defined. Management fees under this agreement amounted to $210,100 for the period from April 1, 1997, through May 23, 1997. In addition, the Company has agreed to pay a monitoring fee of two dollars per basic subscriber, as defined, per year for services provided by KKR. Monitoring fees amounted to $20,171 for the period from April 1, 1997, through May 23, 1997. 6. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases certain facilities and equipment under noncancelable operating leases. Rent expense incurred under these leases for the period from April 1, 1997, through May 23, 1997, was $67,600. The Company rents utility poles in its operations. Generally, pole rental agreements are short term, but LBAC anticipates that such rentals will recur. Rent expense for pole attachments for the period from April 1, 1997, through May 23, 1997, was $12,700. LITIGATION The Company is a party to lawsuits which are generally incidental to its business. In the opinion of management, after consulting with legal counsel, the outcome of these lawsuits will not have a material adverse effect on the Company's financial position or results of operations. 7. INCOME TAXES: The Company has not recognized the tax benefit associated with its taxable loss for the period from April 1, 1997, through May 23, 1997, as the Company believes the benefit will likely not be realized. 8. EMPLOYEE BENEFIT PLANS: Substantially all employees of the Company are eligible to participate in a defined contribution plan containing a qualified cash or deferred arrangement pursuant to IRC Section 401(k). The plan provides that eligible employees may contribute up to 10% of their compensation to the plan. The Company made no contributions to the plan for the period from April 1, 1997, through May 23, 1997. F-241
489 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) SUCCESSOR --------------------------- JUNE 30, DECEMBER 31, 1999 1998 ----------- ------------ (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 109,626 $ 9,573 Accounts receivable, net of allowance for doubtful accounts of $3,833 and $1,728, respectively............ 32,487 15,108 Prepaid expenses and other................................ 10,181 2,519 ---------- ---------- Total current assets.............................. 152,294 27,200 ---------- ---------- INVESTMENT IN CABLE TELEVISION PROPERTIES: Property, plant and equipment............................. 1,764,499 716,242 Franchises................................................ 6,591,972 3,590,054 ---------- ---------- 8,356,471 4,306,296 ---------- ---------- OTHER ASSETS................................................ 178,709 2,031 ---------- ---------- $8,687,474 $4,335,527 ========== ========== LIABILITIES AND MEMBER'S EQUITY CURRENT LIABILITIES: Current maturities of long-term debt...................... $ -- $ 10,450 Accounts payable and accrued expenses..................... 273,987 127,586 Payables to manager of cable television systems - related party.................................................. 4,741 4,334 ---------- ---------- Total current liabilities......................... 278,728 142,370 ---------- ---------- LONG-TERM DEBT.............................................. 5,134,310 1,991,756 ---------- ---------- DEFERRED MANAGEMENT FEES - RELATED PARTY.................... 17,004 15,561 OTHER LONG-TERM LIABILITIES................................. 53,310 38,461 ---------- ---------- MEMBER'S EQUITY - 217,585,246 CLASS A UNITS ISSUED AND OUTSTANDING............................................... 3,204,122 2,147,379 ---------- ---------- $8,687,474 $4,335,527 ========== ========== The accompanying notes are an integral part of these condensed consolidated statements. F-242
490 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS) SIX MONTHS ENDED JUNE 30 ------------------------ 1999 1998 SUCCESSOR PREDECESSOR ------------------------ REVENUES.................................................... $ 468,993 $15,129 --------- ------- OPERATING EXPENSES: Operating, general and administrative..................... 241,341 8,378 Depreciation and amortization............................. 249,952 5,312 Stock option compensation expense......................... 38,194 -- Corporate expense charges -- related party................ 11,073 628 --------- ------- 540,560 14,318 --------- ------- (Loss) income from operations.......................... (71,567) 811 --------- ------- OTHER INCOME (EXPENSE): Interest expense.......................................... (157,669) (5,618) Interest income........................................... 10,085 14 Other, net................................................ 2,840 3 --------- ------- (144,744) (5,601) --------- ------- Loss before extraordinary item......................... (216,311) (4,790) EXTRAORDINARY ITEM- Loss from early extinguishment of debt.. 7,794 -- --------- ------- Net loss............................................... $(224,105) $(4,790) ========= ======= The accompanying notes are an integral part of these condensed consolidated statements. F-243
491 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS) SIX MONTHS ENDED JUNE 30 ------------------------ 1999 1998 SUCCESSOR PREDECESSOR ------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (224,105) $ (4,790) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.......................... 249,952 5,312 Stock option compensation expense...................... 38,194 -- Amortization of non-cash interest expense.............. 42,166 802 Gain on disposal of property, plant and equipment...... (1,806) -- Loss from early extinguishment of debt................. 7,794 -- Changes in assets and liabilities, net of effects from acquisitions -- Accounts receivable, net............................... 1,180 (1,291) Prepaid expenses and other............................. (282) (78) Accounts payable and accrued expenses.................. 19,384 10,068 Payables to manager of cable television systems, including deferred management fees.................... 14,592 356 Other operating activities............................. (1,245) -- ---------- --------- Net cash provided by operating activities............ 145,824 10,379 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment................ (205,450) (2,240) Payments for acquisitions, net of cash required........... (1,135,074) (167,484) Loan to Marcus Cable Holdings............................. (1,680,142) -- Other investing activities................................ (8,684) -- ---------- --------- Net cash used in investing activities................ (3,029,350) (169,724) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt.............................. 5,129,188 201,200 Repayments of long-term debt.............................. (2,028,330) (44,800) Payments for debt issuance costs.......................... (107,562) (3,439) Capital contributions..................................... -- 7,000 Distributions............................................. (9,717) -- ---------- --------- Net cash provided by financing activities............ 2,983,579 159,961 ---------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 100,053 616 CASH AND CASH EQUIVALENTS, beginning of period.............. 9,573 626 ---------- --------- CASH AND CASH EQUIVALENTS, end of period.................... $ 109,626 $ 1,242 ========== ========= CASH PAID FOR INTEREST...................................... $ 91,672 $ 3,518 ========== ========= NON CASH TRANSACTION -- Transfer of net assets of Marcus Holdings to the Company (see Note 1)...................... $1,252,370 -- ========== ========= The accompanying notes are an integral part of these condensed consolidated statements. F-244
492 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND BASIS OF PRESENTATION Charter Communications Holding Company, LLC (CCHC), a Delaware limited liability company, was formed in 1999 as a wholly owned subsidiary of Charter Investment, Inc. (Charter), formerly Charter Communications, Inc. Charter, through its wholly owned cable television operating subsidiary, Charter Communications Properties, LLC (CCP), commenced operations with the acquisition of a cable television system on September 30, 1995. Effective December 23, 1998, through a series of transactions, Paul G. Allen acquired approximately 94% of Charter for an aggregate purchase price of $2.2 billion, excluding $2.0 billion in debt assumed (the "Paul Allen Transaction"). In conjunction with the Paul Allen Transaction, Charter acquired 100% of the interests it did not already own in CharterComm Holdings, LLC (CharterComm Holdings) and CCA Group (comprised of CCA Holdings Corp., CCT Holdings Corp. and Charter Communications Long Beach, Inc.), all cable television operating companies, for $2.0 billion, excluding $1.8 billion in debt assumed from unrelated third parties for fair value. Charter previously managed and owned minority interests in these companies. These acquisitions were accounted for using the purchase method of accounting, and accordingly, results of operations of CharterComm Holdings and CCA Group are included in the financial statements from the date of acquisition. In February 1999, Charter transferred all of its cable television operating subsidiaries to a wholly owned subsidiary of Charter Communication Holdings, LLC, (Charter Holdings), Charter Communications Operating, LLC (Charter Operating). Charter Holdings is a wholly owned subsidiary of CHCC. This transfer was accounted for as a reorganization of entities under common control similar to a pooling of interests. As a result of the change in ownership of CCP, CharterComm Holdings and CCA Group, CCHC has applied push-down accounting in the preparation of the consolidated financial statements. Accordingly, CCHC increased its members' equity by $2.2 billion to reflect the amounts paid by Paul G. Allen and Charter. The purchase price was allocated to assets acquired and liabilities assumed based on their relative fair values, including amounts assigned to franchises of $3.6 billion. The allocation of the purchase price is based, in part, on preliminary information which is subject to adjustment upon obtaining complete appraisal and valuation information of intangible assets. The valuation information is expected to be finalized in the third quarter of 1999. Management believes that finalization of the purchase price will not have a material impact on the results of operations or financial position of CCHC. On April 23, 1998, Paul G. Allen and a company controlled by Paul G. Allen, (the "Paul G. Allen Companies") purchased substantially all of the outstanding partnership interests in Marcus Cable Company, L.L.C. (Marcus Cable) for $1.4 billion, excluding $1.8 billion in assumed liabilities. The owner of the remaining partnership interest retained voting control of Marcus Cable. In February 1999, Marcus Cable Holdings, LLC (Marcus Holdings) was formed and Mr. Allen's interests in Marcus Cable were transferred to Marcus Holdings. On March 31, 1999, Paul G. Allen purchased the remaining partnership interests in Marcus Cable, including voting control. On April 7, 1999, Marcus Holdings was merged into Charter Holdings and Marcus Cable was transferred to Charter Holdings. For financial reporting purposes, the merger was accounted for as an acquisition of Marcus Cable effective March 31, 1999, the date Paul G. Allen obtained voting control of Marcus Cable. Accordingly, the results of operations of Marcus Cable have been included in the financial statements from April 1, 1999. The assets and liabilities of Marcus Cable have been recorded in the financial statements using historical carrying values reflected in F-245
493 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the accounts of the Paul G. Allen Companies. Total member's equity increased by $1.3 billion as a result of the Marcus Cable acquisition. Previously, on April 23, 1998, the Paul G. Allen Companies recorded the assets acquired and liabilities assumed of Marcus Cable based on their relative fair values. The consolidated financial statements of CCHC include the accounts of Charter Operating and CCP, the accounts of CharterComm Holdings and CCA Group and their subsidiaries since December 23, 1998 (date acquired by Charter), and the accounts of Marcus since March 31, 1999, and are collectively referred to as the "Company" herein. All subsidiaries are wholly owned. All material intercompany transactions and balances have been eliminated. As a result of the Paul Allen Transaction and application of push-down accounting, the financial information of the Company in the accompanying financial statements and notes thereto as of December 31, 1998, and June 30, 1999, and for the Successor Period (January 1, 1999, through June 30, 1999) is presented on a different cost basis than the financial information of the Company for the Predecessor Period (January 1, 1998, through June 30, 1998) and therefore, such information is not comparable. The accompanying unaudited financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. 2. RESPONSIBILITY FOR INTERIM FINANCIAL STATEMENTS: The accompanying financial statements are unaudited; however, in the opinion of management, such statements include all adjustments necessary for a fair presentation of the results for the periods presented. The interim financial statements should be read in conjunction with the financial statements and notes thereto as of and for the period ended December 31, 1998. Interim results are not necessarily indicative of results for a full year. 3. ACQUISITIONS: In addition to the Paul Allen Transaction and the acquisitions by Charter of CharterComm Holdings, CCA Group and Marcus Holdings, the Company acquired cable television systems for an aggregate purchase price, net of cash acquired, of $291,800 in 1998, and completed the sale of certain cable television systems for an aggregate sales price of $405,000 in 1998, all prior to December 24, 1998. Through June 30, 1999, the Company has acquired cable systems in three separate transactions for an aggregate purchase price, net of cash acquired of $1.1 billion, excluding debt assumed $111 million. The purchase price was allocated to assets acquired and liabilities assumed based on their relative far values, including amounts assigned to franchises of $1.1 billion. The allocation of the purchase price is based, in part, on preliminary information which is subject to adjustment upon obtaining complete valuation information. The valuation information is expected to be finalized by the first quarter of 2000. Management believes that finalization of the purchase price will not have a material impact on the results of operations or financial position of the Company. The above acquisitions were accounted for using the purchase method of accounting, and accordingly, results of operations of the acquired assets have been included in the financial statements from the dates of acquisition. The purchase prices were allocated to tangible and intangible assets based on estimated fair values at the acquisition dates. F-246
494 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Unaudited pro forma operating results as though the acquisitions and dispositions discussed above, including the Paul Allen Transaction and the acquisition of Marcus Holdings, and the refinancing discussed herein, had occurred on January 1, 1998, with adjustments to give effect to amortization of franchises, interest expense and certain other adjustments are as follows: SIX MONTHS ENDED JUNE 30, ---------------------- 1999 1998 --------- --------- Revenues.............................................. $ 669,228 $ 615,916 Loss from operations.................................. (65,912) (79,274) Net loss.............................................. (251,731) (264,336) The unaudited pro forma information has been presented for comparative purposes and does not purport to be indicative of the results of operations had these transactions been completed as of the assumed date or which may be obtained in the future. 4. LONG-TERM DEBT: Long-term debt consists of the following: JUNE 30, DECEMBER 31, 1999 1998 ---------- ------------ Charter: Credit Agreements (including CCP, CCA Group and CharterComm Holdings)................ $ -- $1,726,500 Senior Secured Discount Debentures................ -- 109,152 11 1/4% Senior Notes.............................. -- 125,000 Marcus: Senior Credit Facility............................ -- -- 13 1/2% Senior Subordinated Discount Notes........ 1,010 -- 14 1/4% Senior Discount Notes..................... -- -- Charter Holdings: 8.250% Senior Notes............................... 600,000 -- 8.625% Senior Notes............................... 1,500,000 -- 9.920% Senior Discount Notes...................... 1,475,000 -- CCO Credit Agreement.............................. 2,025,000 -- Renaissance: 10.0% Senior Discount Notes....................... 114,413 -- ---------- ---------- 5,715,423 1,960,652 Current maturities................................ -- (10,450) Unamortized net premium (discount)................ (581,113) 41,554 ---------- ---------- $5,134,310 $1,991,756 ========== ========== F-247
495 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In March 1999, the Company extinguished substantially all existing long-term debt, excluding borrowings of the Company under its credit agreements, and refinanced substantially all existing credit agreements at various subsidiaries with a new credit agreement entered into by Charter Operating (the "CCO Credit Agreement"). The excess of the amount paid over the carrying value of the Company's long-term debt was recorded as Extraordinary item -- loss on early extinguishment of debt in the accompanying statement of operations. CCH NOTES In March 1999, the Company issued $600.0 million 8.250% Senior Notes due 2007 (the "8.250% Senior Notes") for net proceeds of $598.4 million, $1.5 billion 8.625% Senior Notes due 2009 (the "8.625% Senior Notes") for net proceeds of $1,495.4 million, and $1,475.0 million 9.920% Senior Discount Notes due 2011 (the "9.920% Senior Discount Notes") for net proceeds of $905.6 million, (collectively with the 8.250% Senior Notes and the 8.625% Senior Notes, referred to as the "CCH Notes"). The 8.250% Senior Notes are not redeemable prior to maturity. Interest is payable semiannually in arrears on April 1 and October 1 beginning October 1, 1999 until maturity. The 8.625% Senior Notes are redeemable at the option of the Company at amounts decreasing from 104.313% to 100% of par beginning on April 1, 2004, plus accrued and unpaid interest, to the date of redemption. At any time prior to April 1, 2002, the Company may redeem up to 35% of the aggregate principal amount of the 8.625% Senior Notes at a redemption price of 108.625% of the principal amount under certain conditions. Interest is payable semiannually in arrears on April 1 and October 1, beginning October 1, 1999 until maturity. The 9.920% Senior Discount Notes are redeemable at the option of the Company at amounts decreasing from 104.960% to 100% of accreted value beginning April 1, 2004. At any time prior to April 1, 2002, the Company may redeem up to 35% of the aggregate principal amount of the 9.920% Senior Discount Notes at a redemption price of 109.920% of the accreted value under certain conditions. No interest will be payable until April 1, 2004. Thereafter, interest is payable semiannually in arrears on April 1 and October 1 beginning April 1, 2004 until maturity. The discount on the 9.920% Senior Discount Notes is being accreted using the effective interest method at a rate of 9.920% per year. The unamortized discount was $543.4 million at June 30, 1999. The CCH Notes rank equally with current and future unsecured and unsubordinated indebtedness (including trade payables of the Company). The Company is required to make an offer to purchase all of the CCH Notes, at a price equal to 101% of the aggregate principal or 101% of the accreted value, together with accrued and unpaid interest, upon a Change of Control as defined. RENAISSANCE NOTES In connection with the acquisition of Renaissance Media Group LLC (Renaissance) during the second quarter of 1999, the Company assumed $163,175 principal amount of senior discount notes due 2008 (the "Renaissance Notes"). As a result of the change in control of Renaissance, the Company was required to make an offer to purchase the Renaissance Notes at 101% of their accreted value plus accrued interest. In May 1999, the Company made an offer to repurchase the Renaissance Notes pursuant to this requirement, and the holders of the Renaissance Notes tendered an amount representing 30% of the total principal amount for repurchase. F-248
496 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As of June 30, 1999, $114.4 million aggregate principal amount of Renaissance Notes with a carrying value of $82.7 million remains outstanding. Interest on the Renaissance Notes shall be paid semi-annually at a rate of 10% per annum beginning on October 15, 2003. The Renaissance Notes are redeemable at the option of the Company, in whole or in part, at any time on or after April 15, 2003, initially at 105% of their principal amount at maturity, plus accrued interest, declining to 100% of the principal amount at maturity, plus accrued interest, on or after April 15, 2006. In addition, at any time prior to April 15, 2001, the Company may redeem up to 35% of the original principal amount at maturity with the proceeds of one or more sales of capital stock at 110% of their accreted value plus accrued interest on the redemption date, provided that after any such redemption, at least $106 million aggregate principal amount at maturity remains outstanding. CCO CREDIT AGREEMENT The CCO Credit Agreement provides for two term facilities, one with a principal amount of $1.0 billion that matures September 2008 (Term A), and the other with the principal amount of $1.85 billion that matures on March 2009 (Term B). The CCO Credit Agreement also provides for a $1.25 billion revolving credit facility with a maturity date of September 2008. Amounts under the CCO Credit Agreement bear interest at the Base Rate or the Eurodollar rate, as defined, plus a margin up to 2.75%. A quarterly commitment fee of between 0.25% and 0.375% per annum is payable on the unborrowed balance of Term A and the revolving credit facility. The indentures governing the debt agreements require the Company and/or its subsidiaries to comply with various financial and other covenants, including the maintenance of certain operating and financial ratios. These debt instruments also contain substantial limitations on, or prohibitions of distributions, additional indebtedness, liens, asset sales and certain other items. As a result of limitations and prohibitions of distributions, substantially all of the net assets of the consolidated subsidiaries are restricted for distribution to CCHC, the parent company. Based upon outstanding indebtedness at June 30, 1999, and the amortization of term and fund loans, and scheduled reductions in available borrowings of the revolving credit facility, aggregate future principal payments on the total borrowings under all debt agreements at June 30, 1999, are as follows: YEAR AMOUNT - ---- ---------- 2000........................................................ $ -- 2001........................................................ -- 2002........................................................ 17,500 2003........................................................ 17,500 2004........................................................ 18,510 Thereafter.................................................. 5,661,913 ---------- $5,715,423 ========== 5. RELATED-PARTY TRANSACTIONS: The Company is charged a management fee equal to 3.5% percent of gross revenues payable quarterly. To the extent management fees charged to the Company are greater (less) than the corporate expenses incurred by Charter, the Company records a distribution to (capital contributions from) parent. For the six months ended June 30, 1999, the Company F-249
497 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) recorded a distribution of $9,717. As of June 30, 1999, management fees currently payable of $10,015. 6. STOCK OPTION PLAN In accordance with an employment agreement between the President and Chief Executive Officer of Charter and a related option agreement between CCHC and the President and Chief Executive Officer, an option to purchase 3% of the equity value of CCHC, or 7,044,121 membership interests, was issued to the President and Chief Executive Officer. The option vests over a four year period from the date of grant and expires ten years from the date of grant. In February 1999, the Company adopted an option plan providing for the grant of options to purchase up to an aggregate of 10% of the equity value of CCHC. The option plan provides for grants of options to employees, officers and directors of CCHC and its affiliates and consultants who provide services to CCHC. Options granted vest over five years from the grant date. However, if there has not been a public offering of the equity interests of CCHC or an affiliate, vesting will occur only upon termination of employment for any reason, other than for cause or disability. 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. Following the completion of an initial public offering by Charter Communications, Inc. membership units received upon exercise of the options will be automatically exchanged for shares of Class A common stock of CCI on a one-for-one basis. Options outstanding as of June 30, 1999, are as follows: OPTIONS OUTSTANDING OPTIONS --------------------------------------------------------- EXERCISABLE REMAINING ----------- NUMBER OF EXERCISE TOTAL CONTRACT NUMBER OF OPTIONS PRICE DOLLARS LIFE (IN YEARS) OPTIONS ---------- ------------ ------------ --------------- ----------- Outstanding as of January 1, 1999.................. 7,044,127 $ 20.00 $140,882,540 9.4 1,761,032 Granted: February 9, 1999......... 9,111,681 20.00 182,233,620 -- April 5, 1999............ 473,000 20.73 9,805,290 -- Cancelled.................. (90,600) 20.00-20.73 (1,833,754) -- ---------- ------------ ------------ --- --------- Outstanding as of June 30, 1999..................... 16,538,208 $ 20.02 $331,087,696 9.5 1,761,032 ========== ============ ============ === ========= The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" to account for the option plans. Stock option compensation expense of $38.2 million has been recorded in the financial statements since the exercise prices are less than the estimated fair values of the underlying membership interests on the date of grant. Estimated fair values were determined by the Company using the valuation inherent in the Paul Allen Transaction and valuations of public companies in the cable television industry adjusted for factors specific to the Company. Compensation expense is being accrued over the vesting period of each grant that varies from four to five years. As of June 30, 1999, deferred compensation remaining to be recognized in future periods totalled $126 million. Had compensation expense for the option plans been determined based on the fair value at the grant dates under the provisions of SFAS No. 123, the Company's net loss for the six months ended June 30, 1999, would have been $234.0 million. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: no dividend yield, expected volatility of 44.0%, risk free rate of 5.00%, and expected option lives of 10 years. F-250
498 CHARTER COMMUNICATIONS HOLDING COMPANY, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. ACCOUNTING STANDARD NOT YET IMPLEMENTED: 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. We have not yet quantified the impact of adopting SFAS No. 133 on our consolidated financial statements nor have we determined the timing or method of our adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings (losses). 8. SUBSEQUENT EVENT: In the third and fourth quarters of 1999, the Company acquired cable television systems in five separate transactions, including an exchange of cable systems, for an aggregate purchase price of $3.1 billion. The exchange of cable television systems will be recorded at the fair value of the systems exchanged. The Company has also entered into definitive agreements to purchase additional cable television systems, for approximately $9.9 billion. The additional acquisitions are expected to close no later than March 31, 2000. Pursuant to a membership interests purchase agreement, as amended, Vulcan Cable III, a company controlled by Paul G. Allen, contributed $500 million on August 10, 1999 to CCHC, contributed an additional $180.7 million in certain equity interests acquired in connection with the acquisition of Rifkin Acquisition Partners, L.L.L.P. and Interlink Communications Partners, LLP (Rifkin) in September 1999 and contributed $644.3 million in September 1999 to CCHC. All funds will be contributed by CCHC to Charter Holdings. After the issuance of Class A common stock (IPO) by Charter Communications, Inc. and the completion of three acquisitions by CCHC, CCHC will have four separate classes of common membership units designated as Class A, Class B, Class C, and Class D and one class of preferred membership units designated as Class A. The Class A common membership units have been acquired by Charter Investment, Inc. and Vulcan Cable III Inc. Concurrently with the closing of the IPO, Charter Communications, Inc. will contribute the proceeds of the IPO to CCHC in exchange for the Class B common membership units. The Class C common membership units will be acquired by the sellers of Bresnan Communications Company Limited Partnership upon closing of that acquisition. The Class D common membership units may be acquired by the sellers of Falcon Communications, L.P. at their option as a portion of the purchase price upon closing of that transaction. Upon closing of the Rifkin acquisition, certain sellers received 133,312,118 Class A preferred membership units with an aggregate value of $133.3 million. Any matters that require voting will require the affirmative vote of the Class B common membership units. Charter Communications, Inc. will own all Class B common membership units immediately after the IPO and therefore will control CCHC. F-251
499 MARCUS CABLE HOLDINGS, LLC, AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS) THREE MONTHS SIX MONTHS ENDED ENDED MARCH 31 JUNE 30 1999 1998 ------------ ---------- REVENUES.................................................... $ 125,180 $ 254,792 --------- --------- OPERATING EXPENSES: Operating costs........................................... 45,309 98,031 General and administrative................................ 23,675 39,289 Transaction and severance costs........................... -- 114,167 Management fees........................................... 4,381 -- Depreciation and amortization............................. 51,688 105,248 --------- --------- 125,053 356,735 --------- --------- (Loss) income from operations.......................... 127 (101,943) --------- --------- OTHER INCOME (EXPENSE): Interest expense.......................................... (26,963) (81,458) Other, net................................................ (158) 43,662 --------- --------- (27,121) (37,796) --------- --------- Loss before extraordinary item......................... (26,994) (139,739) EXTRAORDINARY ITEM -- Loss from early extinguishment of debt...................................................... (107,978) -- --------- --------- Net loss $(134,972) $(139,739) ========= ========= The accompanying notes are an integral part of these consolidated statements. F-252
500 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS) THREE MONTHS SIX MONTHS ENDED ENDED MARCH 31, JUNE 30, 1999 1998 ------------ ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (134,972) $(139,739) Adjustments to reconcile net loss to net cash provided by operating activities -- Depreciation and amortization.......................... 51,688 105,248 Gain on sale of assets................................. -- (43,662) Loss from early extinguishment of debt................. 107,978 -- Amortization of debt issuance costs, debt discount and interest rate cap agreements......................... 868 40,134 Changes in assets and liabilities, net of effects from acquisitions -- Receivables, net..................................... 2,650 (3,016) Prepaid expenses and other........................... 2,882 (2,630) Accounts payable and accrued expenses................ (13,170) 12,830 Other operating activities........................... 9,022 (43) ----------- --------- Net cash used in operating activities................ 26,946 (30,878) ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of cable systems.............................. -- (57,500) Purchases of property, plant and equipment................ (57,057) (111,031) Proceeds from sale of assets.............................. -- 64,564 Other investing activities................................ -- (42) ----------- --------- Net cash used in investing activities................ (57,057) (104,009) ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt.............................. 38,768 51,500 Repayments of long-term debt.............................. (1,680,142) -- Loan from Charter Holdings................................ 1,680,142 -- Cash contributed by member................................ -- 90,200 Payments of debt issuance costs........................... -- (99) Payments of other long-term liabilities................... -- (463) ----------- --------- Net cash provided by financing activities............ 38,768 141,138 ----------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 8,657 6,251 CASH AND CASH EQUIVALENTS, beginning of period.............. 813 1,607 ----------- --------- CASH AND CASH EQUIVALENTS, end of period.................... $ 9,470 $ 7,858 =========== ========= CASH PAID FOR INTEREST...................................... $ 12,807 $ 41,271 =========== ========= The accompanying notes are an integral part of these consolidated statements. F-253
501 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND BASIS OF PRESENTATION Marcus Cable Holdings, LLC (MCHLLC) was formed in February 1999 as parent of Marcus Cable Company, L.L.C. (MCCLLC), formerly Marcus Cable Company, L.P. (MCCLP). MCCLP was formed as a Delaware limited partnership and was converted to a Delaware limited liability company on June 9, 1998. MCHLLC and its subsidiaries (collectively, the "Company") derive their primary source of revenues by providing various levels of cable television programming and services to residential and business customers. The Company's operations are conducted through Marcus Cable Operating Company, L.L.C. (MCOC), a wholly owned subsidiary of the Company. The Company has operated its cable television systems primarily in Texas, Wisconsin, Indiana, California and Alabama. The accompanying consolidated financial statements include the accounts of MCCLLC, which is the predecessor of MCHLLC, and its subsidiary limited liability companies and corporations. All significant intercompany accounts and transactions have been eliminated in consolidation. On April 23, 1998, Vulcan Cable, Inc. and Paul G. Allen (collectively referred to as "Vulcan") acquired all of the outstanding limited partnership interest and substantially all of the general partner interest in MCCLP for cash payments of $1,392,000 (the "Vulcan Acquisition"). Under the terms of the purchase agreement, the owner of the remaining 0.6% general partner interest in the Company, (the "Minority Interest"), which represents 100% of the voting control of the Company, could cause Vulcan to purchase the 0.6% general partner interest under certain conditions, or Vulcan could cause the Minority Interest to sell its interest to Vulcan under certain conditions, at a fair value of not less than $8,000. On March 31, 1999, Vulcan acquired voting control of the Company by its acquisition of the Minority Interest for cash consideration. Effective December 23, 1998, through a series of transactions, Paul G. Allen acquired approximately 94% of Charter Communications, Inc. (Charter). Beginning in October 1998, Charter managed the operations of the Company. In March 1999, Charter transferred all of its cable television operating subsidiaries to a subsidiary, Charter Communications Holdings, LLC (Charter Holdings) in connection with the issuance of Senior Notes and Senior Discount Notes totaling $3.6 billion. These operating subsidiaries were then transferred to Charter Communications Operating, LLC (Charter Operating). On April 7, 1999, the cable television operating subsidiaries of the Company were transferred to Charter Operating subsequent to the purchase of Paul G. Allen of the Minority Interest. As a result of the Vulcan Acquisition, the Company recognized severance and stay-on bonus compensation of $16,034, during the fourth quarter of 1998. As of March 31, 1999, 85 employees and officers of the Company had been terminated. The remaining balance of $2,400 is to be paid by April 30, 1999 and an additional $400 in stay-on bonuses will be recorded as compensation in 1999 as the related services are provided. F-254
502 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS) INTERIM FINANCIAL INFORMATION The accompanying financial statements are unaudited; however, in the opinion of management, such statements include all adjustments necessary for a fair presentation of the results for the periods presented. The interim financial statements should be read in conjunction with the financial statements and notes thereto as of and for the period ended December 31, 1998. Interim results are not necessarily indicative of results for a full year. 2. ACQUISITIONS AND DISPOSITIONS On April 1, 1998, the Company completed the acquisition of the Mountain Brook and Shelby Cable System form Mountain Brook and Shelby Cable for an aggregate purchase price of $57,500. The communities served by this system are adjacent to the Company's existing systems in the suburban Birmingham, Alabama area. As of the date of the acquisition, this system served approximately 23,000 basic customers. The excess of the cost of properties acquired over the amounts assigned to net tangible assets and noncompetition agreements as of the date of acquisition was approximately $44,603 and is included in franchises. Additionally, in 1998, the Company completed the sale of certain cable television systems for an aggregate net sales price of $401,432, resulting in a total gain of $201,278. No gains or losses were recognized on the sale of the cable television systems divested after the Vulcan Acquisition as such amounts are considered to be an adjustment of the purchase price allocation as these systems were designated as assets to be sold at the date of the Vulcan Acquisition. 3. LONG-TERM DEBT: In March 1999, concurrent with the issuance of Senior Notes and Senior Discount Notes, the combined company (Charter and the Company) extinguished all long-term debt, excluding borrowings of Charter and the Company under their respective credit agreements, and refinanced all existing credit agreements at various subsidiaries of the Company and Charter with a new credit agreement entered into by a wholly owned subsidiary of the combined company. The excess of the amount paid over the carrying value of the Company's long-term debt was recorded as Extraordinary item -- loss on early extinguishment of debt in the accompanying statement of operations 4. RELATED-PARTY TRANSACTIONS: The Company and Charter entered into a management agreement on October 6, 1998 whereby Charter began to manage the day-to-day operations of the Company. In consideration for the management consulting services provided by Charter, the Company pays Charter an annual fee equal to 3% of the gross revenues of the cable system operations, plus expense. For the three months ended March 31, 1999, management fees under this agreement were $2,432. In connection with the transfer of the Company's operating subsidiaries to Charter Operating, the annual fee paid by the Company to Charter increased to 3.5%, plus expense. Prior to consummation of the Vulcan Acquisition, affiliates of Goldman Sachs owned limited partnership interests in MCCLP. Maryland Cable Partners, L.P. ("Maryland Cable"), which was controlled by an affiliate of Goldman Sachs, owned the Maryland Cable systems. MCOC F-255
503 MARCUS CABLE HOLDINGS, LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) (DOLLARS IN THOUSANDS) managed the Maryland Cable systems under the Maryland Cable agreement. Pursuant to such agreement, MCOC earned a management fee equal to 4.7% of the revenues of Maryland Cable. Effective January 31, 1997, Maryland Cable was sold to a third party. Although MCOC is no longer involved in the active management of the Maryland Cable systems, MCOC has entered into an agreement with Maryland Cable to oversee the activities, if any, of Maryland Cable through the liquidation of the partnership. Pursuant to such agreement, MCOC earns a nominal monthly fee. During the three months ended March 31, 1999 and 1998, MCOC earned total management fees of $0 and $355, respectively. 5. ACCOUNTING STANDARD NOT YET IMPLEMENTED: In June 1998, the Financial Accounting Standards Board (FASB) adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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. In June 1999, the FASB issued SFAS No. 137 "Deferral of the Effective Date of FASB Statement No. 133". SFAS No. 137 delays the effective date of SFAS No. 133 for one year to fiscal years beginning after June 15, 2000 and thus the Company will adopt SFAS No. 133 at that time. The Company has not yet quantified the impacts of adopting SFAS No. 133 on its consolidated financial statements nor has it determined the timing or method of its adoption of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings (loss). F-256
504 RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOUR MONTHS SIX MONTHS ENDED APRIL 30, ENDED JUNE 30, 1999 1998 --------------- -------------- (IN THOUSANDS) (UNAUDITED) Revenues................................................ $20,396 $12,921 Cost and expenses: Operating, general and administrative................. 9,382 6,658 Depreciation and amortization......................... 8,912 5,457 ------- ------- Operating income................................... 2,102 806 Interest income......................................... 122 60 Interest expense........................................ (6,321) (4,389) ------- ------- Loss before provision (benefit) for taxes............... (4,097) (3,523) Provision (benefit) for taxes........................... (65) 75 ------- ------- Net loss................................................ $(4,032) $(3,598) ======= ======= See accompanying notes to condensed consolidated financial statements. F-257
505 RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS FOUR MONTHS ENDED JUNE ENDED APRIL 30, 30, 1999 1998 --------------- --------------- (IN THOUSANDS) (UNAUDITED) Operating Activities: Net loss.............................................. $(4,032) $ (3,598) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization...................... 8,912 5,457 Accretion on senior discount notes and non-cash interest expense................................. 3,850 2,300 Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable, net........................... 298 (1,422) Prepaid expenses and other assets.................. (75) (360) Accounts payable and accrued expenses.............. (5,046) 10,053 Advances from affiliates........................... (135) 104 ------- --------- Net cash provided by operating activities........ 3,772 12,534 ------- --------- Investing Activities: Acquisitions of cable systems......................... (2,770) (309,500) Escrow deposit........................................ 150 -- Capital expenditures.................................. (4,250) (691) Cable television franchises........................... -- (1,235) Other intangible assets............................... 16 (490) ------- --------- Net cash used in investing activities............ (6,854) (311,916) ------- --------- Financing Activities: Debt acquisition costs................................ -- (8,343) Repayments on bank debt............................... -- (7,500) Proceeds from bank debt............................... -- 110,000 Net proceeds from issuance of 10% senior discount notes.............................................. -- 100,012 Capital contributions................................. -- 108,500 ------- --------- Net cash provided by financing activities........ -- 302,669 ------- --------- Net increase (decrease) in cash and cash equivalents.... (3,082) 3,287 Cash and cash equivalents at beginning of period........ 8,482 -- ------- --------- Cash and cash equivalents at end of period.............. $ 5,400 $ 3,287 ======= ========= Cash paid for interest.................................. $ 4,210 $ 312 ======= ========= See accompanying notes to condensed consolidated financial statements. F-258
506 RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS EXCEPT WHERE INDICATED) (UNAUDITED) 1. ORGANIZATION Renaissance Media Group LLC ("Group") was formed on March 13, 1998, by Renaissance Media Holdings LLC ("Holdings"). 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"). Louisiana and Tennessee acquired a 76% interest and 24% interest, respectively, in Renaissance Media LLC ("Media") from Morgan Stanley Capital Partners III, Inc. ("MSCP III") on February 13, 1998 for a nominal amount. As a result, Media became a subsidiary of Holdings. The transfer was accounted for as a reorganization of entities under common control similar to a pooling of interests since an entity affiliated with MSCP III had a controlling interest in Holdings. Group and its subsidiaries are collectively referred to as the "Company" herein. On April 9, 1998, the Company acquired six cable television systems (the "TWI Acquisition") from TWI Cable, Inc. a subsidiary of Time Warner Inc. ("Time Warner"). Prior to this Acquisition, the Company had no operations other than start-up related activities. On February 23, 1999, Holdings, Charter Communications, Inc. (now known as Charter Investment, Inc. and referred to herein as "Charter") and Charter Communications, LLC ("CC LLC") executed a purchase agreement, providing for Holdings to sell and CC LLC to purchase, all the outstanding limited liability company membership interests in Group held by Holdings (the "Charter Transaction") subject to certain covenants and restrictions pending closing and satisfaction of certain conditions prior to closing. On April 30, 1999, the Charter Transaction was consummated for a purchase price of $459 million, consisting of $348 million in cash and $111 million in carrying value of debt assumed. 2. BASIS OF PRESENTATION The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles. The interim financial statements are unaudited but include all adjustments, which are of normal recurring nature that the Company considers necessary for a fair presentation of the financial position and the results of operations and cash flows for such periods. Operating results of interim periods are not necessarily indicative of results for a full year. Additional disclosures and information are included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 3. ACQUISITIONS: 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. F-259
507 RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. DEBT Media maintained a credit agreement (the "Credit Agreement") with aggregate commitments under the Credit Agreement totaling $150,000, consisting of a $40,000 revolver, $60,000 Tranche A Term Loans and $50,000 Tranche B Term Loans. On April 30, 1999, in connection with the Charter Transaction all amounts outstanding, including accrued interest and fees, under the Credit Agreement were paid in full and the Credit Agreement was terminated. The Charter Transaction resulted in a "change of control" of the Company. On May 28, 1999, in accordance with the terms and conditions of the indenture governing the 10% senior discount notes (the "Notes"), the Company made an offer (the "Purchase 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 Purchase Offer expired on June 23, 1999, and 48,737 notes ($1,000 face amount at maturity) were validly tendered. On June 28, 1999, CC LLC made a capital contribution in the amount of $34,205 enabling the Company to purchase the Notes. 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). To the extent permitted by the indenture excess cash will be distributed to CC LLC, including repayments of borrowings under Charter Communications Operating, LLC's ("CCO") credit facility (the "CCO Credit Agreement"). The Company and all subsidiaries of CCO have guaranteed payment and performance by CCO of its obligations under the CCO Credit Agreement. In addition, Group and its wholly owned subsidiaries, and all subsidiaries of CCO have pledged their ownership interests as collateral to the CCO Credit Agreement. 5. RELATED PARTY TRANSACTIONS In connection with the TWI Acquisition, Media entered into an agreement with Time Warner, pursuant to which Time Warner would manage the Company's programming in exchange for providing the Company access to certain Time Warner programming arrangements (the "Time Warner Agreement"). Management believes that these programming rates made available through its relationship with Time Warner are lower than the Company could obtain separately. Such volume rates are not available after the Charter Transaction. For the four months ended April 30, 1999, the Company incurred $2,716 for programming services under this agreement. For the period from April 9, 1998 to June 30, 1998 the programming services incurred under this agreement were $1,300. In addition, the Company incurred programming costs of $958 and $1,000 for programming services owned directly or indirectly by Time Warner entities for the four months ended April 30, 1999 and for the period from April 9, 1998 to June 30, 1998, respectively. In connection with the Charter Transaction, the Time Warner Agreement was terminated on April 30, 1999, and Media returned to Time Warner $650 in deferred marketing credits owed to program providers under the programming arrangements. The Company has utilized the law firm of one of its board members for legal services related to the TWI Acquisition, financing agreements and various ongoing legal matters. These fees totaled approximately $154 and $-0- for the four months ended April 30, 1999 and for the period from April 9, 1998 to June 30, 1998, respectively. F-260
508 RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Prior to the consummation of the TWI Acquisition, Media paid fees to six senior managers of the Company who are investors in the Company for services rendered relating to the Acquisition and the Credit Agreement. These fees totaled $287 for the period from April 9, 1998 to June 30, 1998 and were recorded as transaction and financing costs. 6. EMPLOYEE BENEFIT PLAN Beginning April 9, 1998, the Company sponsored a defined contribution plan that covered substantially all employees (the "Plan"). The Plan provided for contributions from eligible employees up to 15% of their compensation subject to a maximum limit as determined by the Internal Revenue Service. The Company's contribution to the Plan was limited to 50% of each eligible employee's contribution up to 10% of his or her compensation. The Company had the right to change the amount of the Company's matching contribution percentage. The Company matching contributions totaled $54 for the four months ended April 30, 1999 and $32 for the period from April 9, 1998 to June 30, 1998. 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"). Employees that qualify for participation 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. F-261
509 HELICON PARTNERS I, L.P. AND AFFILIATES UNAUDITED CONDENSED COMBINED BALANCE SHEET JUNE 30, 1999 ASSETS Cash and cash equivalents................................... $ 6,894,228 Receivables from subscribers................................ 1,858,977 Prepaid expenses and other assets........................... 2,171,812 Property, plant and equipment, net.......................... 88,251,876 Intangible assets and deferred costs, net................... 92,775,247 Due to affiliates, net...................................... 5,886 ------------ Total assets........................................... $191,958,026 ============ LIABILITIES AND PARTNERS' DEFICIT Liabilities: Accounts payable.......................................... $ 2,598,003 Accrued expenses.......................................... 7,190,566 Subscriptions received in advance......................... 576,588 Accrued interest.......................................... 3,922,490 Due to principal owner.................................... 5,000,000 Senior secured notes...................................... 115,000,000 Loans payable to banks.................................... 121,261,571 Senior subordinated loans payable to banks................ 12,000,000 12% subordinated notes, net of unamortized discount of $2,313,425............................................. 45,608,577 Redeemable partnership interests.......................... 21,162,288 Other notes payable....................................... 5,206,373 Due to affiliates, net.................................... -- ------------ Total liabilities...................................... 339,526,456 ------------ Commitments Partners' deficit: Preferred limited partners................................ 9,089,226 Accumulated partners' deficit............................. (156,656,656) Less capital contribution receivable...................... (1,000) ------------ Total partners' deficit................................ (147,568,430) ------------ Total liabilities and partners' deficit................ $191,958,026 ============ See accompanying notes to unaudited condensed combined financial statements. F-262
510 HELICON PARTNERS I, L.P. AND AFFILIATES UNAUDITED CONDENSED COMBINED STATEMENTS OF OPERATIONS SIX-MONTH PERIODS ENDED JUNE 30,1998 AND 1999 1998 1999 ------------ ------------ Revenues................................................. $ 37,208,700 $ 42,956,363 ------------ ------------ Operating expenses: Operating expenses..................................... 11,379,819 13,333,558 General and administrative expenses.................... 6,274,221 6,991,885 Marketing expenses..................................... 1,531,302 1,746,092 Depreciation and amortization.......................... 11,772,187 13,583,647 Management fee charged by affiliate.................... 1,578,472 2,147,812 Corporate and other expenses........................... 192,155 4,855,873 ------------ ------------ Total operating expenses............................ 32,728,156 42,658,867 ------------ ------------ Operating income....................................... 4,480,544 297,496 ------------ ------------ Interest expense......................................... (13,808,274) (15,831,274) Interest income.......................................... 49,515 104,794 ------------ ------------ (13,758,759) (15,726,480) ------------ ------------ Net loss............................................... $ (9,278,215) $(15,428,984) ============ ============ See accompanying notes to unaudited condensed combined financial statements. F-263
511 HELICON PARTNERS I, L.P. AND AFFILIATES UNAUDITED CONDENSED COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT SIX-MONTH PERIOD ENDED JUNE 30, 1999 PARTNERS' DEFICIT PREFERRED ----------------------------- CAPITAL LIMITED GENERAL CLASS A LIMITED CONTRIBUTION PARTNERS PARTNER PARTNERS RECEIVABLE TOTAL ---------- ----------- --------------- ------------ ------------- Balance at December 31, 1998....................... $8,567,467 $ (989,962) $(134,807,570) $(1,000) $(127,231,065) Distribution of additional preferred partnership interests.................. 521,759 (5,218) (516,541) -- -- Accretion of redeemable partnership interests...... -- (49,084) (4,859,297) -- (4,908,381) Net loss..................... -- (154,290) (15,274,694) -- (15,428,984) ---------- ----------- ------------- ------- ------------- Balance at June 30, 1999..... $9,089,226 $(1,198,554) $(155,458,102) $(1,000) $(147,568,430) ========== =========== ============= ======= ============= See accompanying notes to unaudited condensed combined financial statements. F-264
512 HELICON PARTNERS I, L.P. AND AFFILIATES UNAUDITED CONDENSED COMBINED STATEMENTS OF CASH FLOWS SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1999 1998 1999 ----------- ------------ Cash flows from operating activities: Net loss.................................................. $(9,278,215) $(15,428,984) ----------- ------------ Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.......................... 11,772,187 13,583,647 Amortization of debt discount and deferred financing costs................................................ 460,010 483,210 Gain on sale of equipment.............................. (1,498) (10,603) Interest on 12% subordinated notes paid through the issuance of additional notes......................... 2,408,370 2,706,044 Change in operating assets and liabilities: Increase in receivables from subscribers............. (162,393) (200,619) (Increase) decrease in prepaid expenses and other assets............................................ (645,035) 1,300,771 Increase in financing costs incurred................. -- -- (Decrease) increase in accounts payable and accrued expenses.......................................... (2,396,567) 104,941 Decrease in subscriptions received in advance........ (144,134) (242,975) Increase in accrued interest......................... 141,755 180,036 ----------- ------------ Total adjustments................................. 11,432,695 17,904,452 ----------- ------------ Net cash provided by operating activities......... 2,154,480 2,475,468 ----------- ------------ Cash flows from investing activities: Purchases of property, plant and equipment................ (4,575,109) (6,127,185) Proceeds from sale of equipment........................... 91,128 20,355 Cash paid for net assets of cable television systems acquired............................................... -- (6,217,143) Increase in intangible assets............................. (69,325) (238,202) ----------- ------------ Net cash used in investing activities............. (4,553,306) (12,562,175) ----------- ------------ Cash flows from financing activities: Proceeds from bank loans.................................. 3,000,000 13,000,000 Repayment of bank loans................................... (4,834) (5,351) Repayment of other notes payable.......................... (574,499) (651,346) Advances to affiliates.................................... (3,356,074) (5,535,838) Repayments of advances to affiliates...................... 3,309,008 5,282,910 Payment of financing costs................................ -- (240,000) ----------- ------------ Net cash provided by financing activities......... 2,373,601 11,850,375 ----------- ------------ Net (decrease) increase in cash and cash equivalents.................................... (25,225) 1,763,668 Cash and cash equivalents at beginning of period............ 4,372,281 5,130,561 ----------- ------------ Cash and cash equivalents at end of period.................. $ 4,347,056 $ 6,894,229 =========== ============ Supplemental cash flow information: Interest paid............................................. $10,798,139 $ 12,461,977 =========== ============ Other non-cash items: Acquisition of property, plant and equipment through issuance of other notes payable...................... $ 501,502 $ 389,223 =========== ============ See accompanying notes to unaudited condensed combined financial statements. F-265
513 HELICON PARTNERS I, L.P AND AFFILIATES NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS JUNE 30, 1999 1. ORGANIZATION AND NATURE OF BUSINESS Helicon Partners I, L.P. ("the Partnership") was organized as a limited partnership on November 30, 1994 under the laws of the State of Delaware. On April 8, 1996, Baum Investments, Inc. acquired a 1% general partnership interest in the Partnership through an initial capital contribution of $1,500 and the existing limited partners of The Helicon Group, L.P. ("THGLP"), formed in 1993, exchanged their limited partnership interests in THGLP for all Class A Common Limited Partnership Interests and Preferred Limited Partnership Interests in the Partnership. As a result of this exchange, THGLP became 99% owned by the Partnership. The Partnership now owns all of the limited partnership interests in THGLP and Baum Investments, Inc. ("Baum") continues to be the general partner of THGLP and to own a 1% general partnership interest in THGLP. The Partnership also owns a 99% interest and THGLP a 1% interest in HPI Acquisition Co., LLC ("HPIAC"), a Delaware limited liability company formed on February 7, 1996. The Partnership also owns a 89% limited partnership interest and Baum Investments, Inc. a 1% general partnership interest in Helicon OnLine, L. P. ("HOL"), a Delaware limited partnership formed May 31, 1997. The Partnership, THGLP, HPIAC and HOL are referred to collectively herein as the Company. The Partnership operates in one business segment offering cable television services in the states of Pennsylvania, West Virginia, North Carolina, South Carolina, Louisiana, Vermont and New Hampshire, Georgia and Tennessee. The Company also offers to customers advanced services, such as paging, cable modems and private data network systems under the name of "Helicon Network Solutions", as well as, dial up internet service in Pennsylvania and Vermont under the name of "Helicon OnLine". On July 30, 1999, Charter-Helicon, LLC ("Charter-Helicon"), acquired a 1% interest in THGLP previously owned by Baum Investments, Inc. and became the General Partner of THGLP. Concurrently, Charter-Helicon and Charter Communications, LLC ("CC-LLC"), parent of Charter-Helicon, acquired all of the partnership interests of the Partnership. These transactions are collectively referred to as the "Helicon/Charter Deal" herein. In connection with the Helicon/Charter Deal, $228,985,000 of cash was paid to the equity holders; Baum retained a $25,000,000 limited liability company membership interest in Charter-Helicon; debt of $197,447,000 was repaid; debt of $115,000,000 was assumed; and other costs totaling $4,285,000 were incurred. Effective with this change of ownership, the Company will be managed by Charter Investment, Inc. In the opinion of management, the accompanying unaudited condensed combined financial statements of the Partnership reflect all adjustments, consisting of normal recurring accruals, necessary to present fairly the Partnership's combined financial position as of June 30, 1999, and their results of operations and cash flows for the three-month periods ended June 30, 1998 and 1999. The results of operations for the three-month period ended June 30, 1999 are not necessarily indicative of the results for a full year. 2. ACQUISITIONS On December 31, 1998, HPIAC acquired the net assets of cable television systems serving approximately 11,225 (unaudited) subscribers primarily in the North Carolina community of Roanoke Rapids. The aggregate purchase price was $26,063,284 including acquisition costs of $535,875 and was allocated to the net assets acquired, which included property, equipment and intangible assets, based on their estimated fair value. F-266
514 HELICON PARTNERS I, L.P AND AFFILIATES NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED) On January 7, 1999, THGLP acquired the cable television systems, serving approximately 4,350 (unaudited) subscribers in the North Carolina counties of Carter, Johnson and Unicol. The aggregate purchase price was approximately $5,228,097 and was allocated to the net assets acquired, which included property and equipment and intangible assets. On March 1, 1999, HPIAC acquired a cable television system serving approximately 551 (unaudited) subscribers in the communities of Abbeville, Donalds and Due West, South Carolina. The aggregate purchase price was approximately $723,356 and was allocated to the net assets acquired, which included property, equipment and intangible assets, based on their estimated fair value. On April 6, 1999, the HPIAC acquired a cable television system serving approximately 314 (unaudited) subscribers in the communities of Mentone and part of DeKalb, Alabama. The aggregate purchase price was approximately $265,690 and was allocated to the net assets acquired, which included property, equipment and intangible assets, based on their estimated fair value. The operating results relating to the above acquisitions, effective with their acquisition dates, are included in the accompanying unaudited condensed combined financial statements. 3. LOANS PAYABLE TO BANKS On January 5, 1999, THGLP entered into a $12,000,000 Senior Subordinated Loan Agreement with Paribas Capital Funding, LLC ("the 1999 Credit Facility"). The Facility is non-amortizing and is due January 5, 2003. Initial borrowings of $7,000,000 under this Facility financed the acquisition of certain cable television assets in North Carolina. On February 19, 1999, the Company borrowed the remaining $5,000,000 available under the 1999 Credit Facility. Interest on the $12,000,000 is payable at 11.5% per annum. F-267
515 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) COMBINED BALANCE SHEETS (DOLLARS IN THOUSANDS) JUNE 30, DECEMBER 31, 1999 1998 ----------- ------------ (UNAUDITED) ASSETS Accounts receivable, net of allowance for doubtful accounts of $1,417 and $899, respectively.......................... $ 16,009 $ 14,425 Receivable from affiliates.................................. 5,250 5,623 Prepaid expenses............................................ 487 423 Other current assets........................................ 232 350 -------- -------- Total current assets.............................. 21,978 20,821 Intangible assets, net...................................... 226,040 255,356 Property and equipment, net................................. 231,382 218,465 Deferred income taxes....................................... 15,288 12,598 Investments and other non-current assets.................... 5,535 2,804 -------- -------- Total assets...................................... $500,223 $510,044 ======== ======== LIABILITIES AND EQUITY Accounts payable and accrued liabilities.................... $ 19,874 $ 19,230 Deferred revenue............................................ 11,778 11,104 Payable to affiliates....................................... 4,607 3,158 -------- -------- Total current liabilities......................... 36,259 33,492 Note payable to InterMedia Partners IV, L.P................. 414,493 396,579 Deferred channel launch revenue............................. 3,492 4,045 -------- -------- Total liabilities................................. 454,244 434,116 -------- -------- Commitments and contingencies Mandatorily redeemable preferred shares..................... 14,676 14,184 Equity...................................................... 31,303 61,744 -------- -------- Total liabilities and equity...................... $500,223 $510,044 ======== ======== See accompanying notes to the condensed combined financial statements. F-268
516 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) SIX MONTHS ENDED JUNE 30, --------------------- 1999 1998 --------- -------- (UNAUDITED) REVENUES Basic and cable services.................................... $ 69,705 $ 61,679 Pay service................................................. 13,606 11,934 Other service............................................... 17,333 12,247 --------- -------- 100,644 85,860 COSTS AND EXPENSES Program fees................................................ 23,530 19,186 Other direct expenses....................................... 10,055 8,253 Selling, general and administrative expenses................ 21,663 15,752 Management and consulting fees.............................. 1,566 1,562 Depreciation and amortization............................... 52,309 41,413 --------- -------- 109,123 86,166 --------- -------- (Loss) income from operations............................... (8,479) (306) --------- -------- OTHER INCOME (EXPENSE) Interest expense............................................ (11,757) (13,440) Interest and other income................................... 163 137 Other expense............................................... (6) (24) --------- -------- (11,600) (13,327) --------- -------- Loss before income tax benefit.............................. (20,079) (13,633) Income tax benefit.......................................... 2,690 2,689 --------- -------- Net loss.................................................... (17,389) (10,944) OTHER COMPREHENSIVE INCOME Unrealized loss on available-for-sale securities............ (310) -- --------- -------- Comprehensive loss.......................................... $ (17,699) $(10,944) --------- -------- See accompanying notes to the condensed combined financial statements. F-269
517 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) COMBINED STATEMENT OF CHANGES IN EQUITY (DOLLARS IN THOUSANDS) Balance at January 1, 1998.................................. $ 58,713 Net loss.................................................... (3,521) Accretion for mandatorily redeemable preferred shares....... (945) Net cash contributions from parent.......................... 6,350 In-kind contribution from parent............................ 1,147 -------- Balance at December 31, 1998................................ 61,744 Net loss (unaudited)........................................ (17,389) Accretion for mandatorily redeemable preferred shares (unaudited)............................................... (492) Net cash distributions to parent (unaudited)................ (12,250) Other comprehensive income (unaudited)...................... (310) -------- Balance at June 30, 1999 (unaudited)........................ $ 31,303 ======== See accompanying notes to the condensed combined financial statements. F-270
518 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) SIX MONTHS ENDED JUNE 30, -------------------- 1999 1998 -------- -------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net loss.................................................. $(17,389) $(10,944) Adjustments to reconcile net loss to cash flows from operating activities: Depreciation and amortization.......................... 52,309 41,413 Changes in assets and liabilities: Accounts receivable.................................. (1,584) (398) Receivables from affiliates.......................... 373 (1,794) Prepaid expenses..................................... (64) 49 Other current assets................................. 118 28 Deferred income taxes................................ (2,690) (2,689) Investments and other non-current assets............. (3,041) 148 Accounts payable and accrued liabilities............. 2,487 (3,406) Deferred revenue..................................... 957 1,248 Payables to affiliates............................... 1,449 (187) Accrued interest..................................... 11,757 13,440 Deferred channel launch revenue...................... (836) (350) -------- -------- Cash flows from operating activities...................... 43,846 36,558 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment....................... (37,441) (36,576) Intangible assets......................................... (312) (333) -------- -------- Cash flows from investing activities...................... (37,753) (36,909) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net (distributions) contributions to/from parent.......... (12,250) 6,768 Net borrowings (repayments) of intercompany debt.......... 6,157 (6,417) -------- -------- Cash flows from financing activities...................... (6,093) 351 -------- -------- Net change in cash.......................................... -- -- -------- -------- Cash at beginning of period................................. -- -- -------- -------- Cash at end of period....................................... $ -- $ -- ======== ======== See accompanying notes to the condensed combined financial statements. F-271
519 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) (UNAUDITED) 1. BASIS OF PRESENTATION THE CHARTER TRANSACTIONS InterMedia Partners, a California limited partnership ("IP-I"), and InterMedia Capital Partners IV, L.P., a California limited partnership, ("ICP-IV", together with IP-I, "InterMedia") are affiliated through common control and management. Robin Media Group, Inc., a Nevada corporation, ("RMG") is a majority owned subsidiary of ICP-IV. On April 20, 1999, InterMedia and certain of its affiliates entered into agreements (the "Agreements") with affiliates of Charter Communications, Inc. ("Charter") to sell and exchange certain of their cable television systems ("the Charter Transactions"). Specifically, ICP-IV and its affiliates have agreed to sell certain of their cable television systems in Tennessee and Gainesville, Georgia through a combination of asset sales and the sale of their equity interests in RMG, and to exchange their systems in and around Greenville and Spartanburg, South Carolina for Charter systems located in Indiana, Kentucky, Utah and Montana. Immediately upon Charter's acquisition of RMG, IP-I will exchange its cable television systems in Athens, Georgia, Asheville and Marion, North Carolina and Cleveland, Tennessee for RMG's cable television systems located in middle Tennessee. The Charter Transactions are expected to close during the third or fourth quarter of 1999. The cable systems retained by Charter upon consummation of the Charter Transactions, together with RMG, are referred to as the "InterMedia Cable Systems," or the "Systems." PRESENTATION The Systems being sold or exchanged do not individually or collectively comprise a separate legal entity. Accordingly, the accompanying condensed combined financial statements have been carved-out from the historical accounting records of InterMedia. The accompanying unaudited interim condensed combined financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, certain footnote disclosures have been condensed or omitted. In the management's opinion, the interim unaudited condensed combined financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the Systems' financial position as of June 30, 1999, and their results of operations for the six months ended June 30, 1999 and 1998 and cash flows for the six months ended June 30, 1999 and 1998. The results of operations for these periods are not necessarily indicative of results that may be expected for the year ending December 31, 1999. These condensed combined financial statements should be read in conjunction with the Systems' audited combined financial statements and notes thereto for the year ended December 31, 1998 contained elsewhere in this document. CARVE-OUT METHODOLOGY Throughout the periods covered by the condensed combined financial statements, the individual cable systems were operated and accounted for separately. However, the Charter Transactions exclude certain systems (the "Excluded Systems") which were operated as part of F-272
520 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN THOUSANDS) (UNAUDITED) the Marion, North Carolina and western Tennessee systems throughout 1998 and 1999. For purposes of carving out and excluding the results of operations and financial position of the Excluded Systems from the condensed combined financial statements, management has estimated the revenues, expenses, assets and liabilities associated with each Excluded System based on the ratio of each Excluded System's basic subscribers to the total basic subscribers served by the Marion, North Carolina and western Tennessee systems, respectively. Management believes the basis used for these allocations is reasonable. The Systems' results of operations are not necessarily indicative of future operating results or the results that would have occurred if the Systems were a separate legal entity. Management and consulting fees represent an allocation of management fees charged to IP-I and ICP-IV by InterMedia Capital Management, a California limited partnership ("ICM") and InterMedia Management, Inc. ("IMI"), respectively. ICM is a limited partner of IP-I. IMI is the managing member of each of the general partners of IP-I and ICP-IV. These fees are charged at a fixed amount per annum pursuant to a management agreement and have been allocated to the Systems based upon the allocated contributed capital of the individual systems as compared to the total contributed capital of InterMedia's subsidiaries. As more fully described in Note 4 -- "Related Party Transactions," certain administrative services are also provided by IMI and are charged to all affiliates based on relative basic subscriber percentages. CASH AND INTERCOMPANY ACCOUNTS Under InterMedia's centralized cash management system, cash requirements of its individual operating units were generally provided directly by InterMedia and the cash generated or used by the Systems is transferred to/from InterMedia, as appropriate, through intercompany accounts. The intercompany account balances between InterMedia and the individual operating units, except RMG's intercompany note payable to InterMedia Partners IV, L.P. ("IP-IV"), as described in Note 3 -- "Note Payable to InterMedia Partners IV, L.P.," are not intended to be settled. Accordingly, the balances, other than RMG's note payable to IP-IV, are included in equity and all net cash generated from operations, investing activities and financing activities have been included in the Systems' net (distributions) contributions to/from parent in the combined statements of cash flows. IP-I and ICP-IV or its subsidiaries maintain all external debt to fund and manage InterMedia's operations on a centralized basis. The condensed combined financial statements present only the debt and related interest expense of RMG, which is to be assumed and repaid by Charter pursuant to the Charter Transactions. See Note 3 -- "Note Payable to InterMedia Partners IV, L.P." Debt, unamortized debt issue costs and interest expense related to the financing of the cable systems not owned by RMG have not been allocated to the InterMedia Cable Systems. As such, the level of debt, unamortized debt issue costs and related interest expense presented in the condensed combined financial statements are not representative of the debt that would be required or interest expense incurred if the InterMedia Cable Systems were a separate legal entity. F-273
521 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN THOUSANDS) (UNAUDITED) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles 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 these estimates. 2. EXCHANGE OF CABLE PROPERTIES EXCHANGE On December 31, 1998, certain of the Systems' cable television assets located in and around western and eastern Tennessee ("Exchanged Assets"), serving approximately 10,600 (unaudited) basic subscribers, plus cash of $398 were exchanged for other cable television assets located in and around western and eastern Tennessee, serving approximately 10,000 (unaudited) basic subscribers. The exchange resulted in a gain of $26,218 calculated as the difference between the fair value of the assets received and the net book value of the Exchanged Assets less cash paid of $398. 3. NOTE PAYABLE TO INTERMEDIA PARTNERS IV, L.P. RMG's note payable to IP-IV consists of the following: JUNE 30, DECEMBER 31, 1999 1998 -------- ------------ Intercompany revolving credit facility, $1,200,000 commitment as of June 30, 1999, interest currently at 6.57% payable on maturity, matures December 31, 2006................................................ $414,493 $396,579 ======== ======== RMG's debt is outstanding under an intercompany revolving credit facility executed with IP-IV. The revolving credit facility currently provides for $1,200,000 of available credit. RMG's intercompany revolving credit facility requires repayment of the outstanding principal and accrued interest on the earlier of (i) December 31, 2006, or (ii) acceleration of any of IP-IV's obligations to repay its bank debt outstanding under its revolving credit facility ("IP-IV Revolving Credit Facility") and term loan agreement ("IP-IV Term Loan", together with the IP-IV Revolving Credit Facility, the "IP-IV Bank Facility") dated July 30, 1996. Interest rates under RMG's intercompany revolving credit facility are calculated monthly and are referenced to those made available under the IP-IV Bank Facility. Interest rates ranged from 6.24% to 6.84% during the six months ended June 30, 1999. Charter has an obligation to assume and repay RMG's intercompany revolving credit facility pursuant to the Charter Transactions. F-274
522 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN THOUSANDS) (UNAUDITED) Advances under the IP-IV Bank Facility are available under interest rate options related to the base rate of the administrative agent for the IP-IV Bank Facility ("ABR") or LIBOR. Interest rates on borrowings under the IP-IV Term Loan vary from LIBOR plus 1.75% to LIBOR plus 2.00% or ABR plus 0.50% to ABR plus 0.75% based on IP-IV's ratio of debt outstanding to annualized quarterly operating cash flow ("Senior Debt Ratio"). Interest rates on borrowings under the IP-IV Revolving Credit Facility also vary from LIBOR plus 0.625% to LIBOR plus 1.50% or ABR to ABR plus 0.25% based on IP-IV's Senior Debt Ratio. The IP-IV Bank Facility requires quarterly payment of fees on the unused portion of the IP-IV Revolving Credit Facility of 0.375% per annum when the Senior Debt Ratio is greater than 4.0:1.0 and at 0.25% when the Senior Debt Ratio is less than or equal to 4.0:1.0. The terms and conditions of RMG's intercompany debt agreement are not necessarily indicative of the terms and conditions which would be available if the Systems were a separate legal entity. 4. RELATED PARTY TRANSACTIONS ICM and IMI provide certain management services to IP-I and ICP-IV, respectively, for per annum fixed fees, of which 20% per annum is deferred and payable in each following year in order to support InterMedia's debt. Management fees charged to InterMedia were $2,706 for the six months ended June 30, 1999 and 1998. Of the fees charged to InterMedia, $1,566 and $1,562 were charged to the Systems for the six months ended June 30, 1999 and 1998, respectively. IMI has entered into agreements with both IP-I and ICP-IV to provide accounting and administrative services at cost. Under the terms of the agreements, the expenses associated with rendering these services are charged to the Systems and other affiliates based upon relative basic subscriber percentages. Management believes this method to be reflective of the actual cost. Administrative fees charged by IMI were $2,009 and $2,070 for the six months ended June 30, 1999 and 1998, respectively. Receivable from affiliates at June 30, 1999 and December 31, 1998 include $45 and $52, respectively, of advances to IMI, net of administrative fees charged by IMI and operating expenses paid by IMI on behalf of the Systems. IP-I is majority-owned, and ICP-IV is owned in part, by AT&T Broadband & Internet Services ("AT&TBIS"), formerly Tele-Communications, Inc. As affiliates of AT&TBIS, IP-I and ICP-IV are able to purchase programming services from a subsidiary of AT&TBIS. Management believes that the overall programming rates made available through this relationship are lower than the Systems could obtain separately. Such volume rates may not continue to be available in the future should AT&TBIS's ownership interest in InterMedia significantly decrease. Programming fees charged by the AT&TBIS subsidiary to the Systems for the six months ended June 30, 1999 and 1998 amounted to $17,276 and $14,399, respectively. Payable to affiliates includes programming fees payable to the AT&TBIS subsidiary of $3,151 and $2,918 at June 30, 1999 and December 31, 1998, respectively. On January 1, 1998 an affiliate of AT&TBIS entered into agreements with InterMedia to manage the Systems' advertising business and related services for an annual fixed fee per advertising sales subscriber, as defined by the agreements. In addition to the annual fixed fee AT&TBIS is entitled to varying percentage shares of the incremental growth in annual cash flows F-275
523 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN THOUSANDS) (UNAUDITED) from advertising sales above specified targets. Management fees charged by the AT&TBIS subsidiary for the six months ended June 30, 1999 amounted to $202. Receivable from affiliates at June 30, 1999 and December 31, 1998 includes $5,069 and $3,437, respectively, of receivables from AT&TBIS for advertising sales. As part of its normal course of business the Systems are involved in transactions with affiliates of InterMedia which own and operate cable television systems. Such transactions include purchases and sales at cost of inventories used in construction of cable plant. Receivable from affiliates at June 30, 1999 and December 31, 1998 include $136 and $2,134, respectively, of receivables from affiliated systems. Payable to affiliates at June 30, 1999 and December 31, 1998 includes $1,410 and $208, respectively, of payables to affiliated systems. 5. COMMITMENTS AND CONTINGENCIES The Systems are committed to provide cable television services under franchise agreements with remaining terms of up to twenty years. Franchise fees of up to 5% of gross revenues are payable under these agreements. Current Federal Communications Commission ("FCC") regulations require that cable television operators obtain permission to retransmit major network and certain local television station signals. The Systems have entered into retransmission agreements with all applicable stations in exchange for in-kind and/or other consideration. InterMedia has been named in several certified class actions in various jurisdictions concerning its late fee charges and practices. Certain cable systems owned by InterMedia charge late fees to customers who do not pay their cable bills on time. These late fee cases challenge the amount of the late fees and the practices under which they are imposed. The Plaintiffs raise claims under state consumer protection statutes, other state statutes and common law. Plaintiffs generally allege that the late fees charged by InterMedia's cable systems in the States of Tennessee, South Carolina and Georgia are not reasonably related to the costs incurred by the cable systems as a result of late payment. Plaintiffs seek to require cable systems to reduce their late fees on a prospective basis and to provide compensation for alleged excessive late fee charges for past periods. These cases are either at the early stages of the litigation process or are subject to a case management order that sets forth a process leading to mediation. Based upon the facts available management believes that, although no assurances can be given as to the outcome of these actions, the ultimate disposition of these matters should not have a material adverse effect upon the financial condition of the Systems. Under existing Tennessee laws and regulations, the Systems paid an Amusement Tax in the form of a sales tax on programming service revenues generated in Tennessee in excess of charges for the basic and expanded basic levels of service. Under the existing statute, only the service charges or fees in excess of the charges for the "basic cable" television service package were not exempt from the Amusement Tax. Related regulations clarify the definition of basic cable to include two tiers of service, which InterMedia's management and other operators in Tennessee have interpreted to mean both the basic and expanded basic levels of service. In the Spring of 1999 Tennessee Department of Revenue ("TDOR") proposed legislation that was passed by the Tennessee State Legislature which replaced the current Amusement Tax F-276
524 INTERMEDIA CABLE SYSTEMS (COMPRISED OF COMPONENTS OF INTERMEDIA PARTNERS AND INTERMEDIA CAPITAL PARTNERS IV, L.P.) NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS -- CONTINUED (DOLLARS IN THOUSANDS) (UNAUDITED) with a new sales tax on all cable service revenues in excess of fifteen dollars per month effective September 1, 1999. The new tax would be computed at a rate approximately equal to the existing effective tax rate. Prior to the passage of the new sales tax legislation, the TDOR suggested that unless InterMedia and other cable operators in Tennessee support the proposed legislation, it would assess additional taxes on prior years' expanded basic service revenue. The TDOR can issue an assessment for prior periods up to three years. Management estimates that the amount of such an assessment, if made for all periods not previously audited, would be approximately $5.4 million. InterMedia's management believes that it is possible but not likely that the TDOR can make such an assessment and prevail in defending it. Management also believes that such an assessment is not likely based on the passage of the new sales tax legislation. InterMedia's management believes it has made a valid interpretation of the current Tennessee statute and regulations and that it has properly determined and paid all sales tax due. InterMedia further believes that the legislative history of the current statute and related regulations, as well as the TDOR's history of not making assessments based on audits of prior periods, support InterMedia's interpretation. InterMedia and other cable operators in Tennessee are aggressively defending their past practices on calculation and payment of the Amusement Tax. The Systems are subject to other claims and litigation in the ordinary course of business. In the opinion of management, the ultimate outcome of any existing litigation or other claims will not have a material adverse effect on the Systems' financial position or results of operations. 6. CHANNEL LAUNCH REVENUE During 1997 and 1998, the Systems were credited with amounts representing their share of payments received or to be received by InterMedia from certain programmers to launch and promote their new channels. Of the total amount credited, the Systems recognized advertising revenue of $333 during the six months ended June 30, 1999 for advertisements provided by the Systems to promote the new channels. No advertising revenue was recognized for the six-month period ended June 30, 1998 related to the promotion of these new channels. The remaining amounts credited to the Systems are being amortized over the respective terms of the program agreements which range between five and ten years. The Systems amortized and recorded as other service revenues of $316 and $350 for the six months ended June 30, 1999 and 1998, respectively. 7. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS Total accretion on RMG's Redeemable Preferred Stock for the six months ended June 30, 1999 and 1998 amounted to $492 and $459, respectively. F-277
525 RIFKIN CABLE INCOME PARTNERS L. P. BALANCE SHEET (UNAUDITED) 12/31/98 6/30/99 ----------- ----------- ASSETS Cash and cash equivalents.................................. $ 65,699 $ 43,982 Customer accounts receivable, net of allowance for doubtful accounts of $18,278 in 1998 and $12,047 in 1999.......... 51,523 47,580 Other receivables.......................................... 133,278 72,684 Prepaid expenses and deposits.............................. 70,675 22,997 Property, plant and equipment, at cost: Cable television transmission and distribution system and related equipment..................................... 8,758,525 11,051,767 Land, buildings, vehicles and furniture and fixtures..... 623,281 468,694 ----------- ----------- 9,381,806 11,520,461 Less accumulated depreciation............................ (4,354,685) (588,674) ----------- ----------- Net property, plant and equipment..................... 5,027,121 10,931,787 Franchise costs and other intangible assets, net of accumulated amortization of $2,033,405 in 1998 and $563,545 in 1999......................................... 1,772,345 12,920,055 ----------- ----------- Total assets..................................... $ 7,120,641 $24,039,085 =========== =========== LIABILITIES AND PARTNERS' EQUITY Accounts payable and accrued liabilities................... $ 396,605 $ 421,834 Customer deposits and prepayments.......................... 126,212 121,878 Interest payable........................................... -- 3,539 Interpartnership debt...................................... 2,865,426 1,585,851 ----------- ----------- Total liabilities................................ 3,388,243 2,133,102 Partners' equity: General partner.......................................... 822,837 8,796,860 Limited partners......................................... 2,909,561 13,109,123 ----------- ----------- Total partners' equity........................... 3,732,398 21,905,983 ----------- ----------- Total liabilities and partners' equity........... $ 7,120,641 $24,039,085 =========== =========== The accompanying notes are an integral part of the financial statements. F-278
526 RIFKIN CABLE INCOME PARTNERS L.P. STATEMENT OF OPERATIONS (UNAUDITED) SIX MONTHS ENDED ------------------------ 6/30/98 6/30/99 ---------- ---------- REVENUE: Service..................................................... $2,380,813 $2,506,608 Installation and other...................................... 166,952 201,478 ---------- ---------- Total revenue..................................... 2,547,765 2,708,086 COSTS AND EXPENSES: Operating expense........................................... 387,727 291,302 Programming expense......................................... 503,809 599,910 Selling, general and administrative expense................. 298,255 337,492 Depreciation................................................ 311,649 589,613 Amortization................................................ 100,145 563,545 Management fees............................................. 127,388 135,335 Loss (gain) on disposal of assets........................... (420) 25,109 ---------- ---------- Total costs and expenses.......................... 1,728,553 2,542,306 ---------- ---------- Operating income............................................ 819,212 165,780 Interest expense............................................ 193,502 96,891 ---------- ---------- Net income.................................................. $ 625,710 $ 68,889 ========== ========== The accompanying notes are an integral part of the financial statements. F-279
527 RIFKIN CABLE INCOME PARTNERS L.P. STATEMENT OF PARTNERS' EQUITY (UNAUDITED) GENERAL LIMITED PARTNER PARTNERS TOTAL ---------- ----------- ----------- Partners' equity, December 31, 1997.......... $ 263,171 $ 2,170,336 $ 2,433,507 Net income................................... 269,606 356,104 625,710 ---------- ----------- ----------- Partners' equity, June 30, 1998.............. $ 532,777 $ 2,526,440 $ 3,059,217 ========== =========== =========== - --------------------------------------------------------------------------------------- Partners' equity, December 31, 1998.......... $ 822,837 $ 2,909,561 $ 3,732,398 Partners' contribution....................... 7,944,340 10,160,356 18,104,696 Net income................................... 29,683 39,206 68,889 ---------- ----------- ----------- Partners' equity, June 30, 1999.............. $8,796,860 $13,109,123 $21,905,983 ========== =========== =========== The partners' capital accounts for financial reporting purposes vary from the tax capital accounts. The accompanying notes are an integral part of the financial statements. F-280
528 RIFKIN CABLE INCOME PARTNERS L.P. STATEMENT OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED ------------------------- 6/30/98 6/30/99 ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................. $ 625,710 $ 68,889 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. 411,794 1,153,158 Amortization of deferred loan cost........................ 9,485 -- Loss (gain) on disposal of fixed assets................... (420) 25,109 Decrease (increase) in customer accounts receivable....... (1,563) 3,943 Decrease in other receivables............................. 65,289 60,594 Decrease (increase) in prepaid expenses and other......... (5,196) 47,677 Increase (decrease) in accounts payable and accrued liabilities............................................ (17,175) 25,229 Decrease in customer deposits and prepayments............. (45,512) (4,334) Increase (decrease) in interest payable................... (4,216) 3,539 ---------- ----------- Net cash provided by operating activities.............. 1,038,196 1,383,804 ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment................ (199,764) (122,490) Additions to other intangible assets...................... -- (4,956) Proceeds from the sale of assets.......................... 2,812 1,500 ---------- ----------- Net cash used in investing activities.................. (196,952) (125,946) ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of long-term debt................................ (464,750) -- Change in interpartnership debt, net...................... -- (1,279,575) ---------- ----------- Net cash used in financing activities.................. (464,750) (1,279,575) ---------- ----------- Net increase (decrease) in cash and cash equivalent......... 376,494 (21,717) Cash and cash equivalents at beginning of period............ 381,378 65,699 ---------- ----------- Cash and cash equivalents at end of period.................. $ 757,872 $ 43,982 ========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid............................................. $ 188,234 $ 93,352 ========== =========== The accompanying notes are an integral part of the financial statements. F-281
529 RIFKIN CABLE INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Rifkin Cable Income Partners L.P. (the "Partnership") was formed in 1986 as a limited partnership under the laws of the State of Delaware. The Partnership owns, operates and develops cable television systems in Missouri and New Mexico. Rifkin Cable Management Partners L.P., an affiliate of Rifkin & Associates, Inc., is the general partner of the Partnership. The Partnership Agreement (the "Agreement") establishes the respective rights, obligations and interests of the partners. The Agreement provides that net income or loss, certain capital events, and cash distributions (all as defined in the Agreement) are generally allocated 43% to the general partner and 57% to the limited partners. ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP Effective December 31, 1998, InterLink Communications Partners, LLLP ("ICP") acquired 100% of the Partnership. This transaction was accounted for as a purchase, as such, assets and liabilities were written up to their fair market value. The December 31, 1998 audited financial statements represent the Partnership just prior to this transaction. The June 30, 1999 unaudited financial statements represent the new basis of accounting as property, plant and equipment and franchise cost which were written up by $6,398,400 and $11,701600, respectively. Accordingly, the June 30, 1999 unaudited financial statements of the Partnership are not comparable to the December 31, 1998 audited financial statements of the Partnership, which are based upon historic costs. BASIS OF PRESENTATION The accompanying consolidated financial statements are unaudited. However, in the opinion of management, the financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for fair presentation in accordance with generally accepted accounting principles applicable to interim periods. The results of operations for the six months ended June 30, 1999 are not necessarily indicative of the results that may be achieved for the full fiscal year and cannot be used to indicate financial performance for the entire year. The accompanying financial statements should be read in conjunction with the December 31, 1998 audited financial statements of Rifkin Cable Income Partners L.P. Effective April 1, 1999, ICP completed the purchase of the remaining general partner interest in the Partnership and the Partnership was merged into ICP and ceased to exist as a separate legal entity. The Partnership's financial statements subsequent to that date represent a divisional carve-out from ICP. These financial statements include all the direct costs of operating its business; however, certain assets, liabilities and costs not specifically related to the Partnership's activities were allocated and reflected in the financial position as of June 30, 1999, and the results of its operations and its cash flows for the six months ended June 30, 1999. Management believes these allocations were made on a reasonable basis. Nonetheless, the financial information included herein may not necessarily reflect what the financial position and results of operations of the Partnership would have been as a stand-alone entity. F-282
530 RIFKIN CABLE INCOME PARTNERS L.P. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) ACQUISITION BY CHARTER COMMUNICATIONS HOLDINGS, LLC On February 12, 1999, ICP signed a letter of intent to sell all of ICP's partnership interests to Charter Communications Holdings, LLC ("Charter"). On April 26, 1999, ICP signed a definitive Purchase and Sale Agreement with Charter for the sale of the individual partners' interest. 2. LITIGATION The Partnership could possibly be named as defendant in various actions and proceedings arising from the normal course of business. In all such cases, the Partnership will vigorously defend itself against the litigation and, where appropriate, will file counterclaims. Although the eventual outcome of potential lawsuits cannot be predicted, it is management's opinion that any such lawsuit will not result in liabilities that would have a material effect on the Partnership's financial position or results of operations. 3. SUBSEQUENT EVENTS On September 13, 1999, the Charter transaction discussed above closed. F-283
531 RIFKIN ACQUISITION PARTNERS, L.L.L.P. CONSOLIDATED BALANCE SHEET JUNE 30, DECEMBER 31, 1999 1998 ------------ ------------ (UNAUDITED) ASSETS Cash..................................................... $ 2,694,050 $ 2,324,892 Subscriber accounts receivable, net of allowance for doubtful accounts of $283,021 in 1999 and $444,839 in 1998................................................... 2,044,860 1,932,140 Other receivables........................................ 3,813,453 5,637,771 Prepaid expenses and other............................... 1,290,900 2,398,528 Property, plant and equipment at cost: Cable television transmission and distribution systems and related equipment............................... 164,389,372 149,376,914 Land, building, vehicles and furniture and fixtures.... 8,431,453 7,421,960 ------------ ------------ 172,820,825 156,798,874 Less accumulated depreciation............................ (42,862,043) (35,226,773) ------------ ------------ Net property, plant and equipment...................... 129,958,782 121,572,101 Franchise costs and other intangible assets, net of accumulated amortization of $78,661,872 in 1999 and $67,857,545 in 1998.................................... 170,219,573 183,438,197 ------------ ------------ Total assets........................................ $310,021,618 $317,303,629 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Accounts payable and accrued liabilities................. $ 18,385,567 $ 11,684,594 Subscriber deposits and prepayments...................... 1,203,363 1,676,900 Interest payable......................................... 7,169,321 7,242,954 Deferred taxes payable................................... 6,703,000 7,942,000 Notes payable............................................ 225,575,000 224,575,000 ------------ ------------ Total liabilities................................... 259,036,251 253,121,448 Commitments: Redeemable partners' interests........................... 16,732,480 10,180,400 Partners' capital (deficit): General partner........................................ (2,941,996) (1,991,018) Limited partners....................................... 36,851,306 55,570,041 Preferred equity interest.............................. 343,577 422,758 ------------ ------------ Total partners' capital............................. 34,252,887 54,001,781 ------------ ------------ Total liabilities and partners' capital............. $310,021,618 $317,303,629 ============ ============ See accompanying notes to financial statements. F-284
532 RIFKIN ACQUISITION PARTNERS, L.L.L.P. CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, --------------------------- 1999 1998 ------------ ----------- (UNAUDITED) REVENUE: Service................................................... $ 44,101,504 $40,840,852 Installation and other.................................... 4,482,312 3,460,924 ------------ ----------- Total revenue........................................ 48,583,816 44,301,776 COSTS AND EXPENSES: Operating expense......................................... 6,644,646 7,005,851 Programming expense....................................... 10,639,390 9,249,482 Selling, general and administrative expense............... 10,744,654 6,357,755 Depreciation.............................................. 8,246,865 7,409,182 Amortization.............................................. 12,738,555 11,274,197 Management fees........................................... 1,700,434 1,550,562 Loss on disposal of assets................................ 471,021 647,759 ------------ ----------- Total costs and expenses............................. 51,185,565 43,494,788 ------------ ----------- Operating income(loss).................................... (2,601,749) 806,988 Gain on sale of Michigan assets........................... -- (5,989,846) Interest expense.......................................... 11,722,458 11,717,980 ------------ ----------- Loss before income taxes and cumulative effect of accounting change....................................... (14,324,207) (4,921,146) Income tax benefit........................................ (1,239,000) (1,900,000) ------------ ----------- Loss before cumulative effect of accounting change........ (13,085,207) (3,021,146) Cumulative effect of accounting change for organizational costs................................................... 111,607 -- ------------ ----------- Net loss.................................................. $(13,196,814) $(3,021,146) ============ =========== See accompanying notes to financial statements. F-285
533 RIFKIN ACQUISITION PARTNERS, L.L.L.P. CONSOLIDATED STATEMENT OF CASH FLOW SIX MONTHS ENDED JUNE 30, ---------------------------- 1999 1998 ------------ ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss................................................. $(13,196,814) $ (3,021,146) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.......................... 20,985,420 18,683,379 Amortization of deferred loan cost..................... 483,396 494,880 Gain on sale of Michigan assets........................ -- (5,989,846) Loss on disposal of fixed assets....................... 471,021 647,759 Cumulative effect of accounting change for organizational costs................................ 111,607 -- Deferred taxes benefit................................. (1,239,000) (1,900,000) Decrease (increase) in subscriber accounts receivable.......................................... (112,720) 269,303 Decrease in other receivables.......................... 1,824,318 72,181 Decrease in prepaid expenses and other................. 1,107,628 201,781 Increase in accounts payable and accrued liabilities... 6,700,973 1,135,221 Decrease in subscriber deposits and prepayment......... (473,537) (261,722) Decrease in interest payable........................... (73,633) (272,439) ------------ ------------ Net cash provided by operating activities........... 16,588,659 10,059,351 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment............... (17,194,454) (15,876,545) Additions to cable television franchises, net of retirements and changes in other intangible assets..... (114,930) (757,843) Net proceeds from sale of Michigan assets................ -- 17,050,564 Net proceeds from the disposal of assets (other than Michigan assets)....................................... 89,883 118,952 ------------ ------------ Net cash provided by (used in) investing activities........................................ (17,219,501) 535,128 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term bank debt........................ 9,500,000 12,000,000 Payments of long term-bank debt.......................... (8,500,000) (23,425,000) ------------ ------------ Net cash provided by (used in) financing activities........................................ 1,000,000 (11,425,000) ------------ ------------ NET INCREASE (DECREASE) IN CASH.......................... 369,158 (830,521) CASH AT BEGINNING OF PERIOD.............................. 2,324,892 1,902,555 ------------ ------------ CASH AT END OF PERIOD.................................... $ 2,694,050 $ 1,072,034 ============ ============ See accompanying notes to financial statements. F-286
534 RIFKIN ACQUISITION PARTNERS, L.L.L.P. CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL (DEFICIT) SIX MONTHS ENDED JUNE 30, 1999 AND 1998 PREFERRED EQUITY GENERAL LIMITED INTEREST PARTNER PARTNERS TOTAL --------- ----------- ----------- ----------- (UNAUDITED) Partners' capital (deficit) at 12/31/98..................... $422,758 $(1,991,018) $55,570,041 $54,001,781 Net loss for the six months ended 6/30/99................ (79,181) (131,968) (12,985,665) (13,196,814) Accretion of redeemable partners' interest........... -- (819,010) (5,733,070) (6,552,080) -------- ----------- ----------- ----------- Partners' capital (deficit) at 6/30/99...................... $343,577 $(2,941,996) $36,851,306 $34,252,887 ======== =========== =========== =========== Partners' capital (deficit) at 12/31/97..................... $276,243 $(1,885,480) $34,044,912 $32,435,675 Net loss for the six months ended 6/30/98................ (18,127) (30,211) (2,972,808) (3,021,146) Accretion of redeemable partners' interest........... -- (140,975) (986,825) (1,127,800) -------- ----------- ----------- ----------- Partners' capital (deficit) at 6/30/98...................... $258,116 $(2,056,666) $30,085,279 $28,286,729 ======== =========== =========== =========== See accompanying notes to financial statements. F-287
535 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL INFORMATION Rifkin Acquisition Partners, L.P. ("RAP L.P.") was formed on December 16, 1988, pursuant to the laws of the State of Colorado, for the purpose of acquiring and operating cable television (CATV) systems. On September 1, 1995, RAP L.P. registered as a limited liability limited partnership, Rifkin Acquisition Partners, L.L.L.P. (the "Partnership"), pursuant to the laws of the State of Colorado. Rifkin Acquisition Management, L.P., was the general partner of RAP L.P. and is the general partner of the Partnership ("General Partner"). The Partnership and its subsidiaries are hereinafter referred to on a consolidated basis as the "Company." The Partnership operates under a limited liability limited partnership agreement (the "Partnership Agreement") which establishes contribution requirements, enumerates the rights and responsibilities of the partners and advisory committee, provides for allocations of income, losses and distributions, and defines certain items relating thereto. These statements have been completed in conformity with the SEC requirements for unaudited consolidated financial statements for the Company and does not contain all of the necessary footnote disclosures required for a fair presentation of the balance sheets, statements of operations, of partners' capital(deficit), and of cash flows in conformity with generally accepted accounting principles. However, in the opinion of management, this data includes all adjustments, consisting of normal recurring accruals necessary to present fairly the consolidated financial position at June 30, 1999, December 31, 1998 and June 30, 1998, and its consolidated results of operations and cash flows for the six months ended June 30, 1999 and 1998. The consolidated financial statements should be read in conjunction with the Company's annual consolidated financial statements and notes thereto included on Form 10-K, No. 333-3084, for the year ended December 31, 1998. 2. SUBSEQUENT EVENT On February 12, 1999, the Company signed a letter of intent for the partners to sell their partnership interests to Charter Communications, Inc. ("Charter"). On April 26, 1999, the Company signed a definitive Purchase and Sale Agreement with Charter for the sale of the individual partners' interest. The transaction closed September 13, 1999. 3. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT Effective January 1, 1999, the Company adopted the Accounting Standards Executive Committee's Statement of Position (SOP)98-5 "Reporting on the Costs of Start-Up Activities," which requires the Company to expense all start-up costs related to organizing a new business. During the first quarter of 1999, the Company wrote off the organization costs capitalized in prior years along with the accumulated amortization, resulting in the recognition of a cumulative effect of accounting change loss of $111,607. 4. RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION Certain reclassifications have been made to the 1998 Consolidated Statement of Operations to conform with the Audited Consolidated Statement of Operations for the year ended December 31, 1998. F-288
536 RIFKIN ACQUISITION PARTNERS, L.L.L.P. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. SENIOR SUBORDINATED NOTES On January 26, 1996, the Company and its wholly-owned subsidiary, Rifkin Acquisition Capital Corp (RAC), co-issued a $125 million aggregate principal amount of 11 1/8% Senior Subordinated Notes (the "Notes") to institutional investors. These Notes were subsequently exchanged on June 18, 1996 for publicly registered notes with identical terms. Interest on the Notes is payable in cash, semi-annually on January 15 and July 15 of each year, commencing on July 15, 1996. The Notes, which mature on January 15, 2006, can be redeemed in whole or in part, at the Issuers' option, at any time on or after January 15, 2001, at redeemable prices contained in the Notes plus accrued interest. In addition, at any time on or prior to January 15, 1999, the Issuers, at their option, were allowed to redeem up to 25% of the principle amount of the notes issued to institutional investors of not less than $25 million. Such redemption did not take place. The Senior Subordinated Notes had a balance of $125 million at June 30, 1999 and December 31, 1998. F-289
537 INDIANA CABLE ASSOCIATES, LTD. BALANCE SHEET 12/31/98 6/30/99 ----------- ----------- (UNAUDITED) ASSETS Cash and cash equivalents................................ $ 108,619 $ -- Customer accounts receivable, less allowance for doubtful accounts of $24,729 in 1998 and $9,526 in 1999......... 85,795 87,996 Other receivables........................................ 295,023 263,708 Prepaid expenses and deposits............................ 152,575 154,330 Property, plant and equipment: Buildings.............................................. 91,682 32,193 Transmission and distribution systems and related equipment........................................... 11,336,892 12,490,384 Office furniture and equipment......................... 161,327 68,003 Spare parts and construction inventory................. 742,022 223,287 ----------- ----------- 12,331,923 12,813,867 Less accumulated depreciation.......................... 8,008,158 726,498 ----------- ----------- Net property, plant and equipment................... 4,323,765 12,087,369 Other assets, less accumulated amortization of $8,355,280 in 1998 and $2,069,935 in 1999......................... 5,083,029 19,769,578 ----------- ----------- Total assets................................... $10,048,806 $32,362,981 =========== =========== LIABILITIES AND PARTNERS' EQUITY (DEFICIT) Liabilities: Accounts payable and accrued liabilities............... $ 897,773 $ 652,702 Customer prepayments................................... 47,458 51,444 Interest payable....................................... -- 27,281 Interpartnership debt.................................. 9,606,630 9,500,071 ----------- ----------- Total liabilities.............................. 10,551,861 10,231,498 Partners' equity (deficit): General partner........................................ (20,106) 772,103 Limited partner........................................ (482,949) 21,359,380 ----------- ----------- Total partners' equity (deficit)......................... (503,055) 22,131,483 ----------- ----------- Total liabilities and partners' equity (deficit)................................... $10,048,806 $32,362,981 =========== =========== See accompanying notes. F-290
538 INDIANA CABLE ASSOCIATES, LTD. STATEMENT OF OPERATIONS (UNAUDITED) SIX MONTHS ENDED ------------------------- 6/30/98 6/30/99 ---------- ----------- REVENUE: Service..................................................... $3,615,421 $ 3,757,873 Installation and other...................................... 356,076 493,077 ---------- ----------- Total revenue..................................... 3,971,497 4,250,950 COSTS AND EXPENSES: Operating expense........................................... 616,355 384,542 Programming expense......................................... 886,757 905,063 Selling, general and administrative expense................. 531,236 584,329 Depreciation................................................ 260,229 728,537 Amortization................................................ 354,803 2,069,935 Management fees............................................. 198,575 212,548 Loss on disposal of assets.................................. 24,924 34,071 ---------- ----------- Total costs and expenses.......................... 2,872,879 4,919,025 ---------- ----------- Operating income (loss)..................................... 1,098,618 (668,075) Interest expense............................................ 574,213 403,594 ---------- ----------- Net income (loss)........................................... $ 524,405 $(1,071,669) ========== =========== See accompanying notes. F-291
539 INDIANA CABLE ASSOCIATES, LTD. STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED -------------------------- 6/30/98 6/30/99 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).......................................... $ 524,405 $(1,071,669) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation............................................. 260,229 728,537 Amortization............................................. 354,803 2,069,935 Amortization of deferred loan costs...................... 13,894 -- Loss on disposal of assets............................... 24,924 34,071 Decrease (increase) in customer accounts receivable...... 21,163 (2,201) Decrease in other receivables............................ 5,924 31,315 Decrease (increase) in prepaid expenses and deposits..... 10,496 (1,755) Increase (decrease) in accounts payable and accrued liabilities........................................... 75,670 (245,071) Increase (decrease) in customer prepayments.............. (14,658) 3,986 Increase (decrease) in interest payable.................. (1,045) 27,281 ----------- ----------- Net cash provided by operating activities............. 1,275,805 1,574,429 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment............... (284,031) (1,574,418) Additions to intangible assets........................... -- (2,662) Net Proceeds from the sale of assets..................... -- 591 ----------- ----------- Net cash used in investing activities................. (284,031) (1,576,489) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt............................. 600,000 -- Payments of long-term debt............................... (1,600,000) -- Change in interpartnership debt, net..................... -- (106,559) Deferred loan cost....................................... (934) -- ----------- ----------- Net cash used in financing activities................. (1,000,934) (106,559) ----------- ----------- Net increase in cash and cash equivalents.................. (9,160) (108,619) Cash and cash equivalents at beginning of period........... 82,684 108,619 ----------- ----------- Cash and cash equivalents at end of period................. $ 73,524 $ -- =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid............................................ $ 529,880 $ 376,313 =========== =========== See accompanying notes. F-292
540 INDIANA CABLE ASSOCIATES, LTD. STATEMENT OF PARTNERS' DEFICIT (UNAUDITED) GENERAL LIMITED PARTNER PARTNERS TOTAL -------- ------------ ------------ Partners' deficit at December 31, 1997........ $(66,418) $ (1,759,845) $ (1,826,263) Net income, six months ended June 30, 1998.... 18,354 506,051 524,405 -------- ------------ ------------ Partners' deficit at June 30, 1998............ $(48,064) $ (1,253,794) $ (1,301,858) ======== ============ ============ - -------------------------------------------------------------------------------------- Partners' deficit at December 31, 1998........ $(20,106) $ (482,949) $ (503,055) Investment in Partnership..................... 829,718 22,876,489 23,706,207 Net loss for six months ended June 30, 1999... (37,509) (1,034,160) (1,071,669) -------- ------------ ------------ Partners' equity at June 30, 1999............. $772,103 $ 21,359,380 $ 22,131,483 ======== ============ ============ See accompanying notes. F-293
541 INDIANA CABLE ASSOCIATES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements are unaudited. However, in the opinion of management, the financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for fair presentation in accordance with generally accepted accounting principles applicable to interim periods. Interim results of operations are not indicative of results for the full year. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements of Indiana Cable Associates, Ltd. (the "Partnership"). Effective April 1, 1999, InterLink Communications Partners, LLLP ("ICP") completed the purchase of the remaining general partner interest in the Partnership and the Partnership was merged into ICP and ceased to exist as a separate legal entity. Indiana Cable Associates' financial statements subsequent to that date represent a divisional carve-out from ICP. These financial statements include all the direct costs of operating its business; however, certain assets, liabilities and costs not specifically related to the Partnership's activities were allocated and reflected in the financial position as of June 30, 1999, and the results of its operations and its cash flows for the six months ended June 30, 1999. Management believes these allocations were made on a reasonable basis. Nonetheless, the financial information included herein may not necessarily reflect what the financial position and results of operations of the Partnership would have been as a stand-alone entity. 2. ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP ICP agreed to purchase all of the Partnership interests as of December 31, 1998, for a total purchase price of approximately $32.7 million. The acquisition of the Partnership by ICP was accounted for as a purchase and a new basis of accounting was established effective January 1, 1999. The new basis resulted in assets and liabilities being recorded at their fair market value resulting in a increase in property, plant, and equipment and franchise costs of approximately $7.0 million and approximately $16.8 million, respectively. Accordingly, the 1999 interim-unaudited financial statements are not comparable to the 1998 interim-unaudited financial statements of the Partnership, which are based on historical costs. 3. ACQUISITION BY CHARTER COMMUNICATIONS HOLDINGS, LLC On February 12, 1999, ICP signed a letter of intent to sell all of ICP's partnership interests to Charter Communications Holdings, LLC ("Charter"). On April 26, 1999, ICP signed a definitive Purchase and Sale Agreement with Charter for the sale of the individual partners' interest. ICP and Charter are expected to complete the sale during the third quarter of 1999. 4. LITIGATION The Partnership could possibly be named as defendant in various actions and proceedings arising from the normal course of business. In all such cases, the Partnership will vigorously defend itself against the litigation and, where appropriate, will file counterclaims. Although the eventual outcome of potential lawsuits cannot be predicted, it is management's opinion that any such lawsuit will not result in liabilities that would have a material affect on the Partnership's financial position or results of operations. F-294
542 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP CONSOLIDATED BALANCE SHEET (UNAUDITED) 12/31/98 6/30/99 ------------ ----------- ASSETS Cash and cash equivalents................................. $ 678,739 $ 720,335 Customer accounts receivable, less allowance for doubtful accounts of $84,424 in 1998 and $17,699 in 1999......... 455,339 486,624 Other receivables......................................... 1,691,593 981,567 Prepaid expenses and deposits............................. 393,022 151,631 Property, plant and equipment, at cost: Transmission and distribution system and related equipment............................................ 27,981,959 24,298,593 Office furniture and equipment.......................... 755,398 251,659 Leasehold improvements.................................. 549,969 1,016 Construction in process and spare parts inventory....... 744,806 1,511,622 ------------ ----------- 30,032,132 26,062,890 Less accumulated depreciation........................... (11,368,764) (1,395,385) ------------ ----------- Net property, plant and equipment.................... 18,663,368 24,667,505 Other assets, less accumulated amortization............... 5,181,012 70,082,997 ------------ ----------- Total assets.................................... $ 27,063,073 $97,090,659 ============ =========== LIABILITIES AND PARTNERS' EQUITY (DEFICIT) Liabilities: Accounts payable and accrued liabilities................ $ 2,356,540 $ 2,629,249 Interest payable........................................ -- 40,774 Customer prepayments.................................... 690,365 752,522 Interpartnership debt................................... 31,222,436 29,181,690 ------------ ----------- Total liabilities............................... 34,269,341 32,604,235 Partners' equity (deficit): General partner......................................... (81,688) 585,770 Limited partner......................................... (8,104,718) 58,010,284 Special limited partner................................. 980,138 5,890,370 ------------ ----------- Total partners' equity (deficit).......................... (7,206,268) 64,486,424 ------------ ----------- Total liabilities and partners' equity (deficit).................................... $ 27,063,073 $97,090,659 ============ =========== See accompanying notes. F-295
543 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) SIX MONTHS ENDED --------------------------- 6/30/98 6/30/99 ----------- ------------ REVENUES: Service................................................... $ 9,263,046 $ 10,443,758 Installation and other.................................... 1,524,279 1,829,934 ----------- ------------ 10,787,325 12,273,692 COSTS AND EXPENSES: Operating expense......................................... 1,871,082 2,015,928 Programming expense....................................... 2,302,086 2,701,090 Selling, general and administrative expense............... 2,333,536 2,169,031 Depreciation.............................................. 1,088,616 1,401,473 Amortization.............................................. 646,553 12,465,996 Management fees........................................... 431,493 490,948 Loss on disposal of assets................................ 96,044 242,800 ----------- ------------ Total costs and expenses........................ 8,769,410 21,487,266 ----------- ------------ Operating income (loss)................................... 2,017,915 (9,213,574) Interest expense.......................................... 1,286,725 1,235,445 ----------- ------------ Net income (loss)......................................... $ 731,190 $(10,449,019) =========== ============ See accompanying notes. F-296
544 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP COMPARATIVE CONSOLIDATED STATEMENT OF PARTNERS' EQUITY (UNAUDITED) SPECIAL GENERAL LIMITED LIMITED PARTNER PARTNERS PARTNERS TOTAL -------- ----------- ---------- ------------ Partners' equity (deficit) at December 31, 1997.................. $(96,602) $(9,582,050) $ 870,419 $ (8,808,233) Net income for the six months ended June 30, 1998...................... 6,808 674,303 50,079 731,190 -------- ----------- ---------- ------------ Partners' equity (deficit) at June 30, 1998........................... $(89,794) $(8,907,747) $ 920,498 $ (8,077,043) ======== =========== ========== ============ - ----------------------------------------------------------------------------------------- Partners' equity (deficit) at December 31, 1998.................. $(81,688) $(8,104,718) $ 980,138 $ (7,206,268) Investment in Partnership............ 764,739 75,751,087 5,625,885 82,141,711 Net loss for the six months ended June 30, 1999...................... (97,281) (9,636,085) (715,653) (10,449,019) -------- ----------- ---------- ------------ Partners' equity at June 30, 1999.... $585,770 $58,010,284 $5,890,370 $ 64,486,424 ======== =========== ========== ============ See accompanying notes. F-297
545 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED --------------------------- 6/30/98 6/30/99 ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ 731,190 $(10,449,019) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation............................................ 1,088,616 1,401,473 Amortization............................................ 646,553 12,465,996 Amortization of deferred loan cost...................... 44,659 -- Loss on disposal of assets.............................. 96,044 242,800 Decrease (increase) in customer accounts receivable..... 233,404 (31,285) Decrease (increase) in other receivables................ (98,355) 710,025 Decrease in prepaid expenses and deposits............... 31,048 241,391 Increase (decrease) in accounts payable and accrued liabilities.......................................... (375,494) 272,709 Increase (decrease) in customer prepayments............. (174,131) 62,157 Increase in interest payable............................ 13,034 40,774 ----------- ------------ Net cash provided by operating activities............ 2,236,568 4,957,021 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment.............. (3,586,254) (2,697,239) Additions to other assets, net of refranchises.......... (142,090) (212,568) Proceeds from the sale of assets........................ 7,063 35,128 ----------- ------------ Net cash used in investing activities................ (3,721,281) (2,874,679) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt............................ 4,400,000 -- Payments of long-term debt.............................. (2,850,000) -- Change in interpartnership debt, net.................... -- (2,040,746) ----------- ------------ Net cash provided by (used in) financing activities....... 1,550,000 (2,040,746) ----------- ------------ Net increase in cash and cash equivalents................. 65,287 41,596 Cash and cash equivalents at beginning of period.......... 362,619 678,739 ----------- ------------ Cash and cash equivalents at end of period................ $ 427,906 $ 720,335 =========== ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid........................................... $ 1,211,531 $ 1,244,254 =========== ============ See accompanying notes. F-298
546 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements are unaudited. However, in the opinion of management, the financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for fair presentation in accordance with generally accepted accounting principles applicable to interim periods. Interim results of operations are not indicative of results for the full year. The accompanying financial statements should be read in conjunction with the December 31, 1998 audited consolidated financial statements of R/N South Florida Cable Management Limited Partnership (the "Partnership"). Effective April 1, 1999, InterLink Communications Partners, LLLP ("ICP") completed the purchase of the remaining general partner interest in the Partnership and the Partnership was merged into ICP and ceased to exist as a separate legal entity. The Partnership's financial statements subsequent to that date represent a divisional carve-out from ICP. These financial statements include all the direct costs of operating its business; however, certain assets, liabilities and costs not specifically related to the Partnership's activities were allocated and reflected in the financial position as of June 30, 1999, and the results of its operations and its cash flows for the six months ended June 30, 1999. Management believes these allocations were made on a reasonable basis. Nonetheless, the financial information included herein may not necessarily reflect what the financial position and results of operations of the Partnership would have been as a stand-alone entity. 2. ACQUISITION BY INTERLINK COMMUNICATIONS PARTNERS, LLLP ICP agreed to purchase all of the Partnership interests as of December 31, 1998, for a total purchase price of approximately $105.5 million. The acquisition of the Partnership by ICP was accounted for as a purchase and a new basis of accounting was established effective January 1, 1999. The new basis resulted in assets and liabilities being recorded at their fair market value resulting in a increase in property, plant, and equipment and franchise costs of approximately $5.0 million and approximately $77.1 million, respectively. Accordingly, the 1999 interim-unaudited financial statements are not comparable to the 1998 interim-unaudited financial statements of the Partnership, which are based on historical costs. 3. DEBT On December 30, 1998, the Partnership obtained an interpartnership loan agreement with ICP. Borrowings under the interpartnership loan, as well as interest and principal payments are due at the discretion of the management of ICP. The balance of the interpartnership loan at December 31, 1998 and June 30, 1999 was $31,222,436 and $29,181,690, respectively. The interest rate at both December 31, 1998 and June 30, 1999 was 8.5% 4. ACQUISITION BY CHARTER COMMUNICATIONS HOLDINGS, LLC On February 12, 1999, ICP signed a letter of intent to sell all of ICP's partnership interests to Charter Communications Holdings, LLC ("Charter"). On April 26, 1999, ICP signed a definitive Purchase and Sale Agreement with Charter for the sale of the individual partners' interest. ICP and Charter are expected to complete the sale during the third quarter of 1999. F-299
547 R/N SOUTH FLORIDA CABLE MANAGEMENT LIMITED PARTNERSHIP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. LITIGATION The Partnership could possibly be named as defendant in various actions and proceedings arising from the normal course of business. In all such cases, the Partnership will vigorously defend itself against the litigation and, where appropriate, will file counterclaims. Although the eventual outcome of potential lawsuits cannot be predicted, it is management's opinion that any such lawsuit will not result in liabilities that would have a material affect on the Partnership's financial position or results of operations. F-300
548 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers of Avalon Cable LLC In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in members' interest and cash flows present fairly, in all material respects, the financial position of Avalon Cable LLC and its subsidiaries (the "Company") at December 31, 1997 and 1998 and the results of their operations, changes in members' interest and their cash flows for the period from September 4, 1997 (inception), through December 31, 1997 and for the year ended December 31, 1998 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP New York, New York March 30, 1999, except for Note 12, as to which the date is May 13, 1999 F-301
549 AVALON CABLE LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, ---------------------- 1998 1997 ---------- ------ (DOLLARS IN THOUSANDS) ASSETS CURRENT ASSETS: Cash........................................................ $ 9,288 $ -- Subscriber receivables, less allowance for doubtful accounts of $943................................................... 5,862 -- Accounts receivable-affiliate............................... 124 -- Deferred income taxes....................................... 479 -- Prepaid expenses and other current assets................... 580 504 -------- ---- Total current assets........................................ 16,333 504 Property, plant and equipment, net.......................... 111,421 -- Intangible assets, net...................................... 462,117 -- Other assets................................................ 227 -- -------- ---- Total assets................................................ $590,098 $504 ======== ==== LIABILITIES AND MEMBERS' INTEREST CURRENT LIABILITIES: Current portion of notes payable............................ $ 20 $ -- Accounts payable and accrued expenses....................... 11,646 -- Accounts payable, net-affiliate............................. 2,023 500 Advance billings and customer deposits...................... 3,171 -- -------- ---- Total current liabilities................................... 16,860 500 Note payable, net of current portion........................ 402,949 -- Note payable-affiliate...................................... 3,341 -- Deferred income taxes....................................... 1,841 -- -------- ---- Total liabilities........................................... 424,991 500 -------- ---- Minority interest........................................... 13,855 -- Commitments and contingencies (Note 10) MEMBERS' INTEREST: Members' capital............................................ 166,630 -- Accumulated earnings (deficit).............................. (15,378) 4 -------- ---- Total member's interest..................................... 151,252 4 -------- ---- Total liabilities and member's interest..................... $590,098 $504 ======== ==== The accompanying notes are an integral part of these consolidated financial statements. F-302
550 AVALON CABLE LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS FOR THE PERIOD FROM FOR THE YEAR SEPTEMBER 4, 1997 ENDED (INCEPTION) THROUGH DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ------------------- (DOLLARS IN THOUSANDS) REVENUE: Basic services.......................................... $ 14,976 $-- Premium services........................................ 1,468 -- Other................................................... 1,743 -- -------- -- Total revenues.......................................... 18,187 -- Operating expenses: Selling, general and administrative..................... 4,207 -- Programming............................................. 4,564 -- Technical and operations................................ 1,951 -- Depreciation and amortization........................... 8,183 -- -------- -- Loss from operations.................................... (718) -- Other income (expense): Interest income......................................... 173 4 Interest expense........................................ (8,223) -- Other expense, net...................................... (65) -- -------- -- Income (loss) before income taxes....................... (8,833) 4 Provision for income taxes.............................. (186) -- -------- -- Income (loss) before minority interest and extraordinary item.................................................. (9,019) 4 Minority interest in consolidated entity................ (398) -- -------- -- Income (loss) before the extraordinary loss on early extinguishment of debt................................ (9,417) 4 Extraordinary loss on early extinguishment of debt...... (5,965) -- -------- -- Net income (loss)....................................... $(15,382) $4 ======== == The accompanying notes are an integral part of these consolidated financial statements. F-303
551 AVALON CABLE LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST FROM THE PERIOD FROM SEPTEMBER 4, 1997 (INCEPTION) THROUGH DECEMBER 31, 1998 CLASS A CLASS B-1 ACCUMULATED TOTAL -------------------- ------------------ EARNINGS MEMBERS' UNITS $ UNITS $ (DEFICIT) INTEREST --------- -------- ------- -------- ----------- -------- (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) Net income for the period from September 4, 1997 through December 31, 1997............. -- $ -- -- $ -- $ 4 $ 4 Issuance of Class A units....... 45,000 45,000 -- -- -- 45,000 Issuance of Class B-1 units in consideration for Avalon Cable of New England LLC............ -- -- 64,696 4,345 -- 4,345 Contribution of assets and liabilities of Avalon Cable of Michigan Inc.................. -- -- 510,994 117,285 -- 117,285 Net loss for the year ended December 31, 1998............. -- -- (15,382) (15,382) ------ ------- ------- -------- -------- -------- Balance at December 31, 1998.... 45,000 $45,000 575,690 $121,630 $(15,378) $151,252 ====== ======= ======= ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. F-304
552 AVALON CABLE LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD FOR THE YEAR SEPTEMBER 31, 1997 ENDED (INCEPTION) DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ------------------ (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)....................................... $ (15,382) $ 4 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization........................... 8,183 -- Deferred income taxes, net.............................. 1,010 -- Extraordinary loss on extinguishment of debt............ 5,965 -- Provision for loss on accounts receivable............... 75 -- Minority interest in consolidated entity................ 398 -- Accretion of senior discount notes...................... 1,083 -- Changes in operating assets and liabilities Increase in subscriber receivables................................ (1,679) Increase in accounts receivable-affiliates.............. (124) -- Increase in prepaid expenses and other current assets... (76) (4) Increase in accounts payable and accrued expenses....... 4,863 -- Increase in accounts payable-affiliates................. 1,523 -- Increase in advance billings and customer deposits...... 1,684 -- Change in Other, net.................................... (227) -- --------- --- Net cash provided by operating activities............... 7,296 -- --------- --- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures.................................... (11,468) -- Acquisitions, net of cash acquired...................... (554,402) -- --------- --- Net cash used in investing activities................... (565,870) -- --------- --- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of credit facility............... 265,888 -- Principal payment on credit facility.................... (125,013) -- Proceeds from issuance of senior subordinated debt...... 150,000 -- Proceeds from issuance of note payable-affiliate........ 3,341 -- Proceeds from issuance of senior discount notes......... 110,411 -- Proceeds from other notes payable....................... 600 -- Payments for debt issuance costs........................ (3,995) -- Contribution by members................................. 166,630 -- --------- --- Net cash provided by financing activities............... 567,862 -- Increase in cash........................................ 9,288 -- Cash, beginning of period............................... -- -- --------- --- Cash, end of period..................................... $ 9,288 $-- ========= === SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest................ $ 3,480 $-- ========= === The accompanying notes are an integral part of these consolidated financial statements. F-305
553 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 (DOLLARS IN THOUSANDS) 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS Avalon Cable LLC ("Avalon"), and its wholly owned subsidiaries Avalon Cable Holdings Finance, Inc. ("Avalon Holdings Finance") and Avalon Cable of Michigan LLC ("Avalon Michigan"), were formed in October 1998, pursuant to the laws of the State of Delaware, as a wholly owned subsidiary of Avalon Cable of New England Holdings, Inc. ("Avalon New England Holdings"). On November 6, 1998, Avalon New England Holdings contributed its 100% interest in Avalon Cable of New England LLC ("Avalon New England") to Avalon in exchange for a membership interest in Avalon. This contribution was between entities under common control and was accounted for similar to a pooling-of-interests. Under this pooling-of-interests method, the results of operations for Avalon include the results of operations from the date of inception (September 4, 1997) of Avalon New England. On that same date, Avalon received $63,000 from affiliated entities, which was comprised of (i) a $45,000 capital contribution by Avalon Investors, LLC ("Avalon Investors") and (ii) a $18,000 promissory note from Avalon Cable Holdings LLC ("Avalon Holdings"), which was used to make a $62,800 cash contribution to Avalon New England. The cash contribution received by Avalon New England was used to (i) extinguish existing indebtedness of $29,600 and (ii) fund a $33,200 loan to Avalon Holdings Finance which matures on December 31, 2001. On December 10, 1998, Avalon received a dividend distribution from Avalon New England in the amount of $18,206, which was used by Avalon to pay off the promissory note payable to Avalon Holdings, plus accrued interest. Avalon Cable of Michigan, Inc. was formed in June 1998, pursuant to the laws of the state of Delaware, as a wholly owned subsidiary of Avalon Cable of Michigan Holdings, Inc. ("Michigan Holdings".) On June 3, 1998, Avalon Cable of Michigan, Inc. entered into an Agreement and Plan of Merger (the "Agreement") among Avalon Cable of Michigan, Inc., Michigan Holdings and Cable Michigan, Inc. ("Cable Michigan"), pursuant to which Avalon Cable of Michigan, Inc. will merge into Cable Michigan and Cable Michigan will become a wholly owned subsidiary of Michigan Holdings (the "Merger"). As part of the Merger, the name of the company was changed to Avalon Cable of Michigan, Inc. In accordance with the terms of the Agreement, each share of common stock, par value $1.00 per share ("common stock"), of Cable Michigan outstanding prior to the effective time of the Merger (other than treasury stock shares owned by Michigan Holdings or its subsidiaries, or shares as to which dissenters' rights have been exercised) shall be converted into the right to receive $40.50 in cash (the "Merger Consideration"), subject to certain possible closing adjustments. In conjunction with the acquisition of Cable Michigan, Avalon Cable of Michigan, Inc. acquired Cable Michigan's 62% ownership interest in Mercom, Inc. ("Mercom"). On November 6, 1998, Avalon Cable of Michigan, Inc. completed its Merger. The total consideration payable in conjunction with the Merger, including fees and expenses is $431,629, including repayment of all existing Cable Michigan indebtedness and accrued interest of $135,205. Subsequent to the Merger, the arrangements with RCN and CTE for certain support F-306
554 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) services were terminated. The Agreement also permitted Avalon Cable of Michigan, Inc. to agree to acquire the remaining shares of Mercom that it did not own. Michigan Holdings contributed $137,375 in cash to Avalon Cable of Michigan, Inc., which was used to consummate the Merger. On November 5, 1998, Michigan Holdings received $105,000 in cash in exchange for promissory notes to lenders (the "Bridge Agreement"). On November 6, 1998, Michigan Holdings contributed the proceeds received from the Bridge Agreement and an additional $35,000 in cash to Avalon Cable of Michigan Inc. in exchange for 100 shares of common stock. On March 26, 1999, Avalon completed a series of transactions to facilitate certain aspects of its financing between affiliated entities under common control. As a result of these transactions: - Avalon Cable of Michigan Inc. contributed its assets and liabilities excluding deferred tax liabilities, net to Avalon in exchange for an approximate 88% voting interest in Avalon. Avalon contributed these assets and liabilities to its wholly-owned subsidiary, Avalon Cable of Michigan. - Avalon Michigan has become the operator of the Michigan cluster replacing Avalon Cable of Michigan, Inc. - Avalon Michigan is an obligor on the Senior Subordinated Notes replacing Avalon Cable of Michigan, Inc., and - Avalon Cable of Michigan, Inc. is a guarantor of the obligations of Avalon Michigan under the Senior Subordinated Notes. Avalon Cable of Michigan, Inc. does not have significant assets, other than its investment in Avalon. - Avalon is an obligor on the Senior Discount Notes replacing Avalon Cable of Michigan Holdings, Inc. As a result of the reorganization between entities under common control, Avalon accounted for the reorganization similar to a pooling-of-interests. Under the pooling-of-interests method, the results of operations for Avalon include the results of operations from the date of inception (June 2, 1998) inception of Avalon Cable of Michigan, Inc. and the date of acquisition of the completed acquisitions. Avalon New England and Avalon Michigan provide cable service to the western New England area and the state of Michigan, respectively. Avalon cable systems offer customer packages of basic and premium cable programming services which are offered at a per channel charge or are packaged together to form a tier of services offered at a discount from the combined channel rate. Avalon cable systems also provide premium cable services to their customers for an extra monthly charge. Customers generally pay initial connection charges and fixed monthly fees for cable programming and premium cable services, which constitute the principal sources of revenue for Avalon. Avalon Holdings Finance was formed for the sole purpose of facilitating financings associated with the acquisitions of various cable operating companies. Avalon Holdings Finance conducts no other activities. F-307
555 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The consolidated financial statements of Avalon and its subsidiaries, include the accounts of Avalon and its wholly owned subsidiaries, Avalon New England, Avalon Michigan and Avalon Holdings Finance (collectively, the "Company"). All significant transactions between Avalon and its subsidiaries have been eliminated. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and use assumptions that affect the reported amounts of assets and liabilities and the disclosure for contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reported period. Actual results may vary from estimates used. Revenue recognition Revenue is recognized as cable services are provided. Installation fee revenue is recognized in the period in which the installation occurs to the extent that direct selling costs meet or exceed installation revenues. Advertising costs Advertising costs are charged to operations as incurred. Advertising costs were $82 for the year ended December 31, 1998. Concentration of credit risk Financial instruments which potentially expose the Company to a concentration of credit risk include cash and subscriber and other receivables. The Company had cash in excess of federally insured deposits at financial institutions at December 31, 1998. The Company does not believe that such deposits are subject to any unusual credit risk beyond the normal credit risk associated with operating its business. The Company extends credit to customers on an unsecured basis in the normal course of business. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not historically exceeded management's expectations. The Company's trade receivables reflect a customer base centered in the state of Michigan and New England. The Company routinely assesses the financial strength of its customers; as a result, concentrations of credit risk are limited. Property, plant and equipment Property, plant and equipment is stated at its fair value for items acquired from Cable Michigan, historical cost for the minority interests share of Mercom property, plant and equipment and cost for additions subsequent to the merger. Initial subscribers installation costs, including materials, labor and overhead costs, are capitalized as a component of cable plant and equipment. The cost of disconnection and reconnection are charged to expense when incurred. F-308
556 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Depreciation is computed for financial statement purposes using the straight-line method based upon the following lives: Vehicles.................................................... 5 years Cable plant and equipment................................... 5-12 years Office furniture and equipment.............................. 5-10 years Buildings and improvements.................................. 10-25 years Intangible assets Intangible assets represent the estimated fair value of cable franchises and goodwill resulting from acquisitions. Goodwill is the excess of the purchase price over the fair value of the net assets acquired, determined through an independent appraisal. Deferred financing costs represent direct costs incurred to obtain long-term financing and are amortized to interest expense over the term of the underlying debt utilizing the effective interest method. Amortization is computed for financial statement purposes using the straight-line method based upon the anticipated economic lives: Cable franchises............................................ 13-15 years Goodwill.................................................... 15 years Non-compete agreement....................................... 5 years Accounting for impairments The Company follows the provisions of Statement of Financial Accounting Standards No. 121 -- "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the Company estimates the net future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected net future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss for long-lived assets and identifiable intangibles expected to be held and used is based on the fair value of the asset. No impairment losses have been recognized by the Company pursuant to SFAS 121. Financial instruments The Company estimates that the fair value of all financial instruments at December 31, 1998 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet. The fair value of the notes payable-affiliate are considered to be equal to carrying values since the Company believes that its credit risk has not changed from the time this debt instrument was executed and therefore, would obtain a similar rate in the current market. Income taxes The Company is not subject to federal and state income taxes since the income or loss of the Company is included in the tax returns of Avalon Cable of Michigan, Inc. and the Company's F-309
557 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) minority partners. However, Mercom, its majority-owned subsidiary is subject to taxes that are accounted for using Statement of Financial Accounting Standards No. 109 -- "Accounting for Income Taxes". The statement requires the use of an asset and liability approach for financial reporting purposes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between financial reporting basis and tax basis of assets and liabilities. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. 3. MEMBERS' CAPITAL Avalon has authorized two classes of equity units; class A units ("Class A Units") and class B units ("Class B Units") (collectively, the "Units"). Each class of the Units represents a fractional part of the membership interests in Avalon and has the rights and obligations specified in Avalon's Limited Liability Company Agreement. Each Class B Unit is entitled to voting rights equal to the percentage such units represents of the aggregate number of outstanding Class B Units. The Class A Units are not entitled to voting rights. Class A Units The Class A Units are participating preferred equity interests. A preferred return accrues annually (the Company's "Preferred Return") on the initial purchase price (the Company's "Capital Value") of each Class A Unit at a rate of 15, or 17% under certain circumstances, per annum. The Company cannot pay distributions in respect of other classes of securities including distributions made in connection with a liquidation until the Company's Capital Value and accrued Preferred Return in respect of each Class A Unit is paid to the holders thereof (such distributions being the Company's "Priority Distributions"). So long as any portion of the Company's Priority Distributions remains unpaid, the holders of a majority of the Class A Units are entitled to block certain actions by the Company including the payment of certain distributions, the issuance of senior or certain types of pari passu equity securities or the entering into or amending of certain related-party agreements. In addition to the Company's Priority Distributions, each Class A Unit is also entitled to participate in common distributions, pro rata according to the percentage such unit represents of the aggregate number of the Company's units then outstanding. Class B Units The Class B Units are junior equity securities which are divided into two identical subclasses, Class B-1 Units and Class B-2 Units. After the payment in full of Avalon's Priority Distributions, each Class B Unit is entitled to participate in distributions pro rata according to the percentage such unit represents of the aggregate number of the Avalon units then outstanding. 4. MERGER AND ACQUISITIONS The Merger was accounted for using the purchase method of accounting. Accordingly, the consideration was allocated to the net assets acquired based on their fair market values at the date of the Merger. The purchase price was allocated as follows: current assets and liabilities at fair values of $470, approximately $94,000 to property, plant and equipment, $315,000 to cable franchises and the excess of consideration paid over the fair market value of the net assets acquired, or goodwill, of $81,705, offset by deferred taxes net of $60,000. F-310
558 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Merger agreement between Michigan Holdings and Avalon Cable of Michigan, Inc. permitted Avalon Cable of Michigan, Inc. to agree to acquire the 1,822,810 shares (approximately 38% of the outstanding stock) of Mercom that it did not own (the "Mercom Acquisition"). On September 10, 1998 Avalon Cable of Michigan, Inc. and Mercom entered into a definitive agreement (the "Mercom Merger Agreement") providing for the acquisition by Avalon Cable of Michigan, Inc. of all of such shares at a price of $12.00 per share. Avalon Cable of Michigan, Inc. completed this acquisition in March 1999. The total estimated consideration payable in conjunction with the Mercom Acquisition, excluding fees and expenses was $21,900. In March 1999, Avalon Michigan acquired the cable television systems of Nova Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII, L.P. for approximately $7,800, excluding transaction fees. On May 29, 1998, the Company acquired certain assets of Amrac Clear View, A Limited Partnership ("Amrac") for consideration of $8,124, including acquisition costs of $589. The acquisition was accounted for using the purchase method of accounting. Accordingly, the consideration was allocated to the net assets acquired based on the fair market values at the date of acquisition as determined through the use of an independent appraisal. The excess of the consideration paid over the estimated fair market value of the net assets acquired, or goodwill, was $256. On July 21, 1998, the Company acquired certain assets and liabilities from Pegasus Cable Television, Inc. and Pegasus Cable Television of Connecticut, Inc. (collectively, "Pegasus") for consideration of $30,467, including acquisition costs of $175. The acquisition was accounted for using the purchase method of accounting. Accordingly, the consideration was allocated to the net assets acquired based on the fair market values at the date of acquisition as determined through use of an independent appraisal. The excess of the consideration paid over the estimated fair market value of the net assets acquired, or goodwill, was $977. Unaudited pro forma results of operations of the Company for the year ended December 31, 1998, as if the Merger and acquisitions occurred on January 1, 1998. DECEMBER 31, 1998 ------------ (UNAUDITED) Revenues.................................................... $ 96,751 ======== Loss from operations........................................ $ (5,292) ======== Net loss.................................................... $(22,365) ======== In September 1998, the Company entered into a definitive agreement to purchase all of the cable systems of Taconic Technology Corporation ("Taconic") for approximately $8,525 (excluding transaction fees). As of December 31, 1998, the Company incurred $41 of transaction costs related to the acquisition of Taconic. This merger is expected to close in the second quarter of 1999. F-311
559 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. PROPERTY, PLANT AND EQUIPMENT At December 31, 1998, property, plant and equipment consists of the following: Cable plant and equipment................................... $106,602 Vehicles.................................................... 2,572 Office furniture and fixtures............................... 1,026 Buildings and improvements.................................. 2,234 Construction in process..................................... 768 -------- 113,202 Less: accumulated depreciation.............................. (1,781) -------- $111,421 ======== Depreciation expense charged to operations was $1,781 for the year ended December 31, 1998. 6. INTANGIBLE ASSETS At December 31, 1998, intangible assets consist of the following: 1998 -------- Cable franchises............................................ $374,773 Goodwill.................................................... 82,928 Deferred financing costs.................................... 10,658 Non-compete agreement....................................... 100 -------- 468,459 Less: accumulated amortization.............................. (6,342) -------- $462,117 ======== Amortization expense was $6,342 for the year ended December 31, 1998. 7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES At December 31, 1998, accounts payable and accrued expenses consist of the following: Accounts payable............................................ $ 5,321 Accrued corporate expenses.................................. 404 Accrued programming costs................................... 2,388 Taxes payable............................................... 1,383 Other....................................................... 2,150 ------- $11,646 ======= F-312
560 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. DEBT At December 31, 1998, Long-term debt consists of the following: Senior Credit Facility...................................... $140,875 Senior Subordinated Notes................................... 150,000 Senior Discount Notes....................................... 111,494 Other Note Payable.......................................... 600 -------- 402,969 Less: current portion of notes payable...................... 20 -------- $402,949 ======== Credit Facilities On May 28, 1998, Avalon New England entered into a term loan and revolving credit agreement with a major commercial lending institution (the "Credit Agreement"). The Credit Agreement allowed for aggregate borrowings under Term Loans A and B (collectively, the "Term Loans") and a revolving credit facility of $30,000 and $5,000, respectively. The proceeds from the Term Loans and revolving credit facility were used to fund the acquisitions made by Avalon New England and to provide for Avalon New England's working capital requirements. In December 1998, Avalon New England retired the Term Loans and revolving credit agreement through the proceeds of a capital contribution from Avalon. The fees and associated costs relating to the early retirement of this debt was $1,110. On November 6, 1998, Avalon New England became a co-borrower along with Avalon Michigan and Avalon Cable Finance, Inc. ("Avalon Finance"), affiliated companies (collectively referred to as the "Co-Borrowers"), on a $320,888 senior credit facility, which includes term loan facilities consisting of (i) tranche A term loans of $120,888 and (ii) tranche B term loans of $170,000, and a revolving credit facility of $30,000 (collectively, the "Credit Facility"). Subject to compliance with the terms of the Credit Facility, borrowings under the Credit Facility will be available for working capital purposes, capital expenditures and pending and future acquisitions. The ability to advance funds under the tranche A term loan facility terminated on March 31, 1999. The tranche A term loans are subject to minimum quarterly amortization payments commencing on January 31, 2001 and maturing on October 31, 2005. The tranche B term loans are subject to minimum quarterly payments commencing on January 31, 2001 with substantially all of tranche B term loans scheduled to be repaid in two equal installments on July 31, 2006 and October 31, 2006. The revolving credit facility borrowings are scheduled to be repaid on October 31, 2005. On November 6, 1998, Avalon Michigan borrowed $265,888 under the Credit Facility. In connection with the Senior Subordinated Notes and Senior Discount Notes offerings, Avalon Michigan repaid $125,013 of the Credit Facility, and the availability under the Credit Facility was reduced to $195,000. Avalon Michigan had borrowings of $11,300 and $129,575 outstanding under the tranche A and tranche B term note facilities, respectively, and had available $30,000 for borrowings under the revolving credit facility. Avalon New England and Avalon Finance had no borrowings outstanding under the Credit Facility at December 31, 1998. The interest rate under the Credit Facility is a rate based on either (i) the Base Rate (a rate per annum equal to the greater of the prime rate and the federal funds rate plus one-half of 1%) or (ii) the Eurodollar Rate (a rate per annum equal to the Eurodollar base rate divided by 1.00 less the Eurocurrency reserve requirement plus, in either case, the applicable margin). As of F-313
561 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1998, the applicable margin was (a) with respect to the tranche B term loans was 2.75% per annum for Base Rate loans and 3.75% per annum for Eurodollar loans and (b) with respect to tranche A term loans and the revolving credit facility was 2.00% per annum for Base Rate loans and 3.00% for Eurodollar loans. The applicable margin for the tranche A term loans and the revolving credit facility are subject to performance based grid pricing which is determined based upon the consolidated leverage ratio of the Co-Borrowers. The interest rate for the tranche A and tranche B term loans outstanding at December 31, 1998 was 8.58% and 9.33%, respectively. Interest is payable on a quarterly basis. Accrued interest on the borrowings incurred by Avalon Cable of Michigan Inc. under the credit facility was $1,389 at December 31, 1998. The Credit Facility contains restrictive covenants which among other things require the Co-Borrowers to maintain certain ratios including consolidated leverage ratios and the interest coverage ratio, fixed charge ratio and debt service coverage ratio. The obligations of the Co-Borrowers under the Credit Facility are secured by substantially all of the assets of the Co-Borrowers. In addition, the obligations of the Co-Borrowers under the Credit Facility are guaranteed by affiliated companies; Avalon Cable of Michigan Holdings, Inc., Avalon Cable Finance Holdings, Inc., Avalon New England Holdings, Inc., Avalon Cable Holdings, LLC and the Company. A Change of Control as defined under the Credit Facility agreement would constitute an event of default under the Credit Facility giving the lender the right to terminate the credit commitment and declare all amounts outstanding immediately due and payable. Subordinated Debt In December 1998, Avalon New England and Avalon Michigan became co-issuers of a $150,000 principal balance, Senior Subordinated Notes ("Subordinated Notes") offering. In conjunction with this financing, Avalon New England received $18,130 from Avalon Michigan as a partial payment against the Company's note receivable-affiliate from Avalon Michigan. Avalon Michigan paid $75 in interest during the period from October 21, 1998 (inception) through December 31, 1998. The cash proceeds received by Avalon New England of $18,206 was paid to Avalon as a dividend. The Subordinated Notes mature on December 1, 2008, and interest accrued at a rate of 9.375% per annum. Interest is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on June 1, 1999. Accrued interest on the Subordinated Notes was $1,078 at December 31, 1998. The Senior Subordinated Notes will not be redeemable at the Co-Borrowers' option prior to December 1, 2003. Thereafter, the Senior Subordinated Notes will be subject to redemption at any time at the option of the Co-Borrowers, in whole or in part at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on December 1 of the years indicated below: YEAR PERCENTAGE - ---- ---------- 2003..................................................... 104.688% 2004..................................................... 103.125% 2005..................................................... 101.563% 2006 and thereafter...................................... 100.000% F-314
562 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The scheduled maturities of the long-term debt are $2,000 in 2001, $4,000 in 2002, $7,000 in 2003, and the remainder thereafter. At any time prior to December 1, 2001, the Co-Borrowers may on any one or more occasions redeem up to 35% of the aggregate principal amount of Senior Subordinate Notes originally issued under the Indenture at a redemption price equal to 109.375% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds of any equity offering and/or the net cash proceeds of a strategic equity investment; provided that at least 65% of the aggregate principal amount at maturity of Senior Subordinated Notes originally issued remain outstanding immediately after each such redemption. As used in the preceding paragraph, "Equity Offering and Strategic Equity Investment" means any public or private sale of Capital Stock of any of the Co-Borrowers pursuant to which the Co-Borrowers together receive net proceeds of at least $25 million, other than issuances of Capital Stock pursuant to employee benefit plans or as compensation to employees; provided that to the extent such Capital Stock is issued by the Co-Borrowers, the net cash proceeds thereof shall have been contributed to one or more of the Co-Borrowers in the form of an equity contribution. The Indentures provide that upon the occurrence of a change of control (a "Change of Control") each holder of the Notes has the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's Notes at an offer price in cash equal to 101% of the aggregate principal amount thereon plus accrued and unpaid interest and Liquidated Damages (as defined in the Indentures) thereof, if any, to the date of purchase. The Senior Discount Notes On December 3, 1998, the Company, Avalon Michigan and Avalon Cable Holdings Finance, Inc. (the "Holding Co-Borrowers") issued $196.0 million aggregate principal amount at maturity of 117/8% Senior Discount Notes ("Senior Discount Notes") due 2008. The Senior Discount Notes were issued at a substantial discount from their principal amount at maturity, to generate gross proceeds of approximately $110.4 million. Interest on the Senior Discount Notes will accrue but not be payable before December 1, 2003. Thereafter, interest on the Senior Discount Notes will accrue on the principal amount at maturity at a rate of 11.875% per annum, and will be payable semi-annually in arrears on June 1 and December 1 of each year, commencing December 1, 2003. Prior to December 1, 2003, the accreted value of the Senior Discount Notes will increase, representing amortization of original issue discount, between the date of original issuance and December 1, 2003 on a semi-annual basis using a 360-day year comprised of twelve 30-day months, such that the accreted value shall be equal to the full principal amount at maturity of the Senior Discount Notes on December 1, 2003. Original issue discount accretion on the Senior Discount Notes was $1,083 at December 31, 1998. On December 1, 2003, the Holding Co-Borrowers will be required to redeem an amount equal to $369.79 per $1,000 principal amount at maturity of each Senior Discount Note then outstanding on a pro rata basis at a redemption price of 100% of the principal amount at maturity of the Senior Discount Notes so redeemed. On or after December 1, 2003, the Senior Discount Notes will be subject to redemption at any time at the option of the Holding Co-borrowers, in whole or in part, at the redemption prices, which are expressed as percentages of principal amount, shown below plus accrued and unpaid F-315
563 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) interest, if any, and liquidated damages, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on December 1 of the years indicated below: YEAR PERCENTAGE - ---- ---------- 2003................................................... 105.938% 2004................................................... 103.958% 2005................................................... 101.979% 2006 and thereafter.................................... 100.000% Notwithstanding the foregoing, at any time before December 1, 2001, the holding companies may on any one or more occasions redeem up to 35% of the aggregate principal amount at maturity of senior discount notes originally issued under the Senior Discount Note indenture at a redemption price equal to 111.875% of the accreted value at the date of redemption, plus liquidated damages, if any, to the redemption date, with the net cash proceeds of any equity offering and/or the net cash proceeds of a strategic equity investment; provided that at least 65% of the aggregate principal amount at maturity of Senior Discount Notes originally issued remain outstanding immediately after each occurrence of such redemption. Upon the occurrence of a Change of Control, each holder of Senior Discount Notes will have the right to require the Holding Co-Borrowers to repurchase all or any part of such holder's Senior Discount Notes pursuant to a Change of Control offer at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and liquidated damages thereon, if any, to the date of purchase. Mercom debt In August 1997, the Mercom revolving credit agreement for $2,000 expired. Mercom had no borrowings under the revolving credit agreement in 1996 or 1997. On September 29, 1997, Cable Michigan, Inc. purchased and assumed all of the bank's interest in the term credit agreement and the note issued thereunder. Immediately after the purchase, the term credit agreement was amended in order to, among other things, provide for less restrictive financial covenants, eliminate mandatory amortization of principal and provide for a bullet maturity of principal on December 31, 2002, and remove the change of control event of default. Mercom's borrowings under the term credit agreement contain pricing and security provisions substantially the same as those in place prior to the purchase of the loan. The borrowings are secured by a pledge of the stock of Mercom's subsidiaries and a first lien on certain of the assets of Mercom and its subsidiaries, including inventory, equipment and receivables. At December 31, 1998, $14,151 of principal was outstanding. The borrowings under the term credit agreement are eliminated in the Company's consolidated balance sheet. Note payable Avalon New England issued a note payable for $500 which is due on May 29, 2003, and bears interest at a rate of 7% per annum (which approximates Avalon New England's incremental borrowing rate) payable annually. Additionally, Avalon New England has a $100 non-compete agreement. The agreement calls for five annual payments of $20, commencing on May 29, 1999. F-316
564 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES The income tax provision in the accompanying consolidated financial statements of operations relating to Mercom, Inc., a majority-owned subsidiary, is comprised of the following: 1998 ---- CURRENT Federal..................................................... $ -- State....................................................... -- ---- Total Current............................................... -- ---- DEFERRED Federal..................................................... 171 State....................................................... 15 ---- Total Deferred.............................................. 186 ---- Total provision for income taxes............................ $186 ==== The benefit for income taxes is different from the amounts computed by applying the U.S. statutory federal tax rate of 35% for 1998. The differences are as follows: 1998 ------- Loss before provision for income taxes...................... $(8,833) ======= Federal tax provision at statutory rates.................... (3,092) State income taxes.......................................... (182) Allocated to members........................................ 3,082 Goodwill.................................................... 6 ------- Provision for income taxes.................................. 186 ======= TAX NET OPERATING EXPIRATION YEAR LOSSES DATE - ---- --------- ---------- 1998................................................... $922 2018 Temporary differences that give rise to significant portion of deferred tax assets and liabilities at December 31 are as follows: 1998 ------- NOL carryforwards........................................... $ 922 Reserves.................................................... 459 Other, net.................................................. 20 ------- Total deferred assets....................................... 1,401 ------- Property, plant and equipment............................... (2,725) Intangible assets........................................... (38) ------- Total deferred liabilities.................................. (2,763) ------- Subtotal.................................................... (1,362) ------- Valuation allowance......................................... -- ------- Total deferred taxes........................................ (1,362) ======= F-317
565 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES Leases Avalon New England and Avalon Michigan rent poles from utility companies for use in their operations. While rental agreements are generally short-term, Avalon New England and Avalon Michigan anticipate such rentals will continue in the future. Avalon New England and Avalon Michigan also lease office facilities and various items of equipment under month-to-month operating leases. Rent expense was $58 for the year ended December 31, 1998. Rental commitments are expected to continue at approximately $1 million a year for the foreseeable future, including pole rental commitments which are cancelable. Legal matters Avalon and its subsidiaries are subject to regulation by the Federal Communications Commission ("FCC") and other franchising authorities. Avalon and its subsidiaries are subject to the provisions of the Cable Television Consumer Protection and Competition Act of 1992, as amended, and the Telecommunications Act of 1996. Avalon and its Subsidiaries have either settled challenges or accrued for anticipated exposures related to rate regulation; however, there is no assurance that there will not be further additional challenges to its rates. In the normal course of business, there are various legal proceedings outstanding. In the opinion of management, these proceedings will not have a material adverse effect on the financial condition or results of operations of Avalon and its subsidiaries. 11. RELATED PARTY TRANSACTIONS AND BALANCES During 1998, Avalon New England received $3,341 from Avalon Holdings. In consideration for this amount, Avalon New England executed a note payable to Avalon Holdings. This note is recorded as note payable-affiliate on the balance sheet at December 31, 1998. Interest accrues at a rate of 5.57% per year and Avalon New England has recorded accrued interest on this note of $100 at December 31, 1998. 12. SUBSEQUENT EVENT In May 1999, the Company signed an agreement with Charter Communications, Inc. ("Charter Communications") under which Charter Communications agreed to purchase Avalon Cable LLC's cable television systems and assume some of their debt. The acquisition by Charter Communications is subject to regulatory approvals. The Company expects to consummate this transaction in the fourth quarter of 1999. This agreement, if closed, would constitute a change in control under the Indenture pursuant to which the Senior Subordinated Notes and the Senior Discount Notes (collectively, the "Notes") were issued. The Indenture provides that upon the occurrence of a change of control of the Company (a "Change of Control") each holder of the Notes has the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's Notes at an offer price in cash equal to 101% of the aggregate principal amount thereon (or 101% of the accreted value for the Senior Discount Notes as of the date of purchase if prior to the full accretion date) plus accrued and unpaid interest and Liquidated Damages (as defined in the Indenture) thereof, if any, to the date of purchase. F-318
566 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) This agreement, if closed, would represent a Change of Control which, on the closing date, constitutes an event of default under the Credit Facility giving the lender the right to terminate the credit commitment and declare all amounts outstanding immediately due and payable. Charter Communications has agreed to repay all amounts due under the Credit Facility or cause all events of default under the Credit Facility arising from the Change of Control to be waived. F-319
567 AVALON CABLE LLC AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET JUNE 30, DECEMBER 31, 1999 1998 ----------- ------------ (UNAUDITED) (IN THOUSANDS) ASSETS CURRENT ASSETS Cash........................................................ $ 3,457 $ 9,288 Subscriber receivables, less allowance for doubtful accounts of $1,509 and $943........................................ 6,158 5,862 Accounts receivable-affiliate............................... -- 124 Deferred income taxes....................................... -- 479 Prepaid expenses and other current assets................... 415 580 -------- -------- Total current assets........................................ 10,030 16,333 Property, plant and equipment, net.......................... 116,587 111,421 Intangible assets, net...................................... 470,041 462,117 Other assets................................................ 32 227 -------- -------- Total assets................................................ $596,690 $590,098 ======== ======== LIABILITIES AND MEMBERS' INTEREST CURRENT LIABILITIES Current portion of notes payable............................ $ 25 $ 20 Accounts payable and accrued expenses....................... 13,983 11,646 Accounts payable, net-affiliate............................. 3,160 2,023 Deferred revenue............................................ 3,136 3,171 -------- -------- Total current liabilities................................... 20,304 16,860 Note payable, net of current portion........................ 446,079 402,949 Note payable-affiliate...................................... -- 3,341 Deferred income taxes....................................... -- 1,841 -------- -------- Total liabilities........................................... 466,383 424,991 Minority interest........................................... -- 13,855 Commitments and contingencies (Note 5) Members' interests Members' capital............................................ 166,630 166,630 Accumulated deficit......................................... (36,323) (15,378) -------- -------- Total members' interest..................................... 130,307 151,252 -------- -------- Total liabilities and members' interest..................... $596,690 $590,098 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. F-320
568 AVALON CABLE LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS FOR THE SIX MONTHS ENDED ENDED JUNE 30, 1999 JUNE 30, 1998 ------------------ ------------------ (UNAUDITED) (IN THOUSANDS) REVENUE Basic services........................................... $ 42,064 $131 Premium services......................................... 4,079 15 Other.................................................... 5,626 8 -------- ---- Total revenues........................................... 51,769 154 Operating expenses Selling, general and administrative...................... 9,544 21 Programming.............................................. 13,966 39 Technical and operations................................. 5,932 17 Depreciation and amortization............................ 22,096 53 -------- ---- Loss from operations..................................... 231 24 Other income (expense) Interest income.......................................... 708 -- Interest expense......................................... (23,246) (5) -------- ---- Income (loss) before income taxes........................ (22,307) 19 (Benefit) for income taxes............................... (1,362) -- -------- ---- Net income (loss)........................................ $(20,945) $ 19 ======== ==== The accompanying notes are an integral part of these consolidated financial statements. F-321
569 AVALON CABLE LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS' INTEREST FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) -------------------------------------------------------------- CLASS A CLASS B-1 TOTAL ---------------- ------------------ ACCUMULATED MEMBERS' UNITS $ UNITS $ DEFICIT INTEREST ------ ------- ------- -------- ----------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) Balance at December 31, 1998.... 45,000 $45,000 575,690 $121,630 $(15,378) $151,252 Net loss for the six months ended June 30, 1999........... -- -- -- -- (20,945) (20,945) ------ ------- ------- -------- -------- -------- Balance at June 30, 1999........ 45,000 $45,000 575,690 $121,630 $(36,323) $130,307 ====== ======= ======= ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. F-322
570 AVALON CABLE LLC AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, 1999 JUNE 30, 1998 -------------- -------------- (UNAUDITED) (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)........................................... $(20,945) $ 19 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization............................... 22,096 53 Accretion of Senior Discount Notes.......................... 6,630 -- Changes in operating assets and liabilities Decrease in subscriber receivables.......................... 247 22 (Increase) decrease in prepaid expenses and other assets.... 240 (16) Increase in accounts payable and accrued expenses........... 2,440 152 Increase in accounts payable, net-affiliate................. 1,000 -- Decrease in deferred revenues............................... (35) (152) Decrease in deferred income taxes, net...................... (1,362) -- -------- ------- Net cash provided by operating activities................... 10,311 78 -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment.................. (9,881) (101) Payments for acquisitions, net.............................. (39,420) (8,187) -------- ------- Net cash used in investing activities....................... (49,301) (8,288) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Note payable-affiliate...................................... (3,341) 733 Capital Contribution........................................ -- 1,062 Proceeds from credit facility............................... 36,500 6,700 -------- ------- Net cash provided by financing activities................... 33,159 8,495 -------- ------- Increase (decrease) in cash................................. (5,831) 285 Cash, beginning of period................................... 9,288 -- -------- ------- Cash, end of period......................................... $ 3,457 $ 285 ======== ======= The accompanying notes are an integral part of these consolidated financial statements. F-323
571 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (IN THOUSANDS) 1. DESCRIPTION OF BUSINESS Avalon Cable LLC ("the Company"), and its wholly owned subsidiaries Avalon Cable Holdings Finance, Inc. ("Avalon Holdings Finance") and Avalon Cable of Michigan LLC ("Avalon Michigan"), were formed in October 1998, pursuant to the laws of the State of Delaware, as a wholly owned subsidiary of Avalon Cable of New England Holdings, Inc. ("Avalon New England Holdings"). On November 6, 1998, Avalon New England Holdings contributed its 100% interest in Avalon Cable of New England LLC ("Avalon New England") to the Company in exchange for a membership interest in the Company. This contribution was between entities under common control and was accounted for similar to a pooling-of-interests. Under the pooling-of-interests method, the results of operations for the Company include the results of operations from the date of inception (September 4, 1997) of Avalon New England. On November 6, 1998, the Company received $63,000 from affiliated entities, which was comprised of (i) a $45,000 capital contribution by Avalon Investors, LLC ("Avalon Investors") and (ii) an $18,000 promissory note from Avalon Cable Holdings LLC ("Avalon Holdings"), which was used to make a $62,800 cash contribution to Avalon New England. The cash contribution received by Avalon New England was used to (i) extinguish existing indebtedness of $29,600 and (ii) fund a $33,200 loan to Avalon Holdings Finance which matures on December 31, 2001. On December 10, 1998, the Company received a dividend distribution from Avalon New England in the amount of $18,206, which was used by the Company to pay off the promissory note payable to Avalon Holdings, plus accrued interest. Avalon Cable of Michigan, Inc. was formed in June 1998, pursuant to the laws of the state of Delaware, as a wholly owned subsidiary of Avalon Cable of Michigan Holdings, Inc. ("Michigan Holdings".) On June 3, 1998, Avalon Cable of Michigan, Inc. entered into an Agreement and Plan of Merger (the "Agreement") among Avalon Cable of Michigan, Inc., Michigan Holdings and Cable Michigan, Inc. (Cable Michigan), pursuant to which Avalon Cable of Michigan, Inc. will merge into Cable Michigan and Cable Michigan will become a wholly owned subsidiary of Michigan Holdings (the "Merger"). As part of the Merger, the name of the company was changed to Avalon Cable of Michigan, Inc. In accordance with the terms of the Agreement, each share of common stock, par value $1.00 per share ("common stock"), of Cable Michigan outstanding prior to the effective time of the Merger (other than treasury stock shares owned by Michigan Holdings or its subsidiaries, or shares as to which dissenters' rights have been exercised) shall be converted into the right to receive $40.50 in cash (the "Merger Consideration"), subject to certain possible closing adjustments. In conjunction with the acquisition of Cable Michigan, Avalon Cable of Michigan, Inc. acquired Cable Michigan's 62% ownership interest in Mercom, Inc. ("Mercom"). On November 6, 1998, Avalon Cable of Michigan, Inc. completed its Merger. The total consideration payable in conjunction with the Merger, including fees and expenses is $431,629, including repayment of all existing Cable Michigan indebtedness and accrued interest of $135,205. Subsequent to the Merger, the arrangements with RCN and CTE for certain support F-324
572 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) services were terminated. The Agreement also permitted Avalon Cable of Michigan, Inc. to agree to acquire the remaining shares of Mercom that it did not own. Michigan Holdings contributed $137,375 in cash to Avalon Cable of Michigan, Inc., which was used to consummate the Merger. On November 5, 1998, Michigan Holdings received $105,000 in cash in exchange for promissory notes to lenders (the "Bridge Agreement"). On November 6, 1998, Michigan Holdings contributed the proceeds received from the Bridge Agreement and an additional $35,000 in cash to Avalon Cable of Michigan Inc. in exchange for 100 shares of common stock. On March 26, 1999, Avalon completed a series of transactions to facilitate certain aspects of its financing between affiliated entities under common control. As a result of these transactions: - Avalon Cable of Michigan, Inc. contributed its assets and liabilities excluding deferred tax liabilities, net to Avalon in exchange for an approximate 88% voting interest in Avalon, which then transferred those assets and liabilities to its wholly-owned subsidiary Avalon Michigan; - Avalon Michigan now operates the Michigan cluster replacing Avalon Cable of Michigan, Inc.; - Avalon Cable of Michigan Holdings, Inc. ceased to be an obligor on the exchanged notes and together with Avalon Cable of Michigan, Inc. became a guarantor of the obligations of the Company under the exchanged notes; - Avalon Michigan became an additional obligor on the Senior Subordinated Notes replacing Avalon Cable of Michigan, Inc.; and - Avalon Cable of Michigan, Inc. ceased to be an obligor on the Senior Subordinated Notes and the credit facility and became a guarantor of the obligations of Avalon Michigan under the Senior Subordinated Notes and the credit facility. As a result of the reorganization between entities under common control, the Company accounted for the reorganization similar to a pooling-of-interests. Under the pooling-of-interests method, the results of operations for Avalon include the results of operations from the date of inception (June 2, 1998) of Avalon Cable of Michigan, Inc. and the date of acquisition of the completed acquisitions. Avalon New England and Avalon Michigan provide cable service to the western New England area and the state of Michigan, respectively. Avalon New England and Avalon Michigan's cable systems offer customer packages of basic and premium cable programming services which are offered at a per channel charge or are packaged together to form a tier of services offered at a discount from the combined channel rate. Avalon New England and Avalon Michigan cable systems also provide premium cable services to their customers for an extra monthly charge. Customers generally pay initial connection charges and fixed monthly fees for cable programming and premium cable services, which constitute the principal sources of revenue for Avalon New England and Avalon Michigan. Avalon Holdings Finance was formed for the sole purpose of facilitating financings associated with the acquisitions of various cable operating companies. Avalon Holdings Finance conducts no other activities. F-325
573 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. BASIS OF PRESENTATION Pursuant to the rules and regulations of the Securities and Exchange Commission, certain financial information has been condensed and certain footnote disclosures have been omitted. Such information and disclosures are normally included in financial statements prepared in accordance with generally accepted accounting principles. The consolidated financial statements herein include the accounts of the Company and its wholly-owned subsidiaries. These condensed financial statements should be read in conjunction with the Company's audited financial statements as of December 31, 1998 and notes thereto included elsewhere herein. The financial statements as of June 30, 1999 and for the six month period then ended are unaudited; however, in the opinion of management, such statements include all adjustments (consisting solely of normal and recurring adjustments except for the acquisition of Cross Country Cable, LLC ("Cross Country"), Nova Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII, L.P. ("Nova Cable"), Novagate Communication Corporation ("Novagate"), Traverse Internet R/Com. L.C., the Mercom Merger and the contribution of assets and liabilities by Avalon Cable of Michigan, Inc.) necessary to present fairly the financial information included therein. 3. MERGER AND ACQUISITIONS The Merger agreement between Michigan Holdings and Avalon Cable of Michigan, Inc. permitted Avalon Cable of Michigan, Inc. to agree to acquire the 1,822,810 shares (approximately 38% of the outstanding stock) of Mercom that it did not own (the "Mercom Acquisition"). On September 10, 1998 Avalon Cable of Michigan, Inc. and Mercom entered into a definitive agreement (the "Mercom Merger Agreement") providing for the acquisition by Avalon Cable of Michigan, Inc. of all of such shares at a price of $12.00 per share. Avalon Cable of Michigan, Inc. completed this acquisition in March 1999. The total estimated consideration paid in conjunction with the Mercom acquisition, excluding fees and expenses was $21,900. The purchase price was allocated as follows: approximately $13,800 to the elimination of minority interest, $1,170 to property, plant and equipment, $6,700 to cable franchises and the excess of consideration paid over the fair market value of the net assets acquired, or goodwill, of $240. In March 1999, Avalon Cable of Michigan Inc. acquired the cable television systems of Nova Cable for approximately $7,800, excluding transaction fees. On January 21, 1999, the Company through its subsidiary, Avalon New England subsidiaries, acquired Novagate for a purchase price of $2,900. On March 26, 1999, the Company through its subsidiary, Avalon Michigan, acquired the assets of R/Com, L.C., for a total purchase price of approximately $450. In January 1999, the Company acquired all of the issued and outstanding Common Stock of Cross Country for a purchase price of approximately $2,500, excluding transaction fees. On April 1, 1999, the Company, through its subsidiary, Avalon New England, acquired Traverse Internet for $2,400. The acquisitions have been accounted for as purchases and the results of the companies acquired have been included in the accompanying financial statements since their acquisition dates. Accordingly, the consideration was allocated to the net assets based on their respective F-326
574 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) fair market values. The excess of the consideration paid over the estimated fair market values of the net assets acquired was $12,940 and is being amortized using the straight line method over 15 years. In July 1999, Avalon New England purchased all of the cable systems of Taconic Technology Corporation for approximately $8,525 (excluding transaction fees). 4. INCOME TAXES Upon the closure of the Mercom merger, Mercom was dissolved as a separate taxable entity which resulted in a change in tax status from a taxable entity to a nontaxable entity. As a result, the Company recognized a tax benefit of $1,362 in its results of operations and eliminated its deferred taxes, net in the balance sheet. 5. COMMITMENTS AND CONTINGENCIES In connection with the acquisition of Mercom, former shareholders of Mercom holding approximately 731,894 Mercom common shares or approximately 15.3% of all outstanding Mercom common shares gave notice of their election to exercise appraisal rights as provided by Delaware law. On July 2, 1999, former shareholders of Mercom holding 535,501 shares of Mercom common stock filed a petition for appraisal of stock in the Court of Chancery in the State of Delaware. With respect to 209,893 of the total number of shares for which the Company received notice, the Company received the notice of election from beneficial holders of Mercom common shares and not from holders of record. The Company believes that the notice with respect to the 209,893 shares did not comply with Delaware law and is ineffective. The Company cannot predict at this time the effect of the elections to exercise appraisal rights on the Company since the Company does not know the extent to which these former shareholders will continue to pursue appraisal rights under Delaware law or choose to abandon these efforts and accept the consideration payable in the Mercom merger. If these former shareholders continue to pursue their appraisal rights and if a Delaware court were to find that the fair value of the Mercom common shares, exclusive of any element of value arising from our acquisition of Mercom, exceeded $12.00 per share, the Company would have to pay the additional amount for each Mercom common share to the appraisal subject to the appraisal proceedings together with a fair rate of interest. The Company could be ordered by the Delaware court to pay reasonable attorney's fees and the fees and expenses of experts for the shareholders. In addition, the Company would have to pay their own litigation costs. The Company have already provided for the consideration of $12.00 per Mercom common share due under the terms of our merger with Mercom with respect to these shares but have not provided for any additional amounts or costs. The Company can provide no assurance as to what a Delaware court would find in any appraisal proceeding or when this matter will be resolved. Accordingly, the Company cannot assure you that the ultimate outcome would not have a material adverse effect on the Company. The Company is subject to the provisions of the Cable Television Consumer Protection and Competition Act of 1992, as amended, and the Telecommunications Act of 1996. The Company has either settled challenges or accrued for anticipated exposures related to rate regulation; however, there is no assurance that there will not be further additional challenges to its rates. In the normal course of business, there are various legal proceedings outstanding. In the opinion of management, these proceedings will not have a material adverse effect on the financial condition or results of operations of the Company. F-327
575 AVALON CABLE LLC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. PENDING MERGER In May 1999, the Company signed an agreement with Charter Communications, Inc. ("Charter Communications") under which Charter Communications agreed to purchase Avalon Cable LLC's cable television systems and assume some of their debt. The acquisition by Charter Communication is subject to regulatory approvals. The Company expects to consummate this transaction in the fourth quarter of 1999. This agreement, if closed, would constitute a change in control under the Indenture pursuant to which the Senior Subordinated Notes and the Senior Discount Notes (collectively, the "Notes") were issued. The Indenture provides that upon the occurrence of a change of control of the Company (a "Change of Control") each holder of the Notes has the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's Notes at an offer price in cash equal to 101% of the aggregate principal amount thereon (or 101% of the accreted value for the Senior Discount Notes as of the date of purchase if prior to the full accretion date) plus accrued and unpaid interest and Liquidated Damages (as defined in the Indenture) thereof, if any, to the date of purchase. This agreement, if closed, would represent a Change of Control which, on the closing date, constitutes an event of default under the Credit Facility giving the lender the right to terminate the credit commitment and declare all amounts outstanding immediately due and payable. Charter Communications has agreed to repay all amounts due under the Credit Facility or cause all events of default under the Credit Facility arising from the Change of Control to be waived. F-328
576 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers of Avalon Cable of Michigan Holdings, Inc. and Subsidiaries In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of Avalon Cable of Michigan Holdings, Inc. and subsidiaries (collectively, the "Company") at December 31, 1997 and 1998, and the results of their operations, changes in shareholders' equity and their cash flows for the period from September 4, 1997 (inception) through December 31, 1997, and for the year ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP New York, New York March 30, 1999, except for Note 13, as to which the date is May 13, 1999 F-329
577 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, ---------------------- 1998 1997 ---------- ------ (DOLLARS IN THOUSANDS) ASSETS Cash........................................................ $ 9,288 $ -- Accounts receivable, net of allowance for doubtful accounts of $943................................................... 5,862 -- Prepayments and other current assets........................ 1,388 504 Accounts receivable from related parties.................... 124 -- Deferred income taxes....................................... 377 -- -------- ---- Current assets.............................................. 17,039 504 Property, plant and equipment, net.......................... 111,421 -- Intangible assets, net...................................... 462,117 -- Deferred charges and other assets........................... 1,302 -- -------- ---- Total assets................................................ $591,879 $504 ======== ==== LIABILITIES AND SHAREHOLDERS' EQUITY Current portion of notes payable............................ $ 20 $ -- Accounts payable and accrued expenses....................... 11,646 -- Advance billings and customer deposits...................... 3,171 -- Accounts payable-affiliate.................................. 2,023 500 -------- ---- Current liabilities......................................... 16,860 500 Long-term debt.............................................. 402,949 -- Notes payable-affiliate..................................... 3,341 -- Deferred income taxes....................................... 80,811 -- -------- ---- Total liabilities........................................... 503,961 500 -------- ---- Commitments and contingencies (Note 11)..................... -- -- Minority interest........................................... 61,836 4 -------- ---- Stockholders equity: Common stock................................................ -- -- Additional paid-in capital.................................. 35,000 -- Accumulated deficit......................................... (8,918) -- -------- ---- Total shareholders' equity.................................. 26,082 -- -------- ---- Total liabilities and shareholders' equity.................. $591,879 $504 ======== ==== The accompanying notes are an integral part of these consolidated financial statements. F-330
578 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE PERIOD FOR THE YEAR SEPTEMBER 4, 1997 ENDED (INCEPTION) THROUGH DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ------------------- (DOLLARS IN THOUSANDS) REVENUE: Basic services.......................................... $14,976 $ -- Premium services........................................ 1,468 -- Other................................................... 1,743 -- ------- ------- 18,187 -- OPERATING EXPENSES: Selling, general and administrative..................... 4,207 -- Programming............................................. 4,564 -- Technical and operations................................ 1,951 -- Depreciation and amortization........................... 8,183 -- ------- ------- Loss from operations.................................... (718) -- Interest income......................................... 173 4 Interest expense........................................ (8,223) -- Other expense, net...................................... (65) -- ------- ------- Income (loss) before income taxes....................... (8,833) 4 (Benefit) from income taxes............................. (2,754) -- ------- ------- Income (loss) before minority interest and extraordinary item.................................................. (6,079) 4 Minority interest in income of consolidated entity...... 1,331 (4) ------- ------- Income (loss) before extraordinary item................. (4,748) -- Extraordinary loss on extinguishment of debt (net of tax of $1,743)............................................ (4,170) -- ------- ------- Net income (loss)....................................... $(8,918) $ -- ======= ======= The accompanying notes are an integral part of these consolidated financial statements. F-331
579 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE PERIOD FROM SEPTEMBER 4, 1997 (INCEPTION) THROUGH DECEMBER 31, 1998 COMMON ADDITIONAL TOTAL SHARES COMMON PAID-IN ACCUMULATED SHAREHOLDERS' OUTSTANDING STOCK CAPITAL DEFICIT EQUITY ----------- ------ ---------- ----------- ------------- (IN THOUSANDS, EXCEPT SHARE AMOUNTS) Net income from date of inception through December 31, 1997.................... -- $-- $ -- $ -- $ -- Balance, January 1, 1998...... 100 -- -- -- -- Net loss...................... -- -- -- (8,918) (8,918) Contributions by parent....... -- -- 35,000 -- 35,000 --- -- ------- ------- ------- Balance, December 31, 1998.... 100 $-- $35,000 $(8,918) $26,082 === == ======= ======= ======= The accompanying notes are an integral part of these consolidated financial statements. F-332
580 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD FROM SEPTEMBER 4, 1997 FOR THE YEAR ENDED (INCEPTION) THROUGH DECEMBER 31, 1998 DECEMBER 31, 1997 ------------------ ------------------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)....................................... $ (8,918) $ 4 Extraordinary loss on extinguishment of debt............ 4,170 -- Depreciation and amortization........................... 8,183 -- Deferred income taxes, net.............................. 82,370 -- Provision for loss on accounts receivable............... 75 -- Increase in minority interest........................... 1,331 -- Accretion on senior discount notes...................... 1,083 Net change in certain assets and liabilities, net of business acquisitions Increase in accounts receivable............................................ (1,679) -- Increase in accounts receivable from related parties.... (124) -- Increase in prepayment and other current assets......... (884) (4) Increase in accounts payable and accrued expenses....... 4,863 -- Increase in accounts payable to related parties......... 1,523 -- Increase in deferred revenue............................ 1,684 -- Change in Other, net.................................... 1,339 --------- --------- Net cash provided by operating activities............... 92,338 -- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment.............. (11,468) -- Payment for acquisition................................. (554,402) -- --------- --------- Net cash used in investing activities................... 565,870 -- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of the Credit Facility....... 265,888 -- Principal payment on debt............................... (125,013) -- Proceeds from the issuance of senior subordinated notes................................................. 150,000 -- Payments made on bridge loan............................ (105,000) -- Proceeds from bridge loan............................... 105,000 -- Proceeds from the senior discount notes................. 110,411 -- Proceeds from sale to minority interest................. 46,588 -- Proceeds from other notes payable....................... 600 -- Proceeds from the issuance of note payable affiliate.... 3,341 -- Payments made for debt financing costs.................. (3,995) -- Proceeds from the issuance of common stock.............. 35,000 -- --------- --------- Net cash provided by financing activities............... 482,820 -- --------- --------- Net increase in cash.................................... 9,288 -- Cash at beginning of the period......................... -- -- --------- --------- Cash at end of the period............................... $ 9,288 $ -- --------- --------- Supplemental disclosures of cash flow information....... Cash paid during the year for Interest.................. $ 3,480 -- Income taxes............................................ -- $ -- The accompanying notes are an integral part of these consolidated financial statements. F-333
581 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS Avalon Cable of Michigan Holdings, Inc. ("the Company") was formed in June 1998, pursuant to the laws of the state of Delaware. Avalon Cable of Michigan Inc. ("Avalon Michigan") was formed in June 1998, pursuant to the laws of the state of Delaware as a wholly owned subsidiary of the Company. On June 3, 1998, Avalon Michigan entered into an Agreement and Plan of Merger (the "Agreement") among the Company, Cable Michigan, Inc. ("Cable Michigan") and Avalon Michigan, pursuant to which Avalon Michigan will merge into Cable Michigan and Cable Michigan will become a wholly owned subsidiary of the Company (the "Merger"). In accordance with the terms of the Agreement, each share of common stock, par value $1.00 per share ("common stock"), of Cable Michigan outstanding prior to the effective time of the Merger (other than treasury stock shares owned by the Company or its subsidiaries, or shares as to which dissenters' rights have been exercised) shall be converted into the right to receive $40.50 in cash (the "Merger Consideration"), subject to certain possible closing adjustments. In conjunction with the acquisition of Cable Michigan, Avalon Michigan acquired Cable Michigan's 62% ownership interest in Mercom, Inc. ("Mercom"). On November 6, 1998, Avalon Michigan completed its merger into and with Cable Michigan. The total consideration paid in conjunction with the merger, including fees and expenses was $431,629, including repayment of all existing Cable Michigan indebtedness and accrued interest of $135,205. Subsequent to the merger, the arrangements with RCN and CTE for certain support services were terminated. The Agreement also permitted Avalon Michigan to agree to acquire the remaining shares of Mercom that it did not own. The Company contributed $137,375 in cash to Avalon Michigan, which was used to consummate the Merger. On November 5, 1998, the Company received $105,000 in cash in exchange for promissory notes to lenders (the "Bridge Agreement"). On November 6, 1998, the Company contributed the proceeds received from the Bridge Agreement and an additional $35,000 in cash to Avalon Michigan in exchange for 100 shares of common stock. On November 6, 1998, Avalon Cable of New England Holdings, Inc. contributed its 100% interest in Avalon Cable of New England LLC ("Avalon New England") to Avalon Cable LLC in exchange for a membership interest in Avalon Cable LLC. This contribution was between entities under common control and was accounted for similar to a pooling-of-interests. Under this pooling-of-interests method, the results of operations for Avalon include the results of operations from the date of inception (September 4, 1997) of Avalon New England. On that same date, Avalon Cable LLC received $63,000 from affiliated entities, which was comprised of (i) a $45,000 capital contribution by Avalon Investors, LLC ("Avalon Investors") and (ii) a $18,000 promissory note from Avalon Cable Holdings LLC ("Avalon Holdings"), which was used to make a $62,800 cash contribution to Avalon New England. The cash contribution received by Avalon New England was used to (i) extinguish existing indebtedness of $29,600 and (ii) fund a $33,200 loan to Avalon Holdings Finance which matures on December 31, 2001. F-334
582 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 On December 10, 1998, Avalon Cable LLC received a dividend distribution from Avalon New England in the amount of $18,206, which was used by Avalon Cable LLC to pay off the promissory note payable to Avalon Holdings, plus accrued interest. On March 26, 1999, after the acquisition of Mercom, Inc., the Company completed a series of transactions to facilitate certain aspects of its financing between affiliated entities under common control. As a result of these transactions: - Avalon Michigan contributed its assets and liabilities excluding deferred tax liabilities, net to Avalon Cable LLC in exchange for an approximate 88% voting interest in Avalon Cable LLC. Avalon Cable LLC contributed these assets and liabilities to its wholly-owned subsidiary, Avalon Cable of Michigan LLC ("Avalon Michigan LLC"); - Avalon Michigan LLC has become the operator of the Michigan cluster replacing Avalon Michigan; - Avalon Michigan LLC is an obligor on the Senior Subordinated Notes replacing Avalon Michigan; and - Avalon Michigan is a guarantor of the obligations of Avalon Michigan LLC under the Senior Subordinated Notes. Avalon Michigan does not have significant assets, other than its investment in Avalon Cable LLC. - The Company contributed the Senior Discount Notes to Avalon Cable LLC and became a guarantor of the Senior Discount Notes. The Company does not have significant assets, other than its 88% investment in Avalon Cable LLC. As a result of this reorganization between entities under common control, the Company accounted for the reorganization similar to a pooling-of-interests. Under the pooling-of-interests method, the results of operations include the results of operations from the earliest date that a member became a part of the control group by inception or acquisition. For the Company, the results of operations are from the date of inception (September 4, 1997) for Avalon New England, a wholly-owned subsidiary of Avalon Cable LLC. Avalon Michigan has a majority-interest in Avalon Cable LLC. Avalon Cable LLC wholly-owns Avalon Cable Holdings Finance, Avalon New England, and Avalon Michigan LLC. Avalon New England and Avalon Michigan provide cable service to the western New England area and the state of Michigan, respectively. Avalon New England and Avalon Michigan LLC's cable systems offer customer packages for basic cable programming services which are offered at a per channel charge or packaged together to form a tier of services offered at a discount from the combined channel rate. Avalon New England and Avalon Michigan LLC's cable systems also provide premium cable services to their customers for an extra monthly charge. Customers generally pay initial connection charges and fixed monthly fees for cable programming and premium cable services, which constitute the principle sources of revenue for the Company. Avalon Holdings Finance was formed for the sole purpose of facilitating financings associated with the acquisitions of various cable operating companies. Avalon Holdings Finance conducts no other activities. F-335
583 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation The consolidated financial statements of the Company include the accounts of the Company and of all its wholly and majority owned subsidiaries. All significant transactions between the Company and its subsidiaries have been eliminated. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles 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. Revenue recognition Revenues from cable services are recorded in the month the service is provided. Installation fee revenue is recognized in the period in which the installation occurs to the extent that direct selling costs meet or exceed installation revenues. Advertising expense Advertising costs are expensed as incurred. Advertising expense charged to operations was $82 for the year ended December 31, 1998. Concentration of credit risk Financial instruments which potentially expose the Company to a concentration of credit risk include cash and subscriber and other receivables. The Company had cash in excess of federally insured deposits at financial institutions at December 31, 1998. The Company does not believe that such deposits are subject to any unusual credit risk beyond the normal credit risk associated with operating its business. The Company extends credit to customers on an unsecured basis in the normal course of business. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have not historically exceeded management's expectations. The Company's trade receivables reflect a customer base centered in Michigan and New England. The Company routinely assesses the financial strength of its customers; as a result, concentrations of credit risk are limited. Property, plant and equipment Property, plant and equipment is stated at its fair value for items acquired from Cable Michigan, historical cost for the minority interests' share of Mercom property, plant and equipment and cost for additions subsequent to the merger. Initial subscribers installation costs, including materials, labor and overhead costs, are capitalized as a component of cable plant and equipment. The cost of disconnection and reconnection are charged to expense when incurred. F-336
584 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 Depreciation is computed for financial statement purposes using the straight-line method based on the following lives: Buildings and improvements.................................. 10-25 years Cable plant and equipment................................... 5-12 years Vehicles.................................................... 5 years Office furniture and equipment.............................. 5-10 years Intangible assets Intangible assets represent the estimated fair value of cable franchises and goodwill resulting from acquisitions. Cable franchises are amortized over a period ranging from 13 to 15 years on a straight-line basis. Goodwill is the excess of the purchase price over the fair value of the net assets acquired, determined through an independent appraisal, and is amortized over 15 years using the straight-line method. Deferred financing costs represent direct costs incurred to obtain long-term financing and are amortized to interest expense over the term of the underlying debt utilizing the effective interest method. Accounting for impairments The Company follows the provisions of Statement of Financial Accounting Standards No. 121 -- "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the Company estimates the net future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected net future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss for long-lived assets and identifiable intangibles expected to be held and used is based on the fair value of the asset. No impairment losses have been recognized by the Company pursuant to SFAS 121. Fair value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: a. The Company estimates that the fair value of all financial instruments at December 31, 1998 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet. The fair value of the notes payable-affiliate are considered to be equal to carrying values since the Company believes that its credit risk has not changed from the time this debt instrument was executed and therefore, would obtain a similar rate in the current market. b. The fair value of the cash and temporary cash investments approximates fair value because of the short maturity of these instruments. F-337
585 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 Income taxes The Company and Mercom file separate consolidated federal income tax returns. The Company accounts for income taxes using Statement of Financial Accounting Standards No. 109 -- "Accounting for Income Taxes". The statement requires the use of an asset and liability approach for financial reporting purposes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between financial reporting basis and tax basis of assets and liabilities. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. 3. MERGER AND ACQUISITIONS The Merger was accounted for using the purchase method of accounting. Accordingly, the consideration was allocated to the net assets acquired based on their fair market values at the date of the Merger. The purchase price was allocated as follows: current assets and liabilities at fair values of $470, approximately $94,000 to property, plant and equipment, $315,000 to cable franchises and the excess of consideration paid over the fair market value of the net assets acquired, or goodwill, of $81,705, offset by deferred taxes, net of $60,000. The Merger agreement between the Company and Avalon Michigan permitted Avalon Michigan to agree to acquire the 1,822,810 shares (approximately 38% of the outstanding stock) of Mercom that it did not own (the "Mercom Acquisition"). On September 10, 1998 Avalon Michigan and Mercom entered into a definitive agreement (the "Mercom Merger Agreement") providing for the acquisition by Avalon Michigan of all of such shares at a price of $12.00 per share. Avalon Michigan completed this acquisition in March 1999. The total estimated consideration payable in conjunction with the Mercom Acquisition, excluding fees and expenses was $21,900. On May 29, 1998, the Company acquired certain assets of Amrac Clear View, A Limited Partnership ("Amrac") for consideration of $8,124, including acquisition costs of $589. The acquisition was accounted for using the purchase method of accounting. Accordingly, the consideration was allocated to the net assets acquired based on the fair market values at the date of acquisition as determined through the use of an independent appraisal. The excess of the consideration paid over the estimated fair market value of the net assets acquired, or goodwill, was $256. On July 21, 1998, the Company acquired certain assets and liabilities from Pegasus Cable Television, Inc. and Pegasus Cable Television of Connecticut, Inc. (collectively, "Pegasus") for consideration of $30,467, including acquisition costs of $175. The acquisition was accounted for using the purchase method of accounting. Accordingly, the consideration was allocated to the net assets acquired based on the fair market values at the date of acquisition as determined through use of an independent appraisal. The excess of the consideration paid over the estimated fair market value of the net assets acquired, or goodwill, was $977. F-338
586 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 Following is the unaudited pro forma results of operations for the year ended December 31, 1998, as if the Merger and acquisitions occurred on January 1, 1998: DECEMBER 31, 1998 ------------ (UNAUDITED) Revenue..................................................... $ 96,751 ======== Loss from operations........................................ $ (5,292) ======== Net loss.................................................... $(22,365) ======== In March 1999, Avalon Michigan acquired the cable television systems of Nova Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII, L.P. for approximately $7,800, excluding transaction fees. In September 1998, the Company entered into a definitive agreement to purchase all of the cable systems of Taconic Technology Corporation ("Taconic") for approximately $8,525 (excluding transaction fees). As of December 31, 1998, the Company incurred $41 of transaction costs related to the acquisition of Taconic. This merger is expected to close in the second quarter of 1999. 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: Cable plant and equipment................................... $106,602 Vehicles.................................................... 2,572 Buildings and improvements.................................. 1,026 Office furniture and equipment.............................. 2,234 Construction in process..................................... 768 -------- Total property, plant and equipment......................... 113,202 Less-accumulated depreciation............................... (1,781) -------- Property, plant and equipment, net.......................... $111,421 ======== Depreciation expense was $1,781 for the year ended December 31, 1998. 5. INTANGIBLE ASSETS Intangible assets consist of the following: Cable Franchise............................................. $374,773 Goodwill.................................................... 82,928 Deferred Financing Costs.................................... 10,658 Non-compete agreement....................................... 100 -------- Total....................................................... 468,459 Less-accumulated amortization............................... (6,342) -------- Intangible assets, net...................................... $462,117 ======== F-339
587 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 Amortization expense for the year ended December 31, 1998 was $6,342. 6. ACCOUNT PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following: Accounts payable............................................ $ 5,321 Accrued corporate expenses.................................. 404 Accrued cable programming costs............................. 2,388 Accrued taxes............................................... 1,383 Other....................................................... 2,150 ------- $11,646 ======= 7. INCOME TAXES The income tax provision (benefit) in the accompanying consolidated financial statements of operations is comprised of the following: 1998 ------- Current Federal..................................................... $ 243 State....................................................... -- ------- Total Current............................................... 243 ------- Deferred Federal..................................................... (2,757) State....................................................... (240) ------- Total Deferred.............................................. (2,997) ------- Total (benefit) for income taxes............................ $(2,754) ======= The benefit for income taxes is different from the amounts computed by applying the U.S. statutory federal tax rate of 35% for 1998. The differences are as follows: 1998 ------- (Loss) before (benefit) for income taxes.................... $(8,833) ======= Federal tax (benefit) at statutory rates.................... (3,092) State income taxes.......................................... (177) Goodwill.................................................... 77 Benefit for taxes allocated to minority partners............ 84 ------- (Benefit) for income taxes.................................. (3,108) ======= TAX NET OPERATING EXPIRATION YEAR LOSSES DATE - ---- --------- ---------- 1998................................................... $10,360 2018 F-340
588 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 Temporary differences that give rise to significant portion of deferred tax assets and liabilities at December 31 are as follows: 1998 -------- NOL carryforwards........................................... $ 5,363 Alternative minimum tax credits............................. 141 Reserves.................................................... 210 Other, net.................................................. 309 -------- Total deferred assets....................................... 6,023 -------- Property, plant and equipment............................... (10,635) Intangible assets........................................... (76,199) -------- Total deferred liabilities.................................. (86,834) -------- Subtotal.................................................... (80,811) -------- Valuation allowance......................................... -- -------- Total deferred taxes........................................ $(80,811) ======== The tax benefit related to the loss on extinguishment of debt results in deferred tax, and it approximates the statutory U.S. tax rate. The tax benefit of $2,036 related to the exercise of certain stock options of Cable Michigan Inc. was charged directly to goodwill in conjunction with the closing of the merger. 8. DEBT At December 31, 1998, long-term debt consists of the following: Senior Credit Facility...................................... $140,875 Senior Subordinated Notes................................... 150,000 Senior Discount Notes....................................... 111,494 Other Note Payable.......................................... 600 -------- 402,969 Current portion............................................. 20 -------- $402,949 ======== Credit Facilities On May 28, 1998, Avalon New England entered into a term loan and revolving credit agreement with a major commercial lending institution (the "Credit Agreement"). The Credit Agreement allowed for aggregate borrowings under Term Loans A and B (collectively, the "Term Loans") and a revolving credit facility of $30,000 and $5,000, respectively. The proceeds from the Term Loans and revolving credit facility were used to fund the acquisitions made by Avalon New England and to provide for Avalon New England's working capital requirements. In December 1998, Avalon New England retired the Term Loans and revolving credit agreement through the proceeds of a capital contribution from Avalon Cable LLC. The fees and associated costs relating to the early retirement of this debt was $1,110. F-341
589 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 On November 6, 1998, Avalon Michigan became a co-borrower along with Avalon New England and Avalon Cable Finance, Inc. (Avalon Finance), affiliated companies, collectively referred to as the ("Co-Borrowers") on a $320,888 senior credit facility, which includes term loan facilities consisting of (i) tranche A term loans of $120,888 and (ii) tranche B term loans of $170,000 and a revolving credit facility of $30,000 (collectively, the "Credit Facility"). Subject to compliance with the terms of the Credit Facility, borrowings under the Credit Facility will be available for working capital purposes, capital expenditures and pending and future acquisitions. The ability to advance funds under the tranche A term loan facility terminated on March 31, 1999. The tranche A term loans are subject to minimum quarterly amortization payments commencing on January 31, 2001 and maturing on October 31, 2005. The tranche B term loans are scheduled to be repaid in two equal installments on July 31, 2006 and October 31, 2006. The revolving credit facility borrowings are scheduled to be repaid on October 31, 2005. On November 6, 1998, Avalon Michigan borrowed $265,888 under the Credit Facility in order to consummate the Merger. In connection with the Senior Subordinated Notes (as defined below) and Senior Discount Notes (as defined below) offerings, Avalon Michigan repaid $125,013 of the Credit Facility, and the availability under the Credit Facility was reduced to $195,000. Avalon Michigan had borrowings of $11,300 and $129,575 outstanding under the tranche A and tranche B term note facilities, and had available $30,000 for borrowings under the revolving credit facility. Avalon New England and Avalon Finance had no borrowings outstanding under the Credit Facility at December 31, 1998. The interest rate under the Credit Facility is a rate based on either (i) the base rate (a rate per annum equal to the greater of the Prime Rate and the Federal Funds Effective Rate plus 1/2 of 1%) or (ii) the Eurodollar rate (a rate per annum equal to the Eurodollar Base Rate divided by 1.00 less the Eurocurrency Reserve Requirements) plus, in either case, the applicable margin. As of December 31, 1998, the applicable margin was (a) with respect to the tranche B term loans was 2.75% per annum for Base Rate loans and 3.75% per annum for Eurodollar loans and (b) with respect to tranche A term loans and the revolving credit facility was 2.00% per annum for Base Rate loans and 3.00% for Eurodollar loans. The applicable margin for the tranche A term loans and the revolving credit facility are subject to performance based grid pricing which is determined based on upon the consolidated leverage ratio of the Co-Borrowers. The interest rate for the tranche B term loans outstanding at December 31, 1998 was 9.19%. Interest is payable on a quarterly basis. Accrued interest on the borrowings under the credit facility was $1,389 at December 31, 1998. The Credit Facility contains restrictive covenants which among other things require the Co-Borrowers to maintain certain ratios including consolidated leverage ratios and the interest coverage ratio, fixed charge ratio and debt service coverage ratio. The obligations of the Co-Borrowers under the Credit Facility are secured by substantially all of the assets of the Co-Borrowers. In addition, the obligations of the Co-Borrowers under the Credit Facility are guaranteed by the Company, Avalon Cable LLC, Avalon Cable Finance Holdings, Inc., Avalon Cable of New England Holdings, Inc. and Avalon Cable Holdings, LLC. A Change of Control as defined under the Credit Facility agreement would constitute an event of default under the Credit Facility giving the lender the right to terminate the credit commitment and declare all amounts outstanding immediately due and payable. F-342
590 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 Subordinated Debt In December 1998, Avalon Michigan became a co-issuer of a $150,000 principal balance, Senior Subordinated Notes ("Subordinated Notes") offering and Michigan Holdings became a co-issuer of a $196,000, gross proceeds, Senior Discount Notes (defined below) offering. In conjunction with these financings, Avalon Michigan paid $18,130 to Avalon Finance as a partial payment against Avalon Michigan's note payable-affiliate. Avalon Michigan paid $76 in interest on this note payable-affiliate during the period from inception (June 2, 1998) through December 31, 1998. The Subordinated Notes mature on December 1, 2008, and interest accrued at a rate of 9.375% per annum. Interest is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on June 1, 1999. Accrued interest on the Subordinated Notes was $1,078 at December 31, 1998. The Senior Subordinated Notes will not be redeemable at the Co-Borrowers' option prior to December 1, 2003. Thereafter, the Senior Subordinated Notes will be subject to redemption at any time at the option of the Co-Borrowers, in whole or in part at the redemption prices (expressed as percentages of principal amount) plus accrued and unpaid interest, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on December 1 of the years indicated below: YEAR PERCENTAGE - ---- ---------- 2003..................................................... 104.688% 2004..................................................... 103.125% 2005..................................................... 101.563% 2006 and thereafter...................................... 100.000% The scheduled maturities of the long-term debt are $2,000 in 2001, $4,000 in 2002, $72,479 in 2003, and the remainder thereafter. At any time prior to December 1, 2001, the Co-Borrowers may on any one or more occasions redeem up to 35% of the aggregate principal amount of Senior Subordinate Notes originally issued under the Indenture at a redemption price equal to 109.375% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds of any equity offering and/or the net cash proceeds of a strategic equity investment; provided that at least 65% of the aggregate principal amount at maturity of Senior Subordinated Notes originally issued remain outstanding immediately after each such redemption. As used in the preceding paragraph, "Equity Offering and Strategic Equity Investment" means any public or private sale of Capital Stock of any of the Co-Borrowers pursuant to which the Co-Borrowers together receive net proceeds of at least $25 million, other than issuances of Capital Stock pursuant to employee benefit plans or as compensation to employees; provided that to the extent such Capital Stock is issued by the Co-Borrowers, the net cash proceeds thereof shall have been contributed to one or more of the Co-Borrowers in the form of an equity contribution. The Indentures provide that upon the occurrence of a change of control (a "Change of Control") each holder of the Notes has the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's Notes at an offer price in F-343
591 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 cash to 101% of the aggregate principal amount thereon plus accrued and unpaid interest and Liquidated Damages (as defined in the Indentures) thereof, if any, to the date of purchase. The Senior Discount Notes On December 3, 1998, the Company, Avalon Cable LLC and Avalon Cable Holdings Finance, Inc. ("Holdings Co-Borrowers") issued $196.0 million aggregate principal amount at maturity of 11 7/8% Senior Discount Notes ("Senior Discount Notes") due 2008. The Senior Discount Notes were issued at a substantial discount from their principal amount at maturity, to generate gross proceeds of approximately $110.4 million. Interest on the Senior Discount Notes will accrue but not be payable before December 1, 2003. Thereafter, interest on the Senior Discount Notes will accrue on the principal amount at maturity at a rate of 11.875% per annum, and will be payable semi-annually in arrears on June 1 and December 1 of each year, commencing December 1, 2003. Prior to December 1, 2003, the accreted value of the Senior Discount Notes will increase, representing amortization of original issue discount, between the date of original issuance and December 1, 2003 on a semi-annual basis using a 360-day year comprised of twelve 30-day months, such that the accreted value shall be equal to the full principal amount at maturity of the Senior Discount Notes on December 1, 2003. Original issue discount accretion on the Senior Discount Notes was $1,083 at December 31, 1998. On December 1, 2003, the Holding Co-borrowers will be required to redeem an amount equal to $369.79 per $1,000 principal amount at maturity of each Senior Discount Note then outstanding on a pro rata basis at a redemption price of 100% of the principal amount at maturity of the Senior Discount Notes so redeemed. On or after December 1, 2003, the Senior Discount Notes will be subject to redemption at any time at the option of the Holding Co-borrowers, in whole or in part, at the redemption prices, which are expressed as percentages of principal amount, shown below plus accrued and unpaid interest, if any, and liquidated damages, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on December 1 of the years indicated below: YEAR PERCENTAGE - ---- ---------- 2003..................................................... 105.938% 2004..................................................... 103.958% 2005..................................................... 101.979% 2006 and thereafter...................................... 100.000% Notwithstanding the foregoing, at any time before December 1, 2001, the holding companies may on any one or more occasions redeem up to 35% of the aggregate principal amount at maturity of senior discount notes originally issued under the Senior Discount Note indenture at a redemption price equal to 111.875% of the accreted value at the date of redemption, plus liquidated damages, if any, to the redemption date, with the net cash proceeds of any equity offering and/or the net cash proceeds of a strategic equity investment; provided that at least 65% of the aggregate principal amount at maturity of Senior Discount Notes originally issued remain outstanding immediately after each occurrence of such redemption. Upon the occurrence of a Change of Control, each holder of Senior Discount Notes will have the right to require the Holding Co-borrowers to repurchase all or any part of such holder's Senior Discount Notes pursuant to a Change of Control offer at an offer price in cash equal to F-344
592 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 101% of the aggregate principal amount thereof plus accrued and unpaid interest and liquidated damages thereon, if any, to the date of purchase. Note Payable Avalon New England issued a note payable for $500 which is due on May 29, 2003, and bears interest at a rate of 7% per annum (which approximates Avalon New England's incremental borrowing rate) payable annually. Additionally, Avalon New England has a $100 non-compete agreement. The agreement calls for five annual payments of $20, commencing on May 29, 1999. Mercom debt In August 1997, the Mercom revolving credit agreement for $2,000 expired. Mercom had no borrowings under the revolving credit agreement in 1996 or 1997. On September 29, 1997, Avalon Michigan purchased and assumed all of the bank's interest in the term credit agreement and the note issued thereunder. Immediately after the purchase, the term credit agreement was amended in order to, among other things, provide for less restrictive financial covenants, eliminate mandatory amortization of principal and provide for a bullet maturity of principal on December 31, 2002, and remove the change of control event of default. Mercom's borrowings under the term credit agreement contain pricing and security provisions substantially the same as those in place prior to the purchase of the loan. The borrowings are secured by a pledge of the stock of Mercom's subsidiaries and a first lien on certain of the assets of Mercom and its subsidiaries, including inventory, equipment and receivables at December 31, 1998, $14,151 of principal was outstanding. The borrowings under the term credit agreement are eliminated in the Company's consolidated balance sheet. 9. MINORITY INTEREST The activity in minority interest for the year ended December 31, 1998 is as follows: AVALON CABLE MERCOM LLC TOTAL ------- ------- ------- Issuance of Class A units by Avalon Cable LLC....... -- 45,000 45,000 Issuance of Class B-1 units by Avalon Cable LLC..... -- 4,345 4,345 Allocated to minority interest prior to restructuring..................................... -- 365 365 Purchase of Cable Michigan, Inc..................... 13,457 -- 13,457 Income (loss) allocated to minority interest........ 398 (1,729) (1,331) ------- ------- ------- Balance at December 31, 1998........................ $13,855 $47,981 $61,836 ======= ======= ======= 10. EMPLOYEE BENEFIT PLANS Avalon Michigan has a qualified savings plan under Section 401(K) of the Internal Revenue Code. Contributions charged to expense for the period from November 5, 1998 to December 31, 1998 was $30. F-345
593 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 11. COMMITMENTS AND CONTINGENCIES Leases Avalon New England and Avalon Michigan rent poles from utility companies for use in their operations. While rental agreements are generally short-term, Avalon New England and Avalon Michigan anticipate such rentals will continue in the future. Avalon New England and Avalon Michigan also lease office facilities and various items of equipment under month-to-month operating leases. Rent expense was $58 for the year ended December 31, 1998. Rental commitments are expected to continue at approximately $1 million a year for the foreseeable future, including pole rental commitments which are cancelable. Legal Matters The Company and its subsidiaries are subject to regulation by the Federal Communications Commission ("FCC") and other franchising authorities. The Company and its subsidiaries are subject to the provisions of the Cable Television Consumer Protection and Competition Act of 1992, as amended, and the Telecommunications Act of 1996. The Company and its subsidiaries have either settled challenges or accrued for anticipated exposures related to rate regulation; however, there is no assurance that there will not be further additional challenges to its rates. In the normal course of business, there are various legal proceedings outstanding. In the opinion of management, these proceedings will not have a material adverse effect on the financial condition or results of operations of the Company and its subsidiaries. 12. RELATED PARTY TRANSACTIONS AND BALANCES During 1998, Avalon New England received $3,341 from Avalon Holdings. In consideration for this amount, Avalon New England executed a note payable to Avalon Holdings. This note is recorded as note payable-affiliate on the balance sheet at December 31, 1998. Interest accrues at the rate of 5.57% per year and Avalon New England has recorded accrued interest on this note of $100 at December 31, 1998. 13. SUBSEQUENT EVENT In May 1999, the Company signed an agreement with Charter Communications, Inc. ("Charter Communications") under which Charter Communications agreed to purchase Avalon Cable LLC's cable television systems and assume some of their debt. The acquisition by Charter Communications is subject to regulatory approvals. The Company expects to consummate this transaction in the fourth quarter of 1999. This agreement, if closed, would constitute a change in control under the Indenture pursuant to which the Senior Subordinated Notes and the Senior Discount Notes (collectively, the "Notes") were issued. The Indenture provides that upon the occurrence of a change of control of the Company (a "Change of Control") each holder of the Notes has the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's Notes at an offer price in cash equal to 101% of the aggregate principal amount thereon (or 101% of the accreted value for the Senior Discount Notes as of the date of purchase if prior F-346
594 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 to the full accretion date) plus accrued and unpaid interest and Liquidated Damages (as defined in the Indenture) thereof, if any, to the date of purchase. This agreement, if closed, would represent a Change of Control which, on the closing date, constitutes an event of default under the Credit Facility giving the lender the right to terminate the credit commitment and declare all amounts outstanding immediately due and payable. Charter Communications has agreed to repay all amounts due under the Credit Facility or cause all events of default under the Credit Facility arising from the Change of Control to be waived. F-347
595 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET JUNE 30, DECEMBER 31, 1999 1998 ----------- ------------ (UNAUDITED) (IN THOUSANDS) ASSETS Cash........................................................ $ 3,457 $ 9,288 Accounts receivable, net of allowance for doubtful accounts of $1,509 and $943........................................ 6,158 5,862 Prepayments and other current assets........................ 1,121 1,388 Accounts receivable from related parties.................... -- 124 Deferred income taxes....................................... -- 377 -------- -------- Total Current assets........................................ 10,736 17,039 Property, plant and equipment, net.......................... 116,587 111,421 Intangible assets, net...................................... 470,041 462,117 Deferred charges and other assets........................... 1,107 1,302 -------- -------- Total assets................................................ $598,471 $591,879 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current portion of notes payable............................ $ 25 $ 20 Accounts payable and accrued expenses....................... 13,983 11,646 Advance billings and customer deposits...................... 3,136 3,171 Accounts payable-affiliate.................................. 3,160 2,023 -------- -------- Total Current liabilities................................... 20,304 16,860 Long-term debt.............................................. 446,079 402,949 Notes payable-affiliate..................................... -- 3,341 Deferred income taxes....................................... 70,152 80,811 -------- -------- Total liabilities........................................... 536,535 503,961 -------- -------- Commitments and contingencies (Note 5) Minority interest........................................... 45,627 61,836 Stockholders' equity Common stock................................................ -- -- Additional paid-in capital.................................. 35,000 35,000 Accumulated deficit......................................... (18,691) (8,918) -------- -------- Total stockholders' equity.................................. 16,309 26,082 -------- -------- Total liabilities and shareholders' equity.................. $598,471 $591,879 ======== ======== The accompanying notes are an integral part of these financial statements. F-348
596 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS FOR THE SIX MONTHS ENDED ENDED JUNE 30, 1999 JUNE 30, 1998 ------------------ ------------------ (UNAUDITED) (IN THOUSANDS) REVENUE Basic services........................................... $ 42,064 $ 131 Premium services......................................... 4,079 15 Other.................................................... 5,626 8 -------- -------- Total Revenue............................................ 51,769 154 Operating expenses Selling, general and administrative...................... 9,544 21 Programming.............................................. 13,966 39 Technical and operations................................. 5,932 17 Depreciation and amortization............................ 22,096 53 -------- -------- Income from operations................................... 231 24 Interest income.......................................... 708 -- Interest expense......................................... (23,246) (5) -------- -------- Income loss before income taxes.......................... (22,307) 19 Benefit from income taxes................................ 10,180 -- -------- -------- Income (loss) before minority interest................... (12,127) 19 Minority interest in loss of consolidated entity......... 2,354 -- -------- -------- Net income (loss)........................................ $ (9,773) $ 19 ======== ======== The accompanying notes are an integral part of these financial statements F-349
597 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1999 ------------------------------------------------------------------- COMMON ADDITIONAL TOTAL SHARES COMMON PAID-IN ACCUMULATED SHAREHOLDERS' OUTSTANDING STOCK CAPITAL DEFICIT EQUITY ----------- ------ ---------- ----------- ------------- (UNAUDITED) (IN THOUSANDS) Balance, December 31, 1998.... 100 $ -- $35,000 $ (8,918) $26,082 Net loss for the six months ended June 30, 1999......... -- -- -- (9,773) (9,773) --- ------ ------- -------- ------- Balance, June 30, 1999........ 100 $ -- $35,000 $(18,691) $16,309 === ====== ======= ======== ======= The accompanying notes are an integral part of these financial statements. F-350
598 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE FOR THE SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 1999 JUNE 30, 1998 ---------------- ---------------- (UNAUDITED) (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)......................................... $ (9,773) $ 19 Depreciation and amortization............................. 22,096 53 Accretion of Senior Discount Notes........................ 6,630 -- Decrease in minority interest............................. (2,354) -- Net change in certain assets and liabilities, net of business acquisitions................................... Decrease in accounts receivable........................... 247 22 (Increase)/decrease in prepayment and other assets........ 342 (16) Increase in accounts payable and accrued expenses......... 2,440 152 Decrease in deferred revenue.............................. (35) (152) Increase in accounts payable, net-affiliate............... 1,000 -- Deferred income taxes, net................................ (10,282) -- -------- ------- Net cash provided by operating activities................. 10,311 78 -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment................ (9,881) (101) Payment for acquisitions.................................. (39,420) (8,187) -------- ------- Net cash used in investing activities..................... (49,301) (8,288) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in Notes payable-affiliate............ (3,341) 733 Capital Contribution...................................... -- 1,062 Proceeds from the issuance of the Credit Facility......... 36,500 6,700 -------- ------- Net cash provided by financing activities................. 33,159 8,495 -------- ------- Net increase (decrease) in cash........................... (5,831) 285 Cash at beginning of the period........................... 9,288 -- -------- ------- Cash at end of the period................................. $ 3,457 $ 285 ======== ======= The accompanying notes are an integral part of these financial statements. F-351
599 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (IN THOUSANDS) 1. DESCRIPTION OF BUSINESS Avalon Cable of Michigan Holdings, Inc. ("the Company") was formed in June 1998, pursuant to the laws of the state of Delaware. Avalon Cable of Michigan Inc. ("Avalon Michigan") was formed in June 1998, pursuant to the laws of the state of Delaware as a wholly owned subsidiary of the Company. On June 3, 1998, Avalon Michigan entered into an Agreement and Plan of Merger (the "Agreement") among the Company, Cable Michigan, Inc. ("Cable Michigan") and Avalon Michigan, pursuant to which Avalon Michigan will merge into Cable Michigan and Cable Michigan will become a wholly owned subsidiary of the Company (the "Merger"). In accordance with the terms of the Agreement, each share of common stock, par value $1.00 per share ("common stock"), of Cable Michigan outstanding prior to the effective time of the Merger (other than treasury stock, shares owned by the Company or its subsidiaries, or shares as to which dissenters' rights have been exercised) shall be converted into the right to receive $40.50 in cash (the "Merger Consideration"), subject to certain possible closing adjustments. In conjunction with the acquisition of Cable Michigan, Avalon Michigan acquired Cable Michigan's 62% ownership interest in Mercom, Inc. ("Mercom"). On November 6, 1998, Avalon Michigan completed its merger into and with Cable Michigan. The total consideration paid in conjunction with the merger, including fees and expenses was $431,629, including repayment of all existing Cable Michigan indebtedness and accrued interest of $135,205. The Agreement also permitted Avalon Michigan to agree to acquire the remaining shares of Mercom that it did not own. The Company contributed $137,375 in cash to Avalon Michigan, which was used to consummate the Merger. On November 5, 1998, the Company received $105,000 in cash in exchange for promissory notes to lenders (the "Bridge Agreement"). On November 6, 1998, the Company contributed the proceeds received from the Bridge Agreement and an additional $35,000 in cash to Avalon Michigan in exchange for 100 shares of common stock. On November 6, 1998, Avalon Cable of New England Holdings, Inc contributed its 100% interest in Avalon Cable of New England LLC ("Avalon New England") to Avalon Cable LLC in exchange for a membership interest in Avalon Cable LLC. This contribution was between entities under common control and was accounted for similar to a pooling-of-interests. Under this pooling-of-interests method, the results of operations for Avalon include the results of operations from the date of inception (September 4, 1997) of Avalon New England. On November 6, 1998, Avalon Cable LLC received $63,000 from affiliated entities, which was comprised of (i) a $45,000 capital contribution by Avalon Investors, LLC ("Avalon Investors") and (ii) a $18,000 promissory note from Avalon Cable Holdings LLC ("Avalon Holdings"), which was used to make a $62,800 cash contribution to Avalon New England. The cash contribution received by Avalon New England was used to (i) extinguish existing indebtedness of $29,600 and (ii) fund a $33,200 loan to Avalon Holdings Finance which matures on December 31, 2001. On December 10, 1998, Avalon Cable LLC received a dividend distribution from Avalon New England in the amount of $18,206, which was used by Avalon Cable LLC to pay off the promissory note payable to Avalon Holdings, plus accrued interest. F-352
600 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1999 On March 26, 1999, after the acquisition of Mercom, the Company completed a series of transactions to facilitate certain aspects of its financing between affiliated entities under common control. As a result of these transactions: - The Company contributed the Senior Discount Notes and associated debt finance costs to Avalon Cable LLC and became a guarantor of the Senior Discount Notes. - Avalon Michigan contributed its assets and liabilities excluding deferred tax liabilities, net to Avalon Cable LLC in exchange for an approximate 88% voting interest in Avalon Cable LLC. Avalon Cable LLC contributed these assets and liabilities, excluding the Senior Discount Notes and associated debt finance costs, to its wholly-owned subsidiary, Avalon Cable of Michigan LLC. - Avalon Cable of Michigan LLC has become the operator of the Michigan cluster replacing Avalon Michigan; - Avalon Cable of Michigan LLC is an obligor on the Senior Subordinated Notes replacing Avalon Michigan; and - Avalon Michigan is a guarantor of the obligations of Avalon Cable of Michigan LLC under the Senior Subordinated Notes. Avalon Michigan does not have significant assets, other than its 88% investment in Avalon Cable LLC at June 30, 1999. As a result of this reorganization between entities under common control, the Company accounted for the reorganization similar to a pooling-of-interests. Under the pooling-of-interests method, the results of operations include the results of operations from the earliest date that a member becomes a part of the control group by inception or acquisition. For the Company, the results of operations are from the date of inception (September 4, 1997) for Avalon New England, a wholly-owned subsidiary of Avalon Cable LLC. The Company has a majority interest in Avalon Cable LLC. Avalon Cable LLC wholly-owns Avalon Cable Holdings Finance, Avalon New England, and Avalon Cable of Michigan LLC. Avalon Cable of Michigan LLC and Avalon New England provide cable services to various areas in Michigan and New England, respectively. Avalon New England and Avalon Michigan LLC's cable systems offer customer packages for basic cable programming services which are offered at a per channel charge or packaged together to form a tier of services offered at a discount from the combined channel rate. Avalon New England and Avalon Cable of Michigan LLC's cable systems also provide premium cable services to their customers for an extra monthly charge. Customers generally pay initial connection charges and fixed monthly fees for cable programming and premium cable services, which constitute the principle sources of revenue for the Company. Avalon Holdings Finance was formed for the sole purpose of facilitating financings associated with the acquisition of various cable operating companies. Avalon Cable Holdings Finance, Inc. conducts no other activities. 2. BASIS OF PRESENTATION Pursuant to the rules and regulations of the Securities and Exchange Commission, certain financial information has been condensed and certain footnote disclosures have been omitted. Such information and disclosures are normally included in financial statements prepared in accordance with generally accepted accounting principles. F-353
601 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1999 These condensed financial statements should be read in conjunction with the Company's audited financial statements at December 31, 1998 and notes thereto as included elsewhere herein. The condensed financial statements as of June 30, 1999 and for the six month periods ended June 30, 1999 and 1998 are unaudited; however, in the opinion of management, such statements include all adjustments (consisting solely of normal and recurring adjustments except for the acquisition of Cross Country Cable, LLC ("Cross Country"), Nova Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII, L.P. ("Nova Cable"), Novagate Communication Corporation ("Novagate"), Traverse Internet, R/Com. L.C., the Mercom Merger and the contribution of assets and liabilities by Avalon Michigan) necessary to present fairly the financial information included therein. 3. MERGER AND ACQUISITIONS The Merger agreement between the Company and Avalon Michigan permitted Avalon Michigan to agree to acquire the 1,822,810 shares (approximately 38% of the outstanding stock) of Mercom that it did not own (the "Mercom Acquisition"). On September 10, 1998 Avalon Michigan and Mercom entered into a definitive agreement (the "Mercom Merger Agreement") providing for the acquisition by Avalon Michigan of all of such shares at a price of $12.00 per share. Avalon Michigan completed this acquisition in March 1999. The total estimated consideration payable in conjunction with the Mercom Acquisition, excluding fees and expenses was $21,900. The purchase price was allocated as follows: approximately $13,800 to the elimination of minority interest, $1,170 to property, plant and equipment, $6,700 to cable franchises and the excess of consideration paid over the fair market value of the net assets acquired, or goodwill, of $240. In March 1999, Avalon Cable of Michigan Inc. acquired the cable television systems of Nova Cable for approximately $7,800, excluding transaction fees. On January 21, 1999, the Company through its subsidiary, Avalon Cable of New England, LLC and subsidiaries, acquired Novagate for a purchase price of $2,900. On March 26, 1999, the Company through its subsidiary, Avalon Cable of Michigan, LLC, acquired the assets of R/Com, L.C., for a total purchase price of approximately $450. In January 1999, the Company acquired all of the issued and outstanding Common Stock of Cross Country for a purchase price of approximately $2,500, excluding transaction fees. On April 1, 1999, the Company, through its subsidiary Avalon New England, acquired Traverse Internet for $2,400. The acquisitions have been accounted for as purchases and the results of the companies acquired have been included in the accompanying financial statements since their acquisition dates. Accordingly, the consideration was allocated to the net assets based on their respective fair market values. The excess of the consideration paid over the estimated fair market values of the net assets acquired was $12,940 and is being amortized using the straight line method over 15 years. In July 1999, Avalon New England purchased all of the cable systems of Taconic Technology Corporation for approximately $8,525 (excluding transaction fees). F-354
602 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1999 4. MINORITY INTEREST The activity in minority interest for the six months ended June 30, 1999 is as follow: AVALON CABLE MERCOM LLC TOTAL ------- ------- ------- Balance at December 31, 1998........................ $13,855 $47,981 $61,836 Purchase of the minority interest of Mercom......... (13,855) -- (13,855) Loss allocated to minority interest................. -- (2,354) (2,354) ------- ------- ------- -- $45,627 $45,627 ======= ======= ======= 5. COMMITMENTS AND CONTINGENCIES In connection with the acquisition of Mercom, former shareholders of Mercom holding approximately 731,894 Mercom common shares or approximately 15.3% of all outstanding Mercom common shares gave notice of their election to exercise appraisal rights as provided by Delaware law. On July 2, 1999, former shareholders of Mercom holding 535,501 shares of Mercom common stock filed a petition for appraisal of stock in the Court of Chancery in the State of Delaware. With respect to 209,893 of the total number of shares for which the Company received notice, the Company received the notice of election from beneficial holders of Mercom common shares and not from holders of record. The Company believes that the notice with respect to the 209,893 shares did not comply with Delaware law and is ineffective. The Company cannot predict at this time the effect of the elections to exercise appraisal rights on the Company since the Company does not know the extent to which these former shareholders will continue to pursue appraisal rights under Delaware law or choose to abandon these efforts and accept the consideration payable in the Mercom merger. If these former shareholders continue to pursue their appraisal rights and if a Delaware court were to find that the fair value of the Mercom common shares, exclusive of any element of value arising from our acquisition of Mercom, exceeded $12.00 per share, the Company would have to pay the additional amount for each Mercom common share subject to the appraisal proceedings together with a fair rate of interest. The Company could be ordered by the Delaware court also to pay reasonable attorney's fees and the fees and expenses of experts for the shareholders. In addition, the Company would have to pay their own litigation costs. The Company have already provided for the consideration of $12.00 per Mercom common share due under the terms of our merger with Mercom with respect to these shares but have not provided for any additional amounts or costs. The Company can provide no assurance as to what a Delaware court would find in any appraisal proceeding or when this matter will be resolved. Accordingly, the Company cannot assure you that the ultimate outcome would not have a material adverse effect on the Company. The Company is subject to the provisions of the Cable Television Consumer Protection and Competition Act of 1992, as amended, and the Telecommunications Act of 1996. The Company has either settled challenges or accrued for anticipated exposures related to rate regulation; however, there is no assurance that there will not be further additional challenges to its rates. In the normal course of business, there are various legal proceedings outstanding. In the opinion of management, these proceedings will not have a material adverse effect on the financial condition or results of operations of the Company. F-355
603 AVALON CABLE OF MICHIGAN HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1999 6. PENDING MERGER In May 1999, the Company signed an agreement with Charter Communications, Inc. ("Charter Communications") under which Charter Communications agreed to purchase the Company's cable television systems and assume some of their debt. The acquisition by Charter Communications is subject to regulatory approvals. The Company expects to consummate this transaction in the fourth quarter of 1999. This agreement, if closed, would constitute a change in control under the Indenture pursuant to which the Senior Subordinated Notes and the Senior Discount Notes (collectively, the "Notes") were issued. The Indenture provides that upon the occurrence of a change of control of the Company (a "Change of Control") each holder of the Notes has the right to require the Company to purchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's Notes at an offer price in cash equal to 101% of the aggregate principal amount thereon (or 101% of the accreted value for the Senior Discount Notes as of the date of purchase if prior to full accretion date) plus accrued and unpaid interest and Liquidated Damages (as defined in the Indenture) thereof, if any, to the date of purchase. This agreement, if closed, would represent a Change of Control which, on the closing date, constitutes an event of default under the Credit Facility giving the lender the right to terminate the credit commitment and declare all amounts outstanding immediately due and payable. Charter Communications has agreed to repay all amounts due under the credit facility or cause all events of default under the credit facility arising from a change of control to be waived. F-356
604 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of Avalon Cable of Michigan, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and changes in shareholders' deficit and of cash flows present fairly, in all material respects, the financial position of Cable Michigan, Inc. and subsidiaries (collectively, the "Company") at December 31, 1996 and 1997 and November 5, 1998, and the results of their operations and their cash flows for each of the two years ended December 31, 1996 and 1997 and the period from January 1, 1998 to November 5, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP New York, New York March 30, 1999 F-357
605 CABLE MICHIGAN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, NOVEMBER 5, 1997 1998 ------------ ----------- (DOLLARS IN THOUSANDS) ASSETS Cash and temporary cash investments......................... $ 17,219 $ 6,093 Accounts receivable, net of reserve for doubtful accounts of $541 at December 31, 1997 and $873 at November 5, 1998.... 3,644 4,232 Prepayments and other....................................... 663 821 Accounts receivable from related parties.................... 166 396 Deferred income taxes....................................... 1,006 541 -------- -------- Total current assets........................................ 22,698 12,083 Property, plant and equipment, net.......................... 73,836 77,565 Intangible assets, net...................................... 45,260 32,130 Deferred charges and other assets........................... 803 9,442 -------- -------- Total assets................................................ $142,597 $131,220 ======== ======== LIABILITIES AND SHAREHOLDERS' DEFICIT Current portion of long-term debt........................... $ -- $ 15,000 Accounts payable............................................ 5,564 8,370 Advance billings and customer deposits...................... 2,242 1,486 Accrued taxes............................................... 167 1,035 Accrued cable programming expense........................... 2,720 5,098 Accrued expenses............................................ 4,378 2,052 Accounts payable to related parties......................... 1,560 343 -------- -------- Total current liabilities................................... 16,631 33,384 Long-term debt.............................................. 143,000 120,000 Deferred income taxes....................................... 22,197 27,011 -------- -------- Total liabilities........................................... 181,828 180,395 -------- -------- Minority interest........................................... 14,643 14,690 -------- -------- Commitments and contingencies (Note 11)..................... -- -- Preferred Stock............................................. -- -- Common stock................................................ -- -- Common shareholders' deficit................................ (53,874) (63,865) -------- -------- Total Liabilities and Shareholders' Deficit................. $142,597 $131,220 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. F-358
606 CABLE MICHIGAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED FOR THE DECEMBER 31, PERIOD FROM ------------------------ JANUARY 1, 1998 TO 1996 1997 NOVEMBER 5, 1998 ---------- ---------- ------------------ (DOLLARS IN THOUSANDS EXCEPT PER SHARE AND SHARE AMOUNTS) Revenues....................................... $ 76,187 $ 81,299 $ 74,521 Costs and expenses, excluding management fees and depreciation and amortization............ 40,593 44,467 41,552 Management fees................................ 3,498 3,715 3,156 Depreciation and amortization.................. 31,427 32,082 28,098 Merger related expenses........................ -- -- 5,764 ---------- ---------- ---------- Operating income............................... 669 1,035 (4,049) Interest income................................ 127 358 652 Interest expense............................... (15,179) (11,751) (8,034) Gain on sale of Florida cable system........... -- 2,571 -- Other (expense), net........................... (736) (738) (937) ---------- ---------- ---------- (Loss) before income taxes..................... (15,119) (8,525) (12,368) (Benefit) from income taxes.................... (5,712) (4,114) (1,909) ---------- ---------- ---------- (Loss) before minority interest and equity in unconsolidated entities...................... (9,407) (4,411) (10,459) Minority interest in loss (income) of consolidated entity.......................... 1,151 53 (75) ---------- ---------- ---------- Net (Loss)..................................... $ (8,256) $ (4,358) $ (10,534) ========== ========== ========== Basic and diluted earnings per average common share Net (loss) to shareholders............. $ (1.20) $ (.63) $ (1.53) Average common shares and common stock equivalents outstanding...................... 6,864,799 6,870,528 6,891,932 The accompanying notes are an integral part of these consolidated financial statements. F-359
607 CABLE MICHIGAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997 AND THE PERIOD FROM JANUARY 1, 1998 TO NOVEMBER 5, 1998 ---------------------------------------------------------------------------- COMMON ADDITIONAL SHAREHOLDER'S TOTAL SHARES COMMON PAID-IN NET SHAREHOLDERS' OUTSTANDING STOCK CAPITAL DEFICIT INVESTMENT DEFICIT ----------- ------ ---------- -------- ------------- ------------- (DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS) Balance, December 31, 1995..... 1,000 $ 1 $ -- $ -- $(73,758) $(73,757) Net loss....................... -- -- -- -- (8,256) (8,256) Transfers from CTE............. -- -- -- -- 2,272 2,272 --------- ------ ---- -------- -------- -------- Balance, December 31, 1996..... 1,000 1 -- -- (79,742) (79,741) Net loss from 1/1/97 through 9/30/97...................... -- -- -- -- (3,251) (3,251) Net loss from 10/1/97 through 12/31/97..................... -- -- -- (1,107) -- (1,107) Transfers from RCN Corporation.................. -- -- -- -- 30,225 30,225 Common stock issued in connection with the Distribution................. 6,870,165 6,870 -- (59,638) 52,768 -- --------- ------ ---- -------- -------- -------- Balance, December 31, 1997..... 6,871,165 6,871 -- (60,745) -- (53,874) Net loss from January 1, 1998 to November 5, 1998.......... -- -- -- (10,534) -- (10,534) Exercise of stock options...... 30,267 30 351 -- -- 381 Tax benefits of stock option exercises.................... -- -- 162 -- -- 162 --------- ------ ---- -------- -------- -------- Balance, November 5, 1998...... 6,901,432 $6,901 $513 $(71,279) $ -- $(63,865) ========= ====== ==== ======== ======== ======== The accompanying notes are an integral part of these consolidated financial statements. F-360
608 CABLE MICHIGAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, FOR THE PERIOD FROM -------------------- JANUARY 1, 1998 TO 1996 1997 NOVEMBER 5, 1998 -------- --------- ------------------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net (loss).................................................. $ (8,256) $ (4,358) $(10,534) Gain on pension curtailment/settlement...................... (855) -- -- Depreciation and amortization............................... 31,427 32,082 28,098 Deferred income taxes, net.................................. 988 (4,359) (3,360) Provision for losses on accounts receivable................. 843 826 710 Gain on sale of Florida cable systems....................... -- (2,571) -- Increase (decrease) in minority interest.................... (1,151) (53) 47 Other non-cash items........................................ 2,274 1,914 -- Net change in certain assets and liabilities, net of business acquisitions Accounts receivable and customer deposits................... (1,226) (617) (2,054) Accounts payable............................................ 1,365 2,234 2,806 Accrued expenses............................................ 125 580 52 Accrued taxes............................................... (99) 61 868 Accounts receivable from related parties.................... 567 1,549 (230) Accounts payable to related parties......................... 1,314 (8,300) (1,217) Other, net.................................................. 501 (644) (158) -------- --------- -------- Net cash provided by operating activities................... 27,817 18,344 15,028 -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment.................. (9,605) (14,041) (18,697) Acquisitions, net of cash acquired.......................... -- (24) -- Proceeds from sale of Florida cable systems................. -- 3,496 -- Other....................................................... 390 560 -- -------- --------- -------- Net cash used in investing activities....................... (9,215) (10,009) (18,697) -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of long-term debt.................................. -- 128,000 -- Redemption of long-term debt................................ (1,500) (17,430) (8,000) Proceeds from the issuance of common stock.................. -- -- 543 Transfers from CTE.......................................... -- 12,500 -- Change in affiliate notes, net.............................. (16,834) (116,836) -- Payments made for debt financing costs...................... -- (647) -- -------- --------- -------- Net cash provided by (used in) financing activities......... (18,334) 5,587 (7,457) Net increase/(decrease) in cash and temporary cash investments............................................... 268 13,922 (11,126) Cash and temporary cash investments at beginning of year.... 3,029 3,297 17,219 -------- --------- -------- Cash and temporary cash investments at end of year.......... $ 3,297 $ 17,219 $ 6,093 ======== ========= ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for Interest...................... $ 15,199 $ 11,400 $ 7,777 Income taxes................................................ 29 370 315 Supplemental Schedule of Non-cash Investing and Financing Activities: In September 1997, in connection with the transfer of CTE's investment in Mercom to the Company, the Company assumed CTE's $15,000 Term Credit Facility. Certain intercompany accounts receivable and payable and intercompany note balances were transferred to shareholders' net investment in connection with the Distribution described in note 1. The accompanying notes are an integral part of these consolidated financial statements. F-361
609 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) DECEMBER 31, 1998 1. BACKGROUND AND BASIS OF PRESENTATION Prior to September 30, 1997, Cable Michigan, Inc. and subsidiaries (the "Company") was operated as part of C-TEC Corporation ("C-TEC"). On September 30, 1997, C-TEC distributed 100 percent of the outstanding shares of common stock of its wholly owned subsidiaries, RCN Corporation ("RCN") and the Company to holders of record of C-TEC's Common Stock and C-TEC's Class B Common Stock as of the close of business on September 19, 1997 (the "Distribution") in accordance with the terms of the Distribution Agreement dated September 5, 1997 among C-TEC, RCN and the Company. The Company consists of C-TEC's Michigan cable operations, including its 62% ownership in Mercom, Inc. ("Mercom"). In connection with the Distribution, C-TEC changed its name to Commonwealth Telephone Enterprises, Inc. ("CTE"). RCN consists primarily of C-TEC's bundled residential voice, video and Internet access operations in the Boston to Washington, D.C. corridor, its existing New York, New Jersey and Pennsylvania cable television operations, a portion of its long distance operations and its international investment in Megacable, S.A. de C.V. C-TEC, RCN, and the Company continue as entities under common control until the Company completes the Merger (as described below). On June 3, 1998, the Company entered into an Agreement and Plan of Merger (the "Agreement") among the Company, Avalon Cable of Michigan Holdings Inc. ("Avalon Holdings") and Avalon Cable of Michigan Inc. ("Avalon Sub"), pursuant to which Avalon Sub will merge into the Company and the Company will become a wholly owned subsidiary of Avalon Holdings (the "Merger"). In accordance with the terms of the Agreement, each share of common stock, par value $1.00 per share ("common stock"), of the Company outstanding prior to the effective time of the Merger (other than treasury stock, shares owned by Avalon Holdings or its subsidiaries, or shares as to which dissenters' rights have been exercised) shall be converted into the right to receive $40.50 in cash (the "Merger Consideration"), subject to certain possible closing adjustments. On November 6, 1998, the Company completed its merger into and with Avalon Cable Michigan, Inc. The total consideration payable in conjunction with the merger, including fees and expenses is approximately 431,600. Subsequent to the merger, the arrangements with RCN and CTE (as described below) were terminated. The Merger agreement also permitted the Company to agree to acquire the remaining shares of Mercom that it did not own. Cable Michigan provides cable services to various areas in the state of Michigan. Cable Michigan's cable television systems offer customer packages for basic cable programming services which are offered at a per channel charge or packaged together to form a tier of services offered at a discount from the combined channel rate. Cable Michigan's cable television systems also provide premium cable services to their customers for an extra monthly charge. Customers generally pay initial connection charges and fixed monthly fees for cable programming and premium cable services, which constitute the principle sources of revenue for the Company. The consolidated financial statements have been prepared using the historical basis of assets and liabilities and historical results of operations of all wholly and majority owned subsidiaries. However, the historical financial information presented herein reflects periods during which the Company did not operate as an independent company and accordingly, certain assumptions were made in preparing such financial information. Such information, therefore, may not necessarily reflect the results of operations, financial condition or cash flows of the Company F-362
610 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) in the future or what they would have been had the Company been an independent, public company during the reporting periods. All material intercompany transactions and balances have been eliminated. RCN's corporate services group has historically provided substantial support services such as finance, cash management, legal, human resources, insurance and risk management. Prior to the Distribution, the corporate office of C-TEC allocated the cost for these services pro rata among the business units supported primarily based on assets; contribution to consolidated earnings before interest, depreciation, amortization, and income taxes; and number of employees. In the opinion of management, the method of allocating these costs is reasonable; however, such costs are not necessarily indicative of the costs that would have been incurred by the Company on a stand-alone basis. CTE, RCN and the Company have entered into certain agreements subsequent to the Distribution, and governing various ongoing relationships, including the provision of support services between the three companies, including a distribution agreement and a tax-sharing agreement. The fee per year for support services from RCN will be 4.0% of the revenues of the Company plus a direct allocation of certain consolidated cable administration functions of RCN. The direct charge for customer service along with the billing service and the cable guide service will be a pro rata share (based on subscribers) of the expenses incurred by RCN to provide such customer service and to provide such billing and cable guide service for RCN and the Company. CTE has agreed to provide or cause to be provided to RCN and the Company certain financial data processing services for a transitional period after the Distribution. The fees for such services will be an allocated portion (based on relative usage) of the cost incurred by CTE to provide such financial data processing services to all three groups. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of estimates The preparation of financial statements, in conformity with generally accepted accounting principles, 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. Cash and temporary cash investments For purposes of reporting cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be temporary cash investments. Temporary cash investments are stated at cost, which approximates market. Property, plant and equipment and depreciation Property, plant and equipment reflects the original cost of acquisition or construction, including payroll and related costs such as taxes, pensions and other fringe benefits, and certain general administrative costs. F-363
611 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Depreciation is provided on the straight-line method based on the useful lives of the various classes of depreciable property. The average estimated lives of depreciable cable property, plant and equipment are: Buildings................................................... 12-25 years Cable television distribution equipment..................... 8.5-12 years Vehicles.................................................... 5 years Other equipment............................................. 12 years Maintenance and repair costs are charged to expense as incurred. Major replacements and betterments are capitalized. Gain or loss is recognized on retirements and dispositions. Intangible assets Intangible assets are amortized on a straight-line basis over the expected period of benefit ranging from 5 to 19.3 years. Intangible assets include cable franchises. The cable systems owned or managed by the Company are constructed and operated under fixed-term franchises or other types of operating authorities (referred to collectively herein as "franchises") that are generally nonexclusive and are granted by local governmental authorities. The provisions of these local franchises are subject to federal regulation. Costs incurred to obtain or renew franchises are capitalized and amortized over the term of the applicable franchise agreement. Accounting for impairments The Company follows the provisions of Statement of Financial Accounting Standards No. 121 -- "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing the review for recoverability, the Company estimates the net future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected net future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss for long-lived assets and identifiable intangibles expected to be held and used is based on the fair value of the asset. No impairment losses have been recognized by the Company pursuant to SFAS 121. Revenue recognition Revenues from cable programming services are recorded in the month the service is provided. Installation fee revenue is recognized in the period in which the installation occurs. Advertising expense Advertising costs are expensed as incurred. Advertising expense charged to operations was $514, $560, and $505 in 1996, 1997, and for the period from January 1, 1998 to November 5, 1998 respectively. F-364
612 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock-based compensation The Company applies Accounting Principles Board Opinion No. 25 -- "Accounting for Stock Issued to Employees" ("APB 25") in accounting for its stock plans. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 -- "Accounting for Stock-Based Compensation" ("SFAS 123"). Earnings (loss) per share The Company has adopted statement of Financial Accounting Standards No. 128 -- "Earnings Per Share" ("SFAS 128"). Basic earnings (loss) per share is computed based on net income (loss) divided by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed based on net income (loss) divided by the weighted average number of shares of common stock outstanding during the period after giving effect to convertible securities considered to be dilutive common stock equivalents. The conversions of stock options during periods in which the Company incurs a loss from continuing operations is not assumed since the effect is anti-dilutive. The number of stock options which would have been converted in 1997 and in 1998 and had a dilutive effect if the Company had income from continuing operations are 55,602 and 45,531, respectively. For periods prior to October 1, 1997, during which the Company was a wholly owned subsidiary of C-TEC, earnings (loss) per share was calculated by dividing net income (loss) by one-fourth the average common shares of C-TEC outstanding, based upon a distribution ratio of one share of Company common stock for each four shares of C-TEC common equity owned. Income taxes The Company and Mercom file separate consolidated federal income tax returns. Prior to the Distribution, income tax expense was allocated to C-TEC's subsidiaries on a separate return basis except that C-TEC's subsidiaries receive benefit for the utilization of net operating losses and investment tax credits included in the consolidated tax return even if such losses and credits could not have been used on a separate return basis. The Company accounts for income taxes using Statement of Financial Accounting Standards No. 109 -- "Accounting for Income Taxes". The statement requires the use of an asset and liability approach for financial reporting purposes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between financial reporting basis and tax basis of assets and liabilities. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. Reclassification Certain amounts have been reclassified to conform with the current year's presentation. 3. BUSINESS COMBINATION AND DISPOSITIONS The Agreement between Avalon Cable of Michigan Holdings, Inc. and the Company permitted the Company to agree to acquire the 1,822,810 shares (approximately 38% of the outstanding stock) of Mercom that it did not own (the "Mercom Acquisition"). On September 10, 1998 the Company and Mercom entered into a definitive agreement (the "Mercom Merger Agreement") providing for the acquisition by the Company of all of such shares at a price of $12.00 per share. The Company completed this acquisition in March 1999. The total F-365
613 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) estimated consideration payable in conjunction with the Mercom Acquisition, excluding fees and expenses was $21,900. In March 1999, Avalon Michigan Inc. acquired the cable television systems of Nova Cablevision, Inc., Nova Cablevision VI, L.P. and Nova Cablevision VII, L.P. for approximately $7,800, excluding transaction fees. In July 1997, Mercom sold its cable system in Port St. Lucie, Florida for cash of approximately $3,500. The Company realized a pretax gain of $2,571 on the transaction. 4. PROPERTY, PLANT AND EQUIPMENT DECEMBER 31, NOVEMBER 5, 1997 1998 ------------ ----------- Cable plant....................................... $158,655 $ 174,532 Buildings and land................................ 2,837 2,917 Furniture, fixtures and vehicles.................. 5,528 6,433 Construction in process........................... 990 401 -------- --------- Total property, plant and equipment............... 168,010 184,283 Less accumulated depreciation..................... (94,174) (106,718) -------- --------- Property, plant and equipment, net................ $ 73,836 $ 77,565 ======== ========= Depreciation expense was $15,728, $16,431 and $14,968 for the years ended December 31, 1996 and 1997, and the period from January 1, 1998 to November 5, 1998, respectively. 5. INTANGIBLE ASSETS Intangible assets consist of the following at: DECEMBER 31, NOVEMBER 5, 1997 1998 ------------ ----------- Cable Franchises.................................. $134,889 $ 134,889 Noncompete agreements............................. 473 473 Goodwill.......................................... 3,990 3,990 Other............................................. 1,729 1,729 -------- --------- Total............................................. 141,081 141,081 Less accumulated amortization..................... (95,821) (108,951) -------- --------- Intangible assets, net............................ $ 45,260 $ 32,130 ======== ========= Amortization expense charged to operations for the years ended December 31, 1996 and 1997 was $15,699 and $15,651, respectively, and $13,130 for the period from January 1, 1998 to November 5, 1998. F-366
614 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. INCOME TAXES The income tax provision (benefit) in the accompanying consolidated financial statements of operations is comprised of the following: 1996 1997 1998 ------- ------- ------- CURRENT Federal............................................. $(6,700) $ 245 $ 320 State............................................... -- -- 28 ------- ------- ------- Total Current....................................... (6,700) 245 348 ------- ------- ------- DEFERRED: Federal............................................. 988 (4,359) (2,074) State............................................... -- -- (183) ------- ------- ------- Total Deferred...................................... 988 (4,359) (2,257) ------- ------- ------- Total (benefit) for income taxes.................... $(5,712) $(4,114) $(1,909) ======= ======= ======= The benefit for income taxes is different from the amounts computed by applying the U.S. statutory federal tax rate of 35% for 1996, 34% for 1997 and 35% for the period from January 1, 1998 to November 5, 1998. The differences are as follows: YEAR ENDED DECEMBER 31, PERIOD FROM ------------------- JANUARY 1, 1998 TO 1996 1997 NOVEMBER 11, 1998 -------- ------- ------------------ (Loss) before (benefit) for income taxes.................................. $(15,119) $(8,525) $(12,368) ======== ======= ======== Federal tax (benefit) at statutory rates.................................. (5,307) (2,899) (4,329) State income taxes....................... -- -- (101) Goodwill................................. 175 171 492 Increase (decrease) in valuation allowance.............................. (518) (1,190) -- Nondeductible expenses................... -- 147 2,029 Benefit of rate differential applied to reversing timing differences........... -- (424) -- Other, net............................... (62) 81 -- -------- ------- -------- (Benefit) for income taxes............... $ (5,712) $(4,114) $ (1,909) ======== ======= ======== Mercom, which files a separate consolidated income tax return, has the following net operating losses available: TAX NET OPERATING EXPIRATION YEAR LOSSES DATE - ---- --------- ---------- 1992..................................................... $ 435 2007 1995..................................................... $2,713 2010 In 1997, Mercom was liable for Federal Alternative Minimum Tax (AMT). At December 31, 1997 and at November 5, 1998, the cumulative minimum tax credits are $141 and $141, respectively. This amount can be carried forward indefinitely to reduce regular tax liabilities that exceed AMT in future years. F-367
615 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Temporary differences that give rise to a significant portion of deferred tax assets and liabilities are as follows: DECEMBER 31, NOVEMBER 5, 1997 1998 ------------ ----------- NOL carryforwards................................... $ 1,588 $ 1,132 Alternative minimum tax credits..................... 141 141 Reserves............................................ 753 210 Other, net.......................................... 230 309 -------- -------- Total deferred assets............................... 2,712 1,792 -------- -------- Property, plant and equipment....................... (11,940) (10,515) Intangible assets................................... (11,963) (10,042) -------- -------- Total deferred liabilities.......................... (23,903) (20,557) -------- -------- Subtotal............................................ (21,191) (18,765) Valuation allowance................................. -- -- -------- -------- Total deferred taxes................................ $(21,191) $(18,765) ======== ======== In the opinion of management, based on the future reversal of taxable temporary differences, primarily depreciation and amortization, the Company will more likely than not be able to realize all of its deferred tax assets. As a result, the net change in the valuation allowance for deferred tax assets during 1997 was a decrease of $1,262, which $72 related to Mercom of Florida. Due to the sale of Mercom of Florida, the Company's deferred tax liabilities decreased by $132. 7. DEBT Long-term debt outstanding at November 5, 1998 is as follows: DECEMBER 31, NOVEMBER 5, 1997 1998 ------------ ----------- Term Credit Facility................................ $100,000 $100,000 Revolving Credit Facility........................... 28,000 20,000 Term Loan........................................... 15,000 15,000 -------- -------- Total............................................... 143,000 135,000 Current portion of long-term debt................... -- 15,000 -------- -------- Total Long-Term Debt................................ $143,000 $120,000 ======== ======== Credit Facility The Company had an outstanding line of credit with a banking institution for $3 million. No amounts were outstanding under this facility. The Company has in place two secured credit facilities (the "Credit Facilities") pursuant to a single credit agreement with a group of lenders for which First Union National Bank acts as agent (the "Credit Agreement"), which was effective as of July 1, 1997. The first is a five-year revolving credit facility in the amount of $65,000 (the "Revolving Credit Facility"). The second is an eight-year term credit facility in the amount of $100,000 (the "Term Credit Facility"). F-368
616 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The interest rate on the Credit Facilities will be, at the election of the Company, based on either a LIBOR or a Base Rate option (6.25% at November 5, 1998) (each as defined in the Credit Agreement). The entire amount of the Term Credit Facility has been drawn and as of November 5, 1998, $100,000 of the principal was outstanding thereunder. The entire amount of the Revolving Credit Facility is available to the Company until June 30, 2002. As of November 5, 1998, $20,000 of principal was outstanding thereunder. Revolving loans may be repaid and reborrowed from time to time. The Term Credit Facility is payable over six years in quarterly installments, from September 30, 1999 through June 30, 2005. Interest only is due through June 1999. The Credit Agreement is currently unsecured. The Credit Agreement contains restrictive covenants which, among other things, require the Company to maintain certain debt to cash flow, interest coverage and fixed charge coverage ratios and place certain limitations on additional debt and investments. The Company does not believe that these covenants will materially restrict its activities. Term Loan On September 30, 1997, the Company assumed all obligations of CTE under a $15 million credit facility extended by a separate group of lenders for which First Union National Bank also acts as agent (the "$15 Million Facility"). The $15 Million Facility matures in a single installment on June 30, 1999 and is collateralized by a first priority pledge of all shares of Mercom owned by the Company. The $15 Million Facility has interest rate provisions (6.25% at November 5, 1998), covenants and events of default substantially the same as the Credit Facilities. On November 6, 1998, the long-term debt of the Company was paid off in conjunction with the closing of the merger. Mercom debt In August 1997, the Mercom revolving credit agreement for $2,000 expired. Mercom had no borrowings under the revolving credit agreement in 1996 or 1997. On September 29, 1997, the Company purchased and assumed all of the bank's interest in the term credit agreement and the note issued thereunder. Immediately after the purchase, the term credit agreement was amended in order to, among other things, provide for less restrictive financial covenants, eliminate mandatory amortization of principal and provide for a bullet maturity of principal on December 31, 2002, and remove the change of control event of default. Mercom's borrowings under the term credit agreement contain pricing and security provisions substantially the same as those in place prior to the purchase of the loan. The borrowings are secured by a pledge of the stock of Mercom's subsidiaries and a first lien on certain of the assets of Mercom and its subsidiaries, including inventory, equipment and receivables. At November 5, 1998, $14,151 of principal was outstanding. The borrowings under the term credit agreement are eliminated in the Company's consolidated balance sheet. 8. COMMON STOCK AND STOCK PLANS The Company has authorized 25,000,000 shares of $1 par value common stock, and 50,000,000 shares of $1 par value Class B common stock. The Company also has authorized F-369
617 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10,000,000 shares of $1 par value preferred stock. At November 5, 1998, 6,901,432 common shares are issued and outstanding. In connection with the Distribution, the Company Board of Directors (the "Board") adopted the Cable Michigan, Inc. 1997 Equity Incentive Plan (the "1997 Plan"), designed to provide equity-based compensation opportunities to key employees when shareholders of the Company have received a corresponding benefit through appreciation in the value of Cable Michigan Common Stock. The 1997 Plan contemplates the issuance of incentive stock options, as well as stock options that are not designated as incentive stock options, performance-based stock options, stock appreciation rights, performance share units, restricted stock, phantom stock units and other stock-based awards (collectively, "Awards"). Up to 300,000 shares of Common Stock, plus shares of Common Stock issuable in connection with the Distribution related option adjustments, may be issued pursuant to Awards granted under the 1997 Plan. All employees and outside consultants to the Company and any of its subsidiaries and all Directors of the Company who are not also employees of the Company are eligible to receive discretionary Awards under the 1997 Plan. Unless earlier terminated by the Board, the 1997 Plan will expire on the 10th anniversary of the Distribution. The Board or the Compensation Committee may, at any time, or from time to time, amend or suspend and, if suspended, reinstate, the 1997 Plan in whole or in part. Prior to the Distribution, certain employees of the Company were granted stock option awards under C-TEC's stock option plans. In connection with the Distribution, 380,013 options covering Common Stock were issued. Each C-Tec option was adjusted so that each holder would hold options to purchase shares of Commonwealth Telephone Enterprise Common Stock, RCN Common Stock and Cable Michigan Common Stock. The number of shares subject to, and the exercise price of, such options were adjusted to take into account the Distribution and to ensure that the aggregate intrinsic value of the resulting RCN, the Company and Commonwealth Telephone Enterprises options immediately after the Distribution was equal to the aggregate intrinsic value of the C-TEC options immediately prior to the Distribution. F-370
618 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Information relating to the Company stock options is as follows: WEIGHTED AVERAGE NUMBER OF EXERCISE SHARES PRICE --------- -------- Outstanding December 31, 1995............................... 301,000 Granted..................................................... 33,750 $ 8.82 Exercised................................................... (7,250) -- Canceled.................................................... (35,500) 10.01 ------- ------ Outstanding December 31, 1996............................... 292,000 8.46 Granted..................................................... 88,013 8.82 Exercised................................................... -- -- Canceled.................................................... (375) 10.01 ------- ------ Outstanding December 31, 1997............................... 379,638 8.82 Granted..................................................... 47,500 31.25 Exercised................................................... (26,075) 26.21 Canceled.................................................... (10,250) -- ------- ------ Outstanding November 5, 1998................................ 390,813 $11.52 ======= ====== Shares exercisable November 5, 1998......................... 155,125 $ 8.45 The range of exercise prices for options outstanding at November 5, 1998 was $8.46 to $31.25. No compensation expense related to stock option grants was recorded in 1997. For the period ended November 5, 1998 compensation expense in the amount of $161 was recorded relating to services rendered by the Board. Under the term of the Merger Agreement the options under the 1997 Plan vest upon the closing of the merger and each option holder will receive $40.50 per option. Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its stock options under the fair value method of SFAS 123. The fair value of these options was estimated at the date of grant using a Black Scholes option pricing model with the following weighted average assumptions for the period ended November 5, 1998. The fair value of these options was estimated at the date of grant using a Black Scholes option pricing model with weighted average assumptions for dividend yield of 0% for 1996, 1997 and 1998; expected volatility of 39.5% for 1996, 38.6% prior to the Distribution and 49.8% subsequent to the Distribution for 1997 and 40% for 1998; risk-free interest rate of 5.95%, 6.52% and 5.68% for 1996, 1997 and 1998 respectively, and expected lives of 5 years for 1996 and 1997 and 6 years for 1998. The weighted-average fair value of options granted during 1997 and 1998 was $4.19 and $14.97, respectively. F-371
619 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net earnings and earnings per share were as follows: FOR THE YEARS FOR THE PERIOD ENDED DECEMBER 31, FROM JANUARY 1, ------------------ TO NOVEMBER 5, 1996 1997 1998 ------- ------- --------------- Net (Loss) as reported........................... $(8,256) $(4,358) $(10,534) Net (Loss) pro forma............................. (8,256) (4,373) (10,174) Basic (Loss) per share-as reported............... (1.20) (0.63) (1.45) Basic (Loss) per share-pro forma................. (1.20) (0.64) (1.48) Diluted (Loss) per share-as reported............. (1.20) (0.63) (1.45) Diluted (Loss) per share-pro forma............... (1.20) (0.64) (1.48) In November 1996, the C-TEC shareholders approved a stock purchase plan for certain key executives (the "Executive Stock Purchase Plan" or "C-TEC ESPP"). Under the C-TEC ESPP, participants may purchase shares of C-TEC Common Stock in an amount of between 1% and 20% of their annual base compensation and between 1% and 100% of their annual bonus compensation and provided, however, that in no event shall the participant's total contribution exceed 20% of the sum of their annual compensation, as defined by the C-TEC ESPP. Participant's accounts are credited with the number of share units derived by dividing the amount of the participant's contribution by the average price of a share of C-TEC Common Stock at approximately the time such contribution is made. The share units credited to participant's account do not give such participant any rights as a shareholder with respect to, or any rights as a holder or record owner of, any shares of C-TEC Common Stock. Amounts representing share units that have been credited to a participant's account will be distributed, either in a lump sum or in installments, as elected by the participant, following the earlier of the participant's termination of employment with the Company or three calendar years following the date on which the share units were initially credited to the participant's account. It is anticipated that, at the time of distribution, a participant will receive one share of C-TEC Common Stock for each share unit being distributed. Following the crediting of each share unit to a participant's account, a matching share of Common Stock is issued in the participant's name. Each matching share is subject to forfeiture as provided in the C-TEC ESPP. The issuance of matching shares will be subject to the participant's execution of an escrow agreement. A participant will be deemed to be the holder of, and may exercise all the rights of a record owner of, the matching shares issued to such participant while such matching shares are held in escrow. Shares of restricted C-TEC Common Stock awarded under the C-TEC ESPP and share units awarded under the C-TEC ESPP that relate to C-TEC Common Stock were adjusted so that following the Distribution, each such participant was credited with an aggregate equivalent value of restricted shares of common stock of CTE, the Company and RCN. In September 1997, the Board approved the Cable Michigan, Inc. Executive Stock Purchase Plan, ("the "Cable Michigan ESPP"), with terms substantially the same as the C-TEC ESPP. The number of shares which may be distributed under the Cable Michigan ESPP as matching shares or in payment of share units is 30,000. 9. PENSIONS AND EMPLOYEE BENEFITS Prior to the Distribution, the Company's financial statements reflect the costs experienced for its employees and retirees while included in the C-TEC plans. F-372
620 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Through December 31, 1996, substantially all employees of the Company were included in a trusteed noncontributory defined benefit pension plan, maintained by C-TEC. Upon retirement, employees are provided a monthly pension based on length of service and compensation. C-TEC funds pension costs to the extent necessary to meet the minimum funding requirements of ERISA. Substantially, all employees of C-TEC's Pennsylvania cable television operations (formerly Twin Country Trans Video, Inc.) were covered by an underfunded plan which was merged into C-TEC's overfunded plan on February 28, 1996. The information that follows relates to the entire C-TEC noncontributory defined benefit plan. The components of C-TEC's pension cost are as follows for 1996: Benefits earned during the year (service costs)............. $ 2,365 Interest cost on projected benefit obligation............... 3,412 Actual return on plan assets................................ (3,880) Other components -- net..................................... (1,456) ------- Net periodic pension cost................................... $ 441 ======= The following assumptions were used in the determination of the consolidated projected benefit obligation and net periodic pension cost (credit) for December 31, 1996: Discount Rate............................................... 7.5% Expected long-term rate of return on plan assets............ 8.0% Weighted average long-term rate of compensation increases... 6.0% The Company's allocable share of the consolidated net periodic pension costs (credit), based on the Company's proportionate share of consolidated annualized salaries as of the valuation date, was approximately $10 for 1996. These amounts are reflected in operating expenses. As discussed below, no pension cost (credit) was recognized in 1997. In connection with the restructuring, C-TEC completed a comprehensive study of its employee benefit plans in 1996. As a result of this study, effective December 31, 1996, in general, employees of the Company no longer accrue benefits under the defined benefit pension plans and became fully vested in their benefit accrued through that date. C-TEC notified affected participants in December 1996. In December 1996, C-TEC allocated pension plan assets of $6,984 and the related liabilities to a separate plan for employees who no longer accrue benefits after sum distributions. The allocation of assets and liabilities resulted in a curtailment/settlement gain of $4,292. The Company's allocable share of this gain was $855. This gain results primarily from the reduction of the related projected benefit obligation. The curtailed plan has assets in excess of the projected benefit obligation. C-TEC sponsors a 401(k) savings plan covering substantially all employees of the Company who are not covered by collective bargaining agreements. Contributions made by the Company to the 401(k) plan are based on a specific percentage of employee contributions. Contributions charged to expense were $128 in 1996. Contributions charged to expense in 1997 prior to the Distribution were $107. In connection with the Distribution, the Company established a qualified saving plan under Section 401(k) of the Code. Contributions charged to expense in 1997 were $53. Contributions charged to expense for the period from January 1, 1998 to November 5, 1998 were $164. F-373
621 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES Total rental expense, primarily for office space and pole rental, was $984, $908 and $1,077 for the year ended December 31, 1996, 1997 and for the period from January 1, 1998 to November 5, 1998, respectively. Rental commitments are expected to continue to approximate $1 million a year for the foreseeable future, including pole rental commitments which are cancelable. The Company is subject to the provisions of the Cable Television Consumer Protection and Competition Act of 1992, as amended, and the Telecommunications Act of 1996. The Company has either settled challenges or accrued for anticipated exposures related to rate regulation; however, there is no assurance that there will not be further additional challenges to its rates. The 1996 statements of operations include charges aggregating approximately $833 relating to cable rate regulation liabilities. No additional charges were incurred in the year ended December 31, 1997 and for the period from January 1, 1998 to November 5, 1998. In the normal course of business, there are various legal proceedings outstanding. In the opinion of management, these proceedings will not have a material adverse effect on the financial condition or results of operations of the Company. The Company has agreed to indemnify RCN and C-TEC and their respective subsidiaries against any and all liabilities which arise primarily from or relate primarily to the management or conduct of the business of the Company prior to the effective time of the Distribution. The Company has also agreed to indemnify RCN and C-TEC and their respective subsidiaries against 20% of any liability which arises from or relates to the management or conduct prior to the effective time of the Distribution of the businesses of C-TEC and its subsidiaries and which is not a true C-TEC liability, a true RCN liability or a true Company liability. The Tax Sharing Agreement, by and among the Company, RCN and C-TEC (the "Tax Sharing Agreement"), governs contingent tax liabilities and benefits, tax contests and other tax matters with respect to tax returns filed with respect to tax periods, in the case of the Company, ending or deemed to end on or before the Distribution date. Under the Tax Sharing Agreement, adjustments to taxes that are clearly attributable to the Company group, the RCN group, or the C-TEC group will be borne solely by such group. Adjustments to all other tax liabilities will be borne 50% by C-TEC, 20% by the Company and 30% by RCN. Notwithstanding the above, if as a result of the acquisition of all or a portion of the capital stock or assets of the Company, the Distribution fails to qualify as a tax-free distribution under Section 355 of the Internal Revenue Code, then the Company will be liable for any and all increases in tax attributable thereto. F-374
622 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. AFFILIATE AND RELATED PARTY TRANSACTIONS The Company has the following transactions with affiliates: FOR THE YEAR FOR THE ENDED PERIOD ENDED ----------------- NOVEMBER 5, 1996 1997 1998 ------- ------ ------------ Corporate office costs allocated to the Company... $ 3,498 $3,715 $1,866 Cable staff and customer service costs allocated from RCN Cable.................................. 3,577 3,489 3,640 Interest expense on affiliate notes............... 13,952 8,447 795 Royalty fees charged by CTE....................... 585 465 -- Charges for engineering services.................. 296 -- -- Other affiliate expenses.......................... 189 171 157 In addition, RCN has agreed to obtain programming from third party suppliers for Cable Michigan, the costs of which will be reimbursed to RCN by Cable Michigan. In those circumstances where RCN purchases third party programming on behalf of both RCN and the Company, such costs will be shared by each company, on a pro rata basis, based on each company's number of subscribers. At December 31, 1997 and November 5, 1998, the Company has accounts receivable from related parties of $166 and $396 respectively, for these transactions. At December 31, 1997 and November 5, 1998, the Company has accounts payable to related parties of $1,560 and $343 respectively, for these transactions. The Company had a note payable to RCN Corporation of $147,567 at December 31, 1996 primarily related to the acquisition of the Michigan cable operations and its subsequent operations. The Company repaid approximately $110,000 of this note payable in 1997. The remaining balance was transferred to shareholder's net investment in connection with the Distribution. 12. OFF BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK The Company places its cash and temporary investments with high credit quality financial institutions. The Company also periodically evaluates the creditworthiness of the institutions with which it invests. The Company does, however, maintain unsecured cash and temporary cash investment balances in excess of federally insured limits. The Company's trade receivables reflect a customer base centered in the state of Michigan. The Company routinely assesses the financial strength of its customers; as a result, concentrations of credit risk are limited. 13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: a. The fair value of the revolving credit agreement is considered to be equal to carrying value since the debt re-prices at least every six months and the Company believes that its credit risk has not changed from the time the floating rate debt was borrowed and therefore, would obtain similar rates in the current market. F-375
623 CABLE MICHIGAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) b. The fair value of the cash and temporary cash investments approximates fair value because of the short maturity of these instruments. 14. QUARTERLY INFORMATION (UNAUDITED) The Company estimated the following quarterly data based on assumptions which it believes are reasonable. The quarterly data may differ from quarterly data subsequently presented in interim financial statements. FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1998 Revenue.................................. $20,734 $22,311 $22,735 $ 8,741 Operating income before depreciation, amortization, and management fees...... 9,043 10,047 10,185 12,277 Operating income (loss).................. 7,000 (3,324) (674) (7,051) Net (loss)............................... (1,401) (5,143) (2,375) (1,615) Net (loss) per average Common Share...... (0.20) (0.75) (0.34) (.23) 1997 Revenue.................................. $19,557 $20,673 $20,682 $20,387 Operating income before depreciation, amortization, and management fees...... 8,940 9,592 9,287 9,013 Operating income (loss).................. 275 809 (118) 69 Net (loss)............................... N/A N/A N/A (1,107) Net (loss) per average Common Share...... N/A N/A N/A $ (.16) The fourth quarter information for the quarter ended December 31, 1998 includes the results of operations of the Company for the period from October 1, 1998 through November 5, 1998. F-376
624 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers of Avalon Cable of New England LLC In our opinion, the accompanying balance sheet and the related statements of operations, partners' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Amrac Clear View, a Limited Partnership, (the "Partnership"), as of May 28, 1998 and the results of its operations and its cash flows for the period ended May 28, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Partnership's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Boston, Massachusetts September 11, 1998 F-377
625 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP BALANCE SHEET MAY 28, 1998 ASSETS Current Assets Cash and cash equivalents................................... $ 415,844 Subscribers and other receivables, net of allowance for doubtful accounts of $16,445.............................. 45,359 Prepaid expenses and other current assets................... 129,004 ---------- Total current assets........................................ 590,207 Property, plant and equipment, net.......................... 483,134 ---------- $1,073,341 ========== LIABILITIES AND PARTNERS' EQUITY Accounts payable............................................ $ 57,815 Accrued expenses............................................ 84,395 ---------- Total current liabilities................................... 142,210 ---------- Commitments and contingencies (Note 7) Partners' equity............................................ 931,131 ---------- $1,073,341 ========== The accompanying notes are an integral part of these financial statements. F-378
626 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP STATEMENT OF OPERATIONS FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH MAY 28, 1998 REVENUE: Basic services.............................................. $651,878 Premium services............................................ 78,365 Other....................................................... 49,067 -------- 779,310 -------- OPERATING EXPENSES: Programming................................................. 193,093 Selling, general and administrative......................... 151,914 Technical and operations.................................... 98,628 Depreciation and amortization............................... 47,268 Management fees............................................. 41,674 -------- Income from operations...................................... 246,733 Interest income............................................. 2,319 Interest (expense).......................................... (1,871) -------- Net income.................................................. $247,181 ======== The accompanying notes are an integral part of these financial statements. F-379
627 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' EQUITY (DEFICIT) FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH MAY 28, 1998 CLASS A CLASS B INVESTOR GENERAL LIMITED LIMITED LIMITED PARTNER PARTNER PARTNER PARTNERS TOTAL ------- ------- ------- -------- -------- Partners' (deficit) equity at December 31, 1997................ $(6,756) $(6,756) $(2,703) $700,165 $683,950 Net income......................... 6,180 6,180 2,472 232,349 247,181 ------- ------- ------- -------- -------- Partners' equity at May 28, 1998............................. $ (576) $ (576) $ (231) $932,514 $931,131 ------- ------- ------- -------- -------- The accompanying notes are an integral part of these financial statements. F-380
628 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS FOR THE PERIOD FROM JANUARY 1, 1998 THROUGH MAY 28, 1998 CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $247,181 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization............................... 47,268 CHANGES IN OPERATING ASSETS AND LIABILITIES: Decrease in subscribers and other receivables............... 21,038 Increase in prepaid expenses and other current assets....... (52,746) Increase in accounts payable................................ 9,866 Increase in accrued expenses................................ 3,127 -------- Net cash provided by operating activities................... 275,734 -------- CASH FLOWS FOR INVESTING ACTIVITIES Capital expenditures........................................ (61,308) -------- Cash flows for financing activities Repayment of long-term debt...................................................... (560,500) -------- Net increase in cash and cash equivalents................... (346,074) -------- Cash and cash equivalents, beginning of the period.......... 761,918 -------- Cash and cash equivalents, end of the period................ $415,844 ======== SUPPLEMENTAL DISCLOSURES Cash paid during the period for: Interest.................................................... $ 6,939 ======== The accompanying notes are an integral part of these financial statements. F-381
629 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND NATURE OF BUSINESS The Partnership is a Massachusetts limited partnership created pursuant to a Limited Partnership Agreement, dated as of October 1, 1986, as amended (the "Partnership Agreement"), by and among (1) Amrac Telecommunications as the general partner (the "General Partner"), (2) Clear View Cablevision, Inc. as the class A limited partner (the "Class A Limited Partner"), (3) Schuparra Properties, Inc., as the class B limited partner (the "Class B Limited Partner"), and (4) those persons admitted to the Partnership from time to time as investor limited partners (the "Investor Limited Partner"). The Partnership provides cable television service to the towns of Hadley and Belchertown located in western Massachusetts. At May 28, 1998, the Partnership provided services to approximately 5,100 customers residing in those towns. The Partnership's cable television systems offer customer packages of basic and cable programming services which are offered at a per channel charge or are packaged together to form a tier of services offered at a discount from the combined channel rate. The Partnership's cable television systems also provide premium television services to their customers for an extra monthly charge. Customers generally pay initial connection charges and fixed monthly fees for cable programming and premium television services, which constitute the principal sources of revenue for the Partnership. On October 7, 1997, the Partnership entered into a definitive agreement with Avalon Cable of New England LLC ("Avalon New England") whereby Avalon New England would purchase the assets and operations of the Partnership for $7,500,000. This transaction was consummated and became effective on May 29, 1998. The assets and liabilities at May 28, 1998, have not been adjusted or reclassified to reflect this transaction. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and use assumptions that affect the reported amounts of assets and liabilities and the disclosure for contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reported period. Actual results may vary from estimates used. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments purchased with an initial maturity of three months or less. Revenue Recognition Revenue is recognized as cable television services are provided. Concentration of Credit Risk Financial instruments which potentially expose the Partnership to a concentration of credit risk include cash, cash equivalents and subscriber and other receivables. The Partnership does not believe that such deposits are subject to any unusual credit risk beyond the normal credit risk associated with operating its business. The Partnership extends credit to customers on an unsecured basis in the normal course of business. The Partnership maintains reserves for F-382
630 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) potential credit losses and such losses, in the aggregate, have not historically exceeded management's expectations. Property and Equipment Property and equipment is stated at cost. Initial subscriber installation costs, including material, labor and overhead costs, are capitalized as a component of cable plant and equipment. Depreciation is computed for financial statement purposes using the straight-line method based upon the following lives: Cable plant and equipment................................... 10 years Office furniture and equipment.............................. 5 to 10 years Vehicles.................................................... 6 years Financial Instruments The Partnership estimates that the fair value of all financial instruments at May 28, 1998 does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet. Income Taxes The Partnership is not subject to federal and state income taxes. Accordingly, no recognition has been given to income taxes in the accompanying financial statements of the Partnership since the income or loss of the Partnership is to be included in the tax returns of the individual partners. Allocation of Profits and Losses and Distributions of Cash Flow Partnership profits and losses (other than those arising from capital transactions, described below) and distributions of cash flow are allocated 94% to the Investor Limited Partners, 2.5% to the Class A Limited Partner, 1% to the Class B Limited Partner and 2.5% to the General Partner until Payout (as defined in the Partnership Agreement) and after Payout, 65% to the Investor Limited Partners, 15% to the Class A Limited Partner, 5% to the Class B Limited Partner and 15% to the General Partner. Partnership profits and capital transactions are allocated first, in proportion to the partners' respective capital accounts until their respective account balances are zero and second, in proportion to any distributed cash proceeds resulting from the capital transaction and third, any remaining profit, if any, is allocated 65% to the Investor Limited Partners, 15% to the Class A Limited Partner, 5% to the Class B Limited Partner, and 15% to the General Partner. Partnership losses from capital transactions are allocated first, in proportion to the partners' respective capital accounts until their respective account balances are zero and, second, any remaining loss, if any, is allocated 65% to the Investor Limited Partners, 15% to the Class A Limited Partner, 5% to the Class B Limited Partner, and 15% to the General Partner. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components in financial statements. SFAS No. 130 states that comprehensive income includes reported net income of a company, adjusted for items that are F-383
631 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) currently accounted for as direct entries to equity, such as the net unrealized gain or loss on securities available for sale. SFAS No. 130 is effective for both interim and annual periods beginning after December 15, 1997. Management does not anticipate that adoption of SFAS No. 130 will have a material effect on the financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which establishes standards for reporting by public companies about operating segments of their business. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for periods beginning after December 15, 1997. Management does not anticipate that the adoption of SFAS No. 131 will have a material effect on the financial statements. 3. PREPAID EXPENSES AND OTHER CURRENT ASSETS At May 28, 1998, prepaid expenses and other current assets consist of the following: Deferred transaction costs.................................. $ 91,024 Other....................................................... 37,980 -------- $129,004 ======== Deferred transaction costs consist primarily of attorney fees related to the sale of assets of the Partnership (Note 1). 4. PROPERTY, PLANT AND EQUIPMENT At May 28, 1998, property, plant and equipment consists of the following: Cable plant and equipment................................... $ 3,460,234 Office furniture and equipment.............................. 52,531 Vehicles.................................................... 32,468 ----------- 3,545,233 Accumulated depreciation.................................... (3,062,099) ----------- $ 483,134 =========== Depreciation expense was $47,018 for the period from January 1, 1998 through May 28, 1998. 5. ACCRUED EXPENSES At May 28, 1998, accrued expenses consist of the following: Accrued compensation and benefits........................... $17,004 Accrued programming costs................................... 24,883 Accrued legal costs......................................... 25,372 Other....................................................... 17,136 ------- $84,395 ======= 6. LONG-TERM DEBT The Partnership repaid its term loan, due to a bank, on January 15, 1998. Interest on the loan was paid monthly and accrued at the bank's prime rate plus 2% (10.5% at December 31, F-384
632 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 1997). The loan was collateralized by substantially all of the assets of the Partnership and a pledge of all partnership interests. The total principal outstanding at December 31, 1997 was $560,500. 7. COMMITMENTS AND CONTINGENCIES The Partnership rents poles from utility companies for use in its operations. These rentals amounted to approximately $15,918 of rent expense during the period. While rental agreements are generally short-term, the Partnership anticipates such rentals will continue in the future. The Partnership leases office facilities and various items of equipment under month-to-month operating leases. Rental expense under operating leases amounted to $8,171 during the period. The operations of the Partnership are subject to regulation by the Federal Communications Commission and various franchising authorities. From time to time the Partnership is also involved with claims that arise in the normal course of business. In the opinion of management, the ultimate liability with respect to these claims will not have a material adverse effect on the operations, cash flows or financial position of the Partnership. 8. RELATED PARTY TRANSACTIONS The General Partner provides management services to the Partnership for which it receives a management fee of 5% of revenue. The General Partner also allocates, in accordance with a management agreement, certain general, administrative and payroll costs to the Partnership. For the period from January 1, 1998 through May 28, 1998, management fees totaled $41,674 and allocated general, administrative and payroll costs totaled $3,625, which are included in selling general and administrative expenses. The Partnership believes that these fees and allocations were made on a reasonable basis. However, the amounts paid are not necessarily indicative of the level of expenses that might have been incurred had the Partnership contracted directly with third parties. The Partnership has not attempted to obtain quotes from third parties to determine what the cost of obtaining such services from third parties would have been. F-385
633 INDEPENDENT AUDITORS' REPORT To the Partners of AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP We have audited the accompanying balance sheets of Amrac Clear View, a Limited Partnership as of December 31, 1996 and 1997, and the related statements of net earnings, changes in partners' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Amrac Clear View, a Limited Partnership as of December 31, 1996 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. GREENFIELD, ALTMAN, BROWN, BERGER & KATZ, P.C. Canton, Massachusetts February 13, 1998 F-386
634 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP BALANCE SHEETS AT DECEMBER 31, 1996 AND 1997 1996 1997 ---------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................... $ 475,297 $ 761,918 Subscribers and other receivables, net of allowance for doubtful accounts of $2,500 in 1996 and $3,000 in 1997.... 49,868 66,397 Prepaid expenses: Legal....................................................... -- 53,402 Miscellaneous............................................... 28,016 20,633 ---------- ---------- Total current assets........................................ 553,181 902,350 ---------- ---------- Property and equipment, net of accumulated depreciation $2,892,444 in 1996 and $3,015,081 in 1997................. 473,438 468,844 ---------- ---------- OTHER ASSETS: Franchise cost, net of accumulated amortization of $6,757 in 1996 and $7,417 in 1997................................... 3,133 2,473 Deferred financing costs, net of accumulated amortization of $60,247 in 1996 and $73,447 in 1997....................... 13,200 -- ---------- ---------- 16,333 2,473 ---------- ---------- $1,042,952 $1,373,667 ========== ========== LIABILITIES AND PARTNERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt........................ $ 356,500 $ 397,500 Accounts payable-trade...................................... 34,592 47,949 Accrued expenses: Utilities................................................... 59,668 -- Miscellaneous............................................... 50,074 81,268 ---------- ---------- Total current liabilities................................... 500,834 526,717 ---------- ---------- Long-term debt, net of current maturities................... 488,000 163,000 ---------- ---------- Commitments and contingencies (Note 4) Partners' equity............................................ 54,118 683,950 ---------- ---------- $1,042,952 $1,373,667 ========== ========== See notes to financial statements F-387
635 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP STATEMENTS OF NET EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 1995 1996 1997 ---------- ---------- ---------- Revenues........................................... $1,701,322 $1,807,181 $1,902,080 Less cost of service............................... 644,736 656,881 687,433 ---------- ---------- ---------- Net revenues....................................... 1,056,586 1,150,300 1,214,647 ---------- ---------- ---------- Operating expenses excluding management fees and depreciation and amortization.................... 330,574 388,284 351,031 Management fees.................................... 94,317 96,742 101,540 Depreciation and amortization...................... 330,913 340,166 136,497 ---------- ---------- ---------- 755,804 825,192 589,068 ---------- ---------- ---------- Earnings from operations........................... 300,782 325,108 625,579 ---------- ---------- ---------- OTHER EXPENSES (INCOME): Interest income.................................... (7,250) (23,996) Interest expense................................... 130,255 98,603 70,738 Utility refunds.................................... (50,995) ---------- ---------- ---------- 130,255 91,353 (4,253) ---------- ---------- ---------- Net earnings....................................... $ 170,527 $ 233,755 $ 629,832 ========== ========== ========== See notes to financial statements F-388
636 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 CLASS A CLASS B INVESTOR GENERAL LIMITED LIMITED LIMITED PARTNER PARTNER PARTNER PARTNERS TOTAL -------- -------- -------- --------- --------- Partners' deficit at December 31, 1994............................ $(31,012) $(31,012) $(12,405) $(211,905) $(286,334) Net earnings for the year......... 4,263 4,263 1,705 160,296 170,527 Partners' distributions during the year............................ (1,596) (1,596) (638) (60,000) (63,830) -------- -------- -------- --------- --------- Partners' deficit at December 31, 1995............................ (28,345) (28,345) (11,338) (111,609) (179,637) Net earnings for the year......... 5,844 5,844 2,337 219,730 233,755 -------- -------- -------- --------- --------- Partners' equity (deficit) at December 31, 1996............... (22,501) (22,501) (9,001) 108,121 54,118 Net earnings for the year......... 15,745 15,745 6,298 592,044 629,832 -------- -------- -------- --------- --------- Partners' equity (deficit) at December 31, 1997............... $ (6,756) $ (6,756) $ (2,703) $ 700,165 $ 683,950 ======== ======== ======== ========= ========= See notes to financial statements F-389
637 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 1995 1996 1997 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings......................................... $ 170,527 $ 233,755 $ 629,832 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization........................ 330,913 340,166 136,497 Changes in assets and liabilities: (Increase) decrease in: Subscribers and other receivables.................... 4,573 (12,093) (16,529) Prepaid expenses..................................... (3,378) (9,468) (46,019) Increase (decrease) in accounts payable and accrued expenses........................................... (66,424) 69,262 (15,117) --------- --------- --------- Net cash provided by operating activities............ 436,211 621,622 688,664 --------- --------- --------- CASH FLOWS FOR INVESTING ACTIVITIES Purchases of equipment............................... (116,794) (74,879) (118,043) --------- --------- --------- CASH FLOWS FOR FINANCING ACTIVITIES Repayment of long-term debt.......................... (239,250) (260,750) (284,000) Distributions to partners............................ (63,830) --------- --------- --------- Net cash used by financing activities................ (303,080) (260,750) (284,000) --------- --------- --------- Net increase in cash and cash equivalents............ 16,337 285,993 286,621 Cash and cash equivalents, beginning of year......... 172,967 189,304 475,297 --------- --------- --------- Cash and cash equivalents, end of year............... $ 189,304 $ 475,297 $ 761,918 ========= ========= ========= SUPPLEMENTAL DISCLOSURES Cash paid during the year for: Interest............................................. $ 133,540 $ 94,038 $ 73,124 ========= ========= ========= See notes to financial statements F-390
638 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 1. SUMMARY OF BUSINESS ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES: This summary of significant accounting policies of Amrac Clear View, a Limited Partnership (the "Partnership"), is presented to assist in understanding the Partnership's financial statements. The financial statements and notes are representations of the Partnership's management, which is responsible for their integrity and objectivity. The accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used. Operations: The Partnership provides cable television service to the residents of the towns of Hadley and Belchertown in western Massachusetts. Credit concentrations: The Partnership maintains cash balances at several financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. At various times during the year the Partnership's cash balances exceeded the federally insured limits. Concentration of credit risk with respect to subscriber receivables are limited due to the large number of subscribers comprising the Partnership's customer base. Property and equipment/depreciation: Property and equipment are carried at cost. Minor additions and renewals are expensed in the year incurred. Major additions and renewals are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Total depreciation for the years ended December 31, 1995, 1996 and 1997 was $321,872, $331,707 and $122,637, respectively. Other assets/amortization: Amortizable assets are recorded at cost. The Partnership amortizes intangible assets using the straight-line method over the useful lives of the various items. Total amortization for the years ended December 31, 1995, 1996 and 1997 was $9,041, $8,459 and $13,860, respectively. Cash equivalents: For purposes of the statements of cash flows, the Partnership considers all short-term instruments purchased with a maturity of three months or less to be cash equivalents. There were no cash equivalents at December 31, 1995 and 1997. Cash equivalents at December 31, 1996, amounted to $300,000. F-391
639 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 Advertising: The Partnership follows the policy of charging the costs of advertising to expense as incurred. Advertising expense was $1,681, $1,781 and $2,865 for the years ended December 31, 1995, 1996 and 1997, respectively. Income taxes: The Partnership does not incur a liability for federal or state income taxes. The current income or loss of the Partnership is included in the taxable income of the partners, and therefore, no provision for income taxes is reflected in the financial statements. Revenues: The principal sources of revenues are the monthly charges for basic and premium cable television services and installation charges in connection therewith. Allocation of profits and losses and distributions of cash flow: Partnership profits and losses, (other than those arising from capital transactions, described below), and distributions of cash flow are allocated 94% to the Investor Limited Partners, 2.5% to the Class A Limited Partner, 1% to the Class B Limited Partner and 2.5% to the General Partner until Payout (as defined in the Partnership Agreement) and after Payout, 65% to the Investor Limited Partners, 15% to the Class A Limited Partner, 5% to the Class B Limited Partner and 15% to the General Partner. Partnership profits from capital transactions are allocated first, in proportion to the partners' respective capital accounts until their respective account balances are zero and second, in proportion to any distributed cash proceeds resulting from the capital transaction and third, any remaining profit, if any, is allocated 65% to the Investor Limited Partners, 15% to the Class A Limited Partner, 5% to the Class B Limited Partner, and 15% to the General Partner. Partnership losses from capital transactions are allocated first, in proportion to the partners' respective capital accounts until their respective account balances are zero and, second, any remaining loss, if any, is allocated 65% to the Investor Limited Partners, 15% to the Class A Limited Partner, 5% to the Class B Limited Partner, and 15% to the General Partner. 2. PROPERTY AND EQUIPMENT: Property and equipment consists of the following at December 31: 1996 1997 --------- --------- Cable plant and equipment........................... 3,274,684 3,391,750 Office furniture and equipment...................... 63,373 64,350 Vehicles............................................ 27,825 27,825 --------- --------- 3,365,882 3,483,925 ========= ========= Depreciation is provided over the estimated useful lives of the above items as follows: Cable plant and equipment................................... 10 years Office furniture and equipment.............................. 5-10 years Vehicles.................................................... 6 years F-392
640 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 3. LONG-TERM DEBT: The Partnership's term loan, due to a bank, is payable in increasing quarterly installments through June 30, 1999. Interest on the loan is paid monthly and accrues at the bank's prime rate plus 2% (10.5% at December 31, 1997). The loan is collateralized by substantially all of the assets of the Partnership and a pledge of all partnership interests. The total principal outstanding at December 31, 1997 was $560,500. Annual maturities are as follows: 1998........................................................ 397,500 1999........................................................ 163,000 ------- 560,500 ======= The loan agreement contains covenants including, but not limited to, maintenance of certain debt ratios as well as restrictions on capital expenditures and investments, additional indebtedness, partner distributions and payment of management fees. The Partnership was in compliance with all covenants at December 31, 1996 and 1997. In 1995, the Partnership obtained, from the bank, unconditional waivers of the following covenant violations: (1) to make a one- time cash distribution of $63,830, (2) to increase the capital expenditure limit to $125,000, and (3) to waive certain other debt ratio and investment restrictions, which were violated during the year. 4. COMMITMENTS AND CONTINGENCIES: The Partnership rents poles from utility companies in its operations. These rentals amounted to approximately $31,000, $39,500 and $49,000 for the years ended December 31, 1995, 1996 and 1997, respectively. While rental agreements are generally short-term, the Partnership anticipates such rentals will continue in the future. The Partnership leases a motor vehicle under an operating lease that expires in December 1998. The minimum lease cost for 1998 is approximately $6,000. 5. RELATED-PARTY TRANSACTIONS: The General Partner provides management services to the Partnership for which it receives a management fee of 5% of revenue. The General Partner also allocates, in accordance with a management agreement, certain general, administrative and payroll costs to the Partnership. For the years ended December 31, 1995, 1996 and 1997, management fees totaled $87,800, $90,242 and $95,040, respectively and allocated general, administrative and payroll costs totaled $7,200, $7,450 and $8,700, respectively. During each year the Partnership also incurred tap audit fees payable to the General Partner totaling $4,000. At December 31, 1996, the balance due from the General Partner was $12,263. The balance due to Amrac Telecommunications at December 31, 1997 was $4,795. 6. SUBSEQUENT EVENTS: On October 7, 1997, the Partnership entered into an agreement with another cable television service provider to sell all of its assets for $7,500,000. The Partnership received, in escrow, $250,000, which shall be released as liquidating damages if the closing fails to occur solely as a result of a breach of the agreement. As of December 31, 1997, the Partnership incurred $53,402 F-393
641 AMRAC CLEAR VIEW, A LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 in legal costs associated with the sale which are included in prepaid expenses. Subject to certain regulatory approvals, it is anticipated that the transaction will be consummated in the Spring of 1998. On January 15, 1998, the Partnership paid, prior to the maturity date, its outstanding term loan due to a bank as described in Note 3. F-394
642 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers of Avalon Cable of New England LLC In our opinion, the accompanying combined balance sheets and the related combined statements of operations, changes in stockholder's deficit and cash flows present fairly, in all material respects, the financial position of the Combined Operations of Pegasus Cable Television of Connecticut, Inc. and the Massachusetts Operations of Pegasus Cable Television, Inc. at December 31, 1996 and 1997 and June 30, 1998, and the results of their operations, changes in stockholder's deficit and their cash flows for each of the three years in the period ended December 31, 1997 and for the six months ended June 30, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICEWATERHOUSECOOPERS LLP Philadelphia, Pennsylvania March 30, 1999 F-395
643 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. COMBINED BALANCE SHEETS DECEMBER 31, -------------------------- JUNE 30, 1996 1997 1998 ----------- ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents....................... $ 389,097 $ 1,092,084 $ 1,708,549 Accounts receivable, less allowance for doubtful accounts at December 31, 1996 and 1997 and June 30, 1998 of $11,174, $3,072 and $0, respectively.................................. 140,603 116,112 144,653 Prepaid expenses and other...................... 62,556 90,500 92,648 ----------- ----------- ----------- Total current assets............................ 592,256 1,298,696 1,945,850 Property and equipment, net..................... 4,164,545 3,565,597 3,005,045 Intangible assets, net.......................... 2,174,084 2,096,773 1,939,904 Accounts receivable, affiliates................. 4,216,682 5,243,384 5,692,013 Deposits and other.............................. 436,382 456,135 406,135 ----------- ----------- ----------- Total assets.................................... $11,583,949 $12,660,585 $12,988,947 =========== =========== =========== LIABILITIES AND STOCKHOLDER'S DEFICIT CURRENT LIABILITIES: Current portion of long-term debt............... $ 71,744 $ 34,272 $14,993,581 Accounts payable................................ 786,284 803,573 764,588 Accrued incentive compensation.................. 117,692 149,823 220,724 Accrued franchise fees.......................... 193,369 173,735 86,332 Accrued pole rental............................. 83,910 78,345 52,954 Accrued expenses................................ 383,572 203,561 42,038 ----------- ----------- ----------- Total current liabilities....................... 1,636,571 1,443,309 16,160,217 Long-term debt, net............................. 15,043,763 15,018,099 -- Accrued interest................................ 2,811,297 4,685,494 5,622,593 Other........................................... 299,030 299,030 299,030 ----------- ----------- ----------- Total liabilities............................... 19,790,661 21,445,932 22,081,840 Commitments and contingent liabilities.......... -- -- -- STOCKHOLDER'S DEFICIT: Common stock-par value $1 per share; 10,000 shares authorized; 7,673 shares issued and outstanding................................... 7,673 7,673 7,673 Accumulated deficit............................. (8,214,385) (8,793,020) (9,100,566) ----------- ----------- ----------- Total stockholder's deficit..................... (8,206,712) (8,785,347) (9,092,893) ----------- ----------- ----------- Total liabilities and stockholder's deficit..... $11,583,949 $12,660,585 $12,988,947 =========== =========== =========== See accompanying notes to combined financial statements F-396
644 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. COMBINED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, SIX MONTHS ----------------------------------------- ENDED 1995 1996 1997 JUNE 30, 1998 ----------- ----------- ----------- ------------- REVENUES: Basic and satellite service...... $ 4,371,736 $ 4,965,377 $ 5,353,735 $2,841,711 Premium services................. 619,035 640,641 686,513 348,628 Other............................ 144,300 169,125 150,714 86,659 ----------- ----------- ----------- ---------- Total revenues................... 5,135,071 5,775,143 6,190,962 3,276,998 OPERATING EXPENSES: Programming...................... 1,119,540 1,392,247 1,612,458 876,588 General and administrative....... 701,420 811,795 829,977 391,278 Technical and operations......... 713,239 702,375 633,384 341,249 Marketing and selling............ 20,825 15,345 19,532 12,041 Incentive compensation........... 48,794 101,945 94,600 70,900 Management fees.................. 368,085 348,912 242,267 97,714 Depreciation and amortization.... 1,658,455 1,669,107 1,565,068 834,913 ----------- ----------- ----------- ---------- Income from operations........... 504,713 733,417 1,193,676 652,315 Interest expense................. (1,745,635) (1,888,976) (1,884,039) (937,662) Interest income.................. 956 2,067 93,060 29 Other income (expense), net...... 794 (2,645) (27,800) (17,228) ----------- ----------- ----------- ---------- Loss before state income taxes... (1,239,172) (1,156,137) (625,103) (302,546) Provision for state income taxes.......................... 20,000 25,000 16,000 5,000 ----------- ----------- ----------- ---------- Net loss......................... $(1,259,172) $(1,181,137) $ (641,103) $ (307,546) =========== =========== =========== ========== See accompanying notes to combined financial statements F-397
645 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. COMBINED STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT COMMON STOCK ------------------- TOTAL NUMBER OF PAR ACCUMULATED STOCKHOLDER'S SHARES VALUE DEFICIT DEFICIT --------- ------ ----------- ------------- Balances at January 1, 1995.............. 7,673 $7,673 $(5,774,076) $(5,766,403) Net loss................................. (1,259,172) (1,259,172) ----- ------ ----------- ----------- Balances at December 31, 1995............ 7,673 7,673 (7,033,248) (7,025,575) Net loss................................. (1,181,137) (1,181,137) ----- ------ ----------- ----------- Balances at December 31, 1996............ 7,673 7,673 (8,214,385) (8,206,712) Net loss................................. (641,103) (641,103) Stock incentive compensation............. 62,468 62,468 ----- ------ ----------- ----------- Balances at December 31, 1997............ 7,673 7,673 (8,793,020) (8,785,347) Net loss................................. (307,546) (307,546) ----- ------ ----------- ----------- Balances at June 30, 1998................ 7,673 $7,673 $(9,100,566) $(9,092,893) ===== ====== =========== =========== See accompanying notes to combined financial statements F-398
646 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, SIX MONTHS --------------------------------------- ENDED 1995 1996 1997 JUNE 30, 1998 ----------- ----------- ----------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss............................... $(1,259,172) $(1,181,137) $ (641,103) $ (307,546) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.......... 1,658,455 1,669,107 1,565,068 834,913 Bad debt expense....................... 26,558 48,566 45,839 36,074 Change in assets and liabilities: Accounts receivable.................... (75,263) (88,379) (21,348) (64,615) Prepaid expenses and other............. (403,212) 75,208 (27,944) (2,148) Accounts payable and accrued expenses............................. 239,207 981,496 (93,322) 221,219 Accrued interest....................... 902,006 1,874,198 1,874,197 937,099 Deposits and other..................... 83,431 -- (19,753) 50,000 ----------- ----------- ----------- ---------- Net cash provided by operating activities........................... 1,172,010 3,379,059 2,681,634 1,704,996 ----------- ----------- ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures................... (163,588) (1,174,562) (691,269) (114,221) Purchase of intangible assets.......... (127,340) (72,753) (197,540) (3,271) ----------- ----------- ----------- ---------- Net cash used for investing activities........................... (290,928) (1,247,315) (888,809) (117,492) ----------- ----------- ----------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt........... 37,331 -- -- -- Repayments of long-term debt........... (13,764) -- -- (10,837) Capital lease repayments............... (19,764) (52,721) (63,136) (47,952) Advances to affiliates, net............ (404,576) (2,562,295) (1,026,702) (912,250) ----------- ----------- ----------- ---------- Net cash used by financing activities........................... (400,773) (2,615,016) (1,089,838) (971,039) ----------- ----------- ----------- ---------- Net increase in cash and cash equivalents.......................... 480,309 (483,272) 702,987 616,465 Cash and cash equivalents, beginning of year................................. 392,060 872,369 389,097 1,092,084 ----------- ----------- ----------- ---------- Cash and cash equivalents, end of year................................. $ 872,369 $ 389,097 $ 1,092,084 $1,708,549 =========== =========== =========== ========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for interest............................. $ 843,629 $ 14,778 $ 9,842 $ 563 Cash paid during the year for income taxes................................ -- -- $ 9,796 $ 25,600 Supplemental Non-Cash Investing and Financing Activities: Capital contribution and related accrued incentive compensation....... -- -- $ 62,468 -- Acquisition of plant under capital leases............................... $ 298,250 $ 48,438 -- -- See accompanying notes to combined financial statements F-399
647 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. NOTES TO COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: These financial statements reflect the results of operations and financial position of Pegasus Cable Television of Connecticut, Inc. ("PCT-CT"), a wholly owned subsidiary of Pegasus Cable Television, Inc. ("PCT"), and the Massachusetts Operations of Pegasus Cable Television, Inc. ("PCT-MA" or the "Massachusetts Operations") (referred herein as the "Combined Operations"). PCT is a wholly owned subsidiary of Pegasus Media & Communications, Inc. ("PM&C"). PM&C is a wholly owned subsidiary of Pegasus Communications Corporation ("PCC"). On July 21, 1998, PCT sold the assets of its Combined Operations to Avalon Cable of New England, LLC. for $30.1 million. In January 1997, PCT sold the assets of its only other operating division, a cable television system that provided service to individual and commercial subscribers in New Hampshire (the "New Hampshire Operations") for $7.1 million. In presenting the historical financial position, results of operations and cash flows of the Combined Operations, it has been necessary to eliminate the results and financial position of the New Hampshire Operations. Many items are identifiable as relating to the New Hampshire or Massachusetts divisions as PCT has historically separated results of operations as well as billing and collection activity. However, in certain areas, assumptions and estimates have been required in order to eliminate the New Hampshire Operations for periods prior to its sale. For purposes of eliminating the following balances: Prepaid expenses and other; Deposits and other; Accounts payable; and Accrued expenses, balances have been apportioned between the New Hampshire Operations and the Massachusetts Operations on the basis of subscriber counts. Amounts due to and due from affiliates have been allocated to PCT-MA and are included in these financial statements. Prior to October 1996, BDI Associates, L.P. provided substantial support services such as finance, accounting and human resources to PCT. Since October 1996, these services have been provided by PCC. All non-accounting costs of PCC are allocated on the basis of average time spent servicing the divisions, while the costs of the accounting function are allocated on the basis of revenue. In the opinion of management, the methods used in allocating costs from PCC are reasonable; however, the costs of these services as allocated are not necessarily indicative of the costs that would have been incurred by the Combined Operations on a stand-alone basis. The financial information included herein may not necessarily reflect the results of operations, financial position and cash flows of the Combined Operations in the future or what they would have been had it been a separate, stand-alone entity during the periods presented. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and disclosure of contingencies. Actual results could differ from those estimates. Property and Equipment: Property and equipment are stated at cost. The cost and related accumulated depreciation of assets sold, retired, or otherwise disposed of are removed from the respective accounts, and any F-400
648 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) resulting gains or losses are included in the statement of operations. Initial subscriber installation costs, including material, labor and overhead costs of the hookup, are capitalized as part of the distribution facilities. The costs of disconnection and reconnection are charged to expense. Depreciation is computed for financial reporting purposes using the straight-line method based upon the following lives: Reception and distribution facilities....................... 7 to 11 years Building and improvements................................... 12 to 39 years Equipment, furniture and fixtures........................... 5 to 10 years Vehicles.................................................... 3 to 5 years Intangible Assets: Intangible assets are stated at cost and amortized by the straight-line method. Costs of successful franchise applications are capitalized and amortized over the lives of the related franchise agreements, while unsuccessful franchise applications and abandoned franchises are charged to expense. Financing costs incurred in obtaining long-term financing are amortized over the term of the applicable loan. Intangible assets are reviewed periodically for impairment or whenever events or circumstances provide evidence that suggest that the carrying amounts may not be recoverable. The Company assesses the recoverability of its intangible assets by determining whether the amortization of the respective intangible asset balance can be recovered through projected undiscounted future cash flows. Amortization of intangible assets is computed for financial reporting purposes using the straight-line method based upon the following lives: Organization costs.......................................... 5 years Other intangibles........................................... 5 years Deferred franchise costs.................................... 15 years Revenue: The Combined Operations recognize revenue when video and audio services are provided. Advertising Costs: Advertising costs are charged to operations as incurred and totaled $20,998, $12,768, $14,706 and $8,460 for the years ended December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1998, respectively. Cash and Cash Equivalents: Cash and cash equivalents include highly liquid investments purchased with an initial maturity of three months or less. The Combined Operations have cash balances in excess of the federally insured limits at various banks. Income Taxes: The Combined Operations is not a separate tax paying entity. Accordingly, its results of operations have been included in the tax returns filed by PCC. The accompanying financial statements include tax computations assuming the Combined Operations filed separate returns F-401
649 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) and reflect the application of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Concentration of Credit Risk: Financial instruments which potentially subject the Combined Operations to concentrations of credit risk consist principally of trade receivables. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Combined Operation's customer base. 3. PROPERTY AND EQUIPMENT: Property and equipment consist of the following: DECEMBER 31, DECEMBER 31, JUNE 30, 1996 1997 1998 ------------ ------------ ----------- Land.................................... $ 8,000 $ 8,000 $ 8,000 Reception and distribution facilities... 8,233,341 9,009,179 9,123,402 Building and improvements............... 242,369 250,891 250,891 Equipment, furniture and fixtures....... 307,844 312,143 312,143 Vehicles................................ 259,503 287,504 287,504 Other equipment......................... 139,408 79,004 79,004 ----------- ----------- ----------- 9,190,465 9,946,721 10,060,944 Accumulated depreciation................ (5,025,920) (6,381,124) (7,055,899) ----------- ----------- ----------- Net property and equipment.............. $ 4,164,545 $ 3,565,597 $ 3,005,045 =========== =========== =========== Depreciation expense amounted to $1,059,260, $1,267,831, $1,290,217 and $674,775 for the years ended December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1998, respectively. 4. INTANGIBLES: Intangible assets consist of the following: DECEMBER 31, DECEMBER 31, JUNE 30, 1996 1997 1998 ------------ ------------ ---------- Deferred franchise costs.................. $4,367,594 $ 4,486,016 $4,486,333 Deferred financing costs.................. 1,042,079 1,156,075 1,159,027 Organization and other costs.............. 439,188 389,187 389,187 ---------- ------------ ---------- 5,848,861 6,031,278 6,034,547 ---------- ------------ ---------- Accumulated amortization.................. (3,674,777) (3,934,505) (4,094,643) ---------- ------------ ---------- Net intangible assets..................... $2,174,084 $ 2,096,773 $1,939,904 ========== ============ ========== Amortization expense amounted to $599,195, $401,276, $274,851 and $160,138 for the years ended December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1998, respectively. F-402
650 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 5. LONG-TERM DEBT: Long-term debt consists of the following at: DECEMBER 31, DECEMBER 31, JUNE 30, 1996 1997 1998 ------------ ------------ ----------- Note payable to PM&C, payable by PCT, interest is payable quarterly at an annual rate of 12.5%. Principal is due on July 1, 2005. The note is collateralized by substantially all of the assets of the Combined Operations and imposes certain restrictive covenants..................... $14,993,581 $14,993,581 $14,993,581 Capital lease obligations................... 121,926 58,790 -- ----------- ----------- ----------- 15,115,507 15,052,371 14,993,581 Less current maturities..................... 71,744 34,272 14,993,581 ----------- ----------- ----------- Long-term debt.............................. $15,043,763 $15,018,099 $ -- =========== =========== =========== 6. LEASES: The Combined Operations lease utility pole attachments and occupancy of underground conduits. Rent expense for the years ended December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1998 was $184,386, $185,638, $173,930 and $90,471, respectively. The Combined Operations lease equipment under long-term leases and have the option to purchase the equipment for a nominal cost at the termination of the leases. The related obligations are included in long-term debt. There are no future minimum lease payments on capital leases at June 30, 1998. Property and equipment that was leased include the following amounts that have been capitalized: DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ Billing and phone systems........................ $ 56,675 $ 56,675 Vehicles......................................... 166,801 129,227 -------- --------- 223,476 185,902 Accumulated depreciation......................... (69,638) (101,397) -------- --------- Total............................................ $153,838 $ 84,505 ======== ========= 7. RELATED PARTY TRANSACTIONS: The Combined Operations pay management fees to various related parties. The management fees are for certain administrative and accounting services, billing and programming services, and the reimbursement of expenses incurred therewith. For the years ended December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1998, the fees and expenses were $368,085, $348,912, $242,267 and $97,714, respectively. As described in Note 5, PCT has an outstanding loan from its parent company. This loan has been allocated to PCT-MA and is included in these financial statements. Interest expense on that loan was $916,274, $1,874,198, $1,874,195 and $937,098 for the years ended December 31, 1995, 1996 and 1997 and for the six months ended June 30, 1998 respectively. Other related party transaction balances at December 31, 1996 and 1997 and June 30, 1998 included F-403
651 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) $4,216,682, $5,243,384 and $5,692,013 in accounts receivable, affiliates; $581,632, $6,433 and $331,374 in accounts payable; and $299,030, $299,030 and $299,030 in other liabilities, respectively. These related party balances arose primarily as a result of financing capital expenditures, interest payments, programming and other operating expenses. 8. INCOME TAXES: The deferred income tax assets and liabilities recorded in the balance sheet are as follows: DECEMBER 31, DECEMBER 31, JUNE 30, 1996 1997 1998 ------------ ------------ ----------- ASSETS: Excess of tax basis over book basis from tax gain recognized upon incorporation of PCT And PCT-CT........................................ $ 707,546 $ 707,546 $ 707,546 Loss carryforwards.............................. 1,324,236 1,039,849 957,318 Other........................................... 6,997 11,856 11,856 ----------- ----------- ----------- Total deferred tax assets....................... 2,038,779 1,759,251 1,676,720 ----------- ----------- ----------- LIABILITIES: Excess of book basis over tax basis of property, plant and equipment and intangible asset...... (258,311) (294,934) (335,014) Other........................................... (118,086) (134,859) (135,267) ----------- ----------- ----------- Total deferred tax liabilities.................. (376,397) (429,793) (470,281) ----------- ----------- ----------- Net deferred tax assets......................... 1,662,382 1,329,458 1,206,439 Valuation allowance............................. (1,662,382) (1,329,458) (1,206,439) ----------- ----------- ----------- Net deferred tax liabilities.................... $ -- $ -- $ -- =========== =========== =========== The Combined Operations have recorded a valuation allowance to reflect the estimated amount of deferred tax assets which may not be realized due to the expiration of deferred tax assets related to the incorporation of PCT and PCT-CT and the expiration of net operating loss carryforwards. 9. EMPLOYEE BENEFIT PLANS: The Company employees participate in PCC's stock option plan that awards restricted stock (the "Restricted Stock Plan") to eligible employees of the Company. Restricted Stock Plan The Restricted Stock Plan provides for the granting of restricted stock awards representing a maximum of 270,000 shares (subject to adjustment to reflect stock dividends, stock splits, recapitalizations and similar changes in the capitalization of PCC) of Class A Common Stock of the Company to eligible employees who have completed at least one year of service. Restricted stock received under the Restricted Stock Plan vests over four years. The Plan terminates in September 2006. The expense for this plan amounted to $82,425, $80,154 and $63,533 in 1996 and 1997 and for the six months ended June 30, 1998, respectively. F-404
652 THE COMBINED OPERATIONS OF PEGASUS CABLE TELEVISION OF CONNECTICUT, INC. AND THE MASSACHUSETTS OPERATIONS OF PEGASUS CABLE TELEVISION, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 401(k) Plans Effective January 1, 1996, PM&C adopted the Pegasus Communications Savings Plan (the "US 401(k) Plan") for eligible employees of PM&C and its domestic subsidiaries. Substantially all Company employees who, as of the enrollment date under the 401(k) Plans, have completed at least one year of service with the Company are eligible to participate in one of the 401(k) Plans. Participants may make salary deferral contributions of 2% to 6% of their salary to the 401(k) Plans. The expense for this plan amounted to $19,520, $14,446 and $7,367 in 1996 and 1997 and for the six months ended June 30, 1998, respectively. All employee contributions to the 401(k) Plans are fully vested at all times and all Company contributions, if any, vest 34% after two years of service with the Company (including years before the 401(k) Plans were established), 67% after three years of service and 100% after four years of service. A participant also becomes fully vested in Company contributions to the 401(k) Plans upon attaining age 65 or upon his or her death or disability. 10. COMMITMENTS AND CONTINGENT LIABILITIES: Legal Matters: The operations of PCT-CT and PCT-MA are subject to regulation by the Federal Communications Commission ("FCC") and other franchising authorities. From time to time the Combined Operations are also involved with claims that arise in the normal course of business. In the opinion of management, the ultimate liability with respect to these claims will not have a material adverse effect on the operations, cash flows or financial position of the Combined Operations. F-405
653 REPORT OF INDEPENDENT AUDITORS Partners Falcon Communications, L.P. We have audited the accompanying consolidated balance sheets of Falcon Communications, L.P. (successor to Falcon Holding Group, L.P.) as of December 31, 1997 and 1998, and the related consolidated statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the Partnership'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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Falcon Communications, L.P. (successor to Falcon Holding Group, L.P.) at December 31, 1997 and 1998 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /S/ ERNST & YOUNG LLP Los Angeles, California March 5, 1999 F-406
654 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) CONSOLIDATED BALANCE SHEETS DECEMBER 31, ----------------------- 1997 1998 --------- ---------- (DOLLARS IN THOUSANDS) ASSETS: Cash and cash equivalents................................. $ 13,917 $ 14,284 Receivables: Trade, less allowance of $825,000 and $670,000 for possible losses....................................... 13,174 15,760 Affiliates............................................. 11,254 2,322 Other assets.............................................. 16,352 16,779 Property, plant and equipment, less accumulated depreciation and amortization.......................... 324,559 505,894 Franchise cost, less accumulated amortization of $203,700,000 and $226,526,000.......................... 222,281 397,727 Goodwill, less accumulated amortization of $18,531,000 and $25,646,000............................................ 66,879 135,308 Customer lists and other intangible costs, less accumulated amortization of $25,517,000 and $59,422,000............................................ 59,808 333,017 Deferred loan costs, less accumulated amortization of $7,144,000 and $2,014,000.............................. 12,134 24,331 --------- ---------- $ 740,358 $1,445,422 ========= ========== LIABILITIES AND PARTNERS' DEFICIT LIABILITIES: Notes payable............................................. $ 911,221 $1,611,353 Accounts payable.......................................... 9,169 10,341 Accrued expenses.......................................... 52,789 83,077 Customer deposits and prepayments......................... 1,452 2,257 Deferred income taxes..................................... 7,553 8,664 Minority interest......................................... 354 403 Equity in losses of affiliated partnerships in excess of investment............................................. 3,202 -- --------- ---------- TOTAL LIABILITIES........................................... 985,740 1,716,095 --------- ---------- COMMITMENTS AND CONTINGENCIES REDEEMABLE PARTNERS' EQUITY................................. 171,373 133,023 --------- ---------- PARTNERS' DEFICIT: General partners.......................................... (13,200) (408,369) Limited partners.......................................... (403,555) 4,673 --------- ---------- TOTAL PARTNERS' DEFICIT..................................... (416,755) (403,696) --------- ---------- $ 740,358 $1,445,422 ========= ========== See accompanying notes to consolidated financial statements. F-407
655 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, --------------------------------- 1996 1997 1998 -------- -------- --------- (DOLLARS IN THOUSANDS) REVENUES............................................... $217,320 $255,886 $ 307,558 -------- -------- --------- EXPENSES: Service costs........................................ 60,302 75,643 97,832 General and administrative expenses.................. 36,878 46,437 63,401 Depreciation and amortization........................ 100,415 118,856 152,585 -------- -------- --------- Total expenses............................... 197,595 240,936 313,818 -------- -------- --------- Operating income (loss)...................... 19,725 14,950 (6,260) -------- -------- --------- OTHER INCOME (EXPENSE): Interest expense, net................................ (71,602) (79,137) (102,591) Equity in net income (loss) of investee partnerships...................................... (44) 443 (176) Other income (expense), net.......................... 814 885 (2,917) Income tax benefit (expense)......................... 1,122 2,021 (1,897) -------- -------- --------- Net loss before extraordinary item..................... (49,985) (60,838) (113,841) Extraordinary item, retirement of debt................. -- -- (30,642) -------- -------- --------- NET LOSS............................................... $(49,985) $(60,838) $(144,483) ======== ======== ========= See accompanying notes to consolidated financial statements. F-408
656 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) CONSOLIDATED STATEMENTS OF PARTNERS' DEFICIT UNREALIZED GAIN ON GENERAL LIMITED AVAILABLE-FOR-SALE PARTNERS PARTNERS SECURITIES TOTAL --------- --------- ------------------ --------- (DOLLARS IN THOUSANDS) PARTNERS' DEFICIT, January 1, 1996.................. $ (12,091) $(399,423) $(167) $(411,681) Sale of marketable securities.................. -- -- 167 167 Capital contribution.......... -- 5,000 -- 5,000 Net loss for year............. (500) (49,485) -- (49,985) --------- --------- ----- --------- PARTNERS' DEFICIT, December 31, 1996................ (12,591) (443,908) -- (456,499) Reclassification from redeemable partners' equity...................... -- 100,529 -- 100,529 Capital contribution.......... -- 53 -- 53 Net loss for year............. (609) (60,229) -- (60,838) --------- --------- ----- --------- PARTNERS' DEFICIT, December 31, 1997................ (13,200) (403,555) -- (416,755) Reclassification of partners' deficit..................... (408,603) 408,603 -- -- Redemption of partners' interests................... (155,908) -- -- (155,908) Net assets retained by the managing general partner.... (5,392) -- -- (5,392) Reclassification from redeemable partners' equity...................... 38,350 -- -- 38,350 Acquisition of Falcon Video and TCI net assets.......... 280,409 -- -- 280,409 Capital contributions......... 83 -- -- 83 Net loss for year............. (144,108) (375) -- (144,483) --------- --------- ----- --------- PARTNERS' DEFICIT, December 31, 1998................ $(408,369) $ 4,673 $ -- $(403,696) ========= ========= ===== ========= See accompanying notes to consolidated financial statements. F-409
657 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, ------------------------------------ 1996 1997 1998 --------- -------- ----------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net loss........................................... $ (49,985) $(60,838) $ (144,483) Adjustments to reconcile net loss to net cash provided by operating activities: Payment-in-kind interest expense................ 26,580 20,444 -- Amortization of debt discount................... -- -- 19,342 Depreciation and amortization................... 100,415 118,856 152,585 Amortization of deferred loan costs............. 2,473 2,192 2,526 Write-off deferred loan costs................... -- -- 10,961 Gain on sale of securities...................... (2,264) -- -- Gain on casualty losses......................... -- (3,476) (314) Equity in net (income) loss of investee partnerships.................................. 44 (443) 176 Provision for losses on receivables, net of recoveries.................................... 2,417 5,714 4,775 Deferred income taxes........................... (2,684) (2,748) 1,111 Other........................................... 764 1,319 278 Increase (decrease) from changes in: Receivables..................................... (2,420) (9,703) (1,524) Other assets.................................... (274) (4,021) 906 Accounts payable................................ 4,750 (1,357) 337 Accrued expenses................................ 10,246 13,773 24,302 Customer deposits and prepayments............... 569 (175) 633 --------- -------- ----------- Net cash provided by operating activities....... 90,631 79,537 71,611 --------- -------- ----------- Cash flows from investing activities: Capital expenditures............................... (57,668) (76,323) (96,367) Proceeds from sale of available-for-sale securities...................................... 9,502 -- -- Increase in intangible assets...................... (4,847) (1,770) (7,124) Acquisitions of cable television systems........... (247,397) -- (83,391) Cash acquired in connection with the acquisition of TCI and Falcon Video Communications, L.P. ...... -- -- 317 Proceeds from sale of cable system................. 15,000 -- -- Assets retained by the Managing General Partner.... -- -- (3,656) Other.............................................. 1,163 1,806 1,893 --------- -------- ----------- Net cash used in investing activities........... (284,247) (76,287) (188,328) --------- -------- ----------- Cash flows from financing activities: Borrowings from notes payable...................... 700,533 37,500 2,388,607 Repayment of debt.................................. (509,511) (40,722) (2,244,752) Deferred loan costs................................ (3,823) (29) (25,684) Capital contributions.............................. 5,000 93 -- Redemption of partners' interests.................. -- -- (1,170) Minority interest capital contributions............ -- 192 83 --------- -------- ----------- Net cash provided by (used in) financing activities.................................... 192,199 (2,966) 117,084 --------- -------- ----------- Increase (decrease) in cash and cash equivalents..... (1,417) 284 367 Cash and cash equivalents, at beginning of year...... 15,050 13,633 13,917 --------- -------- ----------- Cash and cash equivalents, at end of year............ $ 13,633 $ 13,917 $ 14,284 ========= ======== =========== See accompanying notes to consolidated financial statements. F-410
658 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES FORM OF PRESENTATION Falcon Communications, L.P., a California limited partnership (the "Partnership") and successor to Falcon Holding Group, L.P. ("FHGLP"), owns and operates cable television systems serving small to medium-sized communities and the suburbs of certain cities in 25 states. On September 30, 1998, pursuant to a Contribution and Purchase Agreement dated as of December 30, 1997, as amended (the "Contribution Agreement"), FHGLP acquired the assets and liabilities of Falcon Video Communications, L.P. ("Falcon Video" or the "Falcon Video Systems"), in exchange for ownership interests in FHGLP. Simultaneously with the closing of that transaction, in accordance with the Contribution Agreement, FHGLP contributed substantially all of the existing cable television system operations owned by FHGLP and its subsidiaries (including the Falcon Video Systems) to the Partnership and TCI Falcon Holdings, LLC ("TCI") contributed certain cable television systems owned and operated by affiliates of TCI (the "TCI Systems") to the Partnership (the "TCI Transaction"). As a result, TCI holds approximately 46% of the equity interests of the Partnership and FHGLP holds the remaining 54% and serves as the managing general partner of the Partnership. The TCI Transaction is being accounted for as a recapitalization of FHGLP into the Partnership and the concurrent acquisition by the Partnership of the TCI Systems. The consolidated financial statements include the accounts of the Partnership and its subsidiary holding companies and cable television operating partnerships and corporations, which include Falcon Cable Communications LLC ("Falcon LLC"), a Delaware limited liability company that serves as the general manager of the cable television subsidiaries. The assets contributed by FHGLP to the Partnership excluded certain immaterial investments, principally FHGLP's ownership of 100% of the outstanding stock of Enstar Communications Corporation ("ECC"), which is the general partner and manager of fifteen limited partnerships operating under the name "Enstar". ECC's ownership interest in the Enstar partnerships ranges from 0.5% to 5%. Upon the consummation of the TCI Transaction, the management of the Enstar partnerships was assigned to the Partnership by FHGLP. The consolidated statements of operations and statements of cash flows for the year ended December 31, 1998 include FHGLP's interest in ECC for the nine months ended September 30, 1998. The effects of ECC's operations on all previous periods presented are immaterial. Prior to closing the TCI Transaction, FHGLP owned and operated cable television systems in 23 states. FHGLP also controlled, held varying equity interests in and managed certain other cable television partnerships (the "Affiliated Partnerships") for a fee. FHGLP is a limited partnership, the sole general partner of which is Falcon Holding Group, Inc., a California corporation ("FHGI"). FHGI also holds a 1% interest in certain of the subsidiaries of the Partnership. At the beginning of 1998, the Affiliated Partnerships were comprised of Falcon Classic Cable Income Properties, L.P. ("Falcon Classic") whose cable television systems are referred to as the "Falcon Classic Systems," Falcon Video and the Enstar partnerships. As discussed in Note 3, the Falcon Classic Systems were acquired by FHGLP during 1998. The Falcon Video Systems were acquired on September 30, 1998 in connection with the TCI Transaction. As a result of these transactions, the Affiliated Partnerships consist solely of the Enstar partnerships from October 1, 1998 forward. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements do not give effect to any assets that the partners may have F-411
659 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) outside their interests in the Partnership, nor to any obligations, including income taxes, of the partners. On July 12, 1996, the Partnership acquired the assets of Falcon Cable Systems Company ("FCSC"), an Affiliated Partnership. The results of operations of these cable systems have been included in the consolidated financial statements from July 12, 1996. Management fees and reimbursed expenses received by the Partnership from FCSC for the period of January 1, 1996 through July 11, 1996 are also included in the consolidated financial statements and have not been eliminated in consolidation. See Note 3. CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Partnership considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents. Cash equivalents at December 31, 1996, 1997 and 1998 included $4.1 million, $4.5 million and $345,000 of investments in commercial paper and short-term investment funds of major financial institutions. INVESTMENTS IN AFFILIATED PARTNERSHIPS Prior to closing the TCI Transaction, the Partnership was the general partner of certain entities, which in turn acted as general partner of the Affiliated Partnerships. The Partnership's effective ownership interests in the Affiliated Partnerships were less than one percent. The Affiliated Partnerships were accounted for using the equity method of accounting. Equity in net losses were recorded to the extent of the investments in and advances to the partnerships plus obligations for which the Partnership, as general partner, was responsible. The liabilities of the Affiliated Partnerships, other than amounts due the Partnership, principally consisted of debt for borrowed money and related accrued interest. The Partnership's ownership interests in the Affiliated Partnerships were eliminated in 1998 with the acquisition of Falcon Video and Falcon Classic and the retention by FHGLP of its interests in the Enstar partnerships. PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION AND AMORTIZATION Property, plant and equipment are stated at cost. Direct costs associated with installations in homes not previously served by cable are capitalized as part of the distribution system, and reconnects are expensed as incurred. For financial reporting, depreciation and amortization is computed using the straight-line method over the following estimated useful lives. CABLE TELEVISION SYSTEMS: Headend buildings and equipment..................... 10-16 years Trunk and distribution.............................. 5-15 years Microwave equipment................................. 10-15 years OTHER: Furniture and equipment............................. 3-7 years Vehicles............................................ 3-10 years Leasehold improvements.............................. Life of lease F-412
660 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FRANCHISE COST AND GOODWILL The excess of cost over the fair values of tangible assets and customer lists of cable television systems acquired represents the cost of franchises and goodwill. In addition, franchise cost includes capitalized costs incurred in obtaining new franchises and in the renewal of existing franchises. These costs are amortized using the straight-line method over the lives of the franchises, ranging up to 28 years (composite 15 year average). Goodwill is amortized over 20 years. 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. CUSTOMER LISTS AND OTHER INTANGIBLE COSTS Customer lists and other intangible costs include customer lists, covenants not to compete and organization costs which are amortized using the straight-line method over two to five years. In 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on Costs of Start-Up Activities". The new standard, which becomes effective for the Partnership on January 1, 1999, requires costs of start-up activities, including certain organization costs, to be expensed as incurred. Previously capitalized start-up costs are to be written off as a cumulative effect of a change in accounting principle. The Partnership believes that adoption of this standard will not have a material impact on the Partnership's financial position or results of operations. DEFERRED LOAN COSTS Costs related to borrowings are capitalized and amortized to interest expense over the life of the related loan. RECOVERABILITY OF ASSETS The Partnership assesses on an ongoing basis the recoverability of intangible assets (including goodwill) and capitalized plant assets based on estimates of future undiscounted cash flows compared to net book value. If the future undiscounted cash flow estimates were less than net book value, net book value would then be reduced to estimated fair value, which generally approximates discounted cash flows. The Partnership also evaluates the amortization periods of assets, including goodwill and other intangible assets, to determine whether events or circumstances warrant revised estimates of useful lives. REVENUE RECOGNITION Revenues from customer fees, equipment rental and advertising are recognized in the period that services are delivered. Installation revenue is recognized in the period the installation services are provided to the extent of direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that customers are expected to remain connected to the cable television system. Management fees are recognized on the accrual basis based on a percentage of gross revenues of the respective cable television systems managed. Effective October 1, 1998, 20% of the management fees from the Enstar partnerships is retained by FHGLP. F-413
661 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DERIVATIVE FINANCIAL INSTRUMENTS As part of the Partnership's management of financial market risk and as required by certain covenants in its New Credit Agreement, the Partnership enters into various transactions that involve contracts and financial instruments with off-balance-sheet risk, principally interest rate swap and interest rate cap agreements. The Partnership enters into these agreements in order to manage the interest-rate sensitivity associated with its variable-rate indebtedness. The differential to be paid or received in connection with interest rate swap and interest rate cap agreements is recognized as interest rates change and is charged or credited to interest expense over the life of the agreements. Gains or losses for early termination of those contracts are recognized as an adjustment to interest expense over the remaining portion of the original life of the terminated contract. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 1999. The Partnership expects to adopt the new statement effective January 1, 2000. SFAS 133 will require the Partnership to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the changes in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Partnership believes that adoption of SFAS 133 will not have a material impact on the Partnership's financial position or results of operations. INCOME TAXES The Partnership and its subsidiaries, except for Falcon First, are limited partnerships or limited liability companies and pay no income taxes as entities except for nominal taxes assessed by certain state jurisdictions. All of the income, gains, losses, deductions and credits of the Partnership are passed through to its partners. The basis in the Partnership's assets and liabilities differs for financial and tax reporting purposes. At December 31, 1998, the book basis of the Partnership's net assets exceeded its tax basis by $621.8 million. REPORTING COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which established standards for the reporting and display of comprehensive income and its components in a full set of comparative general-purpose financial statements. SFAS 130 became effective for the Partnership on January 1, 1998. The Partnership does not currently have items of comprehensive income. ADVERTISING COSTS All advertising costs are expensed as incurred. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts F-414
662 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the 1998 presentation. NOTE 2 -- PARTNERSHIP MATTERS The Amended and Restated Agreement of Limited Partnership of FCLP ("FCLP Partnership Agreement") provides that profits and losses will be allocated, and distributions will be made, in proportion to the partners' percentage interests. FHGLP is the managing general partner and a limited partner and owns a 54% interest in FCLP, and TCI is a general partner and owns a 46% interest. The partners' percentage interests are based on the relative net fair market values of the assets contributed to FCLP under the Contribution Agreement, as estimated at the closing. The percentage interests were subsequently adjusted to reflect the December 1998 redemption of a small part of FHGLP's partnership interest. To the extent the relative net fair market values of the assets contributed to FCLP under the Contribution Agreement, as finally determined, are different from the estimates used to calculate the partners' percentage interests, one or the other of the partners will be required to make an additional cash capital contribution to FCLP so as to cause the partners' capital contributions to be in proportion to their percentage interests. Any such additional cash contribution is required to be made only to the extent of distributions by FCLP to the contributing partner. Any such additional cash contribution must be accompanied by interest at 9% per year from the date of closing or, in certain cases, from the date on which FCLP incurred any liability that affected the net fair market value of the parties' capital contributions. At any time after September 30, 2005, either TCI or FHGLP can offer to sell to the other partner the offering partner's entire partnership interest in FCLP for a negotiated price. The partner receiving such an offer may accept or reject the offer. If the partner receiving such an offer rejects it, the offering partner may elect to cause FCLP to be liquidated and dissolved in accordance with the FCLP Partnership Agreement. The Partnership expires on July 1, 2013. The Partnership will be dissolved prior to its expiration date under certain circumstances, including the withdrawal of FHGLP as the managing general partner (unless the partners vote to continue the Partnership), the sale of substantially all of the Partnership's assets, and at the election by TCI in the event of changes in FCLP's key management. The FCLP Partnership Agreement provides for an Advisory Committee consisting of six individual representatives, three of whom are appointed by FHGLP, two of whom are appointed by TCI and one of whom is appointed by joint designation of FHGLP and TCI. The FCLP Partnership Agreement prohibits FCLP from taking certain actions without the affirmative vote of a majority of the members of the Advisory Committee, including, but not limited to, the following: (1) the acquisition or disposition of assets under certain circumstances; and (2) conducting or entering into any line of business other than the ownership and operation of cable television systems and related and ancillary businesses. The FCLP Partnership Agreement further prohibits the Partnership from taking certain actions without the affirmative approval of TCI, including, but not limited to, the following: (1) any merger, consolidation, recapitalization or other reorganization, with certain permitted exceptions; F-415
663 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) the acquisition or disposition of assets under certain circumstances; (3) any sale or disposition of assets that would result in the allocation of taxable income or gain to TCI; (4) incurring indebtedness if, after giving effect to such indebtedness, FCLP's Operating Cash Flow Ratio, as defined, would exceed 8.0:1 through April 15, 2000 and 7.5:1 thereafter; (5) the issuance or redemption of any partnership interest or convertible interest, with certain permitted exceptions; (6) any transaction with FHGLP or any affiliate of FHGLP, with certain permitted exceptions; (7) the adoption or amendment of any management incentive plan; (8) the incurring of Net Overhead Expenses, as defined, that exceed 4.5% of the gross revenues of FCLP and its subsidiaries in any fiscal year; or (9) the liquidation or dissolution of FCLP, except in accordance with the provisions of the FCLP Partnership Agreement. TCI may elect to purchase all of FHGLP's interests in the Partnership in certain circumstances if a court finds that FHGLP has engaged in conduct while acting as Managing General Partner that has resulted in material harm to the Partnership or TCI. Prior to the closing of the TCI Transaction, the FHGLP Partnership Agreement gave certain partners of FHGLP certain rights and priorities with respect to other partners. Among these rights were stated obligations of the Partnership to redeem certain partners' partnership interests at fair value or, in some cases, at stated value. These rights and priorities were eliminated upon the closing of the TCI Transaction. At the closing of the TCI Transaction, a portion of the partnership interests held by certain FHGLP limited partners, having an agreed value of $154.7 million, were redeemed for cash. Under the amended FHGLP partnership agreement, the non-management limited partners of FHGLP may elect at certain times either to require the incorporation of FHGLP or to require that FHGLP elect to incorporate FCLP. Neither of these elections may be made prior to March 30, 2006. If the non-management limited partners of FHGLP make either of these elections, then, at any time more than six months after the election and prior to the date on which the incorporation is completed, the non-management limited partners of FHGLP may elect to require that FCLP (or, if FHGLP has purchased all of TCI's interest in FCLP, FHGLP) purchase all of the non-management partners' partnership interests in FHGLP. Under certain circumstances, a non-management limited partner of FHGLP may elect to exclude its partnership interest in FHGLP from the purchase and sale and, upon such election, all put and call rights with respect to such partner's partnership interest in FHGLP will terminate. The put and call rights with respect to the partnership interests of the non-management partners will terminate automatically if either FHGLP or FCLP is incorporated, if the corporation that succeeds to the assets of FHGLP or FCLP concurrently effects an initial public offering, and if the aggregate price to the public (before underwriting discounts or commissions, registration fees, and other expenses) of all stock sold in the public offering (including stock sold by any selling shareholders, but excluding stock of a different class from that acquired by the non-management partners in the incorporation) is at least $150 million. At any time on or after April 1, 2006, FCLP (or, if FHGLP has purchased all of TCI's interest in FCLP, FHGLP) may require that each of the non-management limited partners of FHGLP sell its entire interest in FHGLP to FCLP or FHGLP, as applicable. In the case of either a put or a call of the non-management limited partners' interests in FHGLP, the purchase price will equal the amount that would be distributed to each partner in dissolution and liquidation of FHGLP, assuming the sale of FCLP's assets at fair market value, as determined by three appraisers. F-416
664 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The estimated redemption values at December 31, 1997 and December 31, 1998 were $171.4 million and $133 million, respectively, and are reflected in the consolidated financial statements as redeemable partners' equity. Such amounts were determined based on management's estimate of the redemption value of such interests under current market conditions. Management of the Partnership will continue to adjust the recorded redemption values based on its estimate of the relative fair value of the interests subject to redemption. The actual redemption value of any partnership interests will generally be determined through the third-party appraisal mechanisms described in the partnership agreements, and the appraisers will not be bound by management's estimates. Accordingly, such appraised valuations may be greater than or less than management's estimates and any such variations could be significant. While the Partnership has assumed the obligations of FHGLP under the 1993 Incentive Performance Plan (the "Incentive Performance Plan"), FHGLP has agreed to contribute cash to the Partnership in an amount equal to any payments made by the Partnership under the Incentive Performance Plan. NOTE 3 -- ACQUISITIONS AND SALES The Partnership acquired the cable television systems of FCSC on July 12, 1996 through a newly-formed subsidiary operating partnership for a purchase price of $253 million including transaction costs. The acquisition of FCSC was accounted for by the purchase method of accounting, whereby the purchase price of the FCSC assets was allocated based on an appraisal. The excess of purchase price over the fair value of net assets acquired, or $18.2 million, has been recorded as goodwill and is being amortized using the straight-line method over 20 years. In March and July 1998, FHGLP acquired the Falcon Classic Systems for an aggregate purchase price of $83.4 million. Falcon Classic had revenue of approximately $20.3 million for the year ended December 31, 1997. As discussed in Note 1, on September 30, 1998 the Partnership acquired the TCI Systems and the Falcon Video Systems in accordance with the Contribution Agreement. The acquisitions of the TCI Systems, the Falcon Video Systems and the Falcon Classic Systems were accounted for by the purchase method of accounting, whereby the purchase prices were allocated to the assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition, as follows: FALCON VIDEO FALCON CLASSIC TCI SYSTEMS SYSTEMS SYSTEMS ----------- -------------------- -------------- (DOLLARS IN THOUSANDS) Purchase Price: General partnership interests issued............................ $234,457 $ 43,073 $ -- Debt assumed........................ 275,000 112,196 -- Debt incurred....................... -- -- 83,391 Other liabilities assumed........... 955 3,315 2,804 Transaction costs................... 2,879 -- -- -------- -------- ------- 513,291 158,584 86,195 -------- -------- ------- F-417
665 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FALCON VIDEO FALCON CLASSIC TCI SYSTEMS SYSTEMS SYSTEMS ----------- -------------------- -------------- (DOLLARS IN THOUSANDS) Fair Market Value of Net Assets Acquired: Property, plant and equipment....... 77,992 41,889 33,539 Franchise costs..................... 170,799 36,374 7,847 Customer lists and other intangible assets............................ 217,443 53,602 34,992 Other assets........................ 4,165 2,381 3,164 -------- -------- ------- 470,399 134,246 79,542 -------- -------- ------- Excess of purchase price over fair value of assets acquired and liabilities assumed............ $ 42,892 $ 24,338 $ 6,653 ======== ======== ======= The excess of purchase price over the fair value of net assets acquired has been recorded as goodwill and is being amortized using the straight-line method over 20 years. The allocation of the purchase price may be subject to possible adjustment pursuant to the Contribution Agreement. The general partnership interests issued in the TCI Transaction were valued in proportion to the estimated fair value of the TCI Systems and the Falcon Video Systems as compared to the estimated fair value of the Partnership's assets, which was agreed upon in the Contribution Agreement by all holders of Partnership interests. Sources and uses of funds for each of the transactions were as follows: FALCON VIDEO FALCON CLASSIC TCI SYSTEMS SYSTEMS SYSTEMS ----------- ------------ -------------- (DOLLARS IN THOUSANDS) Sources of Funds: Cash on hand............................... $ 11,429 $ 59,038 $ 6,591 Advance under bank credit facilities....... 429,739 56,467 76,800 -------- -------- ------- Total sources of funds........... $441,168 $115,505 $83,391 ======== ======== ======= Uses of Funds: Repay debt assumed from TCI and existing debt of Falcon Video, including accrued interest................................. $429,739 $115,505 $ -- Purchase price of assets................... -- -- 83,391 Payment of assumed obligations at closing.................................. 6,495 -- -- Transaction fees and expenses.............. 2,879 -- -- Available funds............................ 2,055 -- -- -------- -------- ------- Total uses of funds.............. $441,168 $115,505 $83,391 ======== ======== ======= The following unaudited condensed consolidated statements of operations present the consolidated results of operations of the Partnership as if the acquisitions referred to above had occurred at the beginning of the periods presented and are not necessarily indicative of what F-418
666 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) would have occurred had the acquisitions been made as of such dates or of results which may occur in the future. YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1997 1998 --------- --------- --------- (DOLLARS IN THOUSANDS) Revenues..................................... $ 399,449 $ 424,994 $ 426,827 Expenses..................................... (429,891) (438,623) (444,886) --------- --------- --------- Operating loss............................. (30,442) (13,629) (18,059) Interest and other expenses.................. (126,904) (115,507) (130,632) --------- --------- --------- Loss before extraordinary item............... $(157,346) $(129,136) $(148,691) ========= ========= ========= NOTE 4 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND CASH EQUIVALENTS The carrying amount approximates fair value due to the short maturity of those instruments. NOTES PAYABLE The fair value of the Partnership's 11% Senior Subordinated Notes, 8.375% Senior Debentures and 9.285% Senior Discount Debentures is based on quoted market prices for those issues of debt. The fair value of the Partnership's other subordinated notes is based on quoted market prices for similar issues of debt with similar maturities. The carrying amount of the Partnership's remaining debt outstanding approximates fair value due to its variable rate nature. INTEREST RATE HEDGING AGREEMENTS The fair value of interest rate hedging agreements is estimated by obtaining quotes from brokers as to the amount either party would be required to pay or receive in order to terminate the agreements. The following table depicts the fair value of each class of financial instruments for which it is practicable to estimate that value as of December 31: 1997 1998 ---------------------- ------------------------ CARRYING CARRYING VALUE FAIR VALUE VALUE FAIR VALUE -------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Cash and cash equivalents................. $ 13,917 $ 13,917 $ 14,284 $ 14,284 Notes payable (Note 6): 11% Senior Subordinated Notes........... 282,193 299,125 -- -- 8.375% Senior Debentures................ -- -- 375,000 382,500 9.285% Senior Discount Debentures....... -- -- 294,982 289,275 Bank credit facilities.................. 606,000 606,000 926,000 926,000 Other Subordinated Notes................ 15,000 16,202 15,000 16,426 Capitalized lease obligations........... 10 10 1 1 Other................................... 8,018 8,018 370 370 F-419
667 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTIONAL NOTIONAL AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- ---------- ---------- Interest Rate Hedging Agreements (Note 6): Interest rate swaps....................... $585,000 $ (371) $1,534,713 $(22,013) Interest rate caps........................ 25,000 (148) -- -- The carrying value of interest rate swaps and caps was an asset of $402,000 at December 31, 1997 and a net obligation of $20.3 million at December 31, 1998. See Note 6(g). The amount of debt on which current interest expense has been affected is $520 million and $960 million for swaps at December 31, 1997 and 1998 and $25 million for caps at December 31, 1997. The balance of the contract totals presented above reflects contracts entered into as of December 31 which do not become effective until existing contracts expire. NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of: DECEMBER 31, ---------------------- 1997 1998 --------- --------- (DOLLARS IN THOUSANDS) Cable television systems........................... $ 555,253 $ 765,641 Furniture and equipment............................ 19,067 25,576 Vehicles........................................... 12,067 18,381 Land, buildings and improvements................... 10,723 16,505 --------- --------- 597,110 826,103 Less accumulated depreciation and amortization..... (272,551) (320,209) --------- --------- $ 324,559 $ 505,894 ========= ========= NOTE 6 -- NOTES PAYABLE Notes payable consist of: DECEMBER 31, ---------------------- 1997 1998 -------- ---------- (DOLLARS IN THOUSANDS) FCLP (formerly FHGLP) Only: 11% Senior Subordinated Notes(a)................. $282,193 $ -- 8.375% Senior Debentures(b)...................... -- 375,000 9.285% Senior Discount Debentures, less unamortized discount(b)....................... -- 294,982 Capitalized lease obligations.................... 10 1 Owned Subsidiaries: Amended and Restated Credit Agreement(c)......... 606,000 -- New Credit Facility(d)........................... -- 926,000 Other subordinated notes(e)...................... 15,000 15,000 Other(f)......................................... 8,018 370 -------- ---------- $911,221 $1,611,353 ======== ========== F-420
668 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (a) 11% Senior Subordinated Notes On March 29, 1993, FHGLP issued $175 million aggregate principal amount of 11% Senior Subordinated Notes due 2003 (the "Notes"). Interest payment dates were semi-annual on each March 15 and September 15 commencing September 15, 1993. Through September 15, 2000 FHGLP, at its option, could pay all or any portion of accrued interest on the Notes by delivering to the holders thereof, in lieu of cash, additional Notes having an aggregate principal amount equal to the amount of accrued interest not paid in cash. Through December 31, 1997, the Partnership elected to issue $107.2 million additional notes as payment-in-kind for interest. The Partnership elected to pay the interest payment due March 15, 1998 in cash and, under the terms of the Notes, was required to continue to make cash payments. On May 19, 1998, FHGLP repurchased approximately $247.8 million aggregate principal amount of the Notes for an aggregate purchase price of $270.3 million pursuant to a fixed spread tender offer for all outstanding Notes. The Notes tendered represented approximately 88% of the Notes previously outstanding. The approximate $34.4 million of Notes not repurchased in the tender offer were redeemed on September 15, 1998 in accordance with their terms. (b) 8.375% Senior Debentures and 9.285% Senior Discount Debentures On April 3, 1998, FHGLP and its wholly-owned subsidiary, Falcon Funding Corporation ("FFC" and, collectively with FHGLP, the "Issuers"), sold $375,000,000 aggregate principal amount of 8.375% Senior Debentures due 2010 (the "Senior Debentures") and $435,250,000 aggregate principal amount at maturity of 9.285% Senior Discount Debentures due 2010 (the "Senior Discount Debentures" and, collectively with the Senior Debentures, the "Debentures") in a private placement. The Debentures were exchanged for debentures with the same form and terms, but registered under the Securities Act of 1933, as amended, in August 1998. In connection with consummation of the TCI Transaction, the Partnership was substituted for FHGLP as an obligor under the Debentures and thereupon FHGLP was released and discharged from any further obligation with respect to the Debentures and the related Indenture. FFC remains as an obligor under the Debentures and is now a wholly owned subsidiary of the Partnership. FFC was incorporated solely for the purpose of serving as a co-issuer of the Debentures and does not have any material operations or assets and will not have any revenues. The Senior Discount Debentures were issued at a price of 63.329% per $1,000 aggregate principal amount at maturity, for total gross proceeds of approximately $275.6 million, and will accrete to stated value at an annual rate of 9.285% until April 15, 2003. The unamortized discount amounted to $140.3 million at December 31, 1998. After giving effect to offering discounts, commissions and estimated expenses of the offering, the sale of the Debentures (representing aggregate indebtedness of approximately $650.6 million as of the date of issuance) generated net proceeds of approximately $631 million. The Partnership used substantially all the net proceeds from the sale of the Debentures to repay outstanding bank indebtedness. (c) Amended and Restated Credit Agreement The Partnership had a $775 million senior secured Amended and Restated Credit Agreement that was scheduled to mature on July 11, 2005. The Amended and Restated Credit Agreement required the Partnership to make annual reductions of $1 million on the term loan portion F-421
669 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) commencing December 31, 1997. Maximum available borrowings under the Amended and Restated Credit Agreement were $774 million at December 31, 1997. The Amended and Restated Credit Agreement required interest on the amount outstanding under the reducing revolver portion to be tied to the ratio of consolidated total debt (as defined) to consolidated annualized cash flow (as defined). Interest rates were based on LIBOR or prime rates at the option of the Partnership. The LIBOR margin under the reducing revolver ranged from 0.75% to 1.625%, while interest on the term loan was at the LIBOR rate plus 2.375%. At December 31, 1997, the weighted average interest rate on borrowings outstanding under the Amended and Restated Credit Agreement (including the effects of the interest rate hedging agreements) was 7.69%. The Partnership was also required to pay a commitment fee per annum on the unused portion. (d) New Credit Facility On June 30, 1998, the Partnership entered into a new $1.5 billion senior credit facility (the "New Credit Facility") which replaced the Amended and Restated Credit Agreement and provided funds for the closing of the TCI Transaction. See Note 1. The borrowers under the New Credit Facility were the operating subsidiaries prior to consummation of the TCI Transaction and, following the TCI Transaction, the borrower is Falcon LLC. The restricted companies, as defined under the New Credit Facility, are Falcon LLC and each of its subsidiaries (excluding certain subsidiaries designated as excluded companies from time to time) and each restricted company (other than Falcon LLC) is also a guarantor of the New Credit Facility. The New Credit Facility consists of three committed facilities (one revolver and two term loans) and one uncommitted $350 million supplemental credit facility (the terms of which will be negotiated at the time the Partnership makes a request to draw on such facility). Facility A is a $650 million revolving credit facility maturing December 29, 2006; Facility B is a $200 million term loan maturing June 29, 2007; and Facility C is a $300 million term loan maturing December 31, 2007. All of Facility C and approximately $126 million of Facility B were funded on June 30, 1998, and the debt outstanding under the Amended and Restated Credit Agreement of approximately $329 million was repaid. As a result, from June 30, 1998 until September 29, 1998, FHGLP had an excess cash balance of approximately $90 million. Immediately prior to closing the TCI Transaction, approximately $39 million was borrowed under Facility A to discharge certain indebtedness of Falcon Video. In connection with consummation of the TCI Transaction, Falcon LLC assumed the approximately $433 million of indebtedness outstanding under the New Credit Facility. In addition to utilizing cash on hand of approximately $63 million, Falcon LLC borrowed the approximately $74 million remaining under Facility B and approximately $366 million under Facility A to discharge approximately $73 million of Falcon Video indebtedness and to retire approximately $430 million of TCI indebtedness assumed as part of the contribution of the TCI Systems. As a result of these borrowings, the amount outstanding under the New Credit Facility at December 31, 1998 was $926 million. Subject to covenant limitations, the Partnership had available to it additional borrowing capacity thereunder of $224 million at December 31, 1998. However, limitations imposed by the Partnership's partnership agreement as amended would limit available borrowings at December 31, 1998 to $23.1 million. (e) Other subordinated notes Other subordinated notes consist of 11.56% Subordinated Notes due March 2001. The subordinated note agreement contains certain covenants which are substantially the same as the F-422
670 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) covenants under the New Credit Facility, which is described in (d) above. At December 31, 1998, management believes that the Partnership was in compliance with such covenants. (f) Other Other notes payable as of December 31, 1997 consisted of $7.5 million owed by Enstar Finance Company, LLC ("EFC"). FHGLP's interest in EFC was not contributed to FCLP on September 30, 1998. Consequently, EFC's obligations are excluded from those of the Partnership as of December 31, 1998. (g) Interest Rate Hedging Agreements The Partnership utilizes interest rate hedging agreements to establish long-term fixed interest rates on a portion of its variable-rate debt. The New Credit Facility requires that interest be tied to the ratio of consolidated total debt to consolidated annualized cash flow (in each case, as defined therein), and further requires that the Partnership maintain hedging arrangements with respect to at least 50% of the outstanding borrowings thereunder plus any additional borrowings of the Partnership, including the Debentures, for a two year period. As of December 31, 1998, borrowings under the New Credit Facility bore interest at an average rate of 7.55% (including the effect of interest rate hedging agreements). The Partnership has entered into fixed interest rate hedging agreements with an aggregate notional amount at December 31, 1998 of $1.485 billion, including contracts of $160 million assumed from Falcon Video in connection with the TCI Transaction. Agreements in effect at December 31, 1998 totaled $910 million, with the remaining $575 million to become effective as certain of the existing contracts mature during 1999 through October of 2004. These agreements expire at various times through October, 2006. In addition to these agreements, the Partnership has one interest rate swap contract with a notional amount of $25 million under which it pays variable LIBOR rates and receives fixed rate payments. The hedging agreements resulted in additional interest expense of $1 million, $350,000 and $1.2 million for the years ended December 31, 1996, 1997 and 1998, respectively. The Partnership does not believe that it has any significant risk of exposure to non-performance by any of its counterparties. (h) Debt Maturities The Partnership's notes payable outstanding at December 31, 1998 mature as follows: OTHER 8.375% SENIOR 9.285% SENIOR NOTES TO SUBORDINATED YEAR DEBENTURES DEBENTURES BANKS NOTES OTHER TOTAL ---- ------------- ------------- -------- ------------ ----- ---------- (DOLLARS IN THOUSANDS) 1999............... $ -- $ -- $ 5,000 $ -- $371 $ 5,371 2000............... -- -- 5,000 -- -- 5,000 2001............... -- -- 5,000 15,000 -- 20,000 2002............... -- -- 5,000 -- -- 5,000 2003............... -- -- 5,000 -- -- 5,000 Thereafter........... 375,000 435,250 901,000 -- -- 1,711,250 F-423
671 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (i) Extraordinary Item Fees and expenses incurred in connection with the repurchase of the Notes on May 19, 1998 and the retirement of the remaining Notes on September 15, 1998 were $19.7 million in the aggregate. In addition, the unamortized portion of deferred loan costs related to the Notes and the Amended and Restated Credit Agreement, which amounted to $10.9 million in the aggregate, were written off as an extraordinary charge upon the extinguishment of the related debt. NOTE 7 -- COMMITMENTS AND CONTINGENCIES The Partnership leases land, office space and equipment under operating leases expiring at various dates through the year 2039. See Note 9. Future minimum rentals for operating leases at December 31, 1998 are as follows: YEAR TOTAL ---- ----------- (DOLLARS IN THOUSANDS) 1999.................................................. $ 2,758 2000.................................................. 2,545 2001.................................................. 2,264 2002.................................................. 1,919 2003.................................................. 1,119 Thereafter.............................................. 4,449 ------- $15,054 ======= In most cases, management expects that, in the normal course of business, these leases will be renewed or replaced by other leases. Rent expense amounted to $2.1 million in 1996, $2.4 million in 1997 and $3.1 million in 1998. In addition, the Partnership rents line space on utility poles in some of the franchise areas it serves. These rentals amounted to $2.8 million for 1996, $3.1 million for 1997 and $3.9 million for 1998. Generally, such pole rental agreements are short-term; however, the Partnership anticipates such rentals will continue in the future. Beginning in August 1997, the Partnership elected to self-insure its cable distribution plant and subscriber connections against property damage as well as possible business interruptions caused by such damage. The decision to self-insure was made due to significant increases in the cost of insurance coverage and decreases in the amount of insurance coverage available. In October 1998, the Partnership reinstated third party insurance coverage against damage to its cable distribution plant and subscriber connections and against business interruptions resulting from such damage. This coverage is subject to a significant annual deductible and is intended to limit the Partnership's exposure to catastrophic losses, if any, in future periods. Management believes that the relatively small size of the Partnership's markets in any one geographic area, coupled with their geographic separation, will mitigate the risk that the Partnership could sustain losses due to seasonal weather conditions or other events that, in the aggregate, could have a material adverse effect on the Partnership's liquidity and cash flows. The Partnership continues to purchase insurance coverage in amounts management views as appropriate for all other property, liability, automobile, workers' compensation and other types of insurable risks. F-424
672 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Partnership is required under various franchise agreements at December 31, 1998 to rebuild certain existing cable systems at a cost of approximately $83 million. The Partnership is regulated by various federal, state and local government entities. The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), provides for among other things, federal and local regulation of rates charged for basic cable service, cable programming service tiers ("CPSTs") and equipment and installation services. Regulations issued in 1993 and significantly amended in 1994 by the Federal Communications Commission (the "FCC") have resulted in changes in the rates charged for the Partnership's cable services. The Partnership believes that compliance with the 1992 Cable Act has had a negative impact on its operations and cash flow. It also presently believes that any potential future liabilities for refund claims or other related actions would not be material. The Telecommunications Act of 1996 (the "1996 Telecom Act") was signed into law on February 8, 1996. As it pertains to cable television, the 1996 Telecom Act, among other things, (i) ends the regulation of certain CPSTs in 1999; (ii) expands the definition of effective competition, the existence of which displaces rate regulation; (iii) eliminates the restriction against the ownership and operation of cable systems by telephone companies within their local exchange service areas; and (iv) liberalizes certain of the FCC's cross-ownership restrictions. The Partnership has various contracts to obtain basic and premium programming from program suppliers whose compensation is generally based on a fixed fee per customer or a percentage of the gross receipts for the particular service. Some program suppliers provide volume discount pricing structures or offer marketing support to the Partnership. The Partnership's programming contracts are generally for a fixed period of time and are subject to negotiated renewal. The Partnership does not have long-term programming contracts for the supply of a substantial amount of its programming. Accordingly, no assurances can be given that the Partnership's programming costs will not continue to increase substantially or that other materially adverse terms will not be added to the Partnership's programming contracts. Management believes, however, that the Partnership's relations with its programming suppliers generally are good. Effective December 1, 1998, the Partnership elected to obtain certain of its programming services through an affiliate of TCI. This election resulted in a reduction in the Partnership's programming costs, the majority of which will be passed on to its customers in the form of reduced rates in compliance with FCC rules. The Partnership has elected to continue to acquire its remaining programming services under its existing programming contracts, but may elect to acquire additional programming services through the TCI affiliate in the future. The Partnership, in the normal course of business, purchases cable programming services from certain program suppliers owned in whole or in part by an affiliate of TCI. The Partnership is periodically a party to various legal proceedings. Such legal proceedings are ordinary and routine litigation proceedings that are incidental to the Partnership's business, and management presently believes that the outcome of all pending legal proceedings will not, individually or in the aggregate, have a material adverse effect on the financial condition or results of operations of the Partnership. The Partnership, certain of its affiliates, and certain third parties have been named as defendants in an action entitled Frank O'Shea I.R.A. et al. v. Falcon Cable Systems Company, et al., Case No. BC 147386, pending in the Superior Court of the State of California, County of Los Angeles (the "Action"). Plaintiffs in the Action are certain former unitholders of FCSC purporting to represent a class consisting of former unitholders of FCSC other than those affiliated with F-425
673 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FCSC and/or its controlling persons. The complaint in the Action alleges, among other things, that defendants breached their fiduciary and contractual duties to unitholders, and acted negligently, with respect to the purchase from former unitholders of their interests in FCSC in 1996. A settlement of the action has been agreed to and will be presented to the court for approval on April 22, 1999. The terms of the settlement, if approved, are not expected to have a material adverse effect on the financial condition of the Partnership. Net of insurance proceeds, the settlement's cost to the Partnership would amount to approximately $2.7 million, all of which had been reserved as of December 31, 1998. The Partnership recognized expenses related to the settlement of $52,000, $145,000 and $2.5 million in 1996, 1997 and 1998, respectively. NOTE 8 -- EMPLOYEE BENEFIT PLANS The subsidiaries of the Partnership have a cash or deferred profit sharing plan (the "Profit Sharing Plan") covering substantially all of their employees. FHGLP joined in the adoption of the FHGI cash or deferred profit sharing plan as of March 31, 1993. The provisions of this plan were amended to be substantially identical to the provisions of the Profit Sharing Plan. The Profit Sharing Plan provides that each participant may elect to make a contribution in an amount up to 20% of the participant's annual compensation which otherwise would have been payable to the participant as salary. The Partnership's contribution to the Profit Sharing Plan, as determined by management, is discretionary but may not exceed 15% of the annual aggregate compensation (as defined) paid to all participating employees. There were no contributions for the Profit Sharing Plan in 1996, 1997 or 1998. On September 30 1998, the Partnership assumed the obligations of FHGLP for its 1993 Incentive Performance Plan (the "Incentive Plan"). The value of the interests in the Incentive Plan is tied to the equity value of certain partnership units in FHGLP held by FHGI. In connection with the assumption by the Partnership, FHGLP agreed to fund any benefits payable under the Incentive Plan through additional capital contributions to the Partnership, the waiver of its rights to receive all or part of certain distributions from the Partnership and/or a contribution of a portion of its partnership units to the Partnership. The benefits which are payable under the Incentive Plan are equal to the amount of distributions which FHGI would have otherwise received with respect to 1,932.67 of the units of FHGLP held by FHGI and a portion of FHGI's interest in certain of the partnerships that are the general partners of the Partnership's operating subsidiaries. Benefits are payable under the Incentive Plan only when distributions would otherwise be paid to FHGI with respect to the above-described units and interests. The Incentive Plan is scheduled to terminate on January 5, 2003, at which time the Partnership is required to distribute the units described above to the participants in the Incentive Plan. At such time, FHGLP is required to cause the units to be contributed to the Partnership to fund such distributions. The participants in the Incentive Plan are present and former employees of the Partnership, FHGLP and its operating affiliates, all of whom are 100% vested. Prior to the closing of the TCI Transaction, FHGLP amended the Incentive Plan to provide for payments by FHGLP at the closing of the TCI Transaction to participants in an aggregate amount of approximately $6.5 million and to reduce by such amount FHGLP's obligations to make future payments to participants under the Incentive Plan. In 1999, the Partnership adopted a Restricted Unit Plan (the "New FCLP Incentive Plan" or "Plan") for the benefit of certain employees. Grants of restricted units are provided at the discretion of the Advisory Committee. The value of the units in the New FCLP Incentive Plan is tied to the equity value of FCLP above a base equity as determined initially in 1999 by the F-426
674 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) partners, and for grants in subsequent years by an appraisal. Benefits are payable under the New FCLP Incentive Plan only when distributions would otherwise be payable to equity holders of FCLP. An initial grant of 100,000 units representing 2.75% of the equity of FCLP in excess of the equity base was approved and will be allocated to the participants in the Plan. There is a five-year vesting requirement for all participants. NOTE 9 -- RELATED PARTY TRANSACTIONS The Partnership is a separate, stand-alone holding company which employs all of the management personnel. The Partnership is financially dependent on the receipt of permitted payments from its operating subsidiaries, management and consulting fees from domestic cable ventures, and the reimbursement of specified expenses by certain of the Affiliated Partnerships to fund its operations. Expected increases in the funding requirements of the Partnership combined with limitations on its sources of cash may create liquidity issues for the Partnership in the future. Specifically, the Amended and Restated Credit Agreement and, subsequently, the New Credit Facility, permitted the subsidiaries of the Partnership to remit to the Partnership no more than 4.25% of their net cable revenues, as defined, in any year, effective July 12, 1996. Beginning on January 1, 1999, this limitation was increased to 4.5% of net cable revenues in any year. As a result of the 1998 acquisition by the Partnership of the Falcon Classic and Falcon Video Systems, the Partnership will no longer receive management fees and reimbursed expenses from Falcon Classic or receive management fees from Falcon Video. Commencing on October 1, 1998, FHGLP retains 20% of the management fees paid by the Enstar partnerships. The management fees earned from the Enstar partnerships were $1.9 million, $2 million and $1.9 million for the years ended December 31, 1996, 1997 and 1998, respectively. The management and consulting fees and expense reimbursements earned from the Affiliated Partnerships amounted to approximately $6.3 million and $3.7 million, $5.2 million and $2.1 million and $3.7 million and $1.5 million for the years ended December 31, 1996, 1997 and 1998, respectively. The fees and expense reimbursements of $6.3 million and $3.7 million earned in 1996 included $1.5 million and $1 million earned from FCSC from January 1, 1996 through July 11, 1996. The fees and expense reimbursements of $3.7 million and $1.5 million earned in 1998 included $191,000 and $128,000 earned from Falcon Classic from January 1, 1998 through July 16, 1998, and $1.2 million in management fees from Falcon Video from January 1, 1998 through September 30, 1998. Subsequent to these acquisitions, the amounts payable to the Partnership in respect of its management of the former FCSC, Falcon Classic and Falcon Video Systems became subject to the limitations contained in the Amended and Restated Credit Agreement and, subsequently, the New Credit Facility. Receivables from the Affiliated Partnerships for services and reimbursements described above amounted to approximately $11.3 million and $2.3 million (which, in 1997, included $7.5 million of notes receivable from the Enstar partnerships) at December 31, 1997 and 1998. Included in Commitments and Contingencies (Note 7) are two facility lease agreements with the Partnership's Chief Executive Officer and his wife, or entities owned by them, requiring annual future minimum rental payments aggregating $2.1 million through 2001, one facility being assumed by a subsidiary as part of the assets acquired on July 12, 1996 from FCSC. That subsidiary acquired the property in February 1999 for $282,500, a price determined by two independent appraisals. During the years ended December 31, 1996, 1997 and 1998 rent expense on the first facility amounted to $397,000, $383,000 and $416,000, respectively. The rent paid for the second facility for the period July 12, 1996 through December 31, 1996 amounted to F-427
675 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) approximately $18,000, and the amount paid in each of 1997 and 1998 was approximately $41,000. In addition, the Partnership provides certain accounting, bookkeeping and clerical services to the Partnership's Chief Executive Officer. The costs of services provided were determined based on allocations of time plus overhead costs (rent, parking, supplies, telephone, etc.). Such services amounted to $118,300, $163,000 and $212,000 for the years ended December 31, 1996, 1997 and 1998, respectively. These costs were net of amounts reimbursed to the Partnership by the Chief Executive Officer amounting to $75,000, $55,000 and $72,000 for the years ended December 31, 1996, 1997 and 1998, respectively. NOTE 10 -- OTHER INCOME (EXPENSE) Other income (expense) is comprised of the following: YEAR ENDED DECEMBER 31, ----------------------------- 1996 1997 1998 ------- ------- ------- (DOLLARS IN THOUSANDS) Gain on sale of Available-for-Sale Securities............... $ 2,264 $ -- $ -- Gain on insured casualty losses............................. -- 3,476 314 Write down of investment.................................... (1,000) -- -- Gain (loss) on sale of investment........................... -- (1,360) 174 Net lawsuit settlement costs................................ -- (1,030) (2,614) Other, net.................................................. (450) (201) (791) ------- ------- ------- $ 814 $ 885 $(2,917) ======= ======= ======= NOTE 11 -- SUBSEQUENT EVENTS In March 1999, AT&T and Tele-Communications, Inc. completed a merger under which Tele-Communications, Inc. became a unit of AT&T called AT&T Broadband & Internet Services. The unit will continue to be headquartered in the Denver area. Leo J. Hindery, Jr., who had been president of Tele-Communications, Inc. since January 1997, was named President and Chief Executive Officer of AT&T Broadband & Internet Services, which became the owner of TCI Falcon Holdings, LLC as a result of the merger. The Partnership entered into a letter of intent with AT&T to form a joint venture. This joint venture would provide local or any-distance communications services, other than mobile wireless services, video entertainment services and high speed Internet access services, to residential and certain small business customers under the AT&T brand name over the Partnership's infrastructure. Formation of the joint venture is subject to certain conditions. The Partnership is unable to predict if or when such conditions will be met. F-428
676 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12 -- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION OPERATING ACTIVITIES During the years ended December 31, 1996, 1997 and 1998, the Partnership paid cash interest amounting to approximately $39.7 million, $48.1 million and $84.9 million, respectively. INVESTING ACTIVITIES See Note 3 regarding the non-cash investing activities related to the acquisitions of the cable systems of the TCI Systems, the Falcon Video Systems, the Falcon Classic Systems and FCSC. FINANCING ACTIVITIES See Note 3 regarding the non-cash financing activities relating to the acquisitions of the cable systems of the TCI Systems, the Falcon Video Systems, the Falcon Classic Systems and FCSC. See Note 2 regarding the reclassification to redeemable partners' equity. F-429
677 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 13 -- FCLP (PARENT COMPANY ONLY) The following parent-only condensed financial information presents Falcon Communications, L.P.'s balance sheets and related statements of operations and cash flows by accounting for the investments in its subsidiaries on the equity method of accounting. The condensed balance sheet information for 1997 and condensed statement of operations information through September 30, 1998 is for FHGLP (parent only). The accompanying condensed financial information should be read in conjunction with the consolidated financial statements and notes thereto. CONDENSED BALANCE SHEET INFORMATION DECEMBER 31, ---------------------- 1997 1998 --------- --------- (DOLLARS IN THOUSANDS) ASSETS: Cash and cash equivalents................................ $ 8,177 $ 1,605 Receivables: Intercompany notes and accrued interest receivable.... 226,437 655,128 Due from affiliates and other entities, of which $23,374,000 was contractually restricted or otherwise deferred at December 31, 1997 (see Note 9).................................................. 25,340 2,129 Prepaid expenses and other............................... 711 236 Investments in affiliated partnerships................... 12,827 -- Other investments........................................ 1,519 -- Property, plant and equipment, less accumulated depreciation and amortization......................... 1,323 3,599 Deferred loan costs, less accumulated amortization....... 4,846 20,044 --------- --------- $ 281,180 $ 682,741 ========= ========= LIABILITIES: Notes payable............................................ $ 10 $ -- Senior notes payable..................................... 282,193 669,982 Notes payable to affiliates.............................. -- 70,805 Accounts payable......................................... 179 135 Accrued expenses......................................... 14,025 14,000 Equity in net losses of subsidiaries in excess of investment............................................ 230,155 198,492 --------- --------- TOTAL LIABILITIES................................ 526,562 953,414 REDEEMABLE PARTNERS' EQUITY................................ 171,373 133,023 PARTNERS' DEFICIT.......................................... (416,755) (403,696) --------- --------- $ 281,180 $ 682,741 ========= ========= F-430
678 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FCLP (PARENT COMPANY ONLY) CONDENSED STATEMENT OF OPERATIONS INFORMATION YEAR ENDED DECEMBER 31, --------------------------------- 1996 1997 1998 -------- -------- --------- (DOLLARS IN THOUSANDS) REVENUES: Management fees: Affiliated Partnerships................... $ 3,962 $ 2,873 $ 2,120 Subsidiaries.............................. 12,020 13,979 14,010 International and other................... 413 281 33 -------- -------- --------- Total revenues....................... 16,395 17,133 16,163 -------- -------- --------- EXPENSES: General and administrative expenses.......... 9,096 11,328 21,134 Depreciation and amortization................ 375 274 559 -------- -------- --------- Total expenses....................... 9,471 11,602 21,693 -------- -------- --------- Operating income (loss).............. 6,924 5,531 (5,530) OTHER INCOME (EXPENSE): Interest income.............................. 19,884 22,997 50,562 Interest expense............................. (27,469) (30,485) (59,629) Equity in net losses of subsidiaries......... (50,351) (56,422) (105,659) Equity in net losses of investee partnerships.............................. (73) (4) (31) Other, net................................... 1,100 (2,455) -- -------- -------- --------- Net loss before extraordinary item............. (49,985) (60,838) (120,287) Extraordinary item, retirement of debt......... -- -- (24,196) -------- -------- --------- NET LOSS....................................... $(49,985) $(60,838) $(144,483) ======== ======== ========= F-431
679 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FCLP (PARENT COMPANY ONLY) CONDENSED STATEMENT OF CASH FLOWS INFORMATION YEAR ENDED DECEMBER 31, ------------------------------ 1996 1997 1998 ------- ------ --------- (DOLLARS IN THOUSANDS) Net cash provided by (used in) Operating activities............................. $(8,969) $1,478 $(418,226) ------- ------ --------- Cash flows from investing activities: Distributions from affiliated partnerships....... 773 -- 1,820 Capital expenditures............................. (242) (417) (2,836) Investments in affiliated partnerships and other investments................................... (9,000) (254) (2,998) Proceeds from sale of investments and other assets........................................ 3 702 1,694 Proceeds from sale of available-for-sale securities.................................... 9,502 -- -- Assets retained by Falcon Holding Group, L.P..... -- -- (2,893) ------- ------ --------- Net cash provided by (used in) investing activities....................................... 1,036 31 (5,213) ------- ------ --------- Cash flows from financing activities: Repayment of debt................................ (120) (131) (282,203) Borrowings from notes payable.................... -- -- 650,639 Borrowings from subsidiaries..................... -- -- 70,805 Capital contributions............................ 5,000 93 -- Redemption of partners' equity................... -- -- (1,170) Deferred loan costs.............................. -- -- (21,204) ------- ------ --------- Net cash provided by (used in) financing activities....................................... 4,880 (38) 416,867 ------- ------ --------- Net increase (decrease) in cash and cash equivalents...................................... (3,053) 1,471 (6,572) Cash and cash equivalents, at beginning of year.... 9,759 6,706 8,177 ------- ------ --------- Cash and cash equivalents, at end of year.......... $ 6,706 $8,177 $ 1,605 ======= ====== ========= F-432
680 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) CONDENSED CONSOLIDATED BALANCE SHEETS DECEMBER 31, JUNE 30, 1998* 1999 ------------ ----------- (UNAUDITED) (DOLLARS IN THOUSANDS) ASSETS: Cash and cash equivalents................................. $ 14,284 $ 11,852 Receivables: Trade, less allowance of $670,000 and $699,000 for possible losses........................................ 15,760 19,102 Affiliates............................................. 2,322 6,949 Other assets.............................................. 16,779 35,007 Property, plant and equipment, less accumulated depreciation and amortization of $320,209,000 and $349,316,000........................................... 505,894 522,587 Franchise cost, less accumulated amortization of $226,526,000 and $251,998,000.......................... 397,727 384,197 Goodwill, less accumulated amortization of $25,646,000 and $30,547,000............................................ 135,308 133,480 Customer lists and other intangible costs, less accumulated amortization of $59,422,000 and $97,912,000............................................ 333,017 300,314 Deferred loan costs, less accumulated amortization of $2,014,000 and $2,352,000.............................. 24,331 23,354 ---------- ---------- $1,445,422 $1,436,842 ========== ========== LIABILITIES AND PARTNERS' DEFICIT LIABILITIES: Notes payable............................................. $1,611,353 $1,665,676 Accounts payable.......................................... 10,341 6,088 Accrued expenses.......................................... 83,077 138,804 Customer deposits and prepayments......................... 2,257 2,630 Deferred income taxes..................................... 8,664 2,287 Minority interest......................................... 403 387 ---------- ---------- TOTAL LIABILITIES........................................... 1,716,095 1,815,872 ---------- ---------- COMMITMENTS AND CONTINGENCIES REDEEMABLE PARTNERS' EQUITY................................. 133,023 400,471 ---------- ---------- PARTNERS' EQUITY (DEFICIT): General partner........................................... (408,369) (783,100) Limited partners.......................................... 4,673 3,599 ---------- ---------- TOTAL PARTNERS' DEFICIT..................................... (403,696) (779,501) ---------- ---------- $1,445,422 $1,436,842 ========== ========== - --------------- *As presented in the audited financial statements. See accompanying notes to condensed consolidated financial statements. F-433
681 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, ----------------------- 1998 1999 --------- ---------- (DOLLARS IN THOUSANDS) (UNAUDITED) REVENUES.................................................... $133,332 $ 212,205 -------- --------- OPERATING COSTS AND EXPENSES: Programming costs......................................... 25,933 47,233 Service costs............................................. 14,124 25,545 General and administrative expenses....................... 24,516 39,779 Equity-based deferred compensation........................ -- 44,600 Depreciation and amortization............................. 64,006 110,048 -------- --------- Total operating costs and expenses................ 128,579 267,205 -------- --------- Operating income (loss)........................... 4,753 (55,000) OTHER INCOME (EXPENSE): Interest expense, net..................................... (44,699) (64,852) Equity in net loss of investee partnerships............... (266) 163 Other income (expense), net............................... (824) 9,807 Income tax benefit........................................ 1,831 2,459 -------- --------- NET LOSS BEFORE EXTRAORDINARY ITEMS......................... $(39,205) $(107,423) EXTRAORDINARY ITEMS......................................... (28,412) -- -------- --------- NET LOSS.................................................... $(67,617) $(107,423) ======== ========= See accompanying notes to condensed consolidated financial statements. F-434
682 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, ---------------------- 1998 1999 ---------- -------- (DOLLARS IN THOUSANDS) (UNAUDITED) Net cash provided by operating activities................... $ 13,558 $ 36,697 ---------- -------- Cash flows from investing activities: Acquisition of cable television systems................... (76,789) (16,450) Capital expenditures...................................... (38,609) (59,034) Increase in intangible assets............................. (1,102) (2,151) Other..................................................... 1,065 (2,107) ---------- -------- Net cash used in investing activities.................. (115,435) (79,742) ---------- -------- Cash flows from financing activities: Borrowings from notes payable............................. 1,445,957 68,500 Repayment of debt......................................... (1,224,683) (27,871) Deferred loan costs....................................... (23,944) (16) Other..................................................... 83 -- ---------- -------- Net cash provided by financing activities.............. 197,413 40,613 ---------- -------- Net increase (decrease) in cash and cash equivalents........ 95,536 (2,432) Cash and cash equivalents at beginning of period............ 13,917 14,284 ---------- -------- Cash and cash equivalents at end of period.................. $ 109,453 $ 11,852 ========== ======== See accompanying notes to condensed consolidated financial statements. F-435
683 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- BASIS OF PRESENTATION Falcon Communications, L.P., a California limited partnership (the "Partnership") and successor to Falcon Holding Group, L.P. ("FHGLP"), owns and operates cable television systems serving small to medium-sized communities and the suburbs of certain cities in 23 states. On September 30, 1998, pursuant to a Contribution and Purchase Agreement dated as of December 30, 1997, as amended (the "Contribution Agreement"), FHGLP acquired the assets and liabilities of Falcon Video Communications, L.P. ("Falcon Video" or the "Falcon Video systems"), in exchange for ownership interests in FHGLP. Simultaneously with the closing of that transaction, in accordance with the Contribution Agreement, FHGLP contributed substantially all of the existing cable television system operations owned by FHGLP and its subsidiaries (including the Falcon Video systems) to the Partnership and TCI Falcon Holdings, LLC ("TCI") contributed certain cable television systems owned and operated by affiliates of TCI (the "TCI systems") to the Partnership (the "TCI Transaction"). In March 1999, AT&T and Tele-Communications, Inc. completed a merger under which Tele-Communications, Inc. became a unit of AT&T called AT&T Broadband & Internet Services, which became the owner of TCI Falcon Holdings, LLC as a result of the merger. As a result, AT&T Broadband and Internet Services holds approximately 46% of the equity interests of the Partnership and FHGLP holds the remaining 54% and serves as the managing general partner of the Partnership. The TCI Transaction has been accounted for as a recapitalization of FHGLP into the Partnership and the concurrent acquisition by the Partnership of the TCI systems. On May 26, 1999, the Partnership and Charter Communications ("Charter") announced a definitive agreement in which Charter will acquire the Partnership in a cash and stock transaction valued at approximately $3.6 billion. Closing of the pending sale is subject to obtaining all necessary government approvals, and is anticipated to take place in the fourth quarter of 1999. NOTE 2 -- INTERIM FINANCIAL STATEMENTS The interim financial statements for the six months ended June 30, 1999 and 1998 are unaudited. These condensed interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Partnership's latest Annual Report on Form 10-K. In the opinion of management, such statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results of such periods. The results of operations for the six months ended June 30, 1999 are not indicative of results for the entire year. NOTE 3 -- REDEEMABLE PARTNERS' EQUITY Redeemable partners' equity has been adjusted as of June 30, 1999 based on the estimated redemption value to be recognized from the pending sale to Charter. NOTE 4 -- EQUITY-BASED DEFERRED COMPENSATION In connection with the pending sale of the Partnership to Charter discussed in Note 1, the Partnership recorded a non-cash charge of $42 million during the three months ended June 30, 1999 related to both the 1993 Incentive Performance Plan ($17.2 million) and the 1999 Employee Restricted Unit Plan ($24.8 million). The amounts were determined based on the value of the underlying ownership units, as established by the pending sale of the Partnership to Charter. $2.6 million of additional compensation related to the 1993 Incentive Performance Plan was recorded in the three months ended March 31, 1999 based on management's estimate of the increase in value of the underlying ownership interests since December 31, 1998. Payments under the plans are subject to closing of the sale to Charter, and will be paid from net sales F-436
684 FALCON COMMUNICATIONS, L.P. (SUCCESSOR TO FALCON HOLDING GROUP, L.P.) NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) proceeds. The total deferred compensation of $44.6 million under these plans is included in accrued expenses. NOTE 5 -- ACQUISITIONS In March 1998, the Partnership acquired substantially all of the assets of Falcon Classic Cable Income Properties, L.P. As discussed in Note 1, on September 30, 1998 the Partnership acquired the TCI systems and the Falcon Video systems in accordance with the Contribution Agreement. The following unaudited condensed consolidated pro forma statement of operations presents the consolidated results of operations of the Partnership as if the acquisitions had occurred at January 1, 1998 and is not necessarily indicative of what would have occurred had the acquisitions been made as of that date or of results which may occur in the future. SIX MONTHS ENDED JUNE 30, 1998 ------------- (DOLLARS IN THOUSANDS) Revenues...................................... $ 213,639 Expenses...................................... (221,238) --------- Operating loss.............................. (7,599) Interest and other expenses................... (63,951) --------- Net loss...................................... $ (71,550) ========= In January 1999, the Partnership acquired the assets of certain cable systems located in Oregon for $800,700. The acquired systems serve approximately 591 customers, and are being operated as part of the Medford region. On March 15, 1999, the Partnership acquired the assets of certain cable systems located in Utah for $6.8 million. This system serves approximately 7,928 customers and is being operated as part of the St. George region. On March 22, 1999, the Partnership acquired the assets of the Franklin, Virginia system in exchange for the assets of its Scottsburg, Indiana systems and $8 million in cash and recognized a gain of $8.3 million. The Franklin system serves approximately 9,042 customers and the Scottsburg systems served approximately 4,507 customers. The effects of this transaction on results of operations are not material. On July 30, 1999, the Partnership acquired the assets of certain cable systems serving 6,500 customers located in Oregon for $9.5 million. NOTE 6 -- RECENT DEVELOPMENTS On April 8, 1999, the Partnership announced that it had executed a term sheet with regard to a joint venture to be formed called @Home Solutions, which would offer turnkey, fully managed and comprehensive high speed Internet access to cable operators serving small to medium-sized communities, including the Partnership. In connection with the sale of the Partnership to Charter as discussed in Note 1, the Partnership withdrew from the @Home Solutions joint venture and reimbursed @Home Solutions $500,000 for costs incurred. NOTE 7 -- SALE OF SYSTEMS On March 1, 1999, the Partnership contributed $2.4 million cash and certain systems located in Oregon with a net book value of $5.6 million to a joint venture with Bend Cable Communications, Inc., who manages the joint venture. The Partnership owns 17% of the joint venture. These systems had been acquired from Falcon Classic in March 1998, and served approximately 3,471 subscribers at March 1, 1999. On March 26, 1999, the Partnership sold certain systems serving approximately 2,550 subscribers in Kansas for $3.2 million and recognized a gain of $2.5 million. F-437
685 INDEPENDENT AUDITORS' REPORT The Board of Directors Tele-Communications, Inc.: We have audited the accompanying combined balance sheets of the TCI Falcon Systems (as defined in Note 1 to the combined financial statements) as of September 30, 1998 and December 31, 1997, and the related combined statements of operations and parent's investment, and cash flows for the nine-month period ended September 30, 1998 and for each of the years in the two-year period ended December 31, 1997. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the TCI Falcon Systems as of September 30, 1998 and December 31, 1997, and the results of their operations and their cash flows for the nine-month period ended September 30, 1998 and for each of the years in the two-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG LLP Denver, Colorado June 21, 1999 F-438
686 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) COMBINED BALANCE SHEETS SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ (AMOUNTS IN THOUSANDS) ASSETS Trade and other receivables, net............................ $ 2,452 $ 4,665 Property and equipment, at cost: Land...................................................... 1,289 1,232 Distribution systems...................................... 151,017 137,767 Support equipment and buildings........................... 20,687 18,354 -------- -------- 172,993 157,353 Less accumulated depreciation............................. 80,404 69,857 -------- -------- 92,589 87,496 -------- -------- Franchise costs............................................. 399,258 393,540 Less accumulated amortization............................. 70,045 62,849 -------- -------- 329,213 330,691 -------- -------- Other assets, net of accumulated amortization............... 630 714 -------- -------- $424,884 $423,566 ======== ======== LIABILITIES AND PARENT'S INVESTMENT Accounts payable............................................ $ 729 $ 350 Accrued expenses............................................ 5,267 3,487 Deferred income taxes (note 4).............................. 124,586 121,183 -------- -------- Total liabilities................................. 130,582 125,020 Parent's investment (note 5)................................ 294,302 298,546 -------- -------- Commitments and contingencies (note 6)...................... $424,884 $423,566 ======== ======== See accompanying notes to combined financial statements. F-439
687 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) COMBINED STATEMENTS OF OPERATIONS AND PARENT'S INVESTMENT JANUARY 1, 1998 YEARS ENDED THROUGH DECEMBER 31, SEPTEMBER 30, -------------------- 1998 1997 1996 --------------- -------- -------- (AMOUNTS IN THOUSANDS) Revenue.............................................. $ 86,476 $113,897 $102,155 Operating costs and expenses: Operating (note 5)................................. 31,154 39,392 33,521 Selling, general and administrative................ 17,234 19,687 21,695 Administrative fees (note 5)....................... 2,853 5,034 5,768 Depreciation....................................... 10,317 12,724 12,077 Amortization....................................... 7,440 9,785 8,184 -------- -------- -------- 68,998 86,622 81,245 -------- -------- -------- Operating income................................ 17,478 27,275 20,910 Other income (expense): Intercompany interest expense (note 5)............. (4,343) (5,832) (4,701) Other, net......................................... 28 (84) (44) -------- -------- -------- (4,315) (5,916) (4,745) -------- -------- -------- Earnings before income taxes.................... 13,163 21,359 16,165 Income tax expense................................... (5,228) (8,808) (6,239) -------- -------- -------- Net earnings.................................... 7,935 12,551 9,926 Parent's investment: Beginning of period................................ 298,546 319,520 262,752 Change in due to Tele-Communications, Inc. ("TCI") (note 5)........................................ (12,179) (33,525) 46,842 -------- -------- -------- End of period...................................... $294,302 $298,546 $319,520 ======== ======== ======== See accompanying notes to combined financial statements. F-440
688 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) COMBINED STATEMENTS OF CASH FLOWS JANUARY 1, 1998 YEARS ENDED THROUGH DECEMBER 31, SEPTEMBER 30, -------------------- 1998 1997 1996 --------------- -------- -------- (AMOUNTS IN THOUSANDS) Cash flows from operating activities: Net earnings....................................... $ 7,935 $ 12,551 $ 9,926 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization................... 17,757 22,509 20,261 Deferred income tax expense..................... 3,403 7,181 4,533 Changes in operating assets and liabilities, net of effects of acquisitions: Change in receivables......................... 2,213 (1,644) (55) Change in other assets........................ 84 (125) (248) Change in accounts payable and accrued expenses................................... 2,159 418 (473) -------- -------- -------- Net cash provided by operating activities............................... 33,551 40,890 33,944 -------- -------- -------- Cash flows from investing activities: Capital expended for property and equipment........ (13,540) (7,586) (13,278) Cash paid for acquisitions......................... -- -- (68,240) Other investing activities......................... (809) 221 732 -------- -------- -------- Net cash used in investing activities...... (14,349) (7,365) (80,786) -------- -------- -------- Cash flows from financing activities: Change in due to TCI............................... (19,202) (33,525) 46,842 -------- -------- -------- Net cash provided by (used in) financing activities............................... (19,202) (33,525) 46,842 -------- -------- -------- Net change in cash......................... -- -- -- Cash: Beginning of period...................... -- -- -- -------- -------- -------- End of period............................ $ -- $ -- $ -- ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for interest........... $ 4,343 $ 5,832 $ 4,701 ======== ======== ======== Cash paid during the period for income taxes....... $ -- $ 140 $ 86 ======== ======== ======== See accompanying notes to combined financial statements. F-441
689 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 1998 TO SEPTEMBER 30, 1998, AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (1) BASIS OF PRESENTATION The combined financial statements include the accounts of thirteen of TCI's cable television systems serving certain subscribers within Oregon, Washington, Alabama, Missouri and California (collectively, the "TCI Falcon Systems"). This combination was created in connection with the Partnership formation discussed below. The TCI Falcon Systems were indirectly wholly-owned by TCI in all periods presented herein up to the date of the Contribution, as defined below. All significant inter-entity accounts and transactions have been eliminated in combination. The combined net assets of the TCI Falcon Systems including amounts due to TCI are referred to as "Parent's Investment". TCI's ownership interests in the TCI Falcon Systems, as described above, were acquired through transactions wherein TCI acquired various larger cable entities (the "Original Systems"). The TCI Falcon System's combined financial statements include an allocation of the purchase price and certain purchase accounting adjustments, including the related deferred tax effects, from TCI's acquisition of the Original Systems. Such allocation and the related franchise cost amortization was based on the relative fair market value of the systems acquired. In addition, certain costs of TCI are charged to the TCI Falcon Systems based on their number of customers (see note 5). Although such allocations are not necessarily indicative of the costs that would have been incurred by the TCI Falcon Systems on a stand alone basis, management believes that the resulting allocated amounts are reasonable. Partnership Formation On September 30, 1998, TCI and Falcon Holding Group, LP ("Falcon") closed a transaction under a Contribution and Purchase Agreement (the "Contribution"), whereby TCI contributed the TCI Falcon Systems to a newly formed partnership (the "Partnership") between TCI and Falcon in exchange for an approximate 46% ownership interest in the Partnership. The accompanying combined financial statements reflect the position, results of operations and cash flows of the TCI Falcon Systems immediately prior to the Contribution, and, therefore, do not include the effects of such Contribution. (2) ACQUISITION On January 1, 1998, a subsidiary of TCI acquired certain cable television assets in and around Ellensburg, WA from King Videocable Company. On the same date, these assets were transferred to the TCI Falcon Systems. As a result of these transactions, the TCI Falcon Systems recorded non-cash increases in property and equipment of $2,100,000, in franchise costs of $4,923,000, and in parent's investment of $7,023,000. Assuming the acquisition had occurred on January 1, 1997, the TCI Falcon Systems' pro forma results of operations would not have been materially different from the results of operations for the year ended December 31, 1997. (3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Receivables Receivables are reflected net of an allowance for doubtful accounts. Such allowance at September 30, 1998 and December 31, 1997 was not significant. F-442
690 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Property and Equipment Property and equipment are stated at cost, including acquisition costs allocated to tangible assets acquired. Construction costs, labor and applicable overhead related to installations, and interest during construction are capitalized. During the nine-month period ended September 30, 1998 and for the years ended December 31, 1997 and 1996, interest capitalized was not significant. Depreciation is computed on a straight-line basis using estimated useful lives of 3 to 15 years for distribution systems and 3 to 40 years for support equipment and buildings. Repairs and maintenance are charged to operations, and renewals and additions are capitalized. At the time of ordinary retirements, sales or other dispositions of property, the original cost and cost of removal of such property are charged to accumulated depreciation, and salvage, if any, is credited thereto. Gains or losses are only recognized in connection with the sales of properties in their entirety. Franchise Costs Franchise costs include the difference between the cost of acquiring cable television systems and amounts assigned to their tangible assets. Such amounts are generally amortized on a straight-line basis over 40 years. Costs incurred by the TCI Falcon Systems in negotiating and renewing franchise agreements are amortized on a straight-line basis over the life of the franchise, generally 10 to 20 years. Impairment of Long-Lived Assets Management periodically reviews the carrying amounts of property, plant and equipment and its intangible assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. If an impairment adjustment is deemed necessary based on an analysis of undiscounted cash flows, such loss is measured by the amount that the carrying value of such assets exceeds their fair value. Considerable management judgment is necessary to estimate the fair value of assets, accordingly, actual results could vary significantly from such estimates. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell. Revenue Recognition Cable revenue for customer fees, equipment rental, advertising, and pay-per-view programming is recognized in the period that services are delivered. Installation revenue is recognized in the period the installation services are provided to the extent of direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that customers are expected to remain connected to the cable television system. Combined Statements of Cash Flows Transactions effected through the intercompany account with TCI (except for the acquisition and dividend discussed in notes 2 and 5, respectively) have been considered constructive cash receipts and payments for purposes of the combined statements of cash flows. F-443
691 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Estimates The preparation of combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the combined financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain prior year amounts have been reclassified for comparability with the 1998 presentation. (4) INCOME TAXES The TCI Falcon Systems were included in the consolidated federal income tax return of TCI. Income tax expense for the TCI Falcon Systems is based on those items in the consolidated calculation applicable to the TCI Falcon Systems. Intercompany tax allocation represents an apportionment of tax expense or benefit (other than deferred taxes) among subsidiaries of TCI in relation to their respective amounts of taxable earnings or losses. The payable or receivable arising from the intercompany tax allocation is recorded as an increase or decrease in amounts due to TCI. Deferred income taxes are based on the book and tax basis differences of the assets and liabilities within the TCI Falcon Systems. The income tax amounts included in the accompanying combined financial statements approximate the amounts that would have been reported if the TCI Falcon Systems had filed a separate income tax return. Income tax expense for the nine-month period ended September 30, 1998 and for the years ended December 31, 1997 and 1996 consists of: CURRENT DEFERRED TOTAL ------- -------- ------- (AMOUNTS IN THOUSANDS) Nine-month period ended September 30, 1998: Intercompany allocation........................... $(1,825) $ -- $(1,825) Federal........................................... -- (2,778) (2,778) State and local................................... -- (625) (625) ------- ------- ------- $(1,825) $(3,403) $(5,228) ======= ======= ======= Year ended December 31, 1997: Intercompany allocation........................... $(1,487) $ -- $(1,487) Federal........................................... -- (5,862) (5,862) State and local................................... (140) (1,319) (1,459) ------- ------- ------- $(1,627) $(7,181) $(8,808) ======= ======= ======= Year ended December 31, 1996: Intercompany allocation........................... $(1,620) $ -- $(1,620) Federal........................................... -- (4,032) (4,032) State and local................................... (86) (501) (587) ------- ------- ------- $(1,706) $(4,533) $(6,239) ======= ======= ======= F-444
692 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Income tax expense differs from the amounts computed by applying the federal income tax rate of 35% as a result of the following: JANUARY 1, 1998 YEARS ENDED THROUGH DECEMBER 31, SEPTEMBER 30, ------------------ 1998 1997 1996 --------------- ------- ------- (AMOUNTS IN THOUSANDS) Computed "expected" tax expense................ $(4,607) $(7,476) $(5,658) Amortization not deductible for tax purposes... (198) (265) (178) State and local income taxes, net of federal income tax benefit........................... (406) (948) (382) Other.......................................... (17) (119) (21) ------- ------- ------- $(5,228) $(8,808) $(6,239) ======= ======= ======= The tax effects of temporary differences that give rise to significant portions of the deferred tax asset and deferred tax liabilities at September 30, 1998 and December 31, 1997 are presented below: SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ (AMOUNTS IN THOUSANDS) Deferred tax asset -- principally due to non- deductible accruals........................... $ 146 $ 128 -------- -------- Deferred tax liabilities: Property and equipment, principally due to differences in depreciation................ 24,246 20,985 Franchise costs, principally due to differences in amortization and initial basis...................................... 100,486 100,326 -------- -------- Total gross deferred tax liabilities......................... 124,732 121,311 -------- -------- Net deferred tax liability............ $124,586 $121,183 ======== ======== (5) PARENT'S INVESTMENT Parent's investment in the TCI Falcon Systems at September 30, 1998 and December 31, 1997 is summarized as follows: SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ (AMOUNTS IN THOUSANDS) Due to TCI...................................... $ 642,228 $224,668 Retained earnings (deficit)..................... (347,926) 73,878 --------- -------- $ 294,302 $298,546 ========= ======== The amount due to TCI represents advances for operations, acquisitions and construction costs, as well as, the amounts owed as a result of the allocation of certain costs from TCI. TCI charges intercompany interest expense at variable rates to cable systems within the TCI Falcon Systems based upon amounts due to TCI from the cable systems. Such amounts are due on demand. F-445
693 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) On August 15, 1998, TCI caused the TCI Falcon Systems to effect distributions from the TCI Falcon Systems to TCI aggregating $429,739,000 (the "Dividend"). The Dividend resulted in a non-cash increase to the intercompany amounts owed to TCI and a corresponding non-cash decrease to retained earnings. As a result of TCI's ownership of 100% of the TCI Falcon Systems prior to the Contribution, the amounts due to TCI have been classified as a component of parent's investment in the accompanying combined financial statements. The TCI Falcon Systems purchase, at TCI's cost, substantially all of their pay television and other programming from affiliates of TCI. Charges for such programming were $21,479,000, $25,500,000 and $20,248,000 for the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996, respectively, and are included in operating expenses in the accompanying combined financial statements. Certain subsidiaries of TCI provide administrative services to the TCI Falcon Systems and have assumed managerial responsibility of the TCI Falcon Systems' cable television system operations and construction. As compensation for these services, the TCI Falcon Systems pay a monthly fee calculated on a per-customer basis. The intercompany advances and expense allocation activity in amounts due to TCI consists of the following: JANUARY 1, 1998 YEARS ENDED THROUGH DECEMBER 31, SEPTEMBER 30, -------------------- 1998 1997 1996 --------------- -------- -------- (AMOUNTS IN THOUSANDS) Beginning of period.......................... $224,668 $258,193 $211,351 Transfer of cable system acquisition purchase price.......................... 7,023 -- 68,240 Programming charges........................ 21,479 25,500 20,248 Administrative fees........................ 2,853 5,034 5,768 Intercompany interest expense.............. 4,343 5,832 4,701 Tax allocations............................ 1,825 1,487 1,620 Distribution to TCI........................ 429,739 -- -- Cash transfer.............................. (49,702) (71,378) (53,735) -------- -------- -------- End of period................................ $642,228 $224,668 $258,193 ======== ======== ======== (6) COMMITMENTS AND CONTINGENCIES The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") imposed certain rate regulations on the cable television industry. Under the 1992 Cable Act, all cable systems are subject to rate regulation, unless they face "effective competition," as defined by the 1992 Cable Act and expanded in the Telecommunications Act of 1996 (the "1996 Act"), in their local franchise area. Although the Federal Communications Commission (the "FCC") has established regulations required by the 1992 Cable Act, local government units (commonly referred to as local franchising authorities) are primarily responsible for administering the regulation of a cable system's basic service tier ("BST"). The FCC itself directly administered rate regulation of any F-446
694 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) cable programming service tier ("CPST"). The FCC's authority to regulate CPST rates expired on March 31, 1999. The FCC has taken the position that it will still adjudicate CPST complaints filed after this sunset date (but no later than 180 days after the last CPST rate increase imposed prior to March 31, 1999), and will strictly limit its review (and possible refund orders) to the time period predating the sunset date. Under the FCC's rate regulations, most cable systems were required to reduce their BST and CPST rates in 1993 and 1994, and have since had their rate increases governed by a complicated price structure that allows for the recovery of inflation and certain increased costs, as well as providing some incentive for expanding channel carriage. Operators also have the opportunity to bypass this "benchmark" regulatory structure in favor of the traditional "cost-of- service" regulation in cases where the latter methodology appears favorable. Premium cable services offered on a per-channel or per-program basis remain unregulated, as do affirmatively marketed packages consisting entirely of new programming product. The management of the TCI Falcon Systems believes that it has complied in all material respects with the provisions of the 1992 Cable Act and the 1996 Act, including its rate setting provisions. If, as a result of the review process, a system cannot substantiate its rates, it could be required to retroactively reduce its rates to the appropriate benchmark and refund the excess portion of rates received. Any refunds of the excess portion of CPST rates would be retroactive to the date of complaint. Any refunds of the excess portion of BST or equipment rates would be retroactive to one year prior to the implementation of the rate reductions. Certain plaintiffs have filed or threatened separate class action complaints against certain of the systems of TCI Falcon Systems, alleging that the systems' practice of assessing an administrative fee to customers whose payments are delinquent constitutes an invalid liquidated damage provision, a breach of contract, and violates local consumer protection statutes. Plaintiffs seek recovery of all late fees paid to the subject systems as a class purporting to consist of all customers who were assessed such fees during the applicable limitation period, plus attorney fees and costs. The TCI Falcon Systems have contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is possible the TCI Falcon Systems may incur losses upon conclusion of the matters referred to above, an estimate of any loss or range of loss cannot presently be made. Based upon the facts available, management believes that, although no assurance can be given as to the outcome of these actions, the ultimate disposition should not have a material adverse effect upon the combined financial condition of the TCI Falcon Systems. The TCI Falcon Systems lease business offices, have entered into pole rental agreements and use certain equipment under lease arrangements. Rental expense under such arrangements amounted to $1,268,000, $1,868,000 and $1,370,000 for the nine-month period ended September 30, 1998, and the years ended December 31, 1997 and 1996, respectively. F-447
695 TCI FALCON SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum lease payments under noncancellable operating leases for each of the next five years are summarized as follows (amounts in thousands): YEARS ENDING SEPTEMBER 30, - ------------- 1999........................................................ $ 762 2000........................................................ 667 2001........................................................ 533 2002........................................................ 469 2003........................................................ 414 Thereafter.................................................. 2,768 ------ $5,613 ====== TCI formed a year 2000 Program Management Office (the "PMO") to organize and manage its year 2000 remediation efforts. The PMO is responsible for overseeing, coordinating and reporting on TCI's year 2000 remediation efforts, including the year 2000 remediation efforts of the TCI Falcon Systems prior to the Contribution. Subsequent to the date of the Contribution, the year 2000 remediation efforts of the TCI Falcon Systems are no longer the responsibility of TCI or the PMO. The failure to correct a material year 2000 problem could result in an interruption or failure of certain important business operations. There can be no assurance that the TCI Falcon Systems or the systems of other companies on which the TCI Falcon Systems relies will be converted in time or that any such failure to convert by the TCI Falcon Systems or other companies will not have a material adverse effect on its financial position, results of operations or cash flows. F-448
696 REPORT OF INDEPENDENT AUDITORS The Management Committee TWFanch-one Co. and TWFanch-two Co. We have audited the accompanying combined balance sheets of Fanch Cable Systems (comprised of components of TWFanch-one Co. and TWFanch-two Co.), as of December 31, 1998 and 1997, and the related combined statements of operations, net assets and cash flows for the years then ended. These financial statements are the responsibility of Fanch Cable System's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Fanch Cable Systems at December 31, 1998 and 1997, and the combined results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Denver, Colorado March 11, 1999 except for Notes 1 and 8, as to which the dates are May 12, 1999 and June 22, 1999, respectively F-449
697 FANCH CABLE SYSTEMS (COMPRISED OF COMPONENTS OF TWFANCH-ONE CO. AND TWFANCH-TWO CO.) COMBINED BALANCE SHEETS DECEMBER 31 ---------------------------- 1998 1997 ------------ ------------ ASSETS Current assets: Cash and cash equivalents................................. $ -- $ -- Accounts receivable, less allowance for doubtful accounts of $406,230 and $412,119 in 1998 and 1997, respectively........................................... 2,681,911 2,573,619 Prepaid expenses and other current assets................. 1,546,251 790,034 ------------ ------------ Total current assets........................................ 4,228,162 3,363,653 Property, plant and equipment: Transmission and distribution systems and related equipment.............................................. 170,156,150 141,800,640 Furniture and equipment................................... 7,308,581 5,553,886 ------------ ------------ 177,464,731 147,354,526 Less accumulated depreciation............................. (34,878,712) (19,011,830) ------------ ------------ Net property, plant and equipment........................... 142,586,019 128,342,696 Goodwill, net of accumulated amortization of $63,029,579 and $46,771,501, in 1998 and 1997, respectively............... 266,776,690 282,543,281 Subscriber lists, net of accumulated amortization of $15,023,945 and $8,900,365, in 1998 and 1997, respectively.............................................. 17,615,055 23,738,635 Other intangible assets, net of accumulated amortization of $2,723,918 and $1,586,203, in 1998 and 1997, respectively.............................................. 2,717,486 4,237,237 Other assets................................................ 1,050,815 50,315 ------------ ------------ Total assets................................................ $434,974,227 $442,275,817 ============ ============ LIABILITIES AND NET ASSETS Current liabilities: Accounts payable and other accrued liabilities............ $ 11,755,752 $ 9,685,993 Subscriber advances and deposits.......................... 1,797,068 1,987,336 Payable to general partner................................ 2,576,625 1,895,456 ------------ ------------ Total current liabilities................................... 16,129,445 13,568,785 Net assets.................................................. 418,844,782 428,707,032 ------------ ------------ Total liabilities and net assets............................ $434,974,227 $442,275,817 ============ ============ See accompanying notes. F-450
698 FANCH CABLE SYSTEMS (COMPRISED OF COMPONENTS OF TWFANCH-ONE CO. AND TWFANCH-TWO CO.) COMBINED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31 ---------------------------- 1998 1997 ------------ ------------ Revenues: Service................................................... $107,881,831 $102,455,766 Installation and other.................................... 16,672,813 15,079,103 ------------ ------------ 124,554,644 117,534,869 Operating expenses, excluding depreciation and amortization.............................................. 36,927,860 35,609,829 Selling, general and administrative expenses................ 18,296,290 19,496,885 ------------ ------------ 55,224,150 55,106,714 Income before other expenses................................ 69,330,494 62,428,155 Other expenses: Depreciation and amortization............................. 40,918,647 58,089,015 Management fees........................................... 3,170,784 3,012,943 Loss on disposal of assets................................ 6,246,237 2,746,920 Other expense, net........................................ 181,185 128,554 ------------ ------------ 50,516,853 63,977,432 ------------ ------------ Net income (loss)........................................... $ 18,813,641 $ (1,549,277) ============ ============ See accompanying notes. F-451
699 FANCH CABLE SYSTEMS (COMPRISED OF COMPONENTS OF TWFANCH-ONE CO. AND TWFANCH-TWO CO.) COMBINED STATEMENTS OF NET ASSETS YEARS ENDED DECEMBER 31, 1998 AND 1997 TOTAL ------------ Net assets at December 31, 1996............................. $471,180,470 Net loss.................................................... (1,549,277) Net distributions to partners............................... (40,924,161) ------------ Net assets at December 31, 1997............................. 428,707,032 Net income.................................................. 18,813,641 Net distributions to partners............................... (28,675,891) ------------ Net assets at December 31, 1998............................. $418,844,782 ============ See accompanying notes. F-452
700 FANCH CABLE SYSTEMS (COMPRISED OF COMPONENTS OF TWFANCH-ONE CO. AND TWFANCH-TWO CO.) COMBINED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31 ---------------------------- 1998 1997 ------------ ------------ OPERATING ACTIVITIES Net income (loss)........................................... $ 18,813,641 $ (1,549,277) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization............................. 40,918,647 58,089,015 Loss on disposal of assets................................ 6,246,237 2,746,920 Decrease (increase) in accounts receivable, prepaid expenses and other current assets...................... (864,509) 1,754,581 (Decrease) increase in accounts payable and other accrued liabilities and subscriber advances and deposits....... 2,560,660 (3,214,781) ------------ ------------ Net cash provided by operating activities................... 67,674,676 57,826,458 INVESTING ACTIVITIES Purchases of property, plant and equipment.................. (38,114,463) (16,863,419) Additions to intangible assets.............................. (1,109,951) (466,470) Proceeds from the disposal of assets........................ 225,629 427,592 ------------ ------------ Net cash used in investing activities....................... (38,998,785) (16,902,297) FINANCING ACTIVITIES Net distributions to partners............................... (28,675,891) (40,924,161) ------------ ------------ Net cash used in financing activities....................... (28,675,891) (40,924,161) ------------ ------------ Net change in cash and cash equivalents..................... -- -- Cash and cash equivalents at beginning of year.............. -- -- ------------ ------------ Cash and cash equivalents at end of year.................... $ -- $ -- ============ ============ See accompanying notes. F-453
701 FANCH CABLE SYSTEMS (COMPRISED OF COMPONENTS OF TWFANCH-ONE CO. AND TWFANCH-TWO CO.) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1998 1. BASIS OF PRESENTATION ACQUISITION BY CHARTER COMMUNICATIONS, INC. AND BASIS OF PRESENTATION TWFanch-one Co. and TWFanch-two Co. (collectively the "Partnerships"), both of which are Delaware general partnerships, are affiliated through common control and management. Pursuant to a purchase agreement, dated May 12, 1999 between certain partners of TWFanch-one Co. and TWFanch-two Co. and Charter Communications, Inc. ("Charter"), the partners of the Partnerships entered into a distribution agreement whereby the Partnerships will distribute and/or sell certain of their cable systems ("Combined Systems") to certain of their respective partners. These partners will then sell the Combined Systems through a combination of asset sales and the sale of equity and partnership interests to Charter. The Combined Systems may have some liabilities related to refunds of programming launch credits that are due at the date of the acquisition by Charter. The refund of these credits is contingent upon the acquisition by Charter occurring and the amount will vary based upon the actual sale date. Accordingly, these 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. For purposes of determining the financial statement amounts of the Combined Systems, management excluded certain systems (the "Excluded Systems). In order to exclude the results of operations and financial position of the Excluded Systems from the combined financial statements, management has estimated certain revenues, expenses, assets and liabilities that are not specifically identified to systems based on the ratio of each Excluded System's basic subscribers to the total basic subscribers served by the respective partnerships. Management believes the basis used for these allocations is reasonable. The Combined Systems' results of operations are not necessarily indicative of future operating results or the results that would have occurred if the Combined Systems were a separate legal entity. DESCRIPTION OF BUSINESS The Combined Systems, operating in various states throughout the United States, are principally engaged in operating cable television systems and related activities under non-exclusive franchise agreements. PRINCIPLES OF COMBINATION The accompanying combined financial statements include the accounts of the Combined Systems, as if the Combined Systems were a single company. All material intercompany balances and transactions have been eliminated. CASH, INTERCOMPANY ACCOUNTS AND DEBT Under the Partnerships' centralized cash management system, the cash requirements of its individual operating units were generally provided directly by the Partnerships and the cash generated or used by the Combined Systems was transferred to/from the Partnerships, as appropriate, through the use of intercompany accounts. The resulting intercompany account balances between the Partnerships and the Combined Systems are not intended to be settled. Accordingly, the balances are excluded or included in net assets and all the net cash generated from/(used in) operations, investing activities and financing activities has been included in the Combined Systems' net distributions to partners in the combined statements of cash flows. The Partnerships maintain external debt to fund and manage operations on a centralized basis. Debt, unamortized loan costs and interest expense of the Partnerships have not been allocated to the F-454
702 FANCH CABLE SYSTEMS (COMPRISED OF COMPONENTS OF TWFANCH-ONE CO. AND TWFANCH-TWO CO.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Combined Systems. As such, the debt, unamortized loan costs, and related interest are not representative of the debt that would be required or interest expense incurred if the Combined Systems were a separate legal entity. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PROPERTY, PLANT AND EQUIPMENT The Combined Systems record additions to property, plant and equipment at cost, which in the case of assets constructed includes amounts for material, labor and overhead. Maintenance and repairs are charged to expense as incurred. For financial reporting purposes, the Combined Systems use the straight-line method of depreciation over the estimated useful lives of the assets as follows: Transmission and distribution systems and related equipment............................................... 3 to 20 years Furniture and equipment................................... 4 to 8 1/2 years INCOME TAXES The Partnerships as entities pay no income taxes, except for an immaterial amount in Michigan. No provision or benefit for income taxes is reported by any of the Combined Systems because the Combined Systems are currently owned by various partnerships and, as such, the tax effects of the Combined Systems' results of operations accrue to the partners. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Actual results could differ from those estimates. REVENUE RECOGNITION The Combined Systems recognize revenue when services have been delivered. Launch support fees collected from programmers are deferred and recognized over the term of the contract. 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 television system. As of December 31, 1998 and 1997, no installation revenue has been deferred, as direct selling costs have exceeded installation revenue. INTANGIBLES Intangibles are recorded at cost and are amortized on a straight-line basis over their estimated useful lives. The estimated useful lives are as follows: LIVES ----- Goodwill........................................... 20 years (10 in 1997) Subscriber list.................................... 5 years Other, including franchise costs................... 4 -- 10 years The estimated useful life of goodwill was changed from 10 years in 1997 to 20 years effective January 1, 1998 to better match the amortization period to anticipated economic lives of the franchises and to better reflect industry practice. This change in estimate resulted in an increase in net income of approximately $20 million for the year ended December 31, 1998. F-455
703 FANCH CABLE SYSTEMS (COMPRISED OF COMPONENTS OF TWFANCH-ONE CO. AND TWFANCH-TWO CO.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Amortization expense was $23,519,373 and $43,094,595 for the years ended December 31, 1998 and 1997, respectively. 3. DISPOSAL OF ASSETS During 1998 and 1997, a loss on disposal of assets was recognized on plant that was replaced to technically upgrade the system and for other operational purposes. The loss on the disposal of assets is summarized as follows: 1998 1997 ----------- ---------- Cost.................................................... $ 8,004,258 $3,467,785 Accumulated depreciation................................ (1,532,392) (293,273) Proceeds................................................ (225,629) (427,592) ----------- ---------- Loss on disposal........................................ $ 6,246,237 $2,746,920 =========== ========== 4. PURCHASE AND SALE OF SYSTEMS On March 30, 1997, the Combined Systems acquired cable television systems, including plant, franchise license and business license, serving communities in the states of Pennsylvania and Virginia. The purchase price was $1,400,000, of which $765,000 was allocated to property, plant and equipment and $635,000 was allocated to intangible assets. Concurrent with the purchase of the systems in Pennsylvania on March 30, 1997, the Combined Systems sold certain of these assets, including plant, franchise and business license, for $340,000. No gain or loss on this transaction was recorded. The above acquisition was accounted for using the purchase method of accounting, and accordingly, results of operations of the acquired assets have been included in the financial statements from the dates of acquisition. 5. RELATED PARTIES The Partnerships have entered into a management agreement with an entity (the "Manager") whose sole stockholder is affiliated with several of the Partnerships' general partners. The Partnerships also entered into a management agreement with another of the Partnerships' general partners (the "General Partner"). The agreements provide that the Manager and General Partner will manage their respective systems and receive annual compensation equal to 2.5% of the gross revenues from operations for their respective systems. Management fees for the years ended December 31, 1998 and 1997 were $3,170,784 and $3,012,943, respectively. A company affiliated with the Manager provides subscriber billing services for a portion of the Combined Systems' subscribers. The Combined Systems incurred fees for monthly billing and related services in the approximate amounts of $308,943 and $307,368 for the years ended December 31, 1998 and 1997, respectively. The Combined Systems purchase the majority of its programming through the Partnerships' General Partner. Fees incurred for programming were approximately $24,600,000 and $22,200,000 for the years ended December 31, 1998 and 1997, respectively. F-456
704 FANCH CABLE SYSTEMS (COMPRISED OF COMPONENTS OF TWFANCH-ONE CO. AND TWFANCH-TWO CO.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The Manager and General Partner pay amounts on behalf of and receive amounts from the Combined Systems in the ordinary course of business. Accounts receivable and payable of the Combined Systems include amounts due from and due to the Manager and General Partner. 6. COMMITMENTS The Combined Systems, as an integral part of its cable operations, has entered into lease contracts for certain items including tower rental, microwave service and office space. Rent expense, including office, tower and pole rent, for the years ended December 31, 1998 and 1997 was approximately $2,326,328 and $2,154,961, respectively. The majority of these agreements are on month-to-month arrangements and, accordingly, the Combined Systems has no material future minimum commitments related to these leases. 7. EMPLOYEE BENEFIT PLAN TWFanch-one Co. and TWFanch-two Co. each have a defined contribution plan (the Plan) which qualifies under section 401(k) of the Internal Revenue Code. Therefore, each system of the Combined Systems participates in the respective plan. Combined Systems contributions were approximately $342,067 and $288,493 for the years ended December 31, 1998 and 1997, respectively. 8. SUBSEQUENT EVENTS On July 8, 1998, the Combined Systems entered into an Asset Purchase Agreement to acquire cable television systems, including plant, franchise license and business license, serving communities in the states of Maryland, Ohio and West Virginia. The purchase price was $248,000,000, subject to purchase price adjustments. The transaction was completed and the assets were transferred to the Combined Systems on February 24, 1999. On June 12, 1998, the Combined Systems entered into an agreement to acquire cable television systems, including plant, franchise licenses, and business licenses serving communities in the state of Michigan. The purchase price was $42,000,000, subject to purchase price adjustments. In connection with the agreement, the Combined Systems received an additional $8.76 million in capital contributions. The agreement was completed and the assets were transferred to the Combined Systems on February 1, 1999. On January 15, 1999 the Combined Systems entered into an agreement to acquire cable television systems, including plant, franchise licenses, and business licenses serving communities in the state of Michigan from a related party. The purchase price was $70 million, subject to purchase price adjustments. The agreement was completed and the assets were transferred to the Combined Systems on March 31, 1999. In connection with the agreement, the Combined Systems received an additional $25 million in capital contributions under a new TWFanch-two partnership agreement. On May 12, 1999, the Combined Systems entered into an agreement to acquire the stock of ARH, Ltd. ARH, Ltd. is engaged in the business of owning and operating cable television systems in Texas and West Virginia. The purchase price was $50,000,000 subject to purchase price adjustments. The transaction was completed and the assets were transferred to the Combined Systems on June 22, 1999. F-457
705 FANCH CABLE SYSTEMS (COMPRISED OF COMPONENTS OF TWFANCH-ONE CO. AND TWFANCH-TWO CO.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Unaudited pro forma operating results as though the acquisitions discussed above had occurred on January 1, 1998, with adjustments to give effect to amortization of franchises and certain other adjustments for the year ended December 31, 1998 is as follows: Revenues.................................................... $197,803,975 Income from operations...................................... $107,053,905 Net income.................................................. $ 32,130,293 The unaudited pro forma information has been presented for comparative purposes and does not purport to be indicative of the results of operations had these transactions been complete as of the assumed date or which may be obtained in the future. 9. YEAR 2000 (UNAUDITED) The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Combined Systems' computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on recent assessments, the Combined Systems determined that it will be required to modify or replace portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Combined Systems presently believe that with modifications or replacements of existing software and certain hardware, the Year 2000 issue can be mitigated. However, if such modifications and replacements are not made, or are not completed timely, the Year 2000 issue could have a material impact on the operations of the Combined Systems. The Combined Systems believe any cost for the necessary modification or replacement will not be material to the Combined Systems' operations. The Combined Systems have queried its significant suppliers and subcontractors that do not share information systems with the Combined Systems (external agents). To date, the Combined Systems are aware of external agents with Year 2000 issues that would materially impact the Combined Systems' results of operations, liquidity or capital resources, if these issues are not addressed. Such agents have represented that they are in the process of addressing these issues and expect to have these issues materially resolved by December 31, 1999. However, the Combined Systems have no means of ensuring that external agents will be Year 2000 ready. The inability of external agents to complete their Year 2000 resolution process in a timely fashion could materially impact the Combined Systems. The effect of noncompliance by external agents is not determinable. Management of the Combined Systems believes it has an effective program in place to resolve material Year 2000 issues in a timely manner. The Combined Systems have contingency plans for certain critical applications and are working on such plans for others. F-458
706 FANCH CABLE SYSTEMS (COMPRISED OF COMPONENTS OF TWFANCH-ONE CO. AND TWFANCH-TWO CO.) COMBINED BALANCE SHEETS JUNE 30 DECEMBER 31 1999 1998 ------------ ------------ (UNAUDITED) ASSETS Current assets:............................................. $ -- $ -- Accounts receivable, less allowance for doubtful accounts of $637,290 and $406,230 in 1999 and 1998, respectively........................................... 2,336,387 2,681,911 Prepaid expenses and other current assets................. 1,145,297 1,546,251 ------------ ------------ Total current assets........................................ 3,481,684 4,228,162 Property, plant and equipment: Transmission and distribution systems and related equipment.............................................. 262,358,553 170,156,150 Furniture and equipment................................... 10,576,311 7,308,581 ------------ ------------ 272,934,864 177,464,731 Less accumulated depreciation............................. (47,798,021) (34,878,712) ------------ ------------ Net property, plant and equipment........................... 225,136,843 142,586,019 Intangible assets, net of accumulated amortization of $97,736,092 and $80,777,442 in 1999 and 1998, respectively.............................................. 604,605,789 287,109,231 Other assets................................................ 40,310 1,050,815 ------------ ------------ Total assets................................................ $833,264,626 $434,974,227 ============ ============ LIABILITIES AND NET ASSETS Current liabilities: Accounts payable and other accrued liabilities............ $ 21,622,379 $ 11,755,752 Subscriber advances and deposits.......................... 2,501,429 1,797,068 Payable to general partner................................ -- 2,576,625 ------------ ------------ Total current liabilities................................... 24,123,808 16,129,445 Net assets.................................................. 809,140,818 418,844,782 ------------ ------------ Total liabilities and net assets............................ $833,264,626 $434,974,227 ============ ============ See accompanying notes. F-459
707 FANCH CABLE SYSTEMS (COMPRISED OF COMPONENTS OF TWFANCH-ONE CO. AND TWFANCH-TWO CO.) COMBINED STATEMENTS OF OPERATIONS SIX MONTHS ENDED JUNE 30 -------------------------- 1999 1998 ----------- ----------- (UNAUDITED) Revenues: Service................................................... $80,422,935 $56,149,864 Installation and other.................................... 9,934,295 5,666,114 ----------- ----------- 90,357,230 61,815,978 Operating expenses, excluding depreciation and amortization.............................................. 28,064,816 18,007,042 Selling, general and administrative expenses................ 12,373,069 9,186,774 ----------- ----------- 40,437,885 27,193,816 Income before other expenses................................ 49,919,345 34,622,162 Other expenses: Depreciation and amortization............................. 29,877,959 20,086,252 Management fees........................................... 2,215,696 1,545,212 (Gain)/loss on disposal of assets......................... (59,354) (4,001) Other expense, net........................................ (43,754) 142,859 ----------- ----------- 31,990,547 21,770,322 ----------- ----------- Net income.................................................. $17,928,798 $12,851,840 =========== =========== See accompanying notes. F-460
708 FANCH CABLE SYSTEMS (COMPRISED OF COMPONENTS OF TWFANCH-ONE CO. AND TWFANCH-TWO CO.) COMBINED STATEMENTS OF NET ASSETS SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED) TOTAL ------------ Net assets at December 31, 1997............................. $428,707,032 Net income for the six months ended June 30, 1998........... 12,851,840 Net distributions to partners............................... (7,481,713) ------------ Net assets at June 30, 1998................................. $434,077,159 ============ Net assets at December 31, 1998............................. $418,844,782 Net income for the six months ended June 30, 1999........... 17,928,798 Contributions from partners, net of distributions........... 372,367,238 ------------ Net assets at June 30, 1999................................. $809,140,818 ============ See accompanying notes. F-461
709 FANCH CABLE SYSTEMS (COMPRISED OF COMPONENTS OF TWFANCH-ONE CO. AND TWFANCH-TWO CO.) COMBINED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30 ----------------------------- 1999 1998 ------------- ------------ (UNAUDITED) OPERATING ACTIVITIES Net income.................................................. $ 17,928,798 $ 12,851,840 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. 29,877,959 20,086,252 Loss/(gain) on disposal of assets......................... (59,354) (4,001) Decrease/(Increase) in accounts receivable, prepaid expenses and other current assets...................... 1,756,983 (1,978,090) Increase (decrease) in accounts payable and other accrued liabilities, and subscriber advances and deposits and deferred revenue....................................... 7,994,363 (3,093,260) ------------- ------------ Net cash provided by operating activities................... 57,498,749 27,862,741 INVESTING ACTIVITIES Acquisition of cable systems................................ (410,655,208) Purchases of property, plant and equipment.................. (19,210,779) (20,381,028) ------------- ------------ Net cash used in investing activities....................... (429,865,987) (20,381,028) FINANCING ACTIVITIES Net contributions from (distribution to) partners........... 372,367,238 (7,481,713) ------------- ------------ Net cash (used in) provided by financing activities......... 372,367,238 (7,481,713) ------------- ------------ Net change in cash and cash equivalents..................... -- -- Cash and cash equivalents at beginning of year.............. -- -- ------------- ------------ Cash and cash equivalents at end of year.................... $ -- $ -- ============= ============ See accompanying notes. F-462
710 FANCH CABLE SYSTEMS (COMPRISED OF COMPONENTS OF TWFANCH-ONE CO. AND TWFANCH-TWO CO.) NOTES TO COMBINED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1999 1. BASIS OF PRESENTATION ACQUISITION BY CHARTER COMMUNICATIONS, INC. AND BASIS OF PRESENTATION TWFanch-one Co. and TWFanch-two Co. (collectively the "Partnerships"), both of which are Delaware general partnerships, are affiliated through common control and management. Pursuant to a purchase agreement, dated May 21, 1999 between certain partners of TWFanch-one Co. and TWFanch-two Co. and Charter Communications, Inc. ("Charter"), the partners of the Partnership entered into a distribution agreement whereby the partnerships will distribute and/or sell certain of their cable systems ("Combined Systems") to certain of their respective partners. These partners will then sell the Combined Systems through a combination of asset sales and sale of equity and partnership interests to Charter. Accordingly, these combined financial statements of the Combined Systems reflect "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. For purposes of determining the financial statement amounts of the Combined Systems, management excluded certain systems (the "Excluded Systems"). In order to exclude the results of operations and financial position of the Excluded Systems from the combined financial statements, management has estimated certain revenues, expenses, assets and liabilities that are not specifically identified to systems based on the ratio of each Excluded System's basic subscribers to the total basic subscribers served by the respective partnerships. Management believes the basis used for these allocations is reasonable. The Combined Systems' results of operations are not necessarily indicative of future operating results or the results that would have occurred if the Combined Systems were a separate legal entity. The accompanying combined financial statements as of and for the periods ended June 30, 1999 and 1998 are unaudited. However, in the opinion of management, the financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for fair presentation in accordance with generally accepted accounting principles applicable to interim periods. Interim results of operations are not indicative of results for the full year. The accompanying financial statements should be read in conjunction with the audited combined financial statements of Fanch Cable Systems (comprised of components of TWFanch-one Co. and TWFanch-two Co.). DESCRIPTION OF BUSINESS The Combined Systems, operating in various states throughout the United States, are principally engaged in operating cable television systems and related activities under non-exclusive franchise agreements. PRINCIPLES OF COMBINATION The accompanying combined financial statements include the accounts of the Combined Systems, as if the Combined Systems were a single company. All material intercompany balances and transactions have been eliminated. CASH, INTERCOMPANY ACCOUNTS AND DEBT Under the Partnerships' centralized cash management system, cash requirements of its individual operating units were generally provided directly by the Partnerships and the cash F-463
711 FANCH CABLE SYSTEMS (COMPRISED OF COMPONENTS OF TWFANCH-ONE CO. AND TWFANCH-TWO CO.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) generated or used by the Combined Systems was transferred to/from the Partnerships, as appropriate, through the intercompany accounts. The intercompany account balances between the Partnerships and the Combined Systems are not intended to be settled. Accordingly, the balances are excluded/included in net assets and all the cash generated from operations, investing activities and financing activities have been included in the Combined Systems' net distributions from/to partners in the combined statements of cash flows. The Partnerships maintain all external debt to fund and manage operations on a centralized basis. Debt, unamortized loan costs and interest expense of the Partnerships have not been allocated to the Combined Systems. As such debt, unamortized loan costs, and related interest expense are not representative of the debt that would be required or interest expense incurred if the Combined Systems were a separate legal entity. 2. ACQUISITIONS On May 12, 1999, the Combined Systems entered into an agreement to acquire the stock of ARH, Ltd. ARH, Ltd. is engaged in the business of owning and operating cable television systems in Texas and West Virginia. The purchase price was $50 million subject to purchase price adjustments. The transaction was completed and the assets were transferred to the Combined Systems on June 22, 1999. On June 12, 1998, the Combined Systems entered into an agreement to acquire cable television systems, including plant, franchise license, and business license serving communities in the state of Michigan. The purchase price was $42 million subject to purchase price adjustments. In connection with the agreement, the Combined Systems received an additional $8.76 million in capital contributions. The agreement was completed and the assets were transferred to the Combined Systems on February 1, 1999. On July 8, 1998, the Combined Systems entered into an Asset Purchase Agreement to acquire cable television systems, including plant, franchise license and business license, serving communities in the states of Maryland, Ohio and West Virginia. The purchase price was $248 million subject to purchase price adjustments. The transaction was completed and the assets were transferred to the Combined Systems on February 24, 1999. On January 15, 1999 the Combined Systems entered into an agreement to acquire cable television systems, including plant, franchise license, and business license serving communities in the state of Michigan from a related party. The purchase price was $70 million, subject to purchase price adjustments. The agreement was completed and the assets were transferred to the Combined Systems on March 31, 1999. In connection with the agreement, the Combined Systems received an additional $25 million in capital contributions under a new TWFanch-two partnership agreement. Unaudited proforma operating results as though the acquisitions discussed above had occurred on January 1, 1998, with adjustments to give effect to amortization of franchises and certain other adjustments are as follows: SIX MONTHS ENDED JUNE 30 --------------------------- 1999 1998 ------------ ----------- Revenues.............................................. $131,527,873 $98,263,557 Income from operations................................ $ 71,104,843 $52,227,958 Net income............................................ $ 30,561,993 $18,465,907 F-464
712 FANCH CABLE SYSTEMS (COMPRISED OF COMPONENTS OF TWFANCH-ONE CO. AND TWFANCH-TWO CO.) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The unaudited pro forma information has been presented for comparative purposes and does not purport to be indicative of the results of operations had these transactions been complete as of the assumed date or which may be obtained in the future. F-465
713 BRESNAN COMMUNICATIONS GROUP LLC CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS) DECEMBER 31, JUNE 30, 1998 1999 ------------ --------- ASSETS Cash and cash equivalents................................... $ 6,636 $ 2,488 Restricted cash............................................. 47,199 338 Trade and other receivables, net............................ 8,874 8,917 Property and equipment, at cost: Land and buildings........................................ 4,123 6,708 Distribution systems...................................... 443,114 469,677 Support equipment......................................... 50,178 56,651 -------- --------- 497,415 533,036 Less accumulated depreciation............................. 190,752 202,160 -------- --------- 306,663 330,876 Franchise costs, net........................................ 291,103 324,990 Other assets, net of accumulated amortization............... 3,961 23,515 -------- --------- Total assets........................................... $664,436 $ 691,124 ======== ========= LIABILITIES AND MEMBER'S EQUITY (DEFICIT) Accounts payable............................................ $ 3,193 $ 5,442 Accrued expenses............................................ 13,395 20,503 Accrued interest............................................ 21,835 17,573 Due to affiliated companies................................. -- 3,698 Debt........................................................ 232,617 846,364 Other liabilities........................................... 11,648 6,015 -------- --------- Total liabilities...................................... 282,688 899,595 Member's equity (deficit)................................... 381,748 (208,471) -------- --------- Commitments and contingencies (note 5) Total liabilities and member's equity (deficit)........ $664,436 $ 691,124 ======== ========= See accompanying notes to consolidated financial statements. F-466
714 BRESNAN COMMUNICATIONS GROUP LLC CONSOLIDATED STATEMENTS OF OPERATIONS AND MEMBER'S EQUITY (DEFICIT) (UNAUDITED) (IN THOUSANDS) SIX MONTHS ENDED JUNE 30, ------------------------- 1998 1999 -------- --------- Revenue..................................................... $126,453 $ 137,291 Operating costs and expenses: Programming (note 4)...................................... 31,198 35,752 Operating................................................. 14,382 15,698 Selling, general and administrative (note 4).............. 25,863 32,806 Depreciation and amortization............................. 26,441 26,035 -------- --------- 97,884 110,291 -------- --------- Operating income....................................... 28,569 27,000 Other income (expense): Interest expense: Related party (note 4)................................. (944) (152) Other.................................................. (8,484) (31,789) Gain (loss) on sale of cable television systems........... 6,869 (170) Other, net................................................ (9) (437) -------- --------- (2,568) (32,548) -------- --------- Net earnings (loss).................................... 26,001 (5,548) Member's equity (deficit) Beginning of period....................................... 359,098 381,748 Operating expense allocations and charges................. 134,079 35,850 Cash transfers, net....................................... (58,793) -- Capital contributions by members.......................... -- 136,500 Capital distributions to members.......................... -- (757,021) -------- --------- End of period............................................. $360,385 $(208,471) ======== ========= See accompanying notes to consolidated financial statements. F-467
715 BRESNAN COMMUNICATIONS GROUP LLC CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS) SIX MONTHS ENDED JUNE 30, --------------------- 1998 1999 -------- --------- Cash flows from operating activities: Net earnings (loss)....................................... $ 26,001 $ (5,548) Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization.......................... 26,441 26,035 Loss (gain) on sale of cable systems................... (6,869) 169 Amortization of deferred financing costs............... -- 2,746 Changes in operating assets and liabilities, net of effects of acquisitions: Change in receivables................................ 3,152 (5,766) Change in other assets............................... 284 (3,858) Change in accounts payable, accrued expenses and other liabilities................................... (1,194) 9,223 -------- --------- Net cash provided by operating activities......... 47,815 23,001 -------- --------- Cash flows from investing activities: Capital expended for property and equipment............... (17,236) (22,827) Capital expended for franchise costs...................... (3,534) (811) Cash paid in acquisitions................................. (16,500) (64,763) Proceeds on dispositions of cable televisions systems..... 12,000 4,097 Change in restricted cash................................. (12,000) 46,861 -------- --------- Net cash used in investing activities............. (37,270) (37,443) -------- --------- Cash flows from financing activities: Borrowings under note agreement........................... 33,400 867,751 Repayments under note agreement........................... (15,301) (254,004) Deferred finance costs paid............................... -- (18,781) Contributions from members................................ -- 136,500 Distributions to members.................................. (24,764) (721,172) -------- --------- Net cash provided by financing activities......... (6,665) 10,294 -------- --------- Net increase (decrease) in cash................... 3,880 (4,148) Cash and cash equivalents: Beginning of period....................................... 6,957 6,636 -------- --------- End of period............................................. $ 10,837 $ 2,488 ======== ========= Supplemental disclosure of cash flow information -- cash paid during the period for interest....................... $ 8,895 $ 33,457 ======== ========= See accompanying notes to consolidated financial statements. F-468
716 BRESNAN COMMUNICATIONS GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1999 (UNAUDITED) (IN THOUSANDS) (1) BASIS OF PRESENTATION Bresnan Communications Group LLC and its subsidiaries ("BCG" or the "Company") are wholly owned by Bresnan Communications Company Limited Partnership, a Michigan limited partnership ("BCCLP"). BCG is a Delaware limited liability corporation formed on August 5, 1998 for the purpose of acting as co-issuer with its wholly-owned subsidiary, Bresnan Capital Corporation ("BCC"), of $170,000 aggregate principal amount at maturity of 8% Senior Notes and $275,000 aggregate principal amount at maturity of 9.25% Senior Discount Notes, both due in 2009 (collectively the "Notes"). Prior to the issuance of the Notes on February 2, 1999, BCCLP completed the terms of a contribution agreement dated June 3, 1998, as amended, whereby certain affiliates of Tele-Communications, Inc. ("TCI") contributed certain cable television systems along with assumed TCI debt of approximately $708,854 to BCCLP. In addition, Blackstone BC Capital Partners L.P. and affiliates contributed $136,500 to BCCLP. Upon completion of the Notes offering on February 2, 1999 BCCLP contributed all of its assets and liabilities to BCG, which formed a wholly owned subsidiary, Bresnan Telecommunications Company LLC ("BTC"), into which it contributed all of its assets and certain liabilities. The above noted contributed assets and liabilities were accounted for at predecessor cost, as reflected in Bresnan Communication Group Systems financial statements, because of the common ownership and control of TCI and have been reflected in the accompanying financial statements in a manner similar to pooling of interests. The Company owns and operates cable television systems in small- and medium-sized communities in the midwestern United States. The accompanying interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of such periods. The results of operations for the period ended June 30, 1999 are not necessarily indicative of results for a full year. These consolidated financial statements should be read in conjunction with the combined financial statements and notes thereto of the predecessor to the Company contained in the Bresnan Communications Group Systems financial statements for the year ended December 31, 1998. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (2) ACQUISITIONS AND DISPOSITIONS In February 1998, the Company acquired certain cable television assets located in Michigan which were accounted for under the purchase method. The purchase price was allocated to the cable television assets acquired in relation to their fair values as increase in property and equipment of $3,703 and franchise costs of $12,797. In addition, the Company acquired two additional systems in the first quarter of 1999 which were accounted for under the purchase method. The purchase prices were allocated to the cable television assets acquired in relation to their estimated fair values as increases in property and equipment of $22,200 and franchise costs of $44,600. F-469
717 BRESNAN COMMUNICATIONS GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1999 (UNAUDITED) (IN THOUSANDS) The results of operations of these cable television systems have been included in the accompanying consolidated statements of operations from their dates of acquisition. Pro forma information has not been presented because the effect was not significant. The Company also disposed of cable television systems during 1998 and 1999 for gross proceeds of $12,000 and $4,400 respectively, resulting in a gain (loss) on sale of cable television systems of $6,869 and $(170) for 1998 and 1999, respectively. The results of operations of these cable television systems through the dates of the dispositions and the gain (loss) from the dispositions have been included in the accompanying consolidated statements of operations. As part these dispositions, the Company received cash that is restricted to reinvestment in additional cable television systems. (3) DEBT Debt is summarized as follows: JUNE 30, 1999 ------------- Senior Credit Facility(a)................................... $500,000 Senior Notes Payable(b)..................................... 170,000 Senior Discount Notes Payable(b)............................ 175,021 Other Debt.................................................. 1,343 -------- $846,364 ======== - --------------- (a) The Senior Credit Facility represents borrowings under a $650,000 senior reducing revolving credit and term loan facility as documented in the loan agreement as of February 2, 1999. The Senior Credit Facility calls for a current available commitment of $650,000 of which $500,000 is outstanding at June 30, 1999. The Senior Credit Facility provides for three tranches, a revolving loan tranche for $150,000 (the "Revolving Loan"), a term loan tranche of $328,000 (the "A Term Loan" and together with the Revolving Loan, "Facility A") and a term loan tranche of $172,000 (the "Facility B"). The commitments under the Senior Credit Facility will reduce commencing with the quarter ending March 31, 2002. Facility A permanently reduces in quarterly amounts ranging from 2.5% to 7.5% of the Facility A amount starting March 31, 2002 and matures approximately eight and one half years after February 2, 1999. Facility B is also to be repaid in quarterly installments of .25% of the Facility B amount beginning in March 2002 and matures approximately nine years after February 2, 1999, on which date all remaining amounts of Facility B will be due and payable. Additional reductions of the Senior Credit Facility will also be required upon certain asset sales, subject to the right of the Company and its subsidiaries to reinvest asset sale proceeds under certain circumstances. The interest rate options include a LIBOR option and a Prime Rate option plus applicable margin rates based on the Company's total leverage ratio, as defined. In addition, the Company is required to pay a commitment fee on the unused revolver portion of Facility A which will accrue at a rate ranging from .25% to .375% per annum, depending on the Company's total leverage ratio, as defined. The rate applicable to balances outstanding at June 30, 1999 ranged from 7.00% to 7.85%. Covenants of the Senior Credit Facility require, among other conditions, the maintenance of specific levels of the ratio of cash flows to future debt and interest expense and certain F-470
718 BRESNAN COMMUNICATIONS GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1999 (UNAUDITED) (IN THOUSANDS) limitations on additional investments, indebtedness, capital expenditures, asset sales and affiliate transactions. (b) On February 2, 1999, the Company sold $170,000 aggregate principal amount senior notes payable (the "Senior Notes"). In addition, on the same date, the Company issued $275,000 aggregate principal amount at maturity of senior discount notes, (the "Senior Discount Notes") for approximately $175,000 gross proceeds (collectively the "Notes"). The Senior Notes are unsecured and will mature on February 1, 2009. The Senior Notes bear interest at 8% per annum payable semi-annually on February 1 and August 1 of each year, commencing August 1, 1999. The Senior Discount Notes are unsecured and will mature on February 1, 2009. The Senior Discount Notes were issued at a discount to their aggregate principal amount at maturity and will accrete at a rate of approximately 9.25% per annum, compounded semi-annually, to an aggregate principal amount of $275,000 on February 1, 2004. Subsequent to February 1, 2004, the Senior Discount Notes will bear interest at a rate of 9.25% per annum payable semi-annually in arrears on February 1 and August 1 of each year, commencing August 1, 2004. The Company may elect, upon not less than 60 days prior notice, to commence the accrual of interest on all outstanding Senior Discount Notes on or after February 1, 2002, in which case the outstanding principal amount at maturity of each Senior Discount Note will on such commencement date be reduced to the accreted value of such Senior Discount Note as of such date and interest shall be payable with respect to the Senior Discount Notes on each February and August 1 thereafter. The Company may not redeem the Notes prior to February 1, 2004 except that prior to February 1, 2002, the Company may redeem up to 35% of the Senior Notes and Senior Discount Notes at redemption prices equal to 108% and 109% of the applicable principal amount and accreted value, respectively. Subsequent to February 1, 2004, the Company may redeem the Notes at redemption prices declining annually from approximately 104% of the principal amount or accreted value. Bresnan Communications Group LLC and its wholly owned subsidiary Bresnan Capital Corporation are the sole obligors of the Senior Notes and Senior Discount Notes. Bresnan Communications Group LLC has no other assets or liabilities other than its investment in its wholly owned subsidiary Bresnan Telecommunications Company LLC. Bresnan Capital Corporation has no other assets or liabilities. Upon change of control of the Company, the holders of the notes have the right to require the Company to purchase the outstanding notes at a price equal to 101% of the principal amount or accreted value plus accrued and unpaid interest. (See note 6 "Proposed Sale of the Company"). BTC has entered into interest rate swap agreements to effectively fix or set maximum interest rates on a portion of its floating rate long-term debt. BTC is exposed to credit loss in the event of nonperformance by the counterparties to the interest rate swap agreements. At June 30, 1999, such Interest Rate Swap agreements effectively fixed or set a maximum LIBOR base interest rates between 5.84% and 8.08% on an aggregate notional principal amount of $110,000 which rates would become effective upon the occurrence of certain events. The effect of the Interest Rate Swap on interest expense for the six months ended F-471
719 BRESNAN COMMUNICATIONS GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1999 (UNAUDITED) (IN THOUSANDS) June 30, 1998 and 1999 was not significant. The expiration dates of the Interest Rate Swaps ranges from August 25, 1999 to April 3, 2000. The difference between the fair market value and book value of long-term debt and the Interest Rate Swaps at June 30, 1998 and 1999 is not significant. (4) TRANSACTIONS WITH RELATED PARTIES BCG and its predecessor purchased, at TCI's cost, substantially all of its pay television and other programming from affiliates of TCI. Charges for such programming were $28,118 and $30,810 for the six months ended June 30, 1998 and 1999, respectively, and are included in programming expenses in the accompanying consolidated financial statements. Prior to February 2, 1999, certain affiliates of the predecessor to BCG provided administrative services to BCG and assumed managerial responsibility of BCG's cable television system operations and construction. As compensation for these services, BCG paid a monthly fee calculated pursuant to certain agreed upon formulas. Subsequent to the TCI Transaction on February 2, 1999, certain affiliates of BCG provide administrative services and have assumed managerial responsibilities of BCG. As compensation for these services BCG pays a monthly fee equal to approximately 3% of gross revenues. Such aggregate charges totaled $5,961 and $5,040 and have been included in selling, general and administrative expenses for the six months ended June 30, 1998 and 1999, respectively. (5) COMMITMENTS AND CONTINGENCIES The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") imposed certain rate regulations on the cable television industry. Under the 1992 Cable Act, all cable systems are subject to rate regulation, unless they face "effective competition," as defined by the 1992 Cable Act and expanded in the Telecommunications Act of 1996 (the "1996 Act"), in their local franchise area. Although the Federal Communications Commission (the "FCC") has established regulations required by the 1992 Cable Act, local government units (commonly referred to as local franchising authorities) are primarily responsible for administering the regulation of a cable system's basic service tier ("BST"). The FCC itself directly administered rate regulation of any cable programming service tier ("CPST"). The FCC's authority to regulate CPST rates expired on March 31, 1999. The FCC has taken the position that it will still adjudicate CPST complaints filed after this sunset date (but no later than 180 days after the last CPST rate increase imposed prior to March 31, 1999), and will strictly limit its review (and possible refund orders) to the time period predating the sunset date. Under the FCC's rate regulations, most cable systems were required to reduce their BST and CPST rates in 1993 and 1994, and have since had their rate increases governed by a complicated price structure that allows for the recovery of inflation and certain associated costs, as well as providing some incentive for expanding channel carriage. Operators also have the opportunity to bypass this "benchmark" regulatory structure in favor of the traditional "cost-of- service" regulation in cases where the latter methodology appears favorable. Premium cable service offered on a per-channel or per-program basis remain unregulated, as do affirmatively marketed packages consisting entirely of new programming product. F-472
720 BRESNAN COMMUNICATIONS GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1999 (UNAUDITED) (IN THOUSANDS) The management of BCG believes that it has complied in all material respects with the provisions of the 1992 Cable Act and the 1996 Act, including its rate setting provisions. If, as a result of the review process, a system cannot substantiate its rates, it could be required to retroactively reduce its rates to the appropriate benchmark and refund the excess portion of rates received. Any refunds of the excess portion of CPST rates would be retroactive to the date of complaint. Any refunds of the excess portion of BST or equipment rates would be retroactive to one year prior to the implementation of the rate reductions. Certain plaintiffs have filed or threatened separate class action complaints against certain of the systems of BCG, alleging that the systems' practice of assessing an administrative fee to the subscribers whose payments are delinquent constitutes an invalid liquidated damage provision and a breach of contract, and violates local consumer protection statutes. Plaintiffs seek recovery of all late fees paid to the subject systems as a class purporting to consist of all subscribers who were assessed such fees during the applicable limitation period, plus attorney fees and costs. BCG has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is possible that BCG may incur losses upon conclusion of the matters referred to above, an estimate of any loss or range of loss cannot presently be made. Based upon the facts available, management believes that, although no assurance can be given as to the outcome of these actions, the ultimate disposition should not have material adverse effect upon the combined financial condition of BCG. BCG leases business offices, has entered into pole attachment agreements and uses certain equipment under lease arrangements. Rental expense under such arrangements amounted to $1,582 and $1,691 during the six months ended June 30, 1998 and 1999, respectively. Future minimum lease payments under noncancelable operating leases are estimated to approximate $2,240 per year for each of the next five years. It is expected that, in the normal course of business, expiring leases will be renewed or replaced by leases on the same or other properties. During 1999, BCG has continued enterprise-wide comprehensive efforts to assess and remediate its respective computer systems and related software and equipment to ensure such systems, software and equipment recognize, process and store information in the year 2000 and thereafter. Such year 2000 remediation efforts include an assessment of its most critical systems, such as customer service and billing systems, headends and other cable plant, business support operations, and other equipment and facilities. BCG also continued its efforts to verify the year 2000 readiness of its significant suppliers and vendors and continued to communicate with significant business partners and affiliates to assess affiliates' year 2000 status. BCG has formed a year 2000 program management team to organize and manage its year 2000 remediation efforts. The program management team is responsible for overseeing, coordinating and reporting on its respective year 2000 remediation efforts. During 1999, the project management team continued its surveys of significant third-party vendors and suppliers whose systems, services or products are important to its operations (e.g., suppliers of addressable controllers and set-top boxes, and the provider of billing services). BCG has instituted a verification process to determine the vendors' year 2000 readiness. Such verification includes, as deemed necessary, reviewing vendors' test and other data and engaging F-473
721 BRESNAN COMMUNICATIONS GROUP LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) JUNE 30, 1999 (UNAUDITED) (IN THOUSANDS) in regular conferences with vendors' year 2000 teams. BCG is also requiring testing to validate the year 2000 compliance of certain critical products and services. The year 2000 readiness of such providers is critical to continued provision of cable service. The failure to correct a material year 2000 problem could result in an interruption or failure of certain important business operations. There can be no assurance that the systems of BCG or the systems of other companies on which they rely will be converted in time, or that any such failure to convert by BCG or other companies will not have a material adverse effect on the financial position, results of operations or cash flows of BCG. (6) PROPOSED SALE OF THE COMPANY In June 1999, the Partners of BCCLP entered into an agreement to sell all of their partnership interests in BCCLP to Charter Communications Holding Company, LLC for a purchase price of approximately $3.1 billion in cash and equity which will be reduced by the assumption of BCCLP's debt at closing. BCCLP anticipates that this transaction will close in the first half of 2000. F-474
722 INDEPENDENT AUDITORS' REPORT The Board of Directors Tele-Communications, Inc.: We have audited the accompanying combined balance sheets of Bresnan Communications Group Systems, (as defined in Note 1 to the combined financial statements) as of December 31, 1997 and 1998, and the related combined statements of operations and Parents' investment and cash flows for each of the years in the three-year period ended December 31, 1998. These combined financial statements are the responsibility of the Bresnan Communications Group Systems management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Bresnan Communications Group Systems, as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP Denver, Colorado April 2, 1999 F-475
723 BRESNAN COMMUNICATIONS GROUP SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) COMBINED BALANCE SHEETS DECEMBER 31, 1997 AND 1998 1997 1998 --------- --------- (AMOUNTS IN THOUSANDS) ASSETS Cash and cash equivalents................................... $ 6,957 $ 6,636 Restricted cash (note 3).................................... -- 47,199 Trade and other receivables, net............................ 11,700 8,874 Property and equipment, at cost: Land and buildings........................................ 5,229 4,123 Distribution systems...................................... 410,158 443,114 Support equipment......................................... 45,687 50,178 -------- -------- 461,074 497,415 Less accumulated depreciation............................. 157,618 190,752 -------- -------- 303,456 306,663 Franchise costs, net........................................ 291,746 291,103 Other assets, net of accumulated amortization............... 3,339 3,961 -------- -------- Total assets........................................... $617,198 $664,436 ======== ======== LIABILITIES AND PARENTS' INVESTMENT Accounts payable............................................ $ 2,071 $ 3,193 Accrued expenses............................................ 11,809 13,395 Accrued interest............................................ 20,331 21,835 Debt........................................................ 214,170 232,617 Other liabilities........................................... 9,719 11,648 -------- -------- Total liabilities...................................... 258,100 282,688 Parents' investment......................................... 359,098 381,748 -------- -------- Commitments and contingencies (note 7) Total liabilities and Parents' investment.............. $617,198 $664,436 ======== ======== See accompanying notes to combined financial statements. F-476
724 BRESNAN COMMUNICATIONS GROUP SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) COMBINED STATEMENTS OF OPERATIONS AND PARENTS' INVESTMENT YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 1996 1997 1998 -------- -------- -------- (AMOUNTS IN THOUSANDS) Revenue................................................. $216,609 $247,108 $261,964 Operating costs and expenses: Programming (note 6).................................. 46,087 53,857 63,686 Operating............................................. 31,405 31,906 28,496 Selling, general and administrative (note 6).......... 52,485 50,572 58,568 Depreciation and amortization......................... 50,908 53,249 54,308 -------- -------- -------- 180,885 189,584 205,058 -------- -------- -------- Operating income................................... 35,724 57,524 56,906 Other income (expense): Interest expense: Related party (note 4)............................. (1,859) (1,892) (1,872) Other.............................................. (13,173) (16,823) (16,424) Gain on sale of cable television systems.............. -- -- 27,027 Other, net............................................ (844) (978) (273) -------- -------- -------- (15,876) (19,693) 8,458 -------- -------- -------- Net earnings....................................... 19,848 37,831 65,364 Parents' investment: Beginning of year..................................... 344,664 347,188 359,098 Operating expense allocations and charges (notes 4 and 6)................................................. 54,643 60,389 71,648 Net assets of acquired systems (note 3)............... -- 33,635 -- Cash transfers, net................................... (71,967) (119,945) (114,362) -------- -------- -------- End of year........................................... $347,188 $359,098 $381,748 ======== ======== ======== See accompanying notes to combined financial statements. F-477
725 BRESNAN COMMUNICATIONS GROUP SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 1996 1997 1998 ------- ------- ------- (AMOUNTS IN THOUSANDS) Cash flows from operating activities Net earnings.............................................. $19,848 $37,831 $65,364 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization.......................... 50,908 53,249 54,308 Gain on sale of cable television systems............... -- -- (27,027) Other noncash charges.................................. 1,171 2,141 452 Changes in operating assets and liabilities, net of effects of acquisitions: Change in receivables................................ (291) (3,413) 2,826 Change in other assets............................... (144) 164 -- Change in accounts payable, accrued expenses and other liabilities................................. 7,178 2,305 6,141 Other, net........................................... 473 271 297 ------- ------- ------- Net cash provided by operating activities......... 79,143 92,548 102,361 ------- ------- ------- Cash flows from investing activities: Capital expended for property and equipment............... (78,248) (33,875) (58,601) Capital expended for franchise costs...................... (87) (1,407) (157) Cash received in acquisitions............................. -- 1,179 28,681 Change in restricted cash................................. -- -- (47,199) ------- ------- ------- Net cash used in investing activities............. (78,335) (34,103) (77,276) ------- ------- ------- Cash flows from financing activities: Borrowings under note agreement........................... 40,300 31,300 49,400 Repayments under note agreement........................... (18,546) (24,364) (30,953) Deferred finance costs paid............................... (595) (2,121) (1,139) Change in Parents' investment............................. (24,259) (59,556) (42,714) ------- ------- ------- Net cash used in financing activities............. (3,100) (54,741) (25,406) ------- ------- ------- Net increase (decrease) in cash................... (2,292) 3,704 (321) Cash and cash equivalents: Beginning of year......................................... 5,545 3,253 6,957 ------- ------- ------- End of year............................................... $ 3,253 $ 6,957 $ 6,636 ======= ======= ======= Supplemental disclosure of cash flow information -- Cash paid during the year for interest.................... $12,996 $16,971 $16,792 ======= ======= ======= See accompanying notes to combined financial statements. F-478
726 BRESNAN COMMUNICATIONS GROUP SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS) (1) BASIS OF PRESENTATION AND PARTNERSHIP FORMATION The financial statements of Bresnan Communications Group Systems are the combination of the financial statements of Bresnan Communications Company Limited Partnership ("BCCLP") and certain additional cable television systems (the "TCI Bresnan Systems") owned by affiliates of Tele-Communications, Inc. ("TCI"). BCCLP and the TCI Bresnan Systems are under the common ownership and control of TCI for all periods presented. Based on such common ownership and control, the accompanying financial statements are presented herein at historical cost on a combined basis and will serve as a predecessor to Bresnan Communications Group LLC. The combined net assets of Bresnan Communications Group Systems are herein referred to as "Parents' investment". BCCLP is a partnership between a subsidiary of TCI and William J. Bresnan and certain entities which he controls (collectively, the "Bresnan Entities"). BCCLP owns and operates cable television systems principally located in the midwestern United States. TCI and the Bresnan Entities hold 78.4% and 21.6% interests, respectively, in BCCLP. Certain of the TCI Bresnan Systems have been acquired through transactions whereby TCI acquired various larger cable entities (the "Original Systems"). The accounts of certain of the TCI Bresnan Systems include allocations of purchase accounting adjustments from TCI's acquisition of the Original Systems. Such allocations and the related franchise cost amortization are based upon the relative fair market values of the systems involved. In addition, certain costs of TCI and the Bresnan Entities are charged to the Bresnan Communications Group Systems based on the methodologies described in note 6. Although such allocations are not necessarily indicative of the costs that would have been incurred by the Bresnan Communications Group Systems on a stand alone basis, management of TCI and the Bresnan Entities believe that the resulting allocated amounts are reasonable. On June 3, 1998, certain affiliates of TCI, the Bresnan Entities, BCCLP and Blackstone Cable Acquisition Company, LLC ("Blackstone") (collectively, the "Partners") entered into a Contribution Agreement. Effective February 2, 1999 under the terms of the contribution agreement, certain systems of affiliates of TCI were transferred to BCCLP along with approximately $708,854 of assumed TCI debt (the "TCI Transaction") which is not reflected in the accompanying combined financial statements. At the same time, Blackstone contributed $136,500 to BCCLP. As a result of these transactions, the Bresnan Entities remain the managing partner of BCCLP, with a 10.2% combined general and limited partner interest, while TCI and Blackstone are 50% and 39.8% limited partners of BCCLP, respectively. The amount of the assumed TCI debt will be adjusted based on certain working capital adjustments at a specified time after the consummation of TCI Transaction. Upon completion of these transactions BCCLP formed a wholly-owned subsidiary, Bresnan Communications Group LLC ("BCG"), into which it contributed all its assets and liabilities. Simultaneous with this transaction Bresnan Communications Group LLC formed a wholly-owned subsidiary, Bresnan Telecommunications Company LLC ("BTC"), into which it contributed all its assets and liabilities. In anticipation of these transactions, on January 25, 1999, BCG sold $170,000 aggregate principal amount of 8% senior notes (the "Senior Notes") due 2009 and $275,000 aggregate principal amount at maturity (approximately $175,000 gross proceeds) of 9.25% senior discount notes (the "Senior Discount Notes") due 2009. The net proceeds from the offering of the Senior Notes and the Senior Discount Notes approximated $336,000 after giving effect to discounts and F-479
727 BRESNAN COMMUNICATIONS GROUP SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS) commissions. Also, BTC borrowed $508,000 of $650,000 available under a new credit facility (the "Credit Facility"). The proceeds of the Senior Notes, the Senior Discount Notes and the Credit Facility were used to retire the assumed TCI debt and the outstanding debt of the Bresnan Communications group systems prior to the TCI Transaction (see Note 4), as well as the payment of certain fees and expenses. Deferred financing costs of $2.6 million associated with the retired debt will be written off. After giving effect to the issuance of debt noted above, the unaudited proforma debt outstanding at December 31, 1998 would be $857 million and the Parents' investment would decrease to a deficit position of $206 million at December 31, 1998. On March 9, 1999, AT&T Corp. ("AT&T") acquired TCI in a merger (the "AT&T Merger"). In the AT&T Merger, TCI became a subsidiary of AT&T. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Cash Equivalents Cash equivalents consist of investments which are readily convertible into cash and have maturities of three months or less at the time of acquisition. (b) Trade and Other Receivables Receivables are reflected net of an allowance for doubtful accounts. Such allowance at December 31, 1997 and 1998 was not significant. (c) Property and Equipment Property and equipment is stated at cost, including acquisition costs allocated to tangible assets acquired. Construction costs, including interest during construction and applicable overhead, are capitalized. During 1996, 1997 and 1998, interest capitalized was $1,005, $324 and $47, respectively. Depreciation is computed on a straight-line basis using estimated useful lives of 3 to 15 years for distribution systems and 3 to 40 years for support equipment and buildings. Repairs and maintenance are charged to operations, and renewals and additions are capitalized. At the time of ordinary retirements, sales or other dispositions of property, the original cost and cost of removal of such property are charged to accumulated depreciation, and salvage, if any, is credited thereto. Gains or losses are only recognized in connection with the sales of properties in their entirety. (d) Franchise Costs Franchise costs include the difference between the cost of acquiring cable television systems and amounts allocated to their tangible assets. Such amounts are generally amortized on a straight-line basis over 40 years. Costs incurred by Bresnan Communications Group Systems in negotiating and renewing franchise agreements are amortized on a straight-line basis over the life of the franchise, generally 10 to 20 years. F-480
728 BRESNAN COMMUNICATIONS GROUP SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS) (e) Impairment of Long-Lived Assets Management periodically reviews the carrying amounts of property and equipment and identifiable intangible assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. If an impairment adjustment is deemed necessary based on an analysis of undiscounted cash flow, such loss is measured by the amount that the carrying value of such assets exceeds their fair value. Considerable management judgment is necessary to estimate the fair value of assets. Accordingly, actual results could vary significantly from such estimates. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell. (f) Financial Instruments Bresnan Communications Group Systems has entered into fixed interest rate exchange agreements ("Interest Rate Swaps") which are used to manage interest rate risk arising from its financial liabilities. Such Interest Rate Swaps are accounted for as hedges; accordingly, amounts receivable or payable under the Interest Rate Swaps are recognized as adjustments to interest expense. Such instruments are not used for trading purposes. During 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133"), which is effective for all fiscal years beginning after June 15, 1999. SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities by requiring that all derivative instruments be reported as assets or liabilities and measured at their fair values. Under SFAS 133, changes in the fair values of derivative instruments are recognized immediately in earnings unless those instruments qualify as hedges of the (1) fair values of existing assets, liabilities, or firm commitments, (2) variability of cash flows of forecasted transactions, or (3) foreign currency exposures of net investments in foreign operations. Although management has not completed its assessment of the impact of SFAS 133 on its combined results of operations and financial position, management estimates that the impact of SFAS 133 will not be material. (g) Income Taxes The majority of the net assets comprising the TCI Bresnan Systems and BCCLP were historically held in partnerships. In addition, BCG has been formed as a limited liability company, to be treated for tax purposes as a flow-through entity. Accordingly, no provision has been made for income tax expense or benefit in the accompanying combined financial statements as the earnings or losses of Bresnan Communications Group Systems will be reported in the respective tax returns of BCG's members (see note 5). (h) Revenue Recognition Cable revenue for customer fees, equipment rental, advertising, and pay-per-view programming is recognized in the period that services are delivered. Installation revenue is recognized in the period the installation services are provided to the extent of direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that customers are expected to remain connected to the cable distribution system. F-481
729 BRESNAN COMMUNICATIONS GROUP SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS) (i) Combined Statements of Cash Flows Except for acquisition transactions described in note 3, transactions effected through Parents' investment have been considered constructive cash receipts and payments for purposes of the combined statements of cash flows. (j) Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. (3) ACQUISITIONS AND SYSTEM DISPOSITIONS In January 1997, affiliates of TCI acquired certain cable television assets located in or around the Saginaw, Michigan area which are included in the TCI Bresnan Systems. TCI's cost basis in such acquired assets has been allocated based on their respective fair values. Such allocation has been reflected in the accompanying combined financial statements as follows: Cash........................................................ $ 1,179 Property and equipment...................................... 10,786 Franchise costs............................................. 21,670 ------- Parents' investment....................................... $33,635 ======= In addition in 1998, BCCLP acquired two cable systems which were accounted for under the purchase method. The purchase prices were allocated to the assets acquired in relation to their fair values as increases in property and equipment of $7,099 and franchise costs of $21,651. The results of operations of these cable television systems have been included in the accompanying combined statements of operations from their dates of acquisition. Pro forma information on the acquisitions has not been presented because the effects were not significant. During 1998, BCCLP also disposed of two cable systems for gross proceeds of $58,949, which resulted in gain on sale of cable television systems of $27,027. In connection with one of the dispositions, a third party intermediary received $47,199 of cash that is designated to be reinvested in certain identified assets for income tax purposes. (4) DEBT Debt is summarized as follows: 1997 1998 -------- -------- Notes payable to banks(a)............................ $190,300 $209,000 Notes payable to partners(b)....................... 22,100 22,100 Other debt......................................... 1,770 1,517 -------- -------- $214,170 $232,617 ======== ======== F-482
730 BRESNAN COMMUNICATIONS GROUP SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS) - --------------- (a) The notes payable to banks represent borrowings under a $250,000 senior unsecured reducing revolving credit and term loan facility (the "Bank Facility") as documented in the loan agreement as amended and restated as of August 5, 1998. The Bank Facility calls for a current available commitment of $250,000 of which $209,000 is outstanding at December 31, 1998. The Bank Facility provides for two tranches, a revolving loan tranche of $175,000 (the "Revolving Loan Tranche") and a term loan tranche of $75,000 (the "Term Loan Tranche"). The Revolving Loan Tranche is available through March 30, 1999 and then requires quarterly payments/commitment reductions ranging from 2.5% to 7.5% of the principal through its maturity on March 31, 2005. The Term Loan Tranche, fully drawn at closing and maturing March 31, 2006, requires quarterly payments of .25% beginning March 31, 1999 through December 31, 2004, quarterly payments of 2.5% for the year ended December 31, 2005 and 84% of the principal at maturity. The Bank Facility provides for interest at varying rates based on two optional measures: 1) for the Revolving Loan Tranche, the prime rate plus .625% and/or the London Interbank Offered Rate ("LIBOR") plus 1.625% and 2) for the Term Loan Tranche, the prime rate plus 1.75% and/or LIBOR plus 2.75%. The Bank Facility has provisions for certain performance-based interest rate reductions which are available under either interest rate option. In addition, the Bank Facility allows for interest rate swap agreements. The rates applicable to balances outstanding at December 31, 1998 ranged from 6.815% to 8.000% Covenants of the Bank Facility require, among other conditions, the maintenance of certain earnings, cash flow and financial ratios and include certain limitations on additional investments, indebtedness, capital expenditures, asset sales, management fees and affiliate transactions. Commitment fees of .375% per annum are payable on the unused principal amounts of the available commitment under the Bank Facility, as well as an annual agency fee to a bank of $60. A guarantee in the amount of $3,000, has been provided by one of the BCCLP partners. Balances outstanding at December 31, 1998 are due as follows: 1999.......................................... $ 14,150 2000.......................................... 17,500 2001.......................................... 20,850 2002.......................................... 24,200 2003 and thereafter........................... 132,300 -------- $209,000 ======== (b) The note payable to a partner is comprised of a $25,000 subordinated note of which $22,100 was outstanding at December 31, 1997 and 1998. The note, dated May 12, 1988, is junior and subordinate to the senior debt represented by the notes payable to banks. Interest is to be provided for at the prime rate (as defined) and is payable quarterly, to the extent allowed under the bank subordination agreement, or at the maturity date of the note, which is the earlier of April 30, 2001 or the first business day following the full repayment of the entire amount due under the notes payable to banks. Applicable interest rates at December 31, 1997 and 1998 were 8.25% and 7.75%, respectively. The note also provides for repayment at any time without penalty, subject to subordination restrictions. F-483
731 BRESNAN COMMUNICATIONS GROUP SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS) Bresnan Communications Group Systems has entered into Interest Rate Swaps to effectively fix or set a maximum interest rate on a portion of its floating rate long-term debt. Bresnan Communications Group Systems is exposed to credit loss in the event of nonperformance by the counterparties to the Interest Rate Swaps. At December 31, 1998, such Interest Rate Swaps effectively fixed or set maximum interest rates between 9.625% and 9.705% on an aggregate notional principal amount of $110,000, which rate would become effective upon the occurrence of certain events. The effect of the Interest Rate Swaps was to increase interest expense by $851, $460, and $19 for the years ended December 31, 1996, 1997 and 1998, respectively. The expiration dates of the Interest Rate Swaps ranges from August 25, 1999 to April 3, 2000. The difference between the fair market value and book value of long-term debt and the Interest Rate Swaps at December 31, 1997 and 1998 is not significant. (5) INCOME TAXES Taxable earnings differ from those reported in the accompanying combined statements of operations due primarily to differences in depreciation and amortization methods and estimated useful lives under regulations prescribed by the Internal Revenue Service. At December 31, 1998, the reported amounts of Bresnan Communications Group Systems' assets exceeded their respective tax bases by approximately $394 million. (6) TRANSACTIONS WITH RELATED PARTIES Bresnan Communications Group Systems purchases, at TCI's cost, substantially all of its pay television and other programming from affiliates of TCI. Charges for such programming were $42,897, $48,588 and $58,562 for 1996, 1997 and 1998, respectively, and are included in programming expenses in the accompanying combined financial statements. Certain affiliates of the Partners provide administrative services to Bresnan Communications Group Systems and have assumed managerial responsibility of Bresnan Communications Group Systems cable television system operations and construction. As compensation for these services, Bresnan Communications Group Systems pays a monthly fee calculated pursuant to certain agreed upon formulas. Such charges totaled $11,746, $11,801 and $13,086 and have been included in selling, general and administrative expenses for years ended December 31, 1996, 1997 and 1998, respectively. (7) COMMITMENTS AND CONTINGENCIES On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and 1994, the Federal Communications Commission ("FCC") adopted certain rate regulations required by the 1992 Cable Act and imposed a moratorium on certain rate increases. As a result of such actions, Bresnan Communications Group Systems' basic and tier service rates and its equipment and installation charges (the "Regulated Services") are subject to the jurisdiction of local franchising authorities and the FCC. Basic and tier service rates are evaluated against competitive benchmark rates as published by the FCC, and equipment and installation charges are based on actual costs. Any rates for Regulated Services that exceeded the benchmarks were reduced as required by the 1993 and 1994 rate regulations. The rate regulations do not apply to the relatively few systems F-484
732 BRESNAN COMMUNICATIONS GROUP SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS) which are subject to "effective competition" or to services offered on an individual service basis, such as premium movie and pay-per-view services. Bresnan Communications Group Systems believes that it has complied in all material respects with the provisions of the 1992 Cable Act, including its rate setting provisions. However, Bresnan Communications Group Systems' rates for Regulated Services are subject to review by the FCC, if a complaint has been filed by a customer, or the appropriate franchise authority, if such authority has been certified by the FCC to regulate rates. If, as a result of the review process, a system cannot substantiate its rates, it could be required to retroactively reduce its rates to the appropriate benchmark and refund the excess portion of rates received. Any refunds of the excess portion of tier service rates would be retroactive to the date of complaint. Any refunds of the excess portion of all other Regulated Service rates would be retroactive to one year prior to the implementation of the rate reductions. Certain of Bresnan Communications Group Systems' individual systems have been named in purported class actions in various jurisdictions concerning late fee charges and practices. Certain of Bresnan Communications Group Systems' cable systems charge late fees to customers who do not pay their cable bills on time. Plaintiffs generally allege that the late fees charged by such cable systems are not reasonably related to the costs incurred by the cable systems as a result of the late payment. Plaintiffs seek to require cable systems to provide compensation for alleged excessive late fee charges for past periods. These cases are at various stages of the litigation process. Based upon the facts available, management believes that, although no assurances can be given as to the outcome of these actions, the ultimate disposition of these matters should not have a material adverse effect upon the financial condition or results of operations of Bresnan Communications Group Systems. BCCLP entered into three letters of intent with three different cable operators pursuant to which the BCCLP intends to sell a small cable television system in Michigan and acquire cable television systems in both Michigan and Minnesota. These transactions would result in a net cost to the BCCLP of approximately $63,000, $2,000 was deposited for the acquisition in Michigan. BCCLP expects to fund these transactions through the use of restricted cash, cash flow from operations and additional borrowings. Bresnan Communications Group Systems has other contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible Bresnan Communications Group Systems may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of the management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying combined financial statements. Bresnan Communications Group Systems leases business offices, has entered into pole attachment agreements and uses certain equipment under lease arrangements. Rental expense under such arrangements amounted to $3,208, $3,221 and $2,833 in 1996, 1997 and 1998, respectively. Future minimum lease payments under noncancelable operating leases are estimated to approximate $2,240 per year for each of the next five years. It is expected that, in the normal course of business, expiring leases will be renewed or replaced by leases on the same or similar properties. F-485
733 BRESNAN COMMUNICATIONS GROUP SYSTEMS (A COMBINATION OF CERTAIN ASSETS, AS DEFINED IN NOTE 1) NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996, 1997 AND 1998 (IN THOUSANDS) During 1998, TCI and BCCLP have continued enterprise-wide, comprehensive efforts to assess and remediate their respective computer systems and related software and equipment to ensure such systems, software and equipment will recognize, process and store information in the year 2000 and thereafter. Such year 2000 remediation efforts, which encompass the TCI Bresnan Systems and the Bresnan Entities, respectively, include an assessment of their most critical systems, such as customer service and billing systems, headends and other cable plant, business support operations, and other equipment and facilities. TCI and BCCLP also continued their efforts to verify the year 2000 readiness of their significant suppliers and vendors and continued to communicate with significant business partners' and affiliates to assess such partners and affiliates' year 2000 status. TCI and BCCLP have formed year 2000 program management teams to organize and manage their year 2000 remediation efforts. The program management teams are responsible for overseeing, coordinating and reporting on their respective year 2000 remediation efforts. Upon consummation of the TCI Transaction, assessment and remediation of year 2000 issues for the TCI Bresnan Systems became the responsibility of BCCLP. During 1998, the project management teams continued their surveys of significant third-party vendors and suppliers whose systems, services or products are important to their operations (e.g., suppliers of addressable controllers and set-top boxes, and the provider of billing services). The year 2000 readiness of such providers is critical to continued provision of cable service. TCI and BCCLP have instituted a verification process to determine the vendors' year 2000 readiness. Such verification includes, as deemed necessary, reviewing vendors' test and other data and engaging in regular conferences with vendors' year 2000 teams. TCI and BCCLP are also requiring testing to validate the year 2000 compliance of certain critical products and services. The failure to correct a material year 2000 problem could result in an interruption or failure of certain important business operations. There can be no assurance that the systems of Bresnan Communications Group Systems or the systems of other companies on which they rely will be converted in time, or that any such failure to convert by the Bresnan Communications Group Systems or other companies will not have a material adverse effect on the financial position, results of operations or cash flows of Bresnan Communications Group Systems. F-486
734 [Inside Back Cover] [Text:] Cable Television High Speed Internet Access Internet TV Interactive TV [Graphics of friendly customer service representative assisting customer using a headset and people enjoying cable programming; background image of computer screen displaying Charter Communications' website] [Charter logo]
735 ------------------------------------------------------ ------------------------------------------------------ No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date. ------------------------- TABLE OF CONTENTS PAGE ---- Prospectus Summary............... 1 Risk Factors..................... 15 Forward-Looking Statements....... 37 Use of Proceeds.................. 38 Dividend Policy.................. 39 Capitalization................... 40 Dilution......................... 44 Unaudited Pro Forma Financial Statements..................... 45 Selected Historical Financial Data........................... 74 Management's Discussion and Analysis of Financial Condition And Results of Operations...... 76 Business......................... 108 Regulation and Legislation....... 151 Management....................... 160 Principal Stockholders........... 173 Certain Relationships and Related Transactions................... 175 Description of Certain Indebtedness................... 192 Description of Capital Stock and Membership Units............... 215 Shares Eligible for Future Sale........................... 232 Certain United States Tax Considerations for Non-United States Holders................. 234 Legal Matters.................... 239 Experts.......................... 239 Underwriting..................... 241 Index to Financial Statements.... F-1 Through and including , 1999 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ 170,000,000 Shares CHARTER COMMUNICATIONS, INC. Class A Common Stock [CHARTER COMMUNICATIONS LOGO] GOLDMAN, SACHS & CO. BEAR, STEARNS & CO. INC. MORGAN STANLEY DEAN WITTER DONALDSON, LUFKIN & JENRETTE MERRILL LYNCH & CO. SALOMON SMITH BARNEY A.G. EDWARDS & SONS, INC. M.R. BEAL & COMPANY Representatives of the Underwriters ------------------------------------------------------ ------------------------------------------------------
736 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the expenses, other than underwriting discounts and commissions, to be paid in connection with the sale of the Class A common stock being registered, all of which will be paid by Charter Communications Holding Company. All amounts are estimates except the registration fee, the Nasdaq National Market listing fee and the NASD filing fee. Registration fee............................................ $ 1,032,631 Nasdaq National Market listing fee.......................... 95,000 NASD filing fee............................................. 30,500 Accounting fees and expenses................................ 8,000,000 Legal fees and expenses..................................... 11,500,000 Printing and engraving expenses............................. 8,750,000 Transfer agent and registrar fees........................... 100,000 Miscellaneous expenses...................................... 7,000,000 ----------- Total............................................. $36,508,131 =========== - --------------- * To be completed by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS INDEMNIFICATION UNDER THE CERTIFICATE OF INCORPORATION AND BYLAWS OF THE REGISTRANT The Registrant's certificate of incorporation provides that a director of the Registrant shall not be personally liable to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability: (i) for any breach of the directors' duty of loyalty to the Registrant or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Section 174 of the Delaware General Corporation law; or (iv) for any transaction from which the director derived an improper personal benefit. The Registrant's bylaws require the Registrant, to the fullest extent authorized by the Delaware General Corporation Law, to indemnify any person who was or is made a party or is threatened to be made a party or is otherwise involved in any action, suit or proceeding by reason of the fact that he is or was a director or officer of the Registrant or is or was serving at the request of the Registrant as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other entity or enterprise, in each case, against all expense, liability and loss (including attorneys' fees, judgments, amounts paid in settlement, fines, ERISA excise taxes or penalties) reasonably incurred or suffered by such person in connection therewith. INDEMNIFICATION UNDER THE DELAWARE GENERAL CORPORATION LAW Section 145 of the Delaware General Corporation Law authorizes a corporation to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding, if the person acted in good faith and in a manner the person reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful; provided, however, that the Delaware General Corporation Law permits indemnification only for expenses (including attorneys' fees) II-1
737 in connection with an action or suit by or in the right of the corporation, and, in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation, such indemnification is permitted only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability, but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to above, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses, including attorneys' fees, actually and reasonably incurred by such person in connection therewith. INDEMNIFICATION UNDER THE LIMITED LIABILITY COMPANY AGREEMENT OF CHARTER COMMUNICATIONS HOLDING COMPANY The Charter Communications Holding Company limited liability company agreement will provide that, to the extent permitted by applicable law, it will indemnify its directors, officers, members, manager and the officers, directors, agents, shareholders, members, partners affiliates of its members and its manager for specified losses. The losses are specified as any loss, damage or claim incurred as a result of any act or omission performed or omitted in good faith on behalf of, or in connection with the business and affairs of, Charter Communications Holding Company. This act or omission must be performed by the indemnified party with valid authority. No indemnification will be provided with respect to any losses incurred as a result of fraud, deceit, reckless, or intentional misconduct, gross negligence, or a knowing violation of law. Payment of these indemnification obligations shall be made from the assets of Charter Communications Holding Company and the members shall not be personally liable to an indemnifiable person or required to make a capital contribution for payment of indemnification. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The Registrant has not issued any common stock prior to the offering. Concurrently with the consummation of the offering to which this registration statement relates, Paul G. Allen will purchase a total of 50,000 shares of Class B common stock for an aggregate purchase price of $900,000. The offering and sale of the shares of common stock will not be registered under the Securities Act of 1933 because the offering and sales will be made in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933 and Rule 506 thereunder for transactions by an issuer not involving a public offering. On September 22, 1999, Charter Communications Holding Company issued 39.8 million membership units to Vulcan Cable III Inc., in consideration of the contribution by Vulcan Cable III Inc. of approximately $644.3 million in cash and approximately $180.7 million in equity interests in Rifkin. This acquisition was undertaken as a private placement. In September 1999, Charter Communications Operating, LLC, our affiliate, acquired Rifkin Acquisition Partners L.L.L.P. and InterLink Communications Partners, LLLP. In exchange for a portion of the equity of these entities, Charter Communications Holding Company, LLC issued 133,312,118 of its Class A preferred membership units to 27 individuals and entities. The Charter Communications Holding Company preferred membership units are exchangeable at the consummation of this offering for shares of our Class A common stock. As a condition of receiving the preferred membership units, each of the Rifkin sellers was required to provide representations and warranties designed to establish that the offers and sales were valid private placements under Section 4(2) of the Securities Act of 1933. Among other representations and warranties, each Rifkin seller receiving equity was required to represent and warrant that it is an accredited investor under the federal securities laws and is acquiring the preferred membership units for investment purposes and not for sale or with a view to distribution, and to acknowledge that the preferred membership units represent restricted securities under the federal securities laws that cannot be resold without registration under the Securities Act of 1933. Any of these Rifkin sellers that was not an accredited investor was also required to deliver a letter from his or her purchaser representative. II-2
738 On August 10, 1999, Vulcan Cable III Inc., purchased approximately 24.1 million membership units in Charter Communications Holding Company for $500 million. The offer and sale of these membership units was not registered under the Securities Act of 1933, because the offer and sale was made in reliance on the exemption provided under Section 4(2) of the Securities Act of 1933 for transactions by an issuer not involving a public offering. At its inception, Charter Communications, Inc. issued in July, 1999 100 shares of its Class A common stock to Charter Investment, Inc. The offer and sale of these shares was not registered under the Securities Act of 1933, because the offer and sale was made in reliance on the exemption provided under Section 4(2) of the Securities Act of 1933 for transactions by an issuer not involving a public offering. In June 1999, Charter Communications Holding Company, our affiliate, entered into an agreement to purchase Bresnan Communications Company Limited Partnership. Under the Bresnan purchase agreement, Charter Communications Holding Company has agreed to issue $1.0 billion worth of its common membership units to the Bresnan sellers in partial consideration for the equity of Bresnan Communications Company Limited Partnership. The Charter Communications Holding company membership units are exchangeable for Class A common stock. The offer of these membership units was not and the sale of these membership units will not be registered under the Securities Act of 1933. Charter Communications Holding Company offered these securities in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933 for transactions by an issuer not involving a public offering. Each of the Bresnan sellers represented and warranted that it is an accredited investor within the meaning of the federal securities laws and is acquiring the securities for investment and not with a view to public distribution thereof, and acknowledged that the membership units represented restricted securities under the federal securities laws. In May 1999, Charter Investment, Inc., our affiliate, entered into an agreement to purchase partnership interests in Falcon Communications, L.P. from Falcon Holding Group, L.P. and TCI Falcon Holdings, LLC, interests in a number of Falcon entities held by Falcon Cable Trust and Falcon Holding Group, Inc., specified interests in Enstar Communications Corporation and Enstar Finance Company, LLC held by Falcon Holding Group, L.P., and specified interests in Adlink held by DHN, Inc. Under the Falcon purchase agreement, Falcon Holding Group, L.P. has agreed to contribute to Charter Communications Holding Company a portion of its partnership interest in Falcon Communications, L.P. in exchange for common membership units of Charter Communications Holding Company. The issuance of these securities has not been registered. The offer of these membership units was not and the sale of these membership units will not be registered under the Securities Act of 1933. Charter Communications Holding Company offered these securities in reliance on the exemption provided by Section 4(2) of the Securities Act of 1933 for transactions by an issuer not involving a public offering. The membership units are to be issued to a single purchaser that could distribute them upon a distribution of all its assets. Each of the Falcon seller represented and warranted that it is an informed and sophisticated purchaser and is acquiring the securities for investment and not with a view to public distribution. In May 1999, in connection with the mergers of Vulcan Cable, Inc., Vulcan Cable II, Inc. and Marcus Cable Properties, Inc. into Charter Investment, Inc., Charter Investment, Inc. issued to Mr. Allen 78,124 shares of Class A common stock of Charter Investment, Inc. These acquisitions were undertaken as private placements. During the period December 1998, through March 1999, Mr. Allen loaned approximately $288 million to Charter Investment, Inc. In March 1999, these loans were contributed to Charter Investment, Inc. in exchange for 11,316 shares of Class A common stock of Charter Investment, Inc. This acquisition was undertaken as a private placement. Charter Holdings adopted a plan on February 9, 1999, which was assumed by Charter Communications Holding Company on May 25, 1999, providing for the grant of options to purchase up to 25,009,798 membership units in Charter Communications Holding Company, which is equal to 10% of the aggregate equity value of the subsidiaries of Charter Communications Holding Company as of February 9, 1999, the date of adoption of the plan. The plan provides for grants of options to employees and II-3
739 consultants of Charter Communications Holding Company and its affiliates. There are a total of 9,206,281 options granted under the plan. Of those, 8,771,481 options were granted on February 9, 1999 with an exercise price of $20.00 and 443,200 options were granted on April 5, 1999 with an exercise price of $20.73. Of the options granted on February 9, 1999, 65,000 options have vested and an additional 65,000 options will vest on the date of the closing of this offering and with respect to the remaining 8,641,481, 2,160,370 options vest on April 3, 2000 and the remainder vest 1/45 on each monthly anniversary following April 3, 2000. One-fourth of the options granted on April 5, 1999 vest on the 15-month anniversary from April 5, 1999, with the remainder vesting 1/45 on each monthly anniversary for 45 months following the 15-month anniversary. The options expire after ten years from the date of grant. Under the terms of the plan, following consummation of the offering, each membership unit held as a result of exercise of options will be exchanged automatically for shares of Class A common stock on a one-for-one basis. None of these options have been exercised. Effective December 23, 1998, Mr. Kent received a grant of options to purchase three percent (3%) of the equity value of all cable systems managed by Charter Investment on the date of the grant, or 7,044,127 Charter Communications Holding Company membership units. The options have a term of ten years and vested twenty-five percent (25%) on the date of grant. The remaining seventy-five percent (75%) will vest on the first day of each of the 36 months commencing on the first day of the thirteenth month following the date of grant. Membership units received upon exercise of these options are automatically exchanged for shares of Class A common stock of Charter Communications, Inc. None of these options have been exercised. On December 23, 1998, Mr. Allen purchased 52,046 shares of Class A common stock of Charter Investment, Inc. for approximately $1.3 billion. This acquisition was undertaken as a private placement. On December 23, 1998, Mr. Kent, Mr. Babcock and Mr. Wood each purchased 598.4 shares of Class A voting common stock of Charter Investment, Inc. through the exercise of outstanding warrants. The offer and sale of these shares was not registered under the Securities Act of 1933, because the offer and sale was made in reliance on the exemption provided under Section 4(2) of the Securities Act of 1933 for transactions by an issuer not involving a public offering. On December 21, 1998, Mr. Allen purchased 16,922 shares of Class D common stock of Charter Investment, Inc. for approximately $431 million. On December 23, 1998, this Class D common stock was converted into Class A common stock of Charter Investment, Inc. These acquisitions were undertaken as private placements. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. EXHIBITS 1.1 Form of Underwriting Agreement by and among Charter Communications, Inc., Charter Communications Holding Company, LLC and the underwriters** 2.1 Merger Agreement, dated March 31, 1999, by and between Charter Communications Holdings, LLC and Marcus Cable Holdings, LLC(1) 2.2(a) Membership Purchase Agreement, dated as of January 1, 1999, by and between ACEC Holding Company, LLC and Charter Communications, Inc. (now called Charter Investment, Inc.)(9) 2.2(b) Assignment of Membership Purchase Agreement, dated as of February 23, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Entertainment II, LLC(9) 2.3(a) Asset Purchase Agreement, dated as of February 17, 1999, among Greater Media, Inc., Greater Media Cablevision, Inc. and Charter Communications, Inc. (now called Charter Investment, Inc.)(9) 2.3(b) Assignment of Asset Purchase Agreement, dated as of February 23, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Entertainment I, LLC(9) II-4
740 2.4 Purchase Agreement, dated as of February 23, 1999, by and among Charter Communications, Inc. (now called Charter Investment, Inc.), Charter Communications, LLC, Renaissance Media Holdings LLC and Renaissance Media Group LLC(9) 2.5 Purchase Agreement, dated as of March 22, 1999, among Charter Communications, Inc. (now called Charter Investment, Inc.), Charter Communications, LLC, Charter Helicon, LLC, Helicon Partners I, L.P., Baum Investments, Inc. and the limited partners of Helicon Partners I, L.P.(9) 2.6(a) Asset and Stock Purchase Agreement, dated April 20, 1999, between Intermedia Partners of West Tennessee, L.P. and Charter Communications, LLC(1) 2.6(b) Stock Purchase Agreement, dated April 20, 1999, between TCID 1P-V, Inc. and Charter Communications, LLC(1) 2.6(c) RMG Purchase Agreement, dated as of April 20, 1999, between Robin Media Group, Inc., InterMedia Partners of West Tennessee, L.P. and Charter RMG, LLC(1) 2.6(d) Asset Exchange Agreement, dated April 20, 1999, among InterMedia Partners Southeast, Charter Communications, LLC, Charter Communications Properties, LLC, and Marcus Cable Associates, L.L.C.(1) 2.6(e) Asset Exchange Agreement, dated April 20, 1999, among InterMedia Partners, a California Limited Partnership, Brenmor Cable Partners, L.P. and Robin Media Group, Inc.(1) 2.6(f) Amendment to Asset Exchange Agreement, made as of October 1, 1999, by and among InterMedia Partners Southeast and Charter Communications, LLC, Charter Communications Properties, LLC and Marcus Cable Associates, L.L.C.** 2.6(g) Common Agreement, dated April 20, 1999, between InterMedia Partners, InterMedia Partners Southeast, InterMedia Partners of West Tennessee, L.P., InterMedia Capital Partners IV, L.P., InterMedia Partners IV, L.P., Brenmor Cable Partners, L.P., TCID IP-V, Inc., Charter Communications, LLC, Charter Communications Properties, LLC, Marcus Cable Associates, L.L.C. and Charter RMG, LLC(10)+ 2.7(a) Purchase and Sale Agreement, dated as of April 26, 1999, by and among InterLink Communications Partners, LLLP, the sellers listed therein and Charter Communications, Inc. (now called Charter Investment, Inc.)(1) 2.7(b) Purchase and Sale Agreement, dated as of April 26, 1999, by and among Rifkin Acquisition Partners, L.L.L.P., the sellers listed therein and Charter Communications, Inc. (now called Charter Investment, Inc.)(9) 2.7(c) RAP Indemnity Agreement, dated April 26, 1999, by and among the sellers listed therein and Charter Communications, Inc. (now called Charter Investment, Inc.)(9) 2.7(d) Assignment of Purchase Agreement with InterLink Communications Partners, LLLP, dated as of June 30, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Operating, LLC(9) 2.7(e) Assignment of Purchase Agreement with Rifkin Acquisition Partners L.L.L.P., dated as of June 30, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Operating, LLC(9) 2.7(f) Assignment of RAP Indemnity Agreement, dated as of June 30, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Operating, LLC(9) 2.7(g) Amendment to the Purchase Agreement with InterLink Communications Partners, LLLP, dated June 29, 1999(11) 2.7(h) Contribution Agreement, dated as of September 14, 1999, by and among Charter Communications Operating, LLC, Charter Communications Holding Company, LLC, Charter Communications, Inc., Paul G. Allen and the certain other individuals and entities listed on the signature pages thereto** II-5
741 2.7(i) Form of First Amendment to the Contribution Agreement dated as of September 14, 1999, by and among Charter Communications Operating, LLC, Charter Communications Holding Company, LLC, Charter Communications, Inc. and Paul G. Allen, entered into as of November , 1999. 2.8(a) Securities Purchase Agreement, dated May 13, 1999, by and between Avalon Cable Holdings LLC, Avalon Investors, L.L.C., Avalon Cable of Michigan Holdings, Inc. and Avalon Cable LLC and Charter Communications Holdings LLC and Charter Communications, Inc. (now called Charter Investment, Inc.)(5) 2.8(b) Assignment and Contribution Agreement, entered into as of October 11, 1999 by and between Charter Communications Holding Company, LLC and Charter Communications, Inc.** 2.8(c) Assignment Agreement effective as of June 16, 1999, by and among Charter Communications, Inc., Charter Communications Holdings LLC, Charter Communications Holding Company, LLC, Avalon Cable Holdings LLC, Avalon Investors, L.L.C., Avalon Cable of Michigan Holdings, Inc. and Avalon Cable LLC** 2.9 Purchase and Contribution Agreement, dated as of May 26, 1999, by and among Falcon Communications, L.P., Falcon Holding Group, L.P., TCI Falcon Holdings, LLC, Falcon Cable Trust, Falcon Holding Group, Inc. and DHN Inc. and Charter Communications, Inc. (now called Charter Investment, Inc.)** 2.9(a) First Amendment to Purchase and Contribution Agreement, dated as of June 22, 1999, by and among Charter Communications, Inc., Charter Communications Holding Company, LLC, Falcon Communications, L.P., Falcon Holding Group, L.P., TCI Falcon Holdings, LLC, Falcon Cable Trust, Falcon Holding Group, Inc. and DHN Inc.(8) 2.9(b) Form of Second Amendment to Purchase And Contribution Agreement, dated as of , 1999, by and among Charter Investment, Inc., Charter Communications Holding Company, LLC, Falcon Communications, L.P., Falcon Holding Group, L.P., TCI Falcon Holdings, LLC, Falcon Holding Group, Inc. and DHN Inc. 2.10(a) Purchase Agreement, dated as of May 21, 1999, among Blackstone TWF Capital Partners, L.P., Blackstone TWF Capital Partners A L.P., Blackstone TWF Capital Partners B L.P., Blackstone TWF Family Investment Partnership, L.P., RCF Carry, LLC, Fanch Management Partners, Inc., PBW Carried Interest, Inc., RCF Indiana Management Corp, The Robert C. Fanch Revocable Trust, A. Dean Windry, Thomas Binning, Jack Pottle, SDG/Michigan Communications Joint Venture, Fanch-JV2 Master Limited Partnership, Cooney Cable Associates of Ohio, Limited Partnership, North Texas Cablevision, LTD., Post Cablevision of Texas, Limited Partnership, Spring Green Communications, L.P., Fanch-Narragansett CSI Limited Partnership, and Fanch Cablevision of Kansas General Partnership and Charter Communications, Inc. (now known as Charter Investment, Inc.)** 2.10(b) Assignment of Purchase Agreement by and between Charter Investment, Inc. and Charter Communications Holding Company, LLC, effective as of September 21, 1999** 2.11 Purchase and Contribution Agreement, entered into as of June 1999, by and among BCI (USA), LLC, William Bresnan, Blackstone BC Capital Partners L.P., Blackstone BC Offshore Capital Partners L.P., Blackstone Family Investment Partnership III L.P., TCID of Michigan, Inc. and TCI Bresnan LLC and Charter Communications Holding Company, LLC (now called Charter Investment, Inc.)** 3.1 Form of Restated Certificate of Incorporation of Registrant** 3.2 Form of Bylaws of Registrant** 4.1 Form of certificate evidencing shares of Class A common stock** 5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP regarding legality of the securities being registered** II-6
742 10.1 Credit Agreement, dated as of March 18, 1999, between Charter Communications Operating, LLC and certain lenders and agents named therein(1) 10.2(a) Amended and Restated Management Agreement, dated March 17, 1999, between Charter Communications Operating, LLC and Charter Communications, Inc. (now called Charter Investment, Inc.)(9) 10.2(b) Form of Second Amended Management Agreement, dated as of , 1999, by and among Charter Investment, Inc., Charter Communications, Inc. and Charter Communications Operating, LLC** 10.2(c) Form of Mutual Services Agreement, dated as of , 1999, by and between Charter Communications, Inc. and Charter Investment, Inc.** 10.2(d) Form of Management Agreement, dated as of , 1999, by and between Charter Communications Holding Company, LLC and Charter Communications, Inc.** 10.3 Consulting Agreement, dated as of March 10, 1999, by and between Vulcan Northwest Inc., Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Holdings, LLC(9) 10.4 Indenture relating to the 8.250% Senior Notes due 2007, dated as of March 17, 1999, between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank(1) 10.5 Indenture relating to the 8.625% Senior Notes due 2009, dated as of March 17, 1999, among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank(1) 10.6 Indenture relating to the 9.920% Senior Discount Notes due 2011, dated as of March 17, 1999, among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank(1) 10.7 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(2) 10.8 Indenture, dated January 15, 1996, by and among Rifkin Acquisition Partners, L.L.L.P., Rifkin Acquisition Capital Corp., as issuers, Cable Equities of Colorado Management Corp., FNI Management Corp., Cable Equities of Colorado, Ltd., Cable Equities, Inc. and Rifkin/ Tennessee, Ltd., as Subsidiary Guarantors, and Marine Midland Bank, as trustee(3) 10.9 Indenture, dated as of October 15, 1993, by and among The Helicon Group, L.P. and Helicon Capital Corp., as issuers, and Shawmut Bank Connecticut, National Association, as trustee(4) 10.10(a) Charter Communications Holdings, LLC 1999 Option Plan(9) 10.10(b) Assumption Agreement, dated as of May 25, 1999, by and between Charter Communications Holdings, LLC and Charter Communications Holding Company, LLC(11) 10.10(c) Form of Amendment No. 1 to the Charter Communications Holdings, LLC 1999 Option Plan 10.11(a) Membership Interests Purchase Agreement, dated July 22, 1999, by and between Charter Communications Holding Company, LLC and Paul G. Allen(11) 10.11(b) Form of Contribution Agreement, dated as of , 1999, by and between Charter Communications, Inc. and Charter Communications Holding Company, LLC** 10.11(c) Amendment to Membership Interests Purchase Agreement, dated as of August 10, 1999, by and among Charter Communications Holding Company, LLC, Vulcan Cable III Inc. and Paul G. Allen(11) 10.11(d) Letter from Paul G. Allen regarding agreement to purchase Charter Communications Holding Company, LLC membership units** 10.12(a) Certificate of Formation of Charter Communications Holding Company, LLC, filed on May 25, 1999** II-7
743 10.12(b) Form of Amended and Restated Limited Liability Company Agreement for Charter Communications Holding Company, LLC, effective as of , 1999, by and among Charter Communications, Inc. and the other individuals and entities listed on Schedule A thereto** 10.13 Form of Exchange Agreement, dated as of , 1999 by and among Charter Investment, Inc., Charter Communications, Inc., Vulcan Cable III Inc. and Paul G. Allen** 10.14 Form of Registration Rights Agreement, dated as of , 1999, by and among Charter Communications, Inc., Charter Investment, Inc., Vulcan Cable III Inc., Mr. Paul G. Allen, Mr. Jerald L. Kent, Mr. Howard L. Wood and Mr. Barry L. Babcock** 10.15(a) Employment Agreement, dated as of August 28, 1998, between Jerald L. Kent and Paul G. Allen(12) 10.15(b) Assignment of Employment Agreements, dated as of December 23, 1998, between Paul G. Allen and Charter Communications, Inc. (now called Charter Investment, Inc.)(11) 10.15(c) Form of Assignment and Assumption Agreement, dated as of , 1999, by and between Charter Investment, Inc. and Charter Communications, Inc.** 10.16(a) Employment Agreement, dated as of December 23, 1998, between Barry L. Babcock and Paul G. Allen(12) 10.16(b) Form of Assignment and Assumption Agreement, dated as of , 1999, by and between Charter Investment, Inc. and Charter Communications, Inc.** 10.16(c) Form of Consulting Agreement, dated as of , 1999, by and between Barry L. Babcock and Charter Communications, Inc.** 10.16(d) Form of Termination of Employment Agreement, dated as of October , 1999, by and between Barry L. Babcock and Charter Investment, Inc., Charter Communications, Inc. and Charter Communications Holding Company, LLC.** 10.17(a) Employment Agreement, dated as of December 23, 1998, between Howard L. Wood and Paul G. Allen(12) 10.17(b) Form of Assignment and Assumption Agreement, dated as of , 1999, by and between Charter Investment, Inc. and Charter Communications, Inc.** 10.17(c) Form of Consulting Agreement, dated as of , 1999, by and between Howard L. Wood and Charter Communications, Inc.** 10.17(d) Form of Termination of Employment Agreement, dated as of October , 1999, by and between Howard L. Wood and Charter Investment, Inc., Communications, Inc. and Charter Communications Holding Company, LLC.** 10.18(a) Note Purchase and Exchange Agreement, dated as of October 21, 1991, by and among Falcon Telecable, The Mutual Life Insurance Company and MONY Life Insurance Company** 10.18(b) First Amendment to Note Purchase and Exchange Agreement, dated as of March 29, 1993, by and among Falcon Telecable, The Mutual Life Insurance Company of New York and MONY Life Insurance Company of America** 10.18(c) Second Amendment to Note Purchase Agreement and Exchange Agreement, dated as of June 30, 1995, by and among Falcon Telecable, MONY Life Insurance Company of America and AUSA Life Insurance Company, Inc.** 10.18(d) Third Amendment to Note Purchase and Exchange Agreement, dated as of December 28, 1995, by and among Falcon Telecable, AUSA Life Insurance Company, Inc. and MONY Life Insurance Company of America** 10.18(e) Fourth Amendment to Note Purchase and Exchange Agreement, dated as of July 12, 1996, by and among Falcon Telecable, AUSA Life Insurance Company, Inc. and MONY Life Insurance Company of America** II-8
744 10.18(f) Note Purchase and Exchange Agreement Consent and Amendment Agreement, dated as of June 30, 1998, by and among Falcon Telecable, AUSA Life Insurance Company, Inc., by AUER & Co., its nominee, and MONY Life Insurance Company of America, by J. ROMEO & Co., its nominee** 10.18(g) Note Purchase and Exchange Agreement Amendment Agreement, dated as of September 30, 1998, by and among Falcon Telecable, AUER & Co. and J. ROMEO & Co.** 10.19 Letter Agreement, dated as of July 22, 1999 between Charter Communications Holding Company, LLC and Charter Communications Holdings, LLC(12) 10.20(a) Option Agreement, dated as of February 9, 1999, between Jerald L. Kent and Charter Communications Holdings, LLC(11) 10.20(b) Amendment to the Option Agreement, dated as of August 23, 1999, between Jerald L. Kent and Charter Communications Holding Company, LLC(11) 10.20(c) Form of Amendment to the Option Agreement, dated as of , 1999, by and among Jerald L. Kent, Charter Communications Holding Company, LLC and Charter Communications, Inc.** 10.22 Letter Agreement, dated September 21, 1999, by and among Charter Communications, Inc., Charter Investment, Inc., Charter Communications Holding Company, Inc. and Vulcan Ventures Inc.** 10.23 Indenture, dated February 2, 1999, among Bresnan Communications Group LLC, Bresnan Capital Corporation and State Street Bank and Trust Company, as trustee, relating to the Issuers' $170,000,000 principal amount of 8% Senior Notes due 2009 and $275,000,000 aggregate principal amount at maturity of 9 1/4% Senior Discount Notes due 2009(13) 10.24 Loan Agreement dated as of February 2, 1999 among Bresnan Telecommunications Company LLC, various lending institutions, Toronto Dominion (Texas), Inc., as the Administrative Agent for the Lenders, with TD Securities (USA) Inc., Chase Securities Inc., the Bank of Nova Scotia, BNY Capital Markets, Inc. and NationsBanc Montgomery Securities LLC, collectively, the Arranging Agents, Chase Securities Inc., as Syndication Agent, the Bank of Nova Scotia, the Bank of New York Company, Inc., and NationsBanc Montgomery Securities LLC, as Documentation Agents, and TD Securities (USA) Inc., and Chase Securities Inc., as Joint Book Managers and Joint Lead Arrangers(13) 10.25 Indenture, dated as of December 10, 1998 by and among Avalon Cable of Michigan, Inc., Avalon Cable of New England LLC and Avalon Cable Finance, Inc., as issuers and The Bank of New York, as trustee for the Notes(5) 10.26 Supplemental Indenture, dated as of March 26, 1999 by and among Avalon Cable of New England LLC, Avalon Cable Finance, Inc. and Avalon Cable of Michigan LLC as issuers, Avalon Cable of Michigan, Inc., as guarantor, and The Bank of New York, as trustee for the Notes(5) 10.27 Senior Credit Agreement, dated as of November 6, 1998, among Avalon Cable of New England LLC, Avalon Cable of Michigan, Inc., Avalon Cable Finance, Inc., Avalon Cable of Michigan, LLC, Lehman Brothers Inc., Fleet Bank of Massachusetts, N.A., Union Bank of California, N.A. and Lehman Commercial Paper Inc.(19) 10.28 Guarantee and Collateral Agreement, dated as of November 6, 1998 made by Avalon LLC, Avalon Cable LLC, Avalon Cable of New England Holdings, Inc., Avalon Cable Holdings Finance, Inc., Avalon Cable of Michigan Holdings, Inc. and Avalon Cable of Michigan, Inc. in favor of Lehman Commercial Paper Inc.(19) 10.29 Indenture, dated as of December 10, 1998 by and among Avalon Cable of Michigan Holdings, Inc., Avalon Cable LLC and Avalon Cable Holdings Finance, Inc., as issuers and The Bank of New York, as trustee for the Notes(14) II-9
745 10.30 Supplemental Indenture, dated as of March 26, 1999 by and among Avalon Cable of Michigan Holdings, Inc., Avalon Cable LLC and Avalon Cable Holdings Finance, Inc., as issuers, Avalon Cable of Michigan, Inc., as guarantor, and The Bank of New York, as trustee for the Notes(14) 10.31 Indenture, dated as of March 29, 1993, by and among Falcon Holding Group, L.P. and United States Trust Company of New York (governing 11% Senior Subordinated Notes due 2003)(15) 10.32 Indenture, dated as of April 3, 1998, among Falcon Holding Group, L.P., Falcon Funding Corporation and United States Trust Company of New York, as trustee(16) 10.33 Supplemental Indenture, dated as of September 30, 1998, by and among Falcon Holding Group, L.P., Falcon Funding Corporation, Falcon Communications, L.P. and United States Trust Company of New York, as trustee(17) 10.34 Credit Agreement, dated as of June 30, 1998, among Falcon Cable Communications, LLC, certain guarantors and lenders named therein, BankBoston, N.A., as Documentation Agent, Toronto Dominion, Inc., as Administrative Agent, Bank of America, N.A. (formerly known as NationsBank, N.A.), as Syndication Agent, and The Chase Manhattan Bank, as Co-Syndication Agent(18) 10.35 Amendment to the Credit Agreement, dated as of September 25, 1998, among the affiliates of Falcon Holding Group, L.P. named therein and BankBoston, N.A., as Documentation Agent(17) 10.36 Form of Credit Agreement, dated as of June 30, 1998, as Amended and Restated as of , 1999, among Falcon Cable Communications, LLC, certain guarantors and lenders named therein, BankBoston, N.A., as Documentation Agent, Toronto Dominion, Inc., as Administrative Agent, Bank of America, N.A., as Syndication Agent, and The Chase Manhattan Bank, as Co-Syndication Agent** 10.37 Commitment Letter, dated August 16, 1999, from Chase Securities Inc., The Chase Manhattan Bank, Banc of America Securities LLC, Bank of America, N.A., TD Securities (USA) Inc. and Toronto Dominion (Texas) Inc. to Charter Investment, Inc.** 10.38 Commitment Letter, dated October 15, 1999, from Goldman Sachs Credit Partners L.P., as administrative agent, and the other lenders party thereto to Charter Communications, Inc. 10.39 Commitment Letter, dated September 29, 1999, from Bank of Montreal, Chicago Branch to Charter Communications Holding Company, LLC 21.1 Subsidiaries of Registrant 23.1 Consent of Paul, Hastings, Janofsky & Walker LLP (contained in Exhibit No. 5.1)** 23.2 Consent of Arthur Andersen LLP 23.3 Consent of KPMG LLP 23.4 Consent of Ernst & Young LLP 23.5 Consent of Ernst & Young LLP 23.6 Consent of KPMG LLP 23.7 Consent of PricewaterhouseCoopers LLP 23.8 Consent of PricewaterhouseCoopers LLP 23.9 Consent of Ernst & Young LLP 23.10 Consent of PricewaterhouseCoopers LLP 23.11 Consent of PricewaterhouseCoopers LLP 23.12 Consent of Greenfield, Altman, Brown, Berger & Katz, P.C. 23.13 Consent of PricewaterhouseCoopers LLP 23.14 Consent of Ernst & Young LLP 23.15 Consent of KPMG LLP 23.16 Consent of KPMG LLP 23.17 Consent of Ernst & Young LLP II-10
746 23.18 Consent of Ernst & Young LLP 24.1 Power of Attorney** 27.1 Financial Data Schedule** 99.1 Consent of Nancy B. Peretsman** 99.2 Consent of Ronald L. Nelson** 99.3 Consent of Howard L. Wood 99.4 Consent of Marc Nathanson** - --------------- * To be filed by amendment. ** Previously filed. + Portions of this exhibit have been omitted pursuant to a request for confidential treatment. (1) Incorporated by reference to Amendment No. 2 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on June 21, 1999 (File No. 333-77499). (2) Incorporated by reference to the registration statement on Forms S-4 and S-1 of Renaissance Media Group LLC, Renaissance Media (Tennessee) LLC, Renaissance Media (Louisiana) LLC and Renaissance Media Capital Corporation filed on June 12, 1998 (File No. 333-56679). (3) Incorporated by reference to the registration statement on Form S-1 of Rifkin Acquisition Capital Corp. and Rifkin Acquisition Partners, L.L.L.P. filed on April 2, 1996 (File No. 333-3084). (4) Incorporated by reference to the registration statement on Form S-4 of The Helicon Group, L.P. and Helicon Capital Corp. filed on December 3, 1993 (File No. 333-72468). (5) Incorporated by reference to Amendment No. 1 to the registration statement on Form S-4 of Avalon Cable of Michigan LLC, Avalon Cable of Michigan Inc., Avalon Cable of New England LLC and Avalon Cable Finance Inc. filed on May 28, 1999 (File No. 333-75453). (6) Incorporated by reference to the report on Form 8-K of Falcon Communications, L.P. and Falcon Funding Corporation filed on June 9, 1999 (File Nos. 033-60776 and 333-55755-01). (7) Incorporated by reference to Amendment No. 1 to the registration statement on Form S-4 of Bresnan Communications Group LLC and Bresnan Capital Corporation filed on July 9, 1999 (File No. 333-77637). (8) Incorporated by reference to the quarterly report on Form 10-Q filed by Falcon Communications, L.P. and Falcon Funding Corporation on August 13, 1999 (File Nos. 333-60776 and 333-55755). (9) Incorporated by reference to Amendment No. 4 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on July 22, 1999 (File No. 333-77499). (10) Incorporated by reference to Amendment No. 3 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on July 2, 1999 (File No. 333-77499). (11) Incorporated by reference to Amendment No. 6 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on August 27, 1999 (File No. 333-77499). (12) Incorporated by reference to Amendment No. 5 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on August 10, 1999 (File No. 333-77499). (13) Incorporated by reference to the registration statement on Form S-4 of Bresnan Communications Group LLC and Bresnan Capital Corporation filed on May 3, 1999 (File No. 333-77637). II-11
747 (14) Incorporated by reference to Amendment No. 1 to the registration statement on Form S-4 of Avalon Cable LLC, Avalon Cable Holdings Finance, Inc., Avalon Cable of Michigan Holdings, Inc. and Avalon Cable of Michigan, Inc. filed on May 28, 1999 (File No. 333-75415). (15) Incorporated by reference to the registration statement on Form S-4 of Falcon Holding Group, L.P. filed on April 18, 1993 (File No. 33-60776). (16) Incorporated by reference to the registration statement on Form S-4 of Falcon Holding Group, L.P. and Falcon Funding Corporation filed on June 1, 1998 (File No. 333-55755). (17) Incorporated by reference to the report on Form 8-K of Falcon Communications, L.P. and Falcon Funding Corporation filed on October 9, 1998 (File No. 33-60776). (18) Incorporated by reference to Amendment No. 1 to the registration statement on Form S-4 of Falcon Holding Group, L.P. and Falcon Funding Corporation filed on July 17, 1998 (File No. 333-55755). (19) Incorporated by reference to Amendment No. 4 to the statement of beneficial ownership on Schedule 13D of Avalon Cable of Michigan, Inc., Avalon Cable of Michigan Holdings, Inc., Avalon Cable Holdings, LLC, ABRY Broadcast Partners III, L.P., ABRY Equity Investors, L.P., ABRY Holdings III, Inc. and Royce Yudkoff filed on November 12, 1998 (File No. 005-40465). FINANCIAL STATEMENT SCHEDULES Schedules not listed above are omitted because of the absence of the conditions under which they are required or because the information required by such omitted schedules is set forth in the financial statements or the notes thereto. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-12
748 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Charter Communications, Inc. has duly caused this Amendment No. 5 to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of St. Louis, State of Missouri on the 4th day of November 1999. CHARTER COMMUNICATIONS, INC. By: /s/ CURTIS S. SHAW ------------------------------------------ Name: Curtis S. Shaw Title: Senior Vice President, General Counsel and Secretary Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE CAPACITY DATE --------- -------- ---- * Chairman of the Board of Directors November 4, 1999 - ------------------------------------ Paul G. Allen * President, Chief Executive Officer and November 4, 1999 - ------------------------------------ Director Jerald L. Kent (Principal Executive Officer) * Director November 4, 1999 - ------------------------------------ William D. Savoy * Senior Vice President and Chief Financial November 4, 1999 - ------------------------------------ Officer (Principal Financial Officer and Kent D. Kalkwarf Principal Accounting Officer) *By: /s/ CURTIS S. SHAW ------------------------------- Attorney-in-fact II-13
749 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE NO. - -------- ----------- -------- 1.1 Form of Underwriting Agreement by and among Charter Communications, Inc., Charter Communications Holding Company, LLC and the underwriters** 2.1 Merger Agreement, dated March 31, 1999, by and between Charter Communications Holdings, LLC and Marcus Cable Holdings, LLC(1) 2.2(a) Membership Purchase Agreement, dated as of January 1, 1999, by and between ACEC Holding Company, LLC and Charter Communications, Inc. (now called Charter Investment, Inc.)(9) 2.2(b) Assignment of Membership Purchase Agreement, dated as of February 23, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Entertainment II, LLC(9) 2.3(a) Asset Purchase Agreement, dated as of February 17, 1999, among Greater Media, Inc., Greater Media Cablevision, Inc. and Charter Communications, Inc. (now called Charter Investment, Inc.)(9) 2.3(b) Assignment of Asset Purchase Agreement, dated as of February 23, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Entertainment I, LLC(9) 2.4 Purchase Agreement, dated as of February 23, 1999, by and among Charter Communications, Inc. (now called Charter Investment, Inc.), Charter Communications, LLC, Renaissance Media Holdings LLC and Renaissance Media Group LLC(9) 2.5 Purchase Agreement, dated as of March 22, 1999, among Charter Communications, Inc. (now called Charter Investment, Inc.), Charter Communications, LLC, Charter Helicon, LLC, Helicon Partners I, L.P., Baum Investments, Inc. and the limited partners of Helicon Partners I, L.P.(9) 2.6(a) Asset and Stock Purchase Agreement, dated April 20, 1999, between Intermedia Partners of West Tennessee, L.P. and Charter Communications, LLC(1) 2.6(b) Stock Purchase Agreement, dated April 20, 1999, between TCID 1P-V, Inc. and Charter Communications, LLC(1) 2.6(c) RMG Purchase Agreement, dated as of April 20, 1999, between Robin Media Group, Inc., InterMedia Partners of West Tennessee, L.P. and Charter RMG, LLC(1) 2.6(d) Asset Exchange Agreement, dated April 20, 1999, among InterMedia Partners Southeast, Charter Communications, LLC, Charter Communications Properties, LLC, and Marcus Cable Associates, L.L.C.(1) 2.6(e) Asset Exchange Agreement, dated April 20, 1999, among InterMedia Partners, a California Limited Partnership, Brenmor Cable Partners, L.P. and Robin Media Group, Inc.(1) 2.6(f) Amendment to Asset Exchange Agreement, made as of October 1, 1999, by and among InterMedia Partners Southeast and Charter Communications, LLC, Charter Communications Properties, LLC and Marcus Cable Associates, L.L.C.** 2.6(g) Common Agreement, dated April 20, 1999, between InterMedia Partners, InterMedia Partners Southeast, InterMedia Partners of West Tennessee, L.P., InterMedia Capital Partners IV, L.P., InterMedia Partners IV, L.P., Brenmor Cable Partners, L.P., TCID IP-V, Inc., Charter Communications, LLC, Charter Communications Properties, LLC, Marcus Cable Associates, L.L.C. and Charter RMG, LLC(10)+ 2.7(a) Purchase and Sale Agreement, dated as of April 26, 1999, by and among Interlink Communications Partners, LLLP, the sellers listed therein and Charter Communications, Inc. (now called Charter Investment, Inc.)(1)
750 EXHIBIT NUMBER DESCRIPTION PAGE NO. - -------- ----------- -------- 2.7(b) Purchase and Sale Agreement, dated as of April 26, 1999, by and among Rifkin Acquisition Partners, L.L.L.P., the sellers listed therein and Charter Communications, Inc. (now called Charter Investment, Inc.)(9) 2.7(c) RAP Indemnity Agreement, dated April 26, 1999, by and among the sellers listed therein and Charter Communications, Inc. (now called Charter Investment, Inc.)(9) 2.7(d) Assignment of Purchase Agreement with InterLink Communications Partners, LLLP, dated as of June 30, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Operating, LLC(9) 2.7(e) Assignment of Purchase Agreement with Rifkin Acquisition Partners L.L.L.P., dated as of June 30, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Operating, LLC(9) 2.7(f) Assignment of RAP Indemnity Agreement, dated as of June 30, 1999, by and between Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Operating, LLC(9) 2.7(g) Amendment to the Purchase Agreement with InterLink Communications Partners, LLLP, dated June 29, 1999(11) 2.7(h) Contribution Agreement, dated as of September 14, 1999, by and among Charter Communications Operating, LLC, Charter Communications Holding Company, LLC, Charter Communications, Inc., Paul G. Allen and the certain other individuals and entities listed on the signature pages thereto** 2.7(i) Form of First Amendment to the Contribution Agreement dated as of September 14, 1999, by and among Charter Communications Operating, LLC, Charter Communications Holding Company, LLC, Charter Communications, Inc. and Paul G. Allen, entered into as of November , 1999 2.8(a) Securities Purchase Agreement, dated May 13, 1999, by and between Avalon Cable Holdings LLC, Avalon Investors, L.L.C., Avalon Cable of Michigan Holdings, Inc. and Avalon Cable LLC and Charter Communications Holdings LLC and Charter Communications, Inc. (now called Charter Investment, Inc.)(5) 2.8(b) Assignment and Contribution Agreement, entered into as of October 11, 1999 by and between Charter Communications Holding Company, LLC and Charter Communications, Inc.** 2.8(c) Assignment Agreement effective as of June 16, 1999, by and among Charter Communications, Inc., Charter Communications Holdings LLC, Charter Communications Holding Company, LLC, Avalon Cable Holdings LLC, Avalon Investors, L.L.C., Avalon Cable of Michigan Holdings, Inc. and Avalon Cable LLC** 2.9 Purchase and Contribution Agreement, dated as of May 26, 1999, by and among Falcon Communications, L.P., Falcon Holding Group, L.P., TCI Falcon Holdings, LLC, Falcon Cable Trust, Falcon Holding Group, Inc. and DHN Inc. and Charter Communications, Inc. (now called Charter Investment, Inc.)** 2.9(a) First Amendment to Purchase and Contribution Agreement, dated as of June 22, 1999, by and among Charter Communications, Inc., Charter Communications Holding Company, LLC, Falcon Communications, L.P., Falcon Holding Group, L.P., TCI Falcon Holdings, LLC, Falcon Cable Trust, Falcon Holding Group, Inc. and DHN Inc. (8) 2.9(b) Form of Second Amendment to Purchase And Contribution Agreement, dated as of , 1999, by and among Charter Investment, Inc., Charter Communications Holding Company, LLC, Falcon Communications, L.P., Falcon Holding Group, L.P., TCI Falcon Holdings, LLC, Falcon Holding Group, Inc. and DHN Inc.
751 EXHIBIT NUMBER DESCRIPTION PAGE NO. - -------- ----------- -------- 2.10(a) Purchase Agreement, dated as of May 21, 1999, among Blackstone TWF Capital Partners, L.P., Blackstone TWF Capital Partners A L.P., Blackstone TWF Capital Partners B L.P., Blackstone TWF Family Investment Partnership, L.P., RCF Carry, LLC, Fanch Management Partners, Inc., PBW Carried Interest, Inc., RCF Indiana Management Corp, The Robert C. Fanch Revocable Trust, A. Dean Windry, Thomas Binning, Jack Pottle, SDG/Michigan Communications Joint Venture, Fanch-JV2 Master Limited Partnership, Cooney Cable Associates of Ohio, Limited Partnership, North Texas Cablevision, LTD., Post Cablevision of Texas, Limited Partnership, Spring Green Communications, L.P., Fanch-Narragansett CSI Limited Partnership, and Fanch Cablevision of Kansas General Partnership and Charter Communications, Inc. (now known as Charter Investment, Inc.)** 2.10(b) Assignment of Purchase Agreement by and between Charter Investment, Inc. and Charter Communications Holding Company, LLC, effective as of September 21, 1999** 2.11 Purchase and Contribution Agreement, entered into as of June 1999, by and among BCI (USA), LLC, William Bresnan, Blackstone BC Capital Partners L.P., Blackstone BC Offshore Capital Partners L.P., Blackstone Family Investment Partnership III L.P., TCID of Michigan, Inc. and TCI Bresnan LLC and Charter Communications Holding Company, LLC (now called Charter Investment, Inc.)** 3.1 Form of Restated Certificate of Incorporation of Registrant** 3.2 Form of Bylaws of Registrant** 4.1 Form of certificate evidencing shares of Class A common stock** 5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP regarding legality of the securities being registered** 10.1 Credit Agreement, dated as of March 18, 1999, between Charter Communications Operating, LLC and certain lenders and agents named therein(1) 10.2(a) Amended and Restated Management Agreement, dated March 17, 1999, between Charter Communications Operating, LLC and Charter Communications, Inc. (now called Charter Investment, Inc.)(9) 10.2(b) Form of Second Amended Management Agreement, dated as of , 1999, by and among Charter Investment, Inc., Charter Communications, Inc. and Charter Communications Operating, LLC** 10.2(c) Form of Mutual Services Agreement, dated as of , 1999, by and between Charter Communications, Inc. and Charter Investment, Inc.** 10.2(d) Form of Management Agreement, dated as of , 1999, by and between Charter Communications Holding Company, LLC and Charter Communications, Inc.** 10.3 Consulting Agreement, dated as of March 10, 1999, by and between Vulcan Northwest Inc., Charter Communications, Inc. (now called Charter Investment, Inc.) and Charter Communications Holdings, LLC(9) 10.4 Indenture relating to the 8.250% Senior Notes due 2007, dated as of March 17, 1999, between Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank(1) 10.5 Indenture relating to the 8.625% Senior Notes due 2009, dated as of March 17, 1999, among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank(1) 10.6 Indenture relating to the 9.920% Senior Discount Notes due 2011, dated as of March 17, 1999, among Charter Communications Holdings, LLC, Charter Communications Holdings Capital Corporation and Harris Trust and Savings Bank(1)
752 EXHIBIT NUMBER DESCRIPTION PAGE NO. - -------- ----------- -------- 10.7 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(2) 10.8 Indenture, dated January 15, 1996, by and among Rifkin Acquisition Partners, L.L.L.P., Rifkin Acquisition Capital Corp., as Issuers, Cable Equities of Colorado Management Corp., FNI Management Corp., Cable Equities of Colorado, Ltd., Cable Equities, Inc. and Rifkin/ Tennessee, Ltd., as Subsidiary Guarantors, and Marine Midland Bank, as trustee(3) 10.9 Indenture, dated as of October 15, 1993, by and among The Helicon Group, L.P. and Helicon Capital Corp., as issuers, and Shawmut Bank Connecticut, National Association, as trustee(4) 10.10(a) Charter Communications Holdings, LLC 1999 Option Plan(9) 10.10(b) Assumption Agreement, dated as of May 25, 1999, by and between Charter Communications Holdings, LLC and Charter Communications Holding Company, LLC(11) 10.10(c) Form of Amendment No. 1 to the Charter Communications Holdings, LLC 1999 Option Plan 10.11(a) Membership Interests Purchase Agreement, dated July 22, 1999, by and between Charter Communications Holding Company, LLC and Paul G. Allen(11) 10.11(b) Form of Contribution Agreement, dated as of , 1999, by and between Charter Communications, Inc. and Charter Communications Holding Company, LLC** 10.11(c) Amendment to Membership Interests Purchase Agreement, dated as of August 10, 1999, by and among Charter Communications Holding Company, LLC, Vulcan Cable III Inc. and Paul G. Allen(11) 10.11(d) Letter from Paul G. Allen regarding agreement to purchase Charter Communications Holding Company, LLC membership units** 10.12(a) Certificate of Formation of Charter Communications Holding Company, LLC, filed on May 25, 1999** 10.12(b) Form of Amended and Restated Limited Liability Company Agreement for Charter Communications Holding Company, LLC, effective as of , 1999, by and among Charter Communications, Inc. and the other individuals and entities listed on Schedule A thereto** 10.13 Form of Exchange Agreement, dated as of , 1999 by and among Charter Investment, Inc., Charter Communications, Inc., Vulcan Cable III Inc. and Paul G. Allen** 10.14 Form of Registration Rights Agreement, dated as of , 1999, by and among Charter Communications, Inc., Charter Investment, Inc., Vulcan Cable III Inc., Mr. Paul G. Allen, Mr. Jerald L. Kent, Mr. Howard L. Wood and Mr. Barry L. Babcock** 10.15(a) Employment Agreement, dated as of August 28, 1998, between Jerald L. Kent and Paul G. Allen(12) 10.15(b) Assignment of Employment Agreements, dated as of December 23, 1998, between Paul G. Allen and Charter Communications, Inc. (now called Charter Investment, Inc.)(11) 10.15(c) Form of Assignment and Assumption Agreement, dated as of , 1999, by and between Charter Investment, Inc. and Charter Communications, Inc.** 10.16(a) Employment Agreement, dated as of December 23, 1998, between Barry L. Babcock and Paul G. Allen(12) 10.16(b) Form of Assignment and Assumption Agreement, dated as of , 1999, by and between Charter Investment, Inc. and Charter Communications, Inc.**
753 EXHIBIT NUMBER DESCRIPTION PAGE NO. - -------- ----------- -------- 10.16(c) Form of Consulting Agreement, dated as of , 1999, by and between Barry L. Babcock and Charter Communications, Inc.** 10.16(d) Form of Termination of Employment Agreement, dated as of October , 1999, by and between Barry L. Babcock and Charter Investment, Inc., Charter Communications, Inc. and Communications Holding Company, LLC.** 10.17(a) Employment Agreement, dated as of December 23, 1998, between Howard L. Wood and Paul G. Allen(12) 10.17(b) Form of Assignment and Assumption Agreement, dated as of , 1999, by and between Charter Investment, Inc. and Charter Communications, Inc.** 10.17(c) Form of Consulting Agreement, dated as of , 1999, by and between Howard L. Wood and Charter Communications, Inc.** 10.17(d) Form of Termination of Employment Agreement, dated as of October , 1999, by and between Howard L. Wood and Charter Investment, Inc., Charter Communications, Inc. and Charter Holding Company.** 10.18(a) Note Purchase and Exchange Agreement, dated as of October 21, 1991, by and among Falcon Telecable, The Mutual Life Insurance Company and MONY Life Insurance Company** 10.18(b) First Amendment to Note Purchase and Exchange Agreement, dated as of March 29, 1993, by and among Falcon Telecable, The Mutual Life Insurance Company of New York and MONY Life Insurance Company of America** 10.18(c) Second Amendment to Note Purchase Agreement and Exchange Agreement, dated as of June 30, 1995, by and among Falcon Telecable, MONY Life Insurance Company of America and AUSA Life Insurance Company, Inc.** 10.18(d) Third Amendment to Note Purchase and Exchange Agreement, dated as of December 28, 1995, by and among Falcon Telecable, AUSA Life Insurance Company, Inc. and MONY Life Insurance Company of America** 10.18(e) Fourth Amendment to Note Purchase and Exchange Agreement, dated as of July 12, 1996, by and among Falcon Telecable, AUSA Life Insurance Company, Inc. and MONY Life Insurance Company of America** 10.18(f) Note Purchase and Exchange Agreement Consent and Amendment Agreement, dated as of June 30, 1998, by and among Falcon Telecable, AUSA Life Insurance Company, Inc., by AUER & Co., its nominee, and MONY Life Insurance Company of America, by J. ROMEO & Co., its nominee** 10.18(g) Note Purchase and Exchange Agreement Amendment Agreement, dated as of September 30, 1998, by and among Falcon Telecable, AUER & Co. and J. ROMEO & Co.** 10.19 Letter Agreement, dated as of July 22, 1999 between Charter Communications Holding Company, LLC and Charter Communications Holdings, LLC(12) 10.20(a) Option Agreement, dated as of February 9, 1999, between Jerald L. Kent and Charter Communications Holdings, LLC(11) 10.20(b) Amendment to the Option Agreement, dated as of August 23, 1999, between Jerald L. Kent and Charter Communications Holding Company, LLC(11) 10.20(c) Form of Amendment to the Option Agreement, dated as of , 1999, by and among Jerald L. Kent, Charter Communications Holding Company, LLC and Charter Communications, Inc.**
754 EXHIBIT NUMBER DESCRIPTION PAGE NO. - -------- ----------- -------- 10.22 Letter agreement, dated September 21, 1999, by and among Charter Communications, Inc., Charter Investment, Inc., Charter Communications Holding Company, Inc. and Vulcan Ventures Inc.** 10.23 Indenture, dated February 2, 1999, among Bresnan Communications Group LLC, Bresnan Capital Corporation and State Street Bank and Trust Company, as trustee, relating to the Issuers' $170,000,000 principal amount of 8% Senior Notes due 2009 and $275,000,000 aggregate principal amount at maturity of 9 1/4% Senior Discount Notes due 2009(13) 10.24 Loan Agreement dated as of February 2, 1999 among Bresnan Telecommunications Company LLC, various lending institutions, Toronto Dominion (Texas), Inc., as the Administrative Agent for the Lenders, with TD Securities (USA) Inc., Chase Securities Inc., the Bank of Nova Scotia, BNY Capital Markets, Inc. and NationsBanc Montgomery Securities LLC, collectively, the Arranging Agents, Chase Securities Inc., as Syndication Agent, the Bank of Nova Scotia, the Bank of New York Company, Inc., and NationsBanc Montgomery Securities LLC, as Documentation Agents, and TD Securities (USA) Inc., and Chase Securities Inc., as Joint Book Managers and Joint Lead Arrangers(13) 10.25 Indenture, dated as of December 10, 1998 by and among Avalon Cable of Michigan, Inc., Avalon Cable of New England LLC and Avalon Cable Finance, Inc., as issuers and The Bank of New York, as trustee for the Notes(5) 10.26 Supplemental Indenture, dated as of March 26, 1999 by and among Avalon Cable of New England LLC, Avalon Cable Finance, Inc. and Avalon Cable of Michigan LLC as issuers, Avalon Cable of Michigan, Inc., as guarantor, and The Bank of New York, as trustee for the Notes(5) 10.27 Senior Credit Agreement, dated as of November 6, 1998, among Avalon Cable of New England LLC, Avalon Cable of Michigan, Inc., Avalon Cable Finance, Inc., Avalon Cable of Michigan, LLC, Lehman Brothers Inc., Fleet Bank of Massachusetts, N.A., Union Bank of California, N.A. and Lehman Commercial Paper Inc.(19) 10.28 Guarantee and Collateral Agreement, dated as of November 6, 1998 made by Avalon LLC, Avalon Cable LLC, Avalon Cable of New England Holdings, Inc., Avalon Cable Holdings Finance, Inc., Avalon Cable of Michigan Holdings, Inc. and Avalon Cable of Michigan, Inc. in favor of Lehman Commercial Paper Inc.(19) 10.29 Indenture, dated as of December 10, 1998 by and among Avalon Cable of Michigan Holdings, Inc., Avalon Cable LLC and Avalon Cable Holdings Finance, Inc., as issuers and The Bank of New York, as trustee for the Notes(14) 10.30 Supplemental Indenture, dated as of March 26, 1999 by and among Avalon Cable of Michigan Holdings, Inc., Avalon Cable LLC and Avalon Cable Holdings Finance, Inc., as issuers, Avalon Cable of Michigan, Inc., as guarantor, and The Bank of New York, as trustee for the Notes(14) 10.31 Indenture, dated as of March 29, 1993, by and among Falcon Holding Group, L.P. and United States Trust Company of New York (governing 11% Senior Subordinated Notes due 2003)(15) 10.32 Indenture, dated as of April 3, 1998, among Falcon Holding Group, L.P., Falcon Funding Corporation and United States Trust Company of New York, as trustee(16) 10.33 Supplemental Indenture, dated as of September 30, 1998, by and among Falcon Holding Group, L.P., Falcon Funding Corporation, Falcon Communications, L.P. and United States Trust Company of New York, as trustee(17)
755 EXHIBIT NUMBER DESCRIPTION PAGE NO. - -------- ----------- -------- 10.34 Credit Agreement, dated as of June 30, 1998, among Falcon Cable Communications, LLC, certain guarantors and lenders named therein, BankBoston, N.A., as Documentation Agent, Toronto Dominion, Inc., as Administrative Agent, Bank of America, N.A. (formerly known as NationsBank, N.A.), as Syndication Agent, and The Chase Manhattan Bank, as Co-Syndication Agent(18) 10.35 Amendment to the Credit Agreement, dated as of September 25, 1998, among the affiliates of Falcon Holding Group, L.P. named therein and BankBoston, N.A., as Documentation Agent(17) 10.36 Form of Credit Agreement, dated as of June 30, 1998, as Amended and Restated as of , 1999, among Falcon Cable Communications, LLC, certain guarantors and lenders named therein, BankBoston, N.A., as Documentation Agent, Toronto Dominion, Inc., as Administrative Agent, Bank of America, N.A., as Syndication Agent, and The Chase Manhattan Bank, as Co-Syndication Agent** 10.37 Commitment Letter, dated August 16, 1999, from Chase Securities Inc., The Chase Manhattan Bank, Banc of America Securities LLC, Bank of America, N.A., TD Securities (USA) Inc. and Toronto Dominion (Texas) Inc. to Charter Investment, Inc.** 10.38 Commitment Letter, dated October 15, 1999, from Goldman Sachs Credit Partners L.P., as administrative agent, and the other lenders party thereto to Charter Communications, Inc. 10.39 Commitment Letter, dated September 29, 1999, from Bank of Montreal, Chicago Branch to Charter Communications Holding Company, LLC 21.1 Subsidiaries of Registrant 23.1 Consent of Paul, Hastings, Janofsky & Walker LLP (contained in Exhibit No. 5.1)** 23.2 Consent of Arthur Andersen LLP 23.3 Consent of KPMG LLP 23.4 Consent of Ernst & Young LLP 23.5 Consent of Ernst & Young LLP 23.6 Consent of KPMG LLP 23.7 Consent of PricewaterhouseCoopers LLP 23.8 Consent of PricewaterhouseCoopers LLP 23.9 Consent of Ernst & Young LLP 23.10 Consent of PricewaterhouseCoopers LLP 23.11 Consent of PricewaterhouseCoopers LLP 23.12 Consent of Greenfield, Altman, Brown, Berger & Katz, P.C. 23.13 Consent of PricewaterhouseCoopers LLP 23.14 Consent of Ernst & Young LLP 23.15 Consent of KPMG LLP 23.16 Consent of KPMG LLP 23.17 Consent of Ernst & Young LLP 23.18 Consent of Ernst & Young LLP 24.1 Power of Attorney** 27.1 Financial Data Schedule** 99.1 Consent of Nancy B. Peretsman** 99.2 Consent of Ronald L. Nelson**
756 EXHIBIT NUMBER DESCRIPTION PAGE NO. - -------- ----------- -------- 99.3 Consent of Howard L. Wood 99.4 Consent of Marc Nathanson** - --------------- * To be filed by amendment. ** Previously filed. + Portions of this exhibit have been omitted pursuant to a request for confidential treatment. (1) Incorporated by reference to Amendment No. 2 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on June 21, 1999 (File No. 333-77499). (2) Incorporated by reference to the registration statement on Forms S-4 and S-1 of Renaissance Media Group LLC, Renaissance Media (Tennessee) LLC, Renaissance Media (Louisiana) LLC and Renaissance Media Capital Corporation filed on June 12, 1998 (File No. 333-56679). (3) Incorporated by reference to the registration statement on Form S-1 of Rifkin Acquisition Capital Corp. and Rifkin Acquisition Partners, L.L.L.P. filed on April 2, 1996 (File No. 333-3084). (4) Incorporated by reference to the registration statement on Form S-4 of The Helicon Group, L.P. and Helicon Capital Corp. filed on December 3, 1993 (File No. 333-72468). (5) Incorporated by reference to Amendment No. 1 to the registration statement on Form S-4 of Avalon Cable of Michigan LLC, Avalon Cable of Michigan Inc., Avalon Cable of New England LLC and Avalon Cable Finance Inc. filed on May 28, 1999 (File No. 333-75453). (6) Incorporated by reference to the report on Form 8-K of Falcon Communications, L.P. and Falcon Funding Corporation filed on June 9, 1999 (File Nos. 033-60776 and 333-55755-01). (7) Incorporated by reference to Amendment No. 1 to the registration statement on Form S-4 of Bresnan Communications Group LLC and Bresnan Capital Corporation filed on July 9, 1999 (File No. 333-77637). (8) Incorporated by reference to the quarterly report on Form 10-Q filed by Falcon Communications, L.P. and Falcon Funding Corporation on August 13, 1999 (File Nos. 333-60776 and 333-55755). (9) Incorporated by reference to Amendment No. 4 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on July 22, 1999 (File No. 333-77499). (10) Incorporated by reference to Amendment No. 3 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on July 2, 1999 (File No. 333-77499). (11) Incorporated by reference to Amendment No. 6 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on August 27, 1999 (File No. 333-77499). (12) Incorporated by reference to Amendment No. 5 to the registration statement on Form S-4 of Charter Communications Holdings, LLC and Charter Communications Holdings Capital Corporation filed on August 10, 1999 (File No. 333-77499). (13) Incorporated by reference to the registration statement on Form S-4 of Bresnan Communications Group LLC and Bresnan Capital Corporation filed on May 3, 1999 (File No. 333-77637). (14) Incorporated by reference to Amendment No. 1 to the registration statement on Form S-4 of Avalon Cable LLC, Avalon Cable Holdings Finance, Inc., Avalon Cable of Michigan Holdings, Inc. and Avalon Cable of Michigan, Inc. filed on May 28, 1999 (File No. 333-75415). (15) Incorporated by reference to the registration statement on Form S-4 of Falcon Holding Group, L.P. filed on April 18, 1993 (File No. 33-60776).
757 (16) Incorporated by reference to the registration statement on Form S-4 of Falcon Holding Group, L.P. and Falcon Funding Corporation filed on June 1, 1998 (File No. 333-55755). (17) Incorporated by reference to the report on Form 8-K of Falcon Communications, L.P. and Falcon Funding Corporation filed on October 9, 1998 (File No. 33-60776). (18) Incorporated by reference to Amendment No. 1 to the registration statement on Form S-4 of Falcon Holding Group, L.P. and Falcon Funding Corporation filed on July 17, 1998 (File No. 333-55755). (19) Incorporated by reference to Amendment No. 4 to the statement of beneficial ownership on Schedule 13D of Avalon Cable of Michigan, Inc., Avalon Cable of Michigan Holdings, Inc., Avalon Cable Holdings, LLC, ABRY Broadcast Partners III, L.P., ABRY Equity Investors, L.P., ABRY Holdings III, Inc. and Royce Yudkoff filed on November 12, 1998 (File No. 005-40465).
1 Exhibit 2.7(i) FIRST AMENDMENT TO CONTRIBUTION AGREEMENT This FIRST AMENDMENT (the "AMENDMENT") to the CONTRIBUTION AGREEMENT dated as of September 14, 1999, by and among Charter Communications Operating, LLC, a Delaware limited liability company ("CCO"); Charter Communications Holding Company, LLC, a Delaware limited liability company ("CHARTER HOLDCO"); the other Persons listed on the signature pages thereto (the "INVESTORS"); with respect to certain provision thereof, Charter Communications, Inc. ("CCI"); and with respect to certain provisions thereof, Paul G. Allen ("ALLEN"), is entered into as of November ___, 1999. RECITALS A. In connection with the transactions contemplated by the Purchase Agreements, CCO, Charter Holdco, the Investors, CCI and Allen entered into that certain Contribution Agreement dated as of September 14, 1999 (the "CONTRIBUTION AGREEMENT"). B. Section 6.6 of the Contribution Agreement provides that the Contribution Agreement may be amended by an instrument in writing executed by a majority-in-interest (measured by Issued Units) of the Investors, so long as such amendment does not have an adverse and discriminatory impact on any Investor. C. The parties executing this Amendment, representing a majority-in-interest (measured by Issued Units) of the Investors, wish to amend the Contribution Agreement in the manner set forth in this Amendment, all effective as of September 14, 1999. D. Capitalized terms used in this Amendment but not otherwise defined have the meaning ascribed to them in the Contribution Agreement. AGREEMENT In consideration of the premises contained herein and the agreements set forth below, and intending to be legally bound, the parties agree that the Contribution Agreement is hereby amended as follows: 1. Sections 3 of the Contribution Agreement is hereby amended and restated in its entirety as follows: "3. Right to Exchange Class A Preferred Units; Put Rights. 3.1. Right to Exchange. Each Investor will have the right to contribute all or any portion of its Issued Units to CCI in exchange for Common Stock immediately prior to or concurrently with the IPO, in the following manner: 3.1.1. Prior hereto, CCI has delivered to R&A Management LLC copies of the preliminary prospectus dated October 18, 1999, relating to the IPO, and the Disbursement Agent has delivered a copy of the preliminary prospectus to each Investor. -1-
2 3.1.2. On or before November 5, 1999, the Disbursement Agent shall deliver a notice to CCI stating the number of Issued Units, if any, that each Investor will commit to exchange into shares of Common Stock concurrently with the closing of the IPO (the "EXCHANGED UNITS"). If no such notice is delivered with respect to one or more Investors, then each such Investor will no longer have the right to exchange Issued Units into shares of Common Stock. Each Investor electing to exchange Issued Units for Common Stock will, upon delivery of the confirmation notice, execute and deliver a Contribution Agreement in the form attached hereto as EXHIBIT C (the "SECOND CONTRIBUTION AGREEMENT"). Such election and such deliveries shall be contingent upon closing of the IPO and the fulfillment of all of the obligations of Charter Holdco, CCI and their affiliates hereunder, including without limitation the delivery of the Accretion Put and Registration Support Put as provided herein. 3.2. Valuation of Exchanged Units and CCI Common Stock. As more fully set forth in the Second Contribution Agreement, for purposes of the exchange under Section 3.1: 3.2.1 shares of Common Stock shall be valued at the gross price to the public in the IPO; and 3.2.2 Exchanged Units shall be valued at the sum of (i) the Class A Preferred Contributed Amount in respect of the Exchanged Units, and (ii) the Class A Preferred Return Amount in respect of such Exchanged Units (the aggregate value of all such Exchanged Units being referred to as the "ROLLOVER AMOUNT"). 3.3. Lockup Agreement. Investors receiving shares of Common Stock in exchange for Exchanged Units (the "ROLLOVER INVESTORS") will enter into a lockup agreement with the underwriters of the IPO, in the form attached hereto as EXHIBIT G. 3.4. Loss of Exchange Rights. Issued Units that are not exchanged for shares of Common Stock concurrently with the IPO will remain as Class A Preferred Units and will no longer be exchangeable into shares of Common Stock. 3.5. Registration Rights Agreement. Each Rollover Investor and CCI shall enter into a Registration Rights Agreement in the form attached hereto as EXHIBIT H. 3.6. Put Rights. The Charter Put (as defined in Section 5) entered into at the Closing will not apply as to any shares of Common Stock received in exchange for Issued Units ("ROLLOVER SHARES"). Allen will deliver two put agreements in the forms attached hereto as EXHIBIT E (the "ACCRETION PUT") and EXHIBIT F (the "REGISTRATION SUPPORT PUT") to each Investor that elects to exchange Issued Units into Common Stock. -2-
3 3.7. Credit Support. 3.7.1 Delivery of LC or Collateral. At the closing under the Second Contribution Agreement, Allen shall either: (i) deliver to the Disbursement Agent a letter of credit from a bank, investment bank or other financial institution reasonably acceptable to the Disbursement Agent in form and substance reasonably acceptable to the Disbursement Agent, in an amount at least equal to the Rollover Amount (the "LETTER OF CREDIT"); or (ii) deliver into escrow, as collateral securing Allen's obligations under the Registration Support Put, marketable securities (which shall include, for this purpose, shares of Microsoft Corp. common stock which Allen has held for at least two years) having a then market value at least equal to the Rollover Amount (the "COLLATERAL") together with a pledge agreement in form and substance reasonably acceptable to the Disbursement Agent securing Allen's obligations under the Registration Support Put (the "PLEDGE AGREEMENT"); provided, however, that, except to the extent action is properly taken against the Collateral as a result of Allen's failure to perform his obligations under the Registration Support Put, Allen shall at all times retain all rights incident to the ownership of such securities including without limitation voting rights and rights to receive dividends; or (iii) deliver any combination of a Letter of Credit and Collateral under clause (i) or (ii) of this Sections 3.7.1 which in the aggregate are valued at the Rollover Amount. 3.7.2 Conditions for Use. The Letter of Credit shall provide that the Letter of Credit may be drawn upon (or, if applicable, the Pledge Agreement shall provide that action may taken against the Collateral) by the Disbursement Agent (on behalf of any Rollover Investor) only in the event, and only to the extent, that Allen breaches his obligation to purchase Rollover Shares from such Rollover Investor pursuant to Section 2 of the Registration Support Put. In such case, the Letter of Credit or Collateral may be utilized either (i) to pay the full Purchase Price due under the Registration Support Put, provided that concurrently therewith title to the Rollover Shares is transferred to Allen or his designee in accordance with the terms of the Registration Support Put or (ii) to compensate such Rollover Holder for damages suffered as a result of such breach, if, following such breach by Allen, the Rollover Holder sells the Rollover Shares tendered to Allen to an unaffiliated third party under arms length commercially reasonable terms, with a reasonable and customary discount to reflect the fact that the Rollover Shares are "restricted shares" under rules and regulations of the SEC (an "ALTERNATE PRIVATE SALE"), which damages shall be deemed to be the difference between the aggregate amount which was payable by Allen under Section 2 of the Registration Support Put and the aggregate sale price received pursuant to such Alternate Private Sale. All draws upon the Letter of Credit, and all actions with respect to the Collateral, shall be made by the Disbursement on behalf of the claiming Rollover Holder. Each Investor hereby -3-
4 irrevocably appoints the Disbursement as its representative for such purpose (and the Disbursement Agent hereby accepts such appointment) and agrees that any action taken by the Disbursement Agent with respect to the Letter of Credit or the Collateral which purports to be on behalf of such Investor shall be binding on such Investor. Any payments received by the Disbursement Agent on behalf of any Investor shall discharge Mr. Allen's obligations to such Investor to the extent of such payments. 3.7.3 Duration. Such Letter of Credit or Pledge Agreement shall be maintained by Allen through the date which is 2 years following the closing date of the IPO. In the case of a Letter of Credit, the initial term shall be for one year; provided, however, that the Disbursement Agent shall be entitled to draw upon the Letter of Credit at the end of such one year period unless, at least 15 days prior thereto, either (i) the Letter of Credit is either affirmatively renewed or renewed under its terms by inaction of the bank or (ii) Allen provides a replacement Letter of Credit and/or replacement Collateral under a Pledge Agreement (provided such new Letter of Credit and Collateral have an aggregate value equal to or exceeding the then remaining face amount of the existing Letter of Credit). If the Disbursement Agent draws upon the Letter of Credit due to its expiration as set forth above, the Disbursement Agent shall deposit such funds in an appropriate escrow account, pursuant to agreements in form and substance reasonably acceptable to the parties, from which payments will be made to Investors in the event of a breach of the Registration Support Put as contemplated by Section 3.7.2 and the Letter of Credit. Any remaining funds in such escrow account will be returned to Mr. Allen two years following the date of the IPO. 3.7.4 Substitution; Reduction. (a) Allen shall have the ability at any time from time to time to substitute a Letter of Credit for some or all of the Collateral, or Collateral for any portion of a Letter of Credit, on a dollar for dollar basis, and the Disbursement Agent shall cooperate with Allen in effecting the release of Collateral or a reduction of the amount of the Letter of Credit concurrently with delivery of such substitute Letter of Credit or Collateral (as the case may be). (b) From time to time at Allen's request (but not more than once every three months), the Disbursement Agent shall cooperate with Allen to reduce the Letter of Credit or the amount of Collateral to an aggregate value not less than the greater of (i) the Rollover Amount multiplied by a fraction the numerator of which is the number of any remaining Rollover Shares which have neither been transferred to Allen nor sold to a third party that is not a Permitted Transferee (whether pursuant to the Shelf Registration or otherwise) and the denominator of which is the initial number of Rollover Shares; and (ii) the fair market value of such remaining Rollover Shares on the date of such request (as determined by reference to the Closing Price under the Registration Support Put). -4-
5 3.8. Earlier Offering by Entity other than CCI. In the event that an affiliate of Charter Holdco and CII other than CCI conducts an initial public offering of common stock prior to the IPO, then: 3.8.1. CII and Charter Holdco shall cause such affiliate to enter into an agreement with the Investors giving them substantially the same rights set forth in Sections 3.1, 3.2, 3.3 and 3.4; and 3.8.2. Allen shall enter into an agreement with the Investors giving them substantially the same rights set forth in Sections 3.5, 3.6 and 3.7 (with the Accretion Put and Registration Support Put being applicable to common stock of such affiliate received by Investors in the initial public offering of such affiliate). 2. Exhibit C (Form of Second Contribution Agreement) to the Contribution Agreement is replaced in its entirety by Exhibit C to this Amendment. 3. Exhibit E (Form of Allen Put) to the Contribution Agreement is replaced in its entirety by Exhibit E (Form of Accretion Put) to this Amendment. 4. Exhibit F (Lockup Put) to the Contribution Agreement is deleted in its entirety, and a new Exhibit F (Registration Support Put) is hereby added in the form of Exhibit F hereto. 5. Exhibit H (Registration Rights Agreement) to the Contribution Agreement is attached hereto as Exhibit H hereto. 6. On or prior to the closing under the Second Contribution Agreement, Section 3.5.3 of the LLC Agreement shall be amended in its entirety to read as follows: "3.5.3 Right to Redeem Class A Preferred Units. At any time after the third anniversary of the Class A Preferred Measuring Date, the Company shall have the right to redeem the Class A Preferred Units at a redemption price equal to the sum of (i) the Class A Preferred Contributed Amount in respect of such redeemed Class A Preferred Units and (ii) the Class A Preferred Return Amount in respect of such redeemed Class A Preferred Units. The Class A Preferred Units redeemed pursuant to this Section 3.5.3 shall be deemed cancelled." 7. Except as otherwise set forth in this Amendment, the Contribution Agreement remains unchanged and in full force and effect and the terms of Section 6 of the Contribution Agreement are incorporated herein and shall be applicable to this Amendment. Without limiting any of the foregoing, each Investor acknowledges that former Section 3 of the Contribution Agreement (and any similar provision of any letter agreement referenced in the Contribution Agreement) is of no further force and effect and that the execution and delivery of this agreement constitutes settlement in full of all claims or rights arising out of any failure by any party to comply with former Section 3 and any such similar provision of any letter agreement. -5-
6 8. This Amendment may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. [SIGNATURE PAGE FOLLOWS] -6-
7 Signature Page to First Amendment to Contribution Agreement IN WITNESS WHEREOF, parties hereto have caused this Amendment to be signed by their duly authorized representatives, all as of the date first written above. AS REQUIRED TO APPROVE AMENDMENT: CHARTER INVESTMENT, INC By: _______________________________________ Name: Title: WITH RESPECT TO SECTION 1 OF THIS AMENDMENT ONLY: ____________________________________________ Paul G. Allen, by William D. Savoy, his attorney-in-fact
8 Signature Page to First Amendment to Contribution Agreement INTERLINK INVESTMENT CORP. By: __________________________________________ Kevin B. Allen, Vice President RIFKIN & ASSOCIATES, INC. By: __________________________________________ Monroe M. Rifkin, Chairman of the Board RIFKIN FAMILY INVESTMENT COMPANY, L.L.L.P. By: Its General Partners _______________________________________________ Monroe M. Rifkin, General Partner _______________________________________________ Stuart G. Rifkin, General Partner _______________________________________________ Bruce A. Rifkin, General Partner _______________________________________________ Ruth R. Bennis, General Partner RIFKIN CHILDREN'S TRUST By: __________________________________________ Monroe M. Rifkin, Co-Trustee
9 Signature Page to First Amendment to Contribution Agreement RIFKIN CHILDREN TRUST-II By: __________________________________________ Monroe M. Rifkin, Co-Trustee RIFKIN CHILDREN'S TRUST III By: __________________________________________ Monroe M. Rifkin, Co-Trustee 360 GROUP, INC. By: __________________________________________ Dale D. Wagner, Treasurer MORRIS CHILDREN TRUST By: __________________________________________ Charles R. Morris, III, Trustee CRM II LIMITED PARTNERSHIP, LLLP By: __________________________________________ Charles R. Morris, General Partner INDIANA CABLEVISION MANAGEMENT CORP. By: __________________________________________ Monroe M. Rifkin, President _______________________________________________ MONROE M. RIFKIN _______________________________________________ KEVIN B. ALLEN
10 Signature Page to First Amendment to Contribution Agreement _______________________________________________ JEFFREY D. BENNIS _______________________________________________ STEPHEN E. HATTRUP _______________________________________________ BRUCE A. RIFKIN _______________________________________________ PETER N. SMITH _______________________________________________ DALE D. WAGNER _______________________________________________ STUART G. RIFKIN _______________________________________________ PAUL A. BAMBEI _______________________________________________ LUCILLE A. MAUN _______________________________________________ RUTH R. BENNIS _______________________________________________ CHARLES R. MORRIS, III "Disbursement Agent" R&A MANAGEMENT LLC By: __________________________________________ Its: __________________________________________
11 EXHIBIT C (AND EXHIBIT C TO CONTRIBUTION AGREEMENT) FORM OF CONTRIBUTION AGREEMENT
12 SECOND CONTRIBUTION AGREEMENT THIS SECOND CONTRIBUTION AGREEMENT is made as of ________ __, 1999, by and between __________ (the "HOLDER"), Charter Communications Holding Company, LLC, a Delaware limited liability company ("CHARTER HOLDCO") and Charter Communications, Inc., a Delaware corporation ("CCI"). RECITALS WHEREAS, Holder owns Class A Preferred Units of Charter Holdco that were issued in connection with (a) that certain Purchase and Sale Agreement by and among Charter Investment, Inc. (formerly Charter Communications, Inc.) ("CII"), Charter Communications Operating, LLC (by assignment) ("CCO"), the Persons listed on the signature pages thereto as "Sellers" and Rifkin Acquisition Partners, L.L.L.P., dated April 26, 1999, as amended (the "RAP AGREEMENT"), and (b) that certain Purchase and Sale Agreement by and among CII, CCO, the Persons listed on the signature pages thereto as "Sellers" and InterLink Communications Partners, LLLP, dated April 26, 1999, as amended (the "INTERLINK AGREEMENT" and, together with the RAP Agreement, the "PURCHASE AGREEMENTS"); WHEREAS, pursuant to the Contribution Agreement by and among Holder and Charter Holdco, among others, dated as of September 14, 1999, as amended, and entered into in connection with the transactions contemplated by the Purchase Agreements (the "FIRST CONTRIBUTION Agreement"), Holder has the right to exchange the Class A Preferred Units that were subject to the First Contribution Agreement for shares of Class A Common Stock of CCI ("COMMON STOCK") simultaneously with the closing of the initial public offering of CCI (the "IPO"), all subject to the terms of the First Contribution Agreement; WHEREAS, Holder has agreed to contribute the number of such Class A Preferred Units set forth on EXHIBIT A hereto (the "CONTRIBUTED UNITS") to CCI simultaneously with, and contingent upon the occurrence of the IPO, in exchange for Common Stock; NOW, THEREFORE, in light of the above recitals and in consideration of the mutual agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. DEFINITIONS. 1.1. "AGREEMENT" means this Contribution Agreement. 1.2. "CLASS A PREFERRED CONTRIBUTED AMOUNT" has the meaning given that term in the Operating Agreement. 1.3. "CLASS A PREFERRED RETURN AMOUNT" has the meaning given that term in the Operating Agreement. 1.4. "CLASS A PREFERRED UNITS" has the meaning given that term in the Operating Agreement. -1-
13 1.5. "EXCHANGING GROUP" means Holder and all other holders of Class A Preferred Units that have agreed to exchange such units for shares of Common Stock simultaneously with the IPO pursuant to an agreement substantially similar to this Agreement. 1.6. "OPERATING AGREEMENT" means that certain Amended and Restated Limited Liability Company Agreement of Charter Holdco effective as of _________, 1999 as amended from time to time. 1.7. "PERSON" means an individual, corporation, limited liability company, partnership, sole proprietorship, association, joint venture, joint stock company, trust, incorporated organization, or governmental agency or other entity. 2. CONTRIBUTION AND ISSUANCE OF COMMON STOCK. 2.1. Contribution of Contributed Units. Holder hereby agrees to contribute to CCI the Contributed Units simultaneously with, and contingent upon, the occurrence of the IPO, in a transaction intended to qualify under Section 351 of the Internal Revenue Code of 1986, as amended. 2.2. Issuance of Common Stock. As consideration for the contribution of the Contributed Units, CCI agrees to issue a number of shares of Common Stock to Holder equal to a fraction, the numerator of which is the sum of (i) the Class A Preferred Contributed Amount in respect of the Contributed Units, and (ii) the Class A Preferred Return Amount in respect of such Contributed Units, and the denominator of which is the gross price at which the Common Stock is sold to the public in the IPO. No fractional shares or scrip representing fractions of shares of Common Stock will be issued upon the exchange of Contributed Units. That portion of each Holder's Contributed Units that would otherwise be exchanged for a fractional share shall instead be redeemed by Charter Holdco for a cash payment (calculated to the nearest $.01) equal to such fraction multiplied by the gross price at which the Common Stock is sold to the public in the IPO. 2.3. Lockup Agreement. Currently with the execution and delivery of this Agreement, Holder agrees to deliver a lockup agreement with the underwriters of the IPO, in the form attached as Exhibit G to the First Contribution Agreement (the "LOCKUP AGREEMENT"). 2.4. Registration Rights Agreement. At the Closing, Charter and each Holder shall execute and deliver a Registration Rights Agreement among the Holders and CCI, in the form attached as Exhibit H to the First Contribution Agreement (the "REGISTRATION RIGHTS AGREEMENT"). 3. REPRESENTATIONS AND WARRANTIES. 3.1. Representations and Warranties of CCI. CCI hereby represents and warrants to each Holder that: (i) it has full power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby, (ii) the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary action on the part of CCI, (iii) this Agreement has been duly and validly executed and delivered by CCI and is a valid and binding -2-
14 agreement of CCI, enforceable against CCI in accordance with its terms, except (a) as such enforcement may be subject to bankruptcy, insolvency or similar laws now or hereafter in effect relating to creditors rights generally and (b) as the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 3.2. Holder's Representations and Warranties. Holder hereby represents and warrants to CCI as follows: 3.2.1. Holder has the full power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Holder and is a valid and binding agreement of Holder, enforceable against it in accordance with its terms, except as (a) such enforcement may be subject to bankruptcy, insolvency or similar laws now or hereafter in effect relating to creditors rights generally and (b) as the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 3.2.2. Holder, either alone or (if such Holder designated a Purchaser Representative in connection with its September 14 acquisition of the Contributed Units from Holdco) together with a Purchaser Representative (which Purchaser Representative has completed and delivered to CII a completed "Purchaser Representative Questionnaire" delivered to each Holder in the Equity Letter), is an "accredited investor" as defined in Securities and Exchange Commission ("SEC") Rule 501(a). The "Investor Questionnaire" that was completed by Holder and delivered to CII together with the executed letter agreement dated August 27, 1999 from CII to each of the Holders is true and correct in all material respects as of the date hereof. If, pursuant to such Investor Questionnaire, Holder designated a "Purchaser Representative", (i) Holder hereby confirms its appointment of such Purchaser Representative as its purchaser representative in connection with its purchase of CCI Stock hereunder and (ii) to the best of Holder's knowledge, such Purchaser Representative's Purchaser Representative Questionnaire is true and correct in all material respects as of the date hereof. If Holder acted in the capacity of "Purchaser Representative" for any other purchaser of Class A Preferred Units, (i) Holder hereby confirms its appointment as purchaser representative in connection with the purchase of CCI stock hereunder and (ii) that its previously delivered Purchaser Representative Questionnaire is true and correct in all material respects as of the date hereof. 3.2.3. If Holder is a corporation, partnership, trust or other entity, Holder was not organized for the specific purpose of acquiring the Common Stock. 3.2.4. Holder has received and reviewed all information Holder considers necessary or appropriate for deciding whether to invest in the Common Stock. Holder further represents that Holder has had an opportunity to ask questions and receive answers from CII, CCI, CCO and Charter Holdco and its officers and employees regarding the terms and conditions of purchase of the Common Stock and regarding the business, financial affairs and other aspects of CCI and has further had the opportunity to obtain any information (to the extent CII, CCI, CCO or Charter Holdco possesses or can acquire such information without unreasonable effort or expense) that Holder deems necessary to -3-
15 evaluate the investment and to verify the accuracy of information otherwise provided to Holder. 3.2.5. Holder acknowledges that the Common Stock has not been registered under the Act, or qualified under any applicable blue sky laws in reliance, in part, on the representations and warranties herein. Such Issued Units are being acquired by Holder for investment purposes for Holder's own account only and not for sale or with a view to distribution of all or any part of such Common Stock. No other person will have any direct or indirect beneficial interest in the Common Stock. 3.2.6. Holder understands that the shares of Common Stock are and will be "restricted securities" under the federal securities laws in that such securities will be acquired from CCI in a transaction not involving a public offering, and that under such laws and applicable regulations such securities may be resold without registration under the Act only in certain limited circumstances and that otherwise such securities must be held indefinitely. 3.2.7. Holder understands and acknowledges that the shares shall bear a legend stating in substance: THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT (AND ANY APPLICABLE STATE SECURITIES LAWS) OR AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREOF. 3.3. At the Closing, Holder will own all of the Contributed Units, both of record and beneficially, free and clear of all liens, encumbrances or adverse interests of any kind or nature whatsoever (including any restriction on the right to vote, sell or otherwise dispose of the Contributed Units), other than those arising under applicable law and those arising under the Operating Agreement. 3.4. Upon the transfer of the Contributed Units, CCI will receive good title to the Contributed Units, free and clear of all liens, encumbrances and adverse interests created by the Holder or any of the Holders predecessors-in-interest, other than those arising under applicable law or those arising under the Operating Agreement. 4. CLOSING; CLOSING CONDITIONS. The closing of the transactions contemplated by this Agreement (the "CLOSING") shall occur simultaneously with (and shall be contingent upon) the closing of the IPO and shall take place at a location specified by CCI. At the Closing, Holder shall (a) contribute to CCI the Contributed Units, (b) deliver or cause to be delivered to CCI one or more certificates evidencing the Contributed Units (if such interests are certificated), together with duly -4-
16 executed assignments separate from the certificate in a form reasonably satisfactory to CCI to effectuate the transfer of such Contributed Units to CCI, (c) execute and deliver the Lockup Agreement, (d) execute and deliver the Registration Rights Agreement, and (e) countersign the Accretion Put and the Registration Support Put (as required by and defined in the First Contribution Agreement). At the Closing, CCI shall execute and deliver the Registration Rights Agreement and shall deliver or cause to be delivered to Holder the Common Stock. The Holder and CCI will cooperate so as to permit all documents required to be delivered at the Closing to be delivered by mail, delivery service or courier without requiring either party or its representatives to be physically present at the Closing. 5. GENERAL PROVISIONS. 5.1. Notices. All notices hereunder shall be in writing and shall be deemed to have been delivered on the date of the first attempted delivery by (i) the United States Postal Service, unless otherwise provided herein, to the respective party if mailed by certified mail, return receipt requested, or (ii) a reputable overnight delivery service, to the respective party at its address set forth below or such other address as either party may designate to the other by written notice in accordance herewith: If to Holder: R&A Management, LLC 360 South Monroe Street, Suite 600 Denver, Colorado 80209 Attention: Kevin B. Allen Telecopy: (303) 322-3553 with a complete copy under separate cover (which copy by itself shall not constitute notice) to: Stuart G. Rifkin, Esq. Baker & Hostetler 303 East 17th Avenue, Suite 1100 Denver, Colorado 80110 Telecopy: (303) 861-7805 If to CCI: Charter Communications, Inc. 12444 Powerscourt Drive St. Louis, Missouri 63131 Attention: Jerald L. Kent, President Telecopy: (314) 965-8793 with a complete copy under separate cover (which copy by itself shall not constitute notice) to: Charter Communications, Inc. -5-
17 12444 Powerscourt Drive St. Louis, Missouri 63131 Attention: Curtis S. Shaw, Esq. Senior Vice President & General Counsel Telecopy: (314) 965-8793 and to: Irell & Manella LLP 1800 Avenue of the Stars Suite 900 Los Angeles, California 90067 Attention: Alvin G. Segel, Esq. Telecopy: (310) 203-7199 5.2. Construction. Throughout this Agreement, as the context requires, (a) the singular tense and number includes the plural, and the plural tense and number includes the singular; (b) the past tense includes the present, and the present tense includes the past; and (c) references to parties, sections, schedules, and exhibits mean the parties, sections, schedules, and exhibits of and to this Agreement. The section headings in this Agreement are inserted only as a matter of convenience, and in no way define, limit, extend, or interpret the scope of this Agreement or of any particular section. If there is any apparent conflict or inconsistency between the provisions set forth in this Agreement, and the provisions set forth in any schedule or exhibit, to the extent possible such provisions shall be interpreted in a manner so as to make them consistent. If it is not possible to interpret such provisions consistently, the provisions set forth in the body of this Agreement shall prevail. 5.3. Assignment. None of the parties may assign their rights under this Agreement without the prior written consent of the other parties; provided, however, that CCI may assign its rights, benefits or obligations under this Agreement to one or more entities controlled by or affiliated with them, without the prior consent of any other party hereto. This Agreement shall be binding on and inure to the benefit of the parties and their respective successors and permitted assigns. 5.4. No Third-Party Benefits. None of the provisions of this Agreement are intended to benefit, or to be enforceable by, any third-party beneficiaries. 5.5. Governing Law. This Agreement is governed by the laws of the State of Delaware, without regard to Delaware's rules relating to conflict of laws. 5.6. Amendment and Waiver. This Agreement may not be modified or amended except by an instrument in writing signed by CCI and Holder; provided, however, that R&A Management, LLC (acting as agent for Holder under the terms of the Purchase Agreements) shall have the right to consent to an amendment to this Agreement on behalf of Holder so long as (i) such amendment does not adversely and discriminatorily affect the Exchanging Group, and (ii) a majority-in-interest (based on Class A Preferred Units being exchanged) of all Persons comprising the Exchanging Group consent to such amendment. No waiver of any provision of this Agreement or of any rights or obligations of any party under this -6-
18 Agreement shall be effective unless in writing and signed by the party or parties waiving compliance, and shall be effective only in the specific instance and for the specific purpose stated in that writing. 5.7. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 5.8. Additional Documents. Each party hereto agrees to execute any and all further documents and writings and to perform such other actions which may be or become necessary or expedient to effectuate and carry out this Agreement. 5.9. Severability. Any provision hereof which is prohibited or unenforceable shall be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. 5.10. Integration. This Agreement and any documents referred to herein or therein (the "TRANSACTION DOCUMENTS") contain the entire understanding of the parties with respect to the subject matter hereof. There are no restrictions, agreements, promises, representations, warranties, covenants or undertakings with respect to the subject matter hereof other than those expressly set forth or referred to herein. Except for the Transaction Documents, this Agreement supersedes all prior agreements and understandings between the parties with respect to its subject matter. [SIGNATURES BEGIN ON FOLLOWING PAGE] -7-
19 Signature Page to Contribution Agreement IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the date indicated. CHARTER COMMUNICATIONS, INC By: _______________________________________ Name: Title: CHARTER COMMUNICATIONS HOLDING COMPANY, LLC By: _______________________________________ Name: Title: HOLDER ___________________________________________ -8-
20 EXHIBIT A CONTRIBUTED UNITS -9-
21 EXHIBIT E (AND EXHIBIT E TO CONTRIBUTION AGREEMENT) FORM OF ACCRETION PUT
22 FORM OF [ACCRETION] PUT AGREEMENT This Put Agreement ("Agreement") is made as of the ___ day of _____, 199_ [to be dated the day of the exchange closing in connection with IPO] by and between Paul G. Allen, an individual ("Allen"), and __________ (the "Holder"), with reference to the following facts: A Charter Communications Operating, LLC ("CCO") is a party to (1) that certain Purchase and Sale Agreement by and among the persons or entities listed on the signature pages thereto as "Sellers," and Rifkin Acquisition Partners, L.L.L.P. ("RAP"), dated April 26, 1999 (the "RAP Agreement"), and (2) that certain Purchase and Sale Agreement by and among the persons or entities listed on the signature pages thereto as "Sellers," and InterLink Communications Partners, LLLP ("InterLink"), dated April 26, 1999 (the "InterLink Agreement" and, together with the RAP Agreement, the "Purchase Agreements"), pursuant to which CCO and certain of its affiliates have acquired all of the outstanding equity of RAP and InterLink, respectively. B Allen is the indirect controlling owner of CCO and expects to derive benefit from the transactions contemplated by the Purchase Agreements. C Holder is a former owner of interests in RAP and/or InterLink and, in connection with the transaction by which CCO acquired RAP and InterLink, and pursuant to the Contribution Agreement (as defined below), Holder was issued preferred membership units of Charter Communications Holding Company, LLC ("Charter LLC"). D In connection with the initial public offering of Charter Communications, Inc. ("CCI"), Holder exchanged its preferred membership units in Charter LLC for CCI Stock (as defined below), and as a condition of such exchange, Allen agreed to enter into this Agreement, giving Holder certain rights with respect to the CCI Stock. NOW, THEREFORE, in consideration of the respective covenants and agreements of the parties and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged by each party), the parties hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms have the following meanings: "Closing Price" means, with respect to a share of CCI common stock, (i) the last reported sales price, regular way, as reported on the principal national securities exchange on which shares of CCI common stock are listed or admitted for trading or (ii) if shares of CCI common stock are not listed or admitted for trading on any national securities exchange, the last reported sales price, regular way, as reported on the Nasdaq National Market or, in the absence of any last reported sales price, the average of the highest bid and lowest asked prices as reported on the Nasdaq Stock Market.
23 "CCI Stock" means all shares of common stock of CCI issued to Holder in exchange for preferred membership units of Charter LLC, and all other securities that constitute "CCI Stock" in accordance with Section 5 of this Agreement. "Contribution Agreement" means the Contribution Agreement dated as of September 14, 1999, by and among , CCO, Charter Communications Holding Company, LLC, the Investors, CCI and Allen, as amended by the First Amendment to Contribution dated as of November ___, 1999. "IPO Price" means the price per share at which shares of common stock of CCI are sold to the public in CCI's initial public offering (without reduction for underwriters' fees, discounts, commissions, and other selling expenses). "Lockup Agreement" means the agreement entered into between the Holder and the underwriters of CCI's initial public offering, which, among other things, prohibits the Holder from selling the CCI Stock until the Lockup Termination Date. "Lockup Termination Date" means the earliest date on which the Lockup Agreement no longer prohibits the Holder from selling the CCI Stock. "Minimum Amount" means the lesser of (i) CCI Stock for which the Purchase Price under this Agreement is at least $1,000,000, or (ii) all CCI Stock that is subject to the Holder's Put Option under this Agreement. 2. Put Option. Allen hereby grants to the Holder the right and option (the "Put Option"), exercisable from the date hereof through and including the date of termination of the Put Option under Section 7 by written notice delivered to Allen, to sell and to permit any of the Holder's Permitted Transferees to sell to Allen or his designee, from time to time, on one or more occasions, all or any portion of the CCI Stock held by the Holder and its Permitted Transferees that represents at least the Minimum Amount. Upon the giving of such notice, Allen shall be obligated to buy or to cause his designee to buy and, subject to Section 5.3, the Holder and the Permitted Transferees identified in the Holder's notice pursuant to this Section 2 shall be obligated to sell, the amount of the CCI Stock held by the Holder and its Permitted Transferees that is specified in the Holder's notice pursuant to this Section 2, at the price and upon the terms and conditions specified in Section 3. 3. Purchase Price; Closing. 3.1 The purchase price to be paid upon any exercise of the Put Option (the "Purchase Price") shall be equal the IPO Price (calculated in accordance with Section 5, if applicable), plus interest thereon at a rate of four and one-half percent (4.5%) per year, compounded annually, for the period from the date of this Agreement through the closing of the purchase and sale of the CCI Stock hereunder (the "Closing"). 3.2 At each Closing, (a) Allen or his designee shall pay to the Holder (for itself and on behalf of its Permitted Transferees, if applicable) the Purchase Price in immediately available funds by wire transfer (if wire transfer instructions were provided in the notice of exercise) or certified bank check; and (b) the Holder shall deliver or cause to be delivered to -2-
24 Allen or his designee one or more certificates evidencing the CCI Stock to be purchased and sold at such Closing, together with duly executed assignments separate from the certificate in form and substance reasonably acceptable to Allen to effectuate the transfer of such CCI Stock to Allen or his designee, together with a certificate of the Holder and its Permitted Transferee, if applicable, reaffirming the representations in Section 4. 3.3 Each Closing shall be held at the offices of Irell & Manella in Los Angeles, California, on (or before if Allen so determines) the thirtieth day after the Holder delivers the written notice described above (or, if such day is not a business day, on the next business day thereafter), or at such other time and place as the Holder and Allen may agree. The Holder and Allen will cooperate so as to permit all documents required to be delivered at the Closing to be delivered by mail, delivery service or courier without requiring either party or his or its representatives to be physically present at the Closing. 4. Representations of the Holder. The Holder represents and warrants to Allen and any of his designees or assignees that on the date hereof and at each Closing: (a) the Holder has full power and authority to execute and deliver this Agreement and consummate the transactions contemplated hereby; (b) this Agreement is the legal, valid and binding obligation of the Holder, enforceable against the Holder in accordance with its terms; (c) at each Closing, the Holder or one of its Permitted Transferees will own all of the CCI Stock required to be purchased and sold at such Closing, both of record and beneficially, free and clear of all liens, encumbrances or adverse interests of any kind or nature whatsoever (including any restriction on the right to vote, sell or otherwise dispose of the CCI Stock), other than those arising under applicable law and those arising under the organizational documents of CCI; (d) upon the transfer of the CCI Stock pursuant to Section 3, Allen or his designee will receive good title to the CCI Stock, free and clear of all liens, encumbrances and adverse interests created by the Holder, any Permitted Transferee, or any of their respective predecessors-in-interest, other than those arising under applicable law or those arising under the organizational documents of CCI. 5. Adjustment for Exchange, Reorganizations, Stock Splits, etc. 5.1 If the number of shares of CCI Stock is increased, decreased, changed into, or exchanged for a different number or kind of shares or securities of CCI through reorganization, recapitalization, reclassification, stock dividend, stock split or reverse stock split, or other similar transaction, an appropriate adjustment shall be made with respect to number and kind of shares or securities subject to the Put Option, without change in the total price applicable to the unexercised portion of the Put Option but with a corresponding adjustment in the price per unit of any security covered by the Put Option. Any shares or securities that become subject to the Put Option pursuant to this Section 5.1 shall constitute "CCI Stock" for purposes of this Agreement. 5.2 Upon a reorganization, merger or consolidation of CCI with one or more other corporations or entities (any of the foregoing, a "Business Combination") pursuant to which the outstanding CCI Stock is converted into or exchanged for any other security ("Replacement Securities"), the Put Option shall cease to be exercisable with respect to the securities that previously constituted "CCI Stock" and shall instead be automatically converted into an option to sell such number of shares or units of Replacement Securities issued in exchange for the CCI -3-
25 Stock pursuant to such Business Combination at a price per share or unit of Replacement Securities equal to the aggregate Purchase Price for all CCI Stock immediately prior to such effectiveness divided by the number of shares or units of Replacement Securities subject to the Put Option immediately following such effectiveness. Any Replacement Securities that become subject to the Put Option pursuant to this Section 5.2 shall constitute "CCI Stock" for purposes of this Agreement. 5.3 In the event of any proposed Business Combination pursuant to which the outstanding CCI Stock will be converted into a right to receive consideration other than securities of CCI or Replacement Securities, (i) Allen will provide notice thereof to the Holder at least ten (10) days prior to consummation of such Business Combination and (ii) the Put Option will expire two days prior to such consummation except with respect to any CCI Stock that is specified in a notice delivered by the Holder pursuant to Section 2 prior to such date. If the Holder delivers a notice pursuant to Section 2 after its receipt of a notice from Allen pursuant to this Section 5.3, the purchase and sale of any of the CCI Stock specified in the Holder's notice may be conditioned at the Holder's option on the consummation of the Business Combination described in Allen's notice pursuant to this Section 5.3. 6. Representations of Allen. Allen represents and warrants to the Holder and each Permitted Transferee that on the date hereof and at all times hereafter through the Closing: (a) Allen has full power and authority to execute and deliver this Agreement and consummate the transactions contemplated hereby; (b) this Agreement constitutes the legal, valid and binding obligation of Allen, enforceable against Allen in accordance with its terms; (c) his execution and delivery of this Agreement does not, and his performance of his obligations under this Agreement will not, violate, conflict with or constitute a breach of, or a default under, any material agreement, indenture or instrument to which he is a party or which is binding on him, and will not result in the creation of any lien on, or security interest in, any of his assets (other than such violations, breaches, defaults, liens or security interests that would not materially and adversely affect his ability to perform his obligations under this Agreement); and (d) his Net Worth is and will be greater than $4 billion. At the request of R&A Management, LLC, a Colorado limited liability company ("R&A"), made (on behalf of Holder together with all other holders receiving put agreements in connection with the transactions under the Purchase Agreements) no more frequently than once every 180 days, Allen will within 10 days of such request deliver to R&A a certificate signed by him or his attorney-in-fact as to the representation and warranty in clause (d) being true and correct at such time. "Net Worth" means the excess of the fair market value of Allen's assets over the aggregate amount of Allen's liabilities. 7. Termination of Put Option. 7.1 The Put Option shall terminate on the earliest of the following dates, except with respect to any CCI Stock that is specified in a notice delivered by the Holder pursuant to Section 2 prior to such earliest date: (a) the later of (x) thirty days after the Lockup Termination Date, or (y) the second anniversary of the date of this Agreement; (b) the date specified in Section 5.3; and -4-
26 (c) the later of (x) thirty days after the Lockup Termination Date, or (y) the first date on which both of the following conditions are satisfied: (i) the Closing Price of CCI common stock has exceeded 115% of the IPO Price for any 90 trading days during the preceding 100 consecutive trading days; and (ii) all shares of CCI common stock then held by the Holder or any Permitted Transferee (as defined below) and subject to the Put Option may be sold to the public in their entirety on such date (x) without registration under the Securities Act of 1933, as amended (the "Act"), pursuant to Rule 144 under the Act or another comparable provision or (y) pursuant to a then effective registration statement under the Act. 7.2 The Put Option shall terminate as to any CCI Stock on the date on which such CCI Stock is first transferred by the Holder or any Permitted Transferee to a person or entity that is not a "Permitted Transferee." 7.3 For purposes of determining whether the condition in Section 7.1(c)(i) is satisfied, appropriate adjustments will be made to take into account any subdivision (by stock split or otherwise) or combination (by reverse stock split or otherwise) of outstanding shares of CCI common stock occurring after the consummation of CCI's initial public offering. 8. Miscellaneous. 8.1 No Impairment of other Put Rights. Nothing herein is intended to supersede, or limit Holder's ability to exercise its rights under, the Registration Support Put (as defined in the Contribution Agreement). 8.2 Complete Agreement; Modifications. This Agreement constitutes the parties' entire agreement with respect to the subject matter hereof and supersedes all other agreements, representations, warranties, statements, promises and understandings, whether oral or written, with respect to the subject matter hereof. This Agreement may not be amended, altered or modified except by a writing signed by both parties. 8.3 Additional Documents. Each party hereto agrees to execute any and all further documents and writings and to perform such other actions which may be or become necessary or expedient to effectuate and carry out this Agreement. 8.4 Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be sufficiently given if delivered in person or transmitted by telecopy or similar means of recorded electronic communication to the relevant party, addressed as follows (or at such other address as either party shall have designated by notice as herein provided to the other party): If to the Holder: -5-
27 with a copy to: If to Allen: Paul G. Allen c/o William D. Savoy @ Vulcan Northwest 110 110th Avenue Northwest Bellevue, Washington 98004 Telecopy: (425) 453-1985 with a copy to: Irell & Manella LLP 1800 Avenue of the Stars, Suite 900 Los Angeles, California 90067-4276 Attention: Alvin G. Segel Telecopy: (310) 203-7199 Any such notice or other communication shall be deemed to have been given and received on the day on which it is delivered or telecopied (or, if such day is not a business day or if the notice or other communication is not telecopied during business hours, at the place of receipt, on the next following business day); provided, however, that any such notice or other communication shall be deemed to have been given and received on the day on which it is sent if delivery thereof is refused or if delivery thereof in the manner described above is not possible because of the intended recipient's failure to advise the sending party of a change in the intended recipient's address or telecopy number. 8.5 No Third-Party Benefits. None of the provisions of this Agreement shall be for the benefit of, or enforceable by, any person or entity that is not a party to this Agreement, other than any Permitted Transferees of the Holder. 8.6 Waivers Strictly Construed. With regard to any power, remedy or right provided herein or otherwise available to any party hereunder (a) no waiver or extension of time shall be effective unless expressly contained in a writing signed by the waiving party; and (b) no alternation, modification or impairment shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise or other indulgence. 8.7 Severability. The validity, legality or enforceability of the remainder of this Agreement shall not be affected even if one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable in any respect. 8.8 Undertakings. All authority herein conferred or agreed to be conferred upon a party to this Agreement and all agreements of a party contained herein shall survive the death or incapacity of such party (or any of them). -6-
28 8.9 Successors and Assigns. Except as provided herein to the contrary, this Agreement shall be binding upon and shall inure to the benefit of the parties, their respective heirs, estates, personal representatives, conservators, successors and permitted assigns. 8.10 Assignments. (a) The Holder and any Permitted Transferee may transfer some or all of its CCI Stock to any of the following persons or entities (each such person or entity, a "Permitted Transferee"), and the Permitted Transferee shall thereupon have the rights provided in this Agreement: (i) any person or entity that was among the "Investors" who were party to the Contribution Agreement; (ii) any person or entity that, directly or indirectly, through the ownership of voting securities, controls, is controlled by, or is commonly controlled with the Holder; (iii) a trust for the benefit of the equity owners of the Holder and of which the trustee or trustees are one or more persons or entities that either control, or are commonly controlled with, the Holder or are banks, trust companies, or similar entities; (iv) any person or entity for which the Holder is acting as nominee or any trust controlled by or under common control with such person or entity; (v) if the Holder is an individual, any charitable foundation, charitable trust, or similar entity, the estate, heirs, or legatees of the Holder upon the Holder's death, any member of the Holder's family, any trust or similar entity for the benefit of the Holder or one or more members of the Holder's family, or any entity controlled by the Holder or one or more members of the Holder's family. (b) The Holder may assign all its rights and delegate all its obligations under this Agreement to any Permitted Transferee, and such Permitted Transferee shall thereupon be deemed to be the "Holder" for purposes of this Agreement. (c) Allen is entitled, in his sole discretion, to assign his rights to purchase any CCI Stock under this Agreement to one or more entities controlled by Allen, but no such assignment will relieve Allen of any of his obligations under this Agreement. 8.11 Governing Law. This Agreement shall be governed by the laws of the State of Delaware, without regard to any choice of law provisions of that state or the laws of any other jurisdiction. 8.12 Headings. The Section headings in this Agreement are inserted only as a matter of convenience and in no way define, limit, extend or interpret the scope of this Agreement or of any particular Section. -7-
29 8.13 Number and Gender. Throughout this Agreement, as the context may require, (a) the masculine gender includes the feminine and neuter; and the neuter gender includes the masculine and feminine; and (b) the singular tense and number includes the plural, and the plural tense and number includes the singular. 8.14 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8.15 Costs. Except as otherwise provided in this Agreement, each party will bear his or its own costs in connection with the exercise of the Holder's right under this Agreement and the purchase and sale of any CCI Stock pursuant to this Agreement. 8.16 Default. In the event of any legal action between the parties arising out of or in relation to this Agreement, the prevailing party in such legal action shall be entitled to recover, in addition to any other legal remedies, all of his or its costs and expenses, including reasonable attorney's fees, from the non-prevailing party, regardless of whether such legal action is prosecuted to completion. -8-
30 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. --------------------------------- Paul G. Allen, by William D. Savoy, attorney-in-fact [SIGNATURE PAGE TO ACCRETION PUT]
31 HOLDER [SIGNATURE PAGE TO ACCRETION PUT] -10-
32 EXHIBIT F (AND EXHIBIT F TO CONTRIBUTION AGREEMENT) FORM OF REGISTRATION SUPPORT PUT
33 FORM OF [REGISTRATION SUPPORT PUT] PUT AGREEMENT This Put Agreement ("Agreement") is made as of the ___ day of _____, 199_ [to be dated the day of the exchange closing in connection with IPO] by and between Paul G. Allen, an individual ("Allen"), and __________ (the "Holder"), with reference to the following facts: A Charter Communications Operating, LLC ("CCO") is a party to (1) that certain Purchase and Sale Agreement by and among the persons or entities listed on the signature pages thereto as "Sellers," and Rifkin Acquisition Partners, L.L.L.P. ("RAP"), dated April 26, 1999 (the "RAP Agreement"), and (2) that certain Purchase and Sale Agreement by and among the persons or entities listed on the signature pages thereto as "Sellers," and InterLink Communications Partners, LLLP ("InterLink"), dated April 26, 1999 (the "InterLink Agreement" and, together with the RAP Agreement, the "Purchase Agreements"), pursuant to which CCO and certain of its affiliates have acquired all of the outstanding equity of RAP and InterLink, respectively. B Allen is the indirect controlling owner of CCO and expects to derive benefit from the transactions contemplated by the Purchase Agreements. C Holder is a former owner of interests in RAP and/or InterLink and, in connection with the transaction by which CCO acquired RAP and InterLink, Holder was issued preferred membership units of Charter Communications Holding Company, LLC ("Charter LLC"). D In connection with the initial public offering of Charter Communications, Inc. ("CCI"), Holder exchanged its preferred membership units in Charter LLC for CCI Stock (as defined below), and as a condition of such exchange, Allen agreed to enter into this Agreement, giving Holder certain rights with respect to the CCI Stock. NOW, THEREFORE, in consideration of the respective covenants and agreements of the parties and for other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged by each party), the parties hereby agree as follows: 1. Definitions. As used in this Agreement, the following terms have the following meanings: "Closing Price" means, with respect to a share of CCI common stock, (i) the last reported sales price, regular way, as reported on the principal national securities exchange on which shares of CCI common stock are listed or admitted for trading or (ii) if shares of CCI common stock are not listed or admitted for trading on any national securities exchange, the last reported sales price, regular way, as reported on the Nasdaq National Market or, if such last reported sales price is not available, the average of the highest bid and lowest asked prices as reported on the Nasdaq Stock Market. "CCI Stock" means all shares of common stock of CCI issued to Holder in exchange for preferred membership units of Charter LLC, and all other securities that constitute "CCI Stock" in accordance with Section 5 of this Agreement.
34 "Contribution Agreement" means the Contribution Agreement dated as of September 14, 1999, by and among , CCO, Charter Communications Holding Company, LLC, the Investors, CCI and Allen, as amended by the First Amendment to Contribution dated as of November ___, 1999. "Registration Rights Agreement" means that certain Registration Rights Agreement, dated the date hereof, among CCI, the Holder and certain additional holders of CCI Stock executing such agreement. 2. Put Option. Allen hereby grants to the Holder the right and option (the "Put Option"), exercisable by written notice in the form attached as Exhibit A hereto delivered to Allen at any time after the date that is 180 days from the date hereof until the date of termination of the Put Option under Section 7, to sell and to permit any of the Holder's Permitted Transferees to sell to Allen or his designee, from time to time, on one or more occasions, all or any portion of the Registrable Securities (as defined in the Registration Statement) held by the Holder and its Permitted Transferees; provided, however, that the Put Option shall not be exercisable unless on the date the written notice of exercise is delivered the Registrable Securities specified in the Holder's notice pursuant to this Section 2 are not then able to be resold under the Registration Statement contemplated by the Registration Rights Agreement (whether or not such inability constitutes a breach of the Registration Rights Agreement). Upon the giving of such notice, Allen shall be obligated to buy or to cause his designee to buy and, subject to Section 5.3, the Holder and the Permitted Transferees identified in the Holder's notice pursuant to this Section 2 shall be obligated to sell, the amount of the CCI Stock held by the Holder and its Permitted Transferees that is specified in the Holder's notice pursuant to this Section 2, at the price and upon the terms and conditions specified in Section 3. 3. Purchase Price; Closing. 3.1 The purchase price to be paid upon any exercise of the Put Option (the "Purchase Price") shall be equal to the Closing Price of CCI common stock on the date on which the Holder's notice of exercise is delivered under Section 2 (or if such date is not a trading day, then the Closing Price on the next trading day). 3.2 At each closing of the purchase and sale of the CCI Stock pursuant to the exercise of the Put Option (the "Closing"), (a) Allen or his designee shall pay to the Holder (for itself and on behalf of its Permitted Transferees, if applicable) the Purchase Price in immediately available funds by wire transfer (if wire transfer instructions were provided in the notice of exercise) or certified bank check; and (b) the Holder shall deliver or cause to be delivered to Allen or his designee one or more certificates evidencing the CCI Stock to be purchased and sold at such Closing, together with duly executed assignments separate from the certificate in form and substance reasonably acceptable to Allen to effectuate the transfer of such CCI Stock to Allen or his designee, together with a certificate of the Holder and its Permitted Transferee, if applicable, reaffirming the representations in Section 4. 3.3 Each Closing shall be held at the offices of Irell & Manella in Los Angeles, California, on the thirtieth day after the Holder delivers the written notice described above (or, if such day is not a business day, on the next business day thereafter), or at such other time and -2-
35 place as the Holder and Allen may agree. The Holder and Allen will cooperate so as to permit all documents required to be delivered at the Closing to be delivered by mail, delivery service or courier without requiring either party or his or its representatives to be physically present at the Closing. 4. Representations of the Holder. The Holder represents and warrants to Allen and any of his designees or assignees that on the date hereof and at each Closing: (a) the Holder has full power and authority to execute and deliver this Agreement and consummate the transactions contemplated hereby; (b) this Agreement is the legal, valid and binding obligation of the Holder, enforceable against the Holder in accordance with its terms; (c) at each Closing, the Holder or one of its Permitted Transferees will own all of the CCI Stock required to be purchased and sold at such Closing, both of record and beneficially, free and clear of all liens, encumbrances or adverse interests of any kind or nature whatsoever (including any restriction on the right to vote, sell or otherwise dispose of the CCI Stock), other than those arising under applicable law and those arising under the organizational documents of CCI; (d) upon the transfer of the CCI Stock pursuant to Section 3, Allen or his designee will receive good title to the CCI Stock, free and clear of all liens, encumbrances and adverse interests created by the Holder, any Permitted Transferee, or any of their respective predecessors-in-interest, other than those arising under applicable law or those arising under the organizational documents of CCI. 5. Adjustment for Exchange, Reorganizations, Stock Splits, etc. 5.1 If the number of shares of CCI Stock is increased, decreased, changed into, or exchanged for a different number or kind of publicly-traded shares or securities of CCI through reorganization, recapitalization, reclassification, stock dividend, stock split or reverse stock split, or other similar transaction, an appropriate adjustment shall be made with respect to number and kind of shares or securities subject to the Put Option. Any shares or securities that become subject to the Put Option pursuant to this Section 5.1 shall constitute "CCI Stock" for purposes of this Agreement. 5.2 Upon a reorganization, merger or consolidation of CCI with one or more other corporations or entities (any of the foregoing, a "Business Combination") pursuant to which the outstanding CCI Stock is converted into or exchanged in whole or in part for any other publicly-traded security ("Replacement Securities"), the Put Option shall cease to be exercisable with respect to the securities that previously constituted "CCI Stock" and shall instead be automatically converted into an option to sell such number of shares or units of Replacement Securities issued in exchange for the CCI Stock pursuant to such Business Combination at a price per share or unit of Replacement Securities equal to the aggregate Purchase Price for all CCI Stock immediately prior to such effectiveness divided by the number of shares or units of Replacement Securities subject to the Put Option immediately following such effectiveness. Any Replacement Securities that become subject to the Put Option pursuant to this Section 5.2 shall constitute "CCI Stock" for purposes of this Agreement. 5.3 In the event of any proposed Business Combination pursuant to which the outstanding CCI Stock will be converted in whole or in part into a right to receive consideration other than publicly-traded securities of CCI or Replacement Securities, (i) Allen will provide notice thereof to the Holder at least ten (10) days prior to consummation of such Business -3-
36 Combination and (ii) the Put Option will expire two days prior to such consummation except with respect to any CCI Stock that is specified in a notice delivered by the Holder pursuant to Section 2 prior to such date and except to the extent the Put Option will continue under 5.2 as to that portion of the consideration received constituting Replacement Securities. If the Holder delivers a notice pursuant to Section 2 after its receipt of a notice from Allen pursuant to this Section 5.3, the purchase and sale of any of the CCI Stock specified in the Holder's notice may be conditioned at the Holder's option on the consummation of the Business Combination described in Allen's notice pursuant to this Section 5.3. 6. Representations of Allen. Allen represents and warrants to the Holder and each Permitted Transferee that on the date hereof and at all times hereafter through the Closing: (a) Allen has full power and authority to execute and deliver this Agreement and consummate the transactions contemplated hereby; (b) this Agreement constitutes the legal, valid and binding obligation of Allen, enforceable against Allen in accordance with its terms; (c) his execution and delivery of this Agreement does not, and his performance of his obligations under this Agreement will not, violate, conflict with or constitute a breach of, or a default under, any material agreement, indenture or instrument to which he is a party or which is binding on him, and will not result in the creation of any lien on, or security interest in, any of his assets (other than such violations, breaches, defaults, liens or security interests that would not materially and adversely affect his ability to perform his obligations under this Agreement); and (d) his Net Worth is and will be greater than $4 billion. At the request of R&A Management, LLC, a Colorado limited liability company ("R&A"), made (on behalf of Holder together with all other holders receiving put agreements in connection with the transactions under the Purchase Agreements) no more frequently than once every 180 days, Allen will within 10 days of such request deliver to R&A a certificate signed by him or his attorney-in-fact as to the representation and warranty in clause (d) being true and correct at such time. "Net Worth" means the excess of the fair market value of Allen's assets over the aggregate amount of Allen's liabilities. 7. Termination of Put Option. The Put Option shall terminate on the earlier of (i) the date on which all Registrable Securities covered by the Registration Statement have been sold pursuant to the Shelf Registration (each as defined in the Registration Rights Agreement) or otherwise sold (other than to Permitted Transferrees) and (ii) the date two years from the date hereof. 8. Miscellaneous. 8.1 No Impairment of other Put Rights. Nothing herein is intended to supersede, or limit Holder's ability to exercise its rights under, the Accretion Put (as defined in the Contribution Agreement). 8.2 Complete Agreement; Modifications. This Agreement constitutes the parties' entire agreement with respect to the subject matter hereof and supersedes all other agreements, representations, warranties, statements, promises and understandings, whether oral or written, with respect to the subject matter hereof. This Agreement may not be amended, altered or modified except by a writing signed by both parties. -4-
37 8.3 Additional Documents. Each party hereto agrees to execute any and all further documents and writings and to perform such other actions which may be or become necessary or expedient to effectuate and carry out this Agreement. 8.4 Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be sufficiently given if delivered in person or transmitted by telecopy or similar means of recorded electronic communication to the relevant party, addressed as follows (or at such other address as either party shall have designated by notice as herein provided to the other party): If to the Holder: with a copy to: If to Allen: Paul G. Allen c/o William D. Savoy @ Vulcan Northwest 110 110th Avenue Northwest Bellevue, Washington 98004 Telecopy: (425) 453-1985 with a copy to: Irell & Manella LLP 1800 Avenue of the Stars, Suite 900 Los Angeles, California 90067-4276 Attention: Alvin G. Segel Telecopy: (310) 203-7199 Any such notice or other communication shall be deemed to have been given and received on the day on which it is delivered or telecopied (or, if such day is not a business day or if the notice or other communication is not telecopied during business hours, at the place of receipt, on the next following business day); provided, however, that any such notice or other communication shall be deemed to have been given and received on the day on which it is sent if delivery thereof is refused or if delivery thereof in the manner described above is not possible because of the intended recipient's failure to advise the sending party of a change in the intended recipient's address or telecopy number. 8.5 No Third-Party Benefits. None of the provisions of this Agreement shall be for the benefit of, or enforceable by, any person or entity that is not a party to this Agreement, other than any Permitted Transferees of the Holder. -5-
38 8.6 Waivers Strictly Construed. With regard to any power, remedy or right provided herein or otherwise available to any party hereunder (a) no waiver or extension of time shall be effective unless expressly contained in a writing signed by the waiving party; and (b) no alternation, modification or impairment shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise or other indulgence. 8.7 Severability. The validity, legality or enforceability of the remainder of this Agreement shall not be affected even if one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable in any respect. 8.8 Undertakings. All authority herein conferred or agreed to be conferred upon a party to this Agreement and all agreements of a party contained herein shall survive the death or incapacity of such party (or any of them). 8.9 Successors and Assigns. Except as provided herein to the contrary, this Agreement shall be binding upon and shall inure to the benefit of the parties, their respective heirs, estates, personal representatives, conservators, successors and permitted assigns. 8.10 Assignments. (a) The Holder and any Permitted Transferee may transfer some or all of its CCI Stock to any of the following persons or entities (each such person or entity, a "Permitted Transferee"), and the Permitted Transferee shall thereupon have the rights provided in this Agreement: (i) any person or entity that was among the "Investors" who were party to the Contribution Agreement; (ii) any person or entity that, directly or indirectly, through the ownership of voting securities, controls, is controlled by, or is commonly controlled with the Holder; (iii) a trust for the benefit of the equity owners of the Holder and of which the trustee or trustees are one or more persons or entities that either control, or are commonly controlled with, the Holder or are banks, trust companies, or similar entities; (iv) any person or entity for which the Holder is acting as nominee or any trust controlled by or under common control with such person or entity; (v) if the Holder is an individual, any charitable foundation, charitable trust, or similar entity, the estate, heirs, or legatees of the Holder upon the Holder's death, any member of the Holder's family, any trust or similar entity for the benefit of the Holder or one or more members of the Holder's family, or any entity controlled by the Holder or one or more members of the Holder's family. (b) The Holder may assign all its rights and delegate all its obligations under this Agreement to any Permitted Transferee, and such Permitted Transferee shall thereupon be deemed to be the "Holder" for purposes of this Agreement. -6-
39 (c) Allen is entitled, in his sole discretion, to assign his rights to purchase any CCI Stock under this Agreement to one or more entities controlled by Allen, but no such assignment will relieve Allen of any of his obligations under this Agreement. 8.11 Governing Law. This Agreement shall be governed by the laws of the State of Delaware, without regard to any choice of law provisions of that state or the laws of any other jurisdiction. 8.12 Headings. The Section headings in this Agreement are inserted only as a matter of convenience and in no way define, limit, extend or interpret the scope of this Agreement or of any particular Section. 8.13 Number and Gender. Throughout this Agreement, as the context may require, (a) the masculine gender includes the feminine and neuter; and the neuter gender includes the masculine and feminine; and (b) the singular tense and number includes the plural, and the plural tense and number includes the singular. 8.14 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8.15 Costs. Except as otherwise provided in this Agreement, each party will bear his or its own costs in connection with the exercise of the Holder's right under this Agreement and the purchase and sale of any CCI Stock pursuant to this Agreement. 8.16 Default. In the event of any legal action between the parties arising out of or in relation to this Agreement, the prevailing party in such legal action shall be entitled to recover, in addition to any other legal remedies, all of his or its costs and expenses, including reasonable attorney's fees, from the non-prevailing party, regardless of whether such legal action is prosecuted to completion. -7-
40 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. --------------------------------- Paul G. Allen, by William D. Savoy, attorney-in-fact [SIGNATURE PAGE TO REGISTRATION SUPPORT PUT]
41 HOLDER [SIGNATURE PAGE TO REGISTRATION SUPPORT PUT]
42 Exhibit A Notice of Exercise
43 EXHIBIT H (AND EXHIBIT H TO CONTRIBUTION AGREEMENT) FORM OF REGISTRATION RIGHTS AGREEMENT
44 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of __________, is entered into by and among Charter Communications, Inc., a Delaware corporation ("Charter") and the stockholders listed on the signature pages hereto (the "Holders"). PRELIMINARY STATEMENTS Pursuant to the Contribution Agreement, dated as of September 14, 1999, by and among Charter Communications Holding Company ("Charter Holdco"), LLC, Paul G. Allen, Charter and the Holders, as amended by the First Amendment to Contribution dated as of November __, 1999 (as amended, the "Contribution Agreement"), each Holder has exchanged certain Class A Preferred Units in Charter Holdco for shares of Common Stock (as hereinafter defined). Capitalized terms not otherwise defined herein shall have the meaning set forth in the Contribution Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual agreement and covenants hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Certain Definitions. 1.1 Terms Defined in this Section. For purposes of this Agreement, the following terms have the following meanings: "Business Day" means any day other than a Saturday, Sunday, or other day on which commercial banking institutions in New York, New York are required or authorized by law to remain closed. "Charter Indemnified Parties" means Charter, its officers, directors, employees, and agents, and each Person, if any, who controls Charter within the meaning of either the Securities Act or the Exchange Act, and the officers, directors, employees, and agents of the foregoing parties. "Class A Preferred Units" has the meaning ascribed to that term in the Operating Agreement. "Common Stock" means the Class A Common Stock, par value $.001 per share, of Charter and any securities into or for which such securities are converted or exchanged by Charter. "Exchange Act" means the Securities Exchange Act of 1934, or any successor federal statute, and the rules and regulations of the SEC promulgated thereunder, in each case as amended from time to time. "Indemnified Party" means a Person claiming a right to indemnification pursuant to Section 5 of this Agreement.
45 "Indemnifying Party" means a Person required to provide indemnification pursuant to Section 5 of this Agreement. "Losses" means any losses, claims, damages, or liabilities, and any related legal or other fees and expenses. "Operating Agreement" means that certain Amended and Restated Limited Liability Company Agreement of Charter Holdco effective as of September 14, 1999, as amended from time to time. "Permitted Transferee" means, with respect to a Stockholder, (i) any party to this Agreement; (ii) any Person that, directly or indirectly, through the ownership of voting securities, controls, is controlled by, or is commonly controlled with such Stockholder; (iii) a trust for the benefit of the equity owners of such Stockholder and of which the trustee or trustees are one or more Persons that either control, or are commonly controlled with, such Stockholder or are banks, trust companies, or similar entities; (iv) any Person for which such Stockholder is acting as nominee or any trust controlled by or under common control with such person or entity; or (v) if such Stockholder is an individual, any charitable foundation, charitable trust, or similar entity, the estate, heirs, or legatees of such Stockholder upon the Investor's death, any member of such Stockholder's immediate family, any trust or similar entity for the benefit of the Investor or one or more members of such Stockholder's immediate family, or any entity controlled by the Investor or one or more members of such Stockholder's immediate family. "Person" means any individual, corporation, partnership, limited partnership, limited liability partnership, limited liability company, trust, association, organization, or other entity. "Prospectus" means the prospectus included in a Registration Statement as of the date it becomes effective under the Securities Act and, in the case of references to the Prospectus as of a date subsequent to the effective date of the Registration Statement, as amended or supplemented as of such date, including all documents incorporated by reference therein, each as amended, and each applicable prospectus supplement relating to the offering and sale of any of the Registrable Securities pursuant to such Registration Statement. "Registrable Securities" means: (i) any shares of Common Stock that are issued to a Stockholder in exchange for Class A Preferred Units pursuant to the Second Contribution Agreement, and (ii) any securities of Charter or its successors issued or issuable with respect to any shares referred to in paragraph (i) whether by way of conversion, exchange, dividend, or stock split or in connection with a combination of shares, recapitalization, merger, consolidation, or other reorganization or otherwise. Securities that are Registrable Securities will cease to be Registrable Securities: (i) when a registration statement with respect to the sale of such securities has become effective under the Securities Act and such securities have been disposed of in accordance with such registration statement, -2-
46 (ii) when such securities shall have been sold pursuant to Rule 144 or Rule 145 (or any successor provisions) under the Securities Act or in any other transaction in which the applicable purchaser does not receive "restricted securities" (as that term is defined for purposes of Rule 144 under the Securities Act), (iii) on the first date on which such securities can be sold and without regard to the volume and manner of sale limitations set forth in Rule 144 (or any successor provision), or (iv) when such securities cease to be outstanding. "Registration Statement" means a shelf registration statement (including the related Prospectus) of Charter under Rule 415 the Securities Act on any form selected by Charter for which Charter then qualifies and which permits the sale thereunder of the number and type of Registrable Securities (and any other securities of Charter) to be included therein in accordance with this Agreement by the Selling Stockholders and any other sellers in the manner described herein. The term "Registration Statement" shall also include all exhibits, financial statements, and schedules and all documents incorporated by reference in such Registration Statement when it becomes effective under the Securities Act, and in the case of the references to the Registration Statement as of a date subsequent to the effective date, as amended or supplemented as of such date. "SEC" means the Securities and Exchange Commission, or any other federal agency at the time administering the Securities Act or the Exchange Act. "Securities Act" means the Securities Act of 1933, or any successor federal statute, and the rules and regulations of the SEC promulgated thereunder, in each case as amended from time to time. "Selling Stockholder" means any Stockholder whose Registrable Securities are included in any Registration Statement pursuant to Section 2. "Stockholder" means each party to this Agreement who owns Registrable Securities or has the right to acquire Registrable Securities pursuant to the Contribution Agreement and any other Person: (i) to whom any Registrable Securities or any rights to acquire any Registrable Securities are transferred by any Person that was, immediately prior to such transfer, a Stockholder, (ii) who continues to hold such Registrable Securities or the right to acquire such Registrable Securities, (iii) to whom the transferring Stockholder has assigned any of its rights under this Agreement, in whole or in part, in accordance with the provisions of Section 6.7 of this Agreement with respect to such Registrable Securities, and (iv) who has executed a counterpart hereof in connection with the transfer of such Registrable Securities. -3-
47 "Stockholder Representative" means R&A Management, LLC or such other party as the Sellers shall notify Charter from time to time in a writing signed by Holders of a majority in interest of the then Registrable Securities. "Stockholder Indemnified Parties" means each Selling Stockholder, its officers, directors, members, partners, employees, and agents, each Person (if any) who controls such Selling Stockholder within the meaning of either the Securities Act or the Exchange Act, and the officers, directors, members, partners, employees, and agents of the foregoing parties. 1.2 Terms Defined Elsewhere in this Agreement. For purposes of this Agreement, the following terms have the meanings set forth in the sections indicated: Term Section - ---- ------- Material Event Section 2.3(a) Registration Expenses Section 4.1 1.3 Terms Generally. The definitions in this Agreement shall apply equally to both the singular and plural forms of the terms defined. Whenever the context requires, any pronoun includes the corresponding masculine, feminine, and neuter forms. The words "include," "includes," and "including" are not limiting. Any reference in this Agreement to a "day" or number of "days" (without the explicit qualification of "Business") shall be interpreted as a reference to a calendar day or number of calendar days. If any action or notice is to be taken or given on or by a particular calendar day, and such calendar day is not a Business Day, then such action or notice shall be deferred until, or may be taken or given on, the next Business Day. 2. Shelf Registration. 2.1 Shelf Registration. Charter shall file, and use its best efforts to cause to become effective by the date which is six months after the date hereof, a Registration Statement registering the sale by the Stockholders of all of the Registrable Securities; provided, however, that during the time the Registration Statement is effective, Charter may require from time to time that the Selling Stockholders refrain from selling pursuant to such registration under the circumstances, in the manner, and for the time period described in Section 2.3. 2.2 Other Securities. In addition to the Registrable Securities, the Registration Statement may also register the sale of securities to be sold for the account of Charter or for any stockholder of Charter not holding Registrable Securities. 2.3 Delay of Filing or Sales. (a) Charter shall have the right, exercisable by giving written notice of the exercise of such right to the applicable Selling Stockholders, subject to Section 2.3(b), at any time and from time to time, to delay filing or the declaration of effectiveness of a Registration Statement or to require the applicable Selling Stockholders not to sell any Registrable Securities pursuant to an effective Registration Statement for a period not in excess of 120 days beginning on the date on which such notice is given, or such shorter period of time as may be specified in such notice or in a subsequent notice delivered by Charter to such effect prior to or during the effectiveness of the Registration Statement, if: -4-
48 (i) Charter is engaged in discussions or negotiations with respect to, or there otherwise is pending, any merger, acquisition, or other form of business combination that is "probable" (within the meaning of the Securities Act), any divestiture, tender offer, financing, or other event that, in any such case, is material to Charter (any such activity or event, a "Material Event"), (ii) such Material Event would, in the judgment of Charter's board of directors (after consultation with counsel), require disclosure so as to permit the Registrable Securities to be sold in compliance with law, and (iii) disclosure of such Material Event would, in the judgment of Charter's board of directors (after consultation with counsel), be adverse to its interests. (b) Charter may not delay the filing of a Registration Statement or the sale of any Registrable Securities, whether pursuant to one or more notices pursuant to Section 2.3(a), for more than an aggregate of 120 days within any 12-month period. (c) Charter shall have the right, exercisable by giving notice of the exercise of such right to the applicable Selling Stockholders, to delay filing or the declaration of effectiveness of a Registration Statement during any period in which, as a result of Charter's failure to satisfy the conditions in Rule 3-01(c) of Regulation S-X, Charter is required to include in the Registration Statement audited financial statements of Charter prior to the date on which such audited financial statements would normally have been prepared in accordance with Charter's past practices and the SEC's periodic reporting requirements. 2.4 Continuing Effectiveness of Registration Statement. In connection with any registration pursuant to Section 2.1, subject to Section 2.3, Charter will use its best efforts to prepare and file with the SEC any amendments and supplements to the Registration Statement and the Prospectus used in connection therewith, and to take any other actions, that may be necessary to keep the Registration Statement and the Prospectus effective, current, and in compliance with the provisions of the Securities Act, until the date two years from the date hereof (or, if earlier, the date on which there remain no Registrable Securities outstanding). 3. Obligations with Respect to Registration. 3.1 Obligations of Charter. Whenever Charter is obligated by the provisions of this Agreement to effect the registration of any Registrable Securities under the Securities Act, Charter shall: (a) Within a reasonable time not to exceed ten Business Days prior to filing a Registration Statement or Prospectus or any amendment or supplement thereto (other than any amendment or supplement in the form of a filing that Charter makes pursuant to the Exchange Act), furnish to each Selling Stockholder copies of such Registration Statement or Prospectus as proposed to be filed, which documents will be subject to the reasonable review and comments of the Selling Stockholders (and their respective counsel) during such period, and Charter will not file any Registration Statement or any Prospectus or any amendment or supplement thereto containing any statements with respect to any Selling Stockholder or the distribution of the Registrable Securities to be included in such Registration Statement for sale -5-
49 by such Selling Stockholder if such Selling Stockholder reasonably objects in writing. Thereafter, Charter will furnish to each Selling Stockholder such number of copies of such Registration Statement, each amendment and supplement thereto (in each case including all exhibits thereto and any documents incorporated by reference), the Prospectus included in such Registration Statement (including each preliminary Prospectus), and such other documents as such Selling Stockholder may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Selling Stockholder. (b) After the filing of the Registration Statement, promptly notify each Selling Stockholder of the effectiveness thereof and of any stop order issued or threatened by the SEC and take all reasonable actions required to prevent the entry of such stop order or to remove it at the earliest possible moment if entered and promptly notify each Selling Stockholder of the lifting or withdrawal of any such order. (c) Immediately notify each Selling Stockholder holding Registrable Securities covered by the applicable Registration Statement at any time when a Prospectus relating thereto is required to be delivered under the Securities Act, of (i) the determination that a Material Event exists or (ii) the occurrence of an event requiring the preparation of a supplement or amendment to such Prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such Prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading and promptly make available to such Selling Stockholder any such supplement or amendment, and subject to the provisions of this Agreement regarding the existence of a Material Event, Charter will promptly prepare and furnish to each such Selling Stockholder a supplement to or an amendment of such Prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such Prospectus will not contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. (d) Make available for inspection by any Selling Stockholder covered by such Registration Statement and any attorney, accountant, or other professional retained by any such Selling Stockholder, all financial and other records, pertinent corporate documents, and properties of Charter as shall be reasonably necessary to enable them to exercise their due diligence responsibility in connection therewith, and cause Charter's officers, directors, and employees to supply all information reasonably requested by any of such Persons in connection with such Registration Statement. Information that Charter determines, in good faith, to be confidential and notifies such Persons is confidential shall not be disclosed by such Persons unless (i) the release of such information is ordered pursuant to a subpoena or other order from a court, or other governmental agency or tribunal, of competent jurisdiction or (ii) such information becomes public other than through a breach by such Persons of the confidentiality obligations of such Persons. Each Selling Stockholder agrees that information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any transactions in the securities of Charter or for any other purpose unless and until such information is made generally available to the public. -6-
50 (e) Register or qualify the Registrable Securities covered by a Registration Statement under the securities or blue sky laws of such United States jurisdictions as the Stockholder Representative shall reasonably request, and do any and all other acts and things which may be necessary to enable each Selling Stockholder to consummate the disposition in such jurisdictions of such Registrable Securities in accordance with the method of distribution described in such Registration Statement; provided, however, that Charter shall not be required (i) to qualify to do business as a foreign corporation in any jurisdiction where it is not otherwise required to be so qualified, (ii) to conform its capitalization or the composition of its assets at the time to the securities or blue sky laws of such jurisdiction, (iii) to execute or file any general consent to service of process under the laws of any jurisdiction, or (iv) to subject itself to taxation in any jurisdiction where it has not theretofore done so. (f) Use its best efforts to (i) cause such Registrable Securities covered by a Registration Statement to be listed on the principal exchange or exchanges or qualified for trading on the principal over-the-counter market or listed on the automated quotation market on which securities of the same class and series as the Registrable Securities (or into which such Registrable Securities will be or have been converted) are then listed, traded, or quoted upon the sale of such Registrable Securities pursuant to such Registration Statement and (ii) provide a transfer agent and registrar for such Registrable Securities covered by such Registration Statement not later than the effective date of such Registration Statement. (g) Make and keep information publicly available relating to Charter so as to satisfy the requirements of Rule 144 under the Securities Act (or any successor or corresponding rule) and file with the SEC all reports and other documents required of Charter under the Securities Act and the Exchange Act in a timely manner. (h) Make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act (provided that Charter shall not be deemed in violation of this paragraph so long as it files customary quarterly reports with the SEC for such period), and not file any amendment or supplement to such Registration Statement or Prospectus to which any of the Selling Stockholders shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act. (i) Use its best efforts to cause such Registrable Securities covered by such Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof to consummate the disposition of such Registrable Securities. (j) Cooperate with the Selling Stockholders to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing securities to be sold under the Registration Statement, and enable such securities to be in such denominations and registered in such names as such Selling Stockholder may request. -7-
51 (k) Cooperate with each Selling Stockholder in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the NASD. 3.2 Selling Stockholders' Obligations. Charter's obligations under this Agreement to a Selling Stockholder shall be conditioned upon such Selling Stockholder's compliance with the following: (a) Such Selling Stockholder shall cooperate with Charter in connection with the preparation of the Registration Statement, and for so long as Charter is obligated to keep the Registration Statement effective, such Selling Stockholder will provide to Charter, in writing, for use in the Registration Statement, all information regarding such Selling Stockholder, its intended method of disposition of the applicable Registrable Securities, and such other information as Charter may reasonably request to prepare the Registration Statement and Prospectus covering the Registrable Securities and to maintain the currency and effectiveness thereof. (b) Such Selling Stockholder agrees that, upon receipt of any notice from Charter of the happening of any event of the kind described in Section 3.1(c), such Selling Stockholder will discontinue its offering and sale of Registrable Securities pursuant to the applicable Registration Statement until such Selling Stockholder's receipt of either (i) notice from Charter that a Material Event no longer exists (but for no longer than the end of the 120-day period described in Section 2.3) or (ii) the copies of the supplemented or amended Prospectus contemplated by Section 3.1(c), and, in either case, if so directed by Charter, such Stockholder will deliver to Charter all copies in its possession of the most recent Prospectus covering such Registrable Securities at the time of receipt of such notice. In the event Charter shall give any such notice, the period mentioned in clause (ii) of Section 2.4 shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 3.1(c) and including the date when each seller of Registrable Securities covered by such Registration Statement shall have received the copies of the supplemented or amended prospectus contemplated by Section 3.1(c). (c) Such Selling Stockholder agrees that, with respect to the Registrable Securities, such Stockholder will not take any action (or agree to take any action) that would reasonably be expected to toll or otherwise lengthen the holding period under Rule 144(d) and Rule 144(k) under the Securities Act (or any successor rule or provision). 4. Expenses of Registration. 4.1 Registration Expenses. Except as provided in Section 4.2 and Section 4.3, all Registration Expenses incurred in connection with the registration under Section 2.1 and and the distribution of any Registrable Securities in connection therewith shall be borne by Charter. For purposes of this Agreement, the term "Registration Expenses" means all: (a) registration, application, filing, listing, transfer, and registrar fees, (b) NASD fees and fees and expenses of registration or qualification of Registrable Securities under state securities or blue sky laws -8-
52 (c) printing expenses (or comparable duplication expenses), delivery charges, and escrow fees, (d) fees and disbursements of counsel for Charter, (e) fees and expenses for independent certified public accountants retained by Charter (including the expenses of any comfort letters or costs associated with the delivery by independent certified public accountants of a comfort letter or comfort letters), (f) fees and expenses of any special experts retained by Charter in connection with such registration; (g) reasonable fees and disbursements of underwriters and broker-dealers customarily paid by issuers or sellers of securities, and (h) fees and expenses of listing the Registrable Securities on a securities exchange or over-the-counter market; and (i) all fees and disbursements of one counsel for all such Selling Stockholders as a group attributable to the registration and sale of the Registrable Securities of such Selling Stockholders included in such registration. 4.2 Selling Stockholder Expenses. Each Selling Stockholder shall pay all stock transfer fees or expenses (including the cost of all transfer tax stamps), if any, all underwriting or brokerage discounts and commissions and all fees and disbursements of counsel for such Selling Stockholder (other than the one counsel described in Section 4.1(i)) attributable to the distribution of the Registrable Securities of such Selling Stockholder included in such registration. 4.3 Internal Expenses of Charter. Notwithstanding any other provision of this Agreement, Charter shall be obligated to bear all internal expenses of Charter in connection with the registration under Section 2.1 (including all salaries and expenses of its officers and employees performing accounting and legal functions and related expenses). 5. Indemnification. 5.1 By Charter. Charter agrees to indemnify and hold harmless each Stockholder Indemnified Party from and against any Losses, joint or several, to which such Stockholder Indemnified Party may become subject under the Securities Act, the Exchange Act, state securities or blue sky laws, common law or otherwise, insofar as such Losses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the applicable Registration Statement or Prospectus, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and Charter will reimburse each such Stockholder Indemnified Party for any reasonable fees and expenses of outside legal counsel for such Stockholder Indemnified Parties, or other expenses reasonably incurred by them, as incurred, in connection with investigating or defending any such claims; provided, however, that Charter will not indemnify -9-
53 or hold harmless any Stockholder Indemnified Party from or against any such Losses (including any related expenses) to the extent such Losses (including any related expenses) result from an untrue statement, omission or allegation thereof which were (a) made in reliance upon and in conformity with written information provided by or on behalf of the applicable Selling Stockholder specifically and expressly for use or inclusion in the applicable Registration Statement or Prospectus or (b) made in any Prospectus used after such time as Charter advised such Selling Stockholder that the filing of a post-effective amendment or supplement thereto was required, except that this proviso shall not apply if the untrue statement, omission, or allegation thereof is contained in the Prospectus as so amended or supplemented. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Stockholder Indemnified Parties and shall survive the transfer of such securities by the Selling Stockholders. 5.2 By Selling Stockholders. Each Selling Stockholder, individually and not jointly, agrees to indemnify and hold harmless each Charter Indemnified Party and each other Stockholder Indemnified Party from and against any Losses, joint or several, to which such Charter Indemnified Party or any other Stockholder Indemnified Party may become subject, insofar as such Losses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the applicable Registration Statement or the Prospectus, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, if the statement or omission was made in reliance upon and in conformity with written information provided by or on behalf of such Selling Stockholder or any Person who controls such Selling Stockholder specifically and expressly for use or inclusion in the applicable Registration Statement or Prospectus; provided, however, that such Selling Stockholder will not indemnify or hold harmless any Charter Indemnified Party or other Stockholder Indemnified Party from or against any such Losses (including any related expenses) (a) to the extent the untrue statement, omission, or allegation thereof upon which such Losses (including any related expenses) are based was made in any Prospectus used after such time as such Selling Stockholder advised Charter that the filing of a post-effective amendment or supplement thereto was required, except the Prospectus as so amended or supplemented, or (b) in an amount that exceeds the net proceeds received by such Selling Stockholder from the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation by or on behalf of Charter Indemnified Parties or the Stockholder Indemnified Parties, and shall survive the transfer of such securities by the Selling Stockholder. 5.3 Procedures. Each Indemnified Party shall give notice to each Indemnifying Party promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and the Indemnifying Party may participate at its own expense in the defense, or if it so elects, assume the defense of any such claim and any action or proceeding resulting therefrom, including the employment of counsel and the payment of all expenses; provided that such counsel shall be reasonably satisfactory to the Indemnified Party. The failure of any Indemnified Party to give notice as provided in this Section 5.3 shall not relieve the Indemnifying Party from its obligations to indemnify such Indemnified Party, except to the extent the Indemnified Party's failure to so notify actually prejudices the Indemnifying Party's ability to defend against such claim, action, or proceeding. If the Indemnifying Party -10-
54 elects to assume the defense in any action or proceeding, an Indemnified Party shall have the right to employ separate counsel in such action or proceeding and to participate in the defense thereof, but such Indemnified Party shall pay the fees and expenses of such separate counsel unless (a) the Indemnifying Party has agreed to pay such fees and expenses, or (b) the named parties to any such action or proceeding (including any impleaded parties) include such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that there is or would be a conflict of interest between such Indemnified Party and the Indemnifying Party in the conduct of the defense of such action (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not assume the defense of such action or proceeding on such Indemnified Party's behalf) or (c) the Indemnifying Party shall not have employed counsel reasonably satisfactory to the Indemnified Party to represent the Indemnified Party within a reasonable time after notice of the institution of such claim. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of the Indemnified Party (which consent will not be unreasonably withheld), consent to entry of any judgment, or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. 5.4 Contribution. If the indemnification provided for under this Section 5 is unavailable to or insufficient to hold the Indemnified Party harmless under Section 5.1 or Section 5.2 above in respect of any Losses referred to therein for any reason other than as specified therein, then the Indemnifying Party shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party, on the one hand, and such Indemnified Party, on the other, in connection with the statements or omissions that resulted in such Losses. The relative fault of each Indemnifying Party or Indemnified Party, as the case may be, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by (or that was failed to be supplied by) such Indemnifying Party or Indemnified Party, such party's relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. 5.5 Other Indemnification. Indemnification similar to that specified in the preceding provisions of Section 5 (with any necessary changes thereto having been made in order to effectuate the general intent thereof) shall be given by Charter and each seller of Registrable Securities to the applicable Indemnified Parties with respect to any required registration or other qualification of securities under any federal or state law or regulation or governmental authority other than the Securities Act. 6. Miscellaneous. 6.1 Notices. -11-
55 (a) All notices, requests, demands, waivers, and other communications under this Agreement shall be in writing and shall be deemed to have been duly given if delivered personally, mailed, certified or registered mail with postage prepaid, or sent by reliable overnight courier, or facsimile transmission, to the address or facsimile number specified for the applicable party on Schedule A attached to this Agreement, or to such other Person, address, or facsimile number as any party shall specify by notice in writing to the other parties. (b) Any notice or other communication to a party in accordance with the provisions of this Agreement shall be deemed to have been given (i) three Business Days after it is sent by certified or registered mail, postage prepaid, return receipt requested, (ii) upon receipt when delivered by hand or transmitted by facsimile (confirmation received), or (iii) one Business Day after it is sent by a reliable overnight courier service, with acknowledgment of receipt requested. Notwithstanding the preceding sentence, notice of change of address shall be effective only upon actual receipt thereof. 6.2 Amendment. This Agreement may not be modified or amended except by an instrument in writing signed by Charter and a majority-in-interest (measured by Registrable Securities) of the Stockholders (except to the extent such amendment would have an adverse and discriminatory impact on any Stockholder, in which event such Amendment shall only be binding on such Stockholder if such Stockholder has executed such amendment). No consent, waiver, or similar act shall be effective unless in writing. 6.3 Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto and supersedes all prior agreements and understandings, oral and written, among the parties hereto with respect to the subject matter hereof. 6.4 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 6.5 Governing Law. This Agreement shall be governed by and interpreted in accordance with the internal laws of the State of New York, without giving effect to principles of conflicts of laws. 6.6 Remedies. In the event of CCI's breach or other failure to perform under this Agreement, each Holder agrees that the sole and exclusive remedy for such breach shall be under such Holder's Registration Support Put; provided, however, that if Paul G. Allen breaches a Holder's Registration Support by failing to purchase securities that he would otherwise be obligated to purchase under the terms thereof, and such holder's damages are not satisfied pursuant to the Letter of Credit and/or Collateral provided under the Contribution Agreement, then this Section 6.6 shall not limit such Holder's remedies against CCI in the event CCI breaches the terms of this Agreement. 6.7 Assignment. (a) Except as expressly provided in this Section 6.7, the rights of the parties hereto cannot be transferred or assigned and any purported assignment or transfer to the contrary shall be void ab initio. Any Stockholder may transfer any of its rights under this -12-
56 Agreement, without the consent of Charter, to any Person to whom such holder transfers any Registrable Securities or any rights to acquire Registrable Securities, whether such transfer is by sale, gift, assignment, pledge, or otherwise, so long as the terms of this Section 6.7 are followed, and so long as (x) such transfer is not made pursuant to an effective Registration Statement or pursuant to Rule 144 or Rule 145 (or any successor provisions) under the Securities Act or in any other manner the effect of which is to cause the transferred securities to be freely transferable without regard to the volume and manner of sale limitations set forth in Rule 144 (or any successor provision) in the hands of the transferee as of the date of such transfer; and (y) such transfer is made to a Permitted Transferee. (b) Notwithstanding Section 6.7(a), no Stockholder may assign any of its rights under this Agreement to any Person to whom such Stockholder transfers any Registrable Securities unless the transfer of such Registrable Securities did not require registration under the Securities Act. (c) The nature and extent of any rights assigned shall be as agreed to between the assigning party and the assignee. No Person may be assigned any rights under this Agreement unless Charter is given written notice by the assigning party at the time of such assignment stating the name and address of the assignee, identifying the securities of Charter as to which the rights in question are being assigned, and providing a detailed description of the nature and extent of the rights that are being assigned. Any assignee hereunder shall receive such assigned rights subject to all the terms and conditions of this Agreement, including the provisions of this Section 6.7. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 6.8 Binding Agreement; No Third Party Beneficiaries. This Agreement will be binding upon and inure to the benefit of the parties hereto and their successors and permitted assigns. Except as set forth herein and by operation of law, no party to this Agreement may assign or delegate all or any portion of its rights, obligations, or liabilities under this Agreement without the prior written consent of each other party to this Agreement. [Signature page follows.] -13-
57 IN WITNESS WHEREOF, Charter and each of the other parties hereto has executed this Agreement as of the date first above written. CHARTER COMMUNICATIONS, INC. By:________________________ Name: Title: [SIGNATURES CONTINUE ON FOLLOWING PAGES] -14-
58 [SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT] ACCEPTED AND AGREED: INTERLINK INVESTMENT CORP. By:_____________________________________ A. Kevin B. Allen, Vice President RIFKIN & ASSOCIATES, INC. By:_____________________________________ Monroe M. Rifkin, Chairman of the Board RIFKIN FAMILY INVESTMENT COMPANY, L.L.L.P. By: Its General Partners __________________________________ Monroe M. Rifkin, General Partner __________________________________ Stuart G. Rifkin, General Partner __________________________________ Bruce A. Rifkin, General Partner __________________________________ Ruth R. Bennis, General Partner RIFKIN CHILDREN'S TRUST By:_____________________________________ Monroe M. Rifkin, Co-Trustee -15-
59 [SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT] RIFKIN CHILDREN TRUST-II By:_____________________________________ Monroe M. Rifkin, Co-Trustee RIFKIN CHILDREN'S TRUST III By:_____________________________________ Monroe M. Rifkin, Co-Trustee 360 GROUP, INC. By:_____________________________________ Dale D. Wagner, Treasurer MORRIS CHILDREN TRUST By:_____________________________________ Charles R. Morris, III, Trustee CRM II LIMITED PARTNERSHIP, LLLP By:_____________________________________ Charles R. Morris, General Partner INDIANA CABLEVISION MANAGEMENT CORP. By:_____________________________________ Monroe M. Rifkin, President ________________________________________ MONROE M. RIFKIN ________________________________________ KEVIN B. ALLEN -16-
60 [SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT] ________________________________________ JEFFREY D. BENNIS ________________________________________ STEPHEN E. HATTRUP ________________________________________ BRUCE A. RIFKIN ________________________________________ PETER N. SMITH ________________________________________ DALE D. WAGNER ________________________________________ STUART G. RIFKIN ________________________________________ PAUL A. BAMBEI ________________________________________ LUCILLE A. MAUN ________________________________________ RUTH R. BENNIS ________________________________________ CHARLES R. MORRIS, III -17-
61 SCHEDULE A ADDRESSES The 360 Group, Inc. c/o Monroe M. Rifkin 360 South Monroe Street, Suite 600 Denver, Colorado 80209 Monroe M. Rifkin R & A Management, LLC 360 South Monroe Street, Suite 600 Denver, Colorado 80209 Rifkin & Associates, Inc. c/o Monroe M. Rifkin R & A Management, LLC 360 South Monroe Street, Suite 600 Denver, Colorado 80209 Rifkin Children's Trust c/o Monroe M. Rifkin, Co-Trustee R & A Management, LLC 360 South Monroe Street, Suite 600 Denver, Colorado 80209 Rifkin Children Trust-II c/o Monroe M. Rifkin, Co-Trustee R & A Management, LLC 360 South Monroe Street, Suite 600 Denver, Colorado 80209 Rifkin Children's Trust-III c/o Monroe M. Rifkin, Co-Trustee R & A Management, LLC 360 South Monroe Street, Suite 600 Denver, Colorado 80209 Rifkin Family Investment Company, LLLP c/o Monroe M. Rifkin, General Partner R & A Management, LLC 360 South Monroe Street, Suite 600 Denver, Colorado 80209 Indiana Cablevision Management Corp. c/o Monroe M. Rifkin R & A Management, LLC -18-
62 360 South Monroe Street, Suite 600 Denver, Colorado 80209 Bruce A. Rifkin R & A Management, LLC 360 South Monroe Street, Suite 600 Denver, Colorado 80209 Ruth Rifkin Bennis 5570 Preserve Drive Greenwood Village, Colorado 80121 Stuart G. Bennis Baker & Hostetler 303 E. 17th Avenue, Suite 1100 Denver, Colorado 80202 Kevin B. Allen R & A Management, LLC 360 South Monroe Street, Suite 600 Denver, Colorado 80209 Jeffrey D. Bennis R & A Management, LLC 360 South Monroe Street, Suite 600 Denver, Colorado 80209 Dale D. Wagner R & A Management, LLC 360 South Monroe Street, Suite 600 Denver, Colorado 80209 Stephen E. Hattrup R & A Management, LLC 360 South Monroe Street, Suite 600 Denver, Colorado 80209 Peter N. Smith R & A Management, LLC 360 South Monroe Street, Suite 600 Denver, Colorado 80209 Paul Bambei R & A Management, LLC 360 South Monroe Street, Suite 600 Denver, Colorado 80209 -19-
63 Lucille Maun R & A Management, LLC 360 South Monroe Street, Suite 600 Denver, Colorado 80209 Charles R. Morris III 4875 South El Camino Drive Englewood, CO 80111 CRM II Limited Partnership, LLLP c/o Charles R. Morris III 4875 South El Camino Drive Englewood, CO 80111 Morris Children's Trust c/o Charles R. Morris III 4875 South El Camino Drive Englewood, CO 80111 InterLink Investment Corp. c/o Kevin B. Allen R & A Management, LLC 360 South Monroe Street, Suite 600 Denver, Colorado 80209 -20-
1 Exhibit 2.9(b) SECOND AMENDMENT TO PURCHASE AND CONTRIBUTION AGREEMENT THIS SECOND AMENDMENT TO PURCHASE AND CONTRIBUTION AGREEMENT ("Second Amendment") is made and entered into as of by and among Charter Investment, Inc., a Delaware corporation formerly known as Charter Communications, Inc. ("CII"), Charter Communications Holding Company, LLC, a Delaware limited liability company ("Charter LLC"), Falcon Communications, L.P., a California limited partnership ("Falcon"), Falcon Holding Group, L.P., a Delaware limited partnership ("FHGLP"), TCI Falcon Holdings, LLC, a Delaware limited liability company ("TCI"), Falcon Cable Trust, a California trust ("FC Trust"), Falcon Holding Group, Inc., a California corporation ("FHGI"), and DHN Inc., a California corporation ("DHN") (FHGLP, TCI, FC Trust, FHGI and DHN are sometimes referred to herein as "Sellers"). PRELIMINARY STATEMENT A. CII, Falcon, and Sellers entered into the Purchase and Contribution Agreement on May 26, 1999 (the "Purchase and Contribution Agreement"), which was amended and modified by a First Amendment to Purchase and Contribution Agreement dated as of June 22, 1999 ("First Amendment"). B. The parties hereto desire to modify the Purchase and Contribution Agreement in certain respects as described herein. Section 11.9 of the Purchase and Contribution Agreement provides that the Purchase and Contribution Agreement may be amended; provided that any such amendment will be binding on the parties prior to Closing only if set forth in a writing executed by them. C. Section 8.1(a)(1) of the Purchase and Contribution Agreement provides that the Closing shall take place on the date specified therein or on such earlier or later date as FHGLP and CII shall mutually agree. FHGLP, CII and Charter LLC desire to designate a certain date for the Closing in certain events as specified herein. NOW, THEREFORE, the parties hereto agree as follows: 1. Except as otherwise provided in this Second Amendment, all capitalized terms used herein and not otherwise defined herein shall have the same meanings assigned to them in the Purchase and Contribution Agreement, as amended and modified by the First Amendment. 2. For purposes of this Second Amendment, "Charter IPO" means the initial public offering of shares of Class A Common Stock of Charter Communications, Inc. that is described in the Preliminary Prospectus dated October 18, 1999. 3. In the event FHGLP would be authorized to specify a date for the Closing that is on or before November 11, 1999 in accordance with Section 8.1(a)(1) of the Purchase and Contribution Agreement and FHGLP has heretofore specified, or after the date hereof specifies, such a date for the Closing, then, notwithstanding any such specification, FHGLP agrees to postpone the date for the Closing to the earlier of (A) the date on which the Charter IPO is consummated (in which event the Closing will occur concurrently with the consummation of the
2 Charter IPO) and (B) November 19, 1999; and FHGLP, CII and Charter LLC agree to consummate the Closing on such earlier date in such event. If the date for the Closing is determined pursuant to the preceding sentence, such date shall be deemed determined in accordance with Section 8.1(a)(1) of the Purchase and Contribution Agreement for all purposes of the Purchase and Contribution Agreement (including, but not limited to, Section 9). Accordingly, consummation of the Closing remains subject to satisfaction or, to the extent permitted by law, waiver, of the closing conditions described in Section 7 and subject to Sections 8.1(a)(2), 8.1(a)(3) and 8.1(a)(4) of the Purchase and Contribution Agreement, and the proviso at the end of Section 8.1(a)(1) shall still apply. In the event FHGLP would not be authorized to specify a date for the Closing that is on or before November 11, 1999 in accordance with Section 8.1(a)(1) of the Purchase and Contribution Agreement or FHGLP does not specify such a date for the Closing, the date for the Closing shall be determined in accordance with the provisions of the Purchase and Contribution Agreement without regard to this Second Amendment. 4. The parties hereby agree that the Purchase and Contribution Agreement, as amended and modified by the First Amendment, is hereby deemed further amended in all respects necessary to give effect to the consents, agreements and waivers contained in this Second Amendment, whether or not a particular Section or provision of the Purchase and Contribution Agreement has been referred to in this Second Amendment. Except as amended hereby, the Purchase and Contribution Agreement, as amended and modified by the First Amendment, shall remain unchanged and in full force and effect, and this Second Amendment shall be governed by and subject to the terms of the Purchase and Contribution Agreement, as amended and modified by the First Amendment and this Second Amendment. From and after the date of this Second Amendment, each reference in the Purchase and Contribution Agreement to "this Agreement," "hereof," "hereunder" or words of like import, and all references to the Purchase and Contribution Agreement in any and all agreements, instruments, documents, notes, certificates and other writings of every kind and nature (other than in this Second Amendment or as otherwise expressly provided) shall be deemed to mean the Purchase and Contribution Agreement, as amended and modified by the First Amendment and as further amended and modified by this Second Amendment, whether or not such First Amendment or Second Amendment is expressly referenced. This Second Amendment may be signed in one or more counterparts, each of which shall constitute an original but which when taken together shall constitute one instrument. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURES ON FOLLOWING PAGES] -2-
3 IN WITNESS WHEREOF, this Second Amendment has been executed by each of CII, Charter LLC, Falcon and Sellers as of the date first written above. SELLERS: CII: FALCON HOLDING GROUP, L.P. CHARTER INVESTMENT, INC. By: Falcon Holding Group, Inc., By: _______________________________ General Partner Name: Curtis S. Shaw Title: Senior Vice President By: _______________________________ Name: Stanley S. Itskowitch Title: Executive Vice President CHARTER LLC: CHARTER COMMUNICATIONS HOLDING COMPANY, LLC TCI FALCON HOLDINGS, LLC By: _______________________________ By: _______________________________ Name: Curtis S. Shaw Name: Derek Chang Title: Senior Vice President Title: Vice President FALCON: FALCON HOLDING GROUP, INC. FALCON COMMUNICATIONS, L.P. By: _______________________________ Name: Stanley S. Itskowitch By: Falcon Holding Group, L.P., Title: Executive Vice President General Partner By: Falcon Holding Group, Inc. FALCON CABLE TRUST General Partner By: _______________________________ By: _______________________________ Name: Marc B. Nathanson Name: Stanley S. Itskowitch Title: Trustee Title: Executive Vice President By: TCI Falcon Holdings, LLC, DHN, INC. General Partner By: _______________________________ By: _______________________________ Name: Stanley S. Itskowitch Name: Derek Chang Title: Executive Vice President Title: Vice President [THIS IS A SIGNATURE PAGE TO THE SECOND AMENDMENT]
1 Exhibit 10.10(c) AMENDMENT NO. 1 TO THE CHARTER COMMUNICATIONS HOLDINGS, LLC 1999 OPTION PLAN This Amendment No. 1 (the "Amendment") to the Charter Communications Holdings, LLC 1999 Option Plan (the "Plan"), made pursuant to action of the Board of Directors of Charter Communications Holding Company, LLC, as assignee of Charter Communications Holdings, LLC, and Kent (as defined in the Plan), pursuant to Section 8.1 of the Plan, is dated as of November ___, 1999. The Plan is hereby amended as follows: 1. Section 1 is amended by adding the definitions of "Exchange Agreement" and "Public Company Value" and amending and restating the definition of "Fair Market Value" in its entirety, as follows: "(p) "Exchange Agreement" means that certain Exchange Agreement to be entered into by and among the Public Company, CCI (now Charter Investment, Inc.), Vulcan Cable III Inc. and Allen." "(r) "Fair Market Value" means the fair market value of the Company: (1) as determined by the Administrator prior to the consummation of an Initial Public Offering; and (2) according to the following formula from and after the consummation of an Initial Public Offering: (a) the Public Company Value, divided by (b) the Percentage Interest of the Company represented by the Public Company's Membership Interest." "(ff) "Public Company Value" means either (a) if the conditions set forth in Sections 2.2.1 and 2.2.2 of the Exchange Agreement are satisfied, (x) the Share Value, multiplied by (y) the total number of outstanding shares of common stock of the Public Company, assuming the exercise of all options, warrants or other similar rights held by any person to purchase common stock of the Public Company; or (b) if the conditions set forth in Sections 2.2.1 and 2.2.2 of the Exchange Agreement are not satisfied, the amount that would be distributed to the Public Company upon the liquidation of the Company, as calculated in accordance with Section 2.3(b) of the Exchange Agreement."
2 2. The remaining paragraph references included in Section 1 are hereby amended as appropriate to provide for the addition of the definitions of "Exchange Agreement" and "Public Company Value." 3. The following sentence is added after the second sentence of Section 3.1: "Without limiting the generality of the foregoing, the Administrator shall have the discretion and power to accelerate the vesting of any outstanding Option under this Plan, whether or not the vesting of such Option would be accelerated under any other provision of this Plan." 4. Section 4.1 is amended to provide in its entirety as follows: "4.1 Eligibility. Optionees shall be those existing and prospective Employees and Consultants to the Company or any Affiliate, and those existing and prospective members of the Board who are not Employees (collectively, "Participants" and individually a "Participant") to whom Options may be granted from time to time by the Administrator based on the recommendation of Kent. The Administrator shall designate, from time to time and based upon the recommendation of Kent, the number of Options to be granted to each Participant. All provisions of this Plan governing the granting of an Option to a Consultant shall apply to the granting of an Option to an existing or prospective member of the Board who is not an Employee. Members of the Board who are not Employees shall be eligible to receive grants of Options even if they are members of the Committee which acts as the Administrator." 5. The following sentence is added after the first sentence of Section 6.5: "The Administrator shall have the discretion and power to grant Options which vest more rapidly than the foregoing general guideline, or which are immediately vested upon grant." 6. Section 8.3 is amended and restated in it entirety as follows: "8.3 Effect of Termination, Amendment or Modification of Plan. Notwithstanding Sections 8.1 and 8.2, no termination, amendment or modification of the Plan shall in any manner affect adversely any Option theretofore granted under the Plan without the consent of the Optionee or a person who shall have acquired the right to exercise the Option by will or the laws of descent or distribution." The terms of the Plan shall remain in full force and effect without modification or amendment except as expressly set forth herein.
1 EXHIBIT 10.38 GOLDMAN SACHS CREDIT PARTNERS L.P. C/O GOLDMAN, SACHS & CO. 85 BROAD STREET NEW YORK, NEW YORK 10004 COMMITMENT LETTER PERSONAL AND CONFIDENTIAL October 15, 1999 Mr. Kent Kalkwarf Chief Financial Officer Charter Communications, Inc. 12444 Powerscourt Drive St. Louis, Missouri 63131 Ladies and Gentlemen: This amended and restated commitment letter amends and restates that certain commitment letter of even date herewith between Charter and GSCP. We are pleased to confirm the arrangements under which Goldman Sachs Credit Partners L.P. ("GSCP" or the "ADMINISTRATIVE AGENT") is exclusively authorized by Charter Communications, Inc. ("CHARTER") to act as the sole arranger and sole syndication agent in connection with the bridge loans described herein, and, together with the other lenders set forth on Schedule 1 hereto and any other entities that become lenders in accordance with the syndication arrangements set forth below (collectively with the Administrative Agent, the "LENDERS"), commits (severally and not jointly) to provide the bridge loans described herein, in each case on the terms and subject to the conditions set forth in this letter, the attached Annex A and Annex B (together, the "COMMITMENT LETTER") and the Fee Letter (as defined below). We understand that Charter has signed an agreement (the "ACQUISITION AGREEMENT") to acquire (the "ACQUISITION") all of the outstanding partnership interests in Falcon Communications, L.P. (together with its successor by merger, "FALCON") from Falcon Holding Group, L.P. and certain of its affiliates. Furthermore, you have advised us that following the Acquisition, Falcon may require funds on an interim basis, in the form of bridge loans, to repurchase certain of its outstanding bonds pursuant to certain mandatory repurchase offers triggered by the Acquisition. Falcon intends to repay borrowings under these bridge loans through an offering of Debt Securities (as defined) pursuant to the terms of the Engagement Letter referred to below (the "PERMANENT DEBT SECURITIES"). 1. Commitment. Each of the Lenders is pleased to confirm its commitment (each a "COMMITMENT"), severally and jointly, to provide Falcon Senior Increasing Rate Bridge Loans in the principal amount set forth opposite its name on Schedule 1 hereto (the "BRIDGE LOANS"), or such lesser pro rata amount as Falcon may specify, having the terms set forth on Annex B on the terms and subject to the conditions contained in this Commitment Letter. The Commitment of each Lender individually shall equal the amount set forth opposite its name on Schedule 1 hereto. Each Lender's Commitment is subject to the conditions set forth in this Commitment Letter, including without limitation the conditions precedent set forth in Annex B hereto, and to
2 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 2 the negotiation, execution and delivery of definitive documentation, including, without limitation, a bridge loan agreement (the "BRIDGE LOAN AGREEMENT"), consistent with the terms of Annex B hereto and satisfactory to each of Falcon, the Lenders and their counsel and the satisfaction of the terms, conditions and covenants contained therein. The terms of this Commitment Letter are intended as an outline of certain of the material terms of the Bridge Loans, but do not include all of the terms, conditions, covenants, representations, warranties, default clauses and other provisions that will be contained in the Bridge Loan Agreement. 2. Fees and Expenses. The fees for these services are set forth in a separate amended and restated fee letter (the "FEE LETTER"), entered into by the Lenders and Charter. In addition, pursuant to an amended and restated engagement letter (the "ENGAGEMENT Letter"), dated as of the date hereof, among Charter, Goldman, Sachs & Co. ("GOLDMAN SACHS") and certain other entities affiliated with the various Lenders, Charter has offered the Agents named therein the right to act as initial purchasers, underwriters or placement agents in connection with the sale of the Permanent Debt Securities. 3. Syndication. The Administrative Agent intends and reserves the right to syndicate the Commitments and/or the Bridge Loans to other Lenders. The Administrative Agent will lead the syndication, including determining the timing of all offers to potential Lenders and the acceptance of commitments, any title of agent or similar designations awarded to Lenders, the amounts offered and the compensation provided to each Lender from the amounts to be paid to the Administrative Agent pursuant to the terms of this Commitment Letter and the Fee Letter. The Administrative Agent will determine the identity of any entities that become Lenders after the date hereof and the final commitment allocations subject to the consent of Charter, which will not be unreasonably withheld, and will notify Charter of such determinations. Pursuant to the syndication process described herein, the rights and obligations of each Lender, including the right and obligation to make any Bridge Loan, may (with the consent of the Administrative Agent, in its sole discretion, prior to the Closing Date (as defined in Annex B) such consent not to be unreasonably withheld after the Closing Date and subject to the consent of Charter in the case of transfers to non-affiliates, which consent will not be unreasonably withheld) be assigned by such Lender, in whole or in part, to any other bank, financial institution or other investor and upon such assignment, the assignee shall become a Lender hereunder and the assigning Lender will be relieved from all obligations with respect to any Commitment assigned. To ensure an orderly and effective syndication of the Bridge Loans, you agree that, from the closing of the Acquisition until the later of the termination of the syndication as determined by the Administrative Agent and 90 days following the date of initial funding under the Bridge Loans, Charter will not permit Falcon or any of its subsidiaries to, and Falcon will not, syndicate or issue, attempt to syndicate or issue, announce or authorize the announcement of the syndication or issuance of, or engage in discussions concerning the syndication or issuance of, any debt facility or debt or preferred equity security (other than the Bridge Loans), including any renewals or refinancings of any existing debt facility or debt or preferred equity security, without the prior written consent of the Administrative Agent. You also agree that the Administrative Agent shall be entitled, but not obligated, after consultation with you, to change the terms, conditions, pricing and/or structure of the Bridge Loans if the Administrative Agent determines in its discretion that such changes are advisable to insure the successful syndication of all of the Bridge Loans; provided that the total amount of the Bridge Loans remains unchanged. The Lenders acknowledge that neither Charter nor Falcon has any obligation to utilize the financing offered hereby and can terminate this Commitment Letter at
3 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 3 any time. 4. Cooperation. Charter agrees to cooperate, and to cause Falcon and its affiliates to cooperate, with the Administrative Agent in connection with (i) the preparation of an information package regarding the business, operations and prospects of Falcon including, without limitation, the delivery of all information relating to the transactions contemplated hereunder and all other information deemed reasonably necessary by the Administrative Agent to complete the syndication of the Commitment and/or Bridge Loans and (ii) the presentation of such information package in lender meetings and other communications with prospective Lenders in connection with the syndication of the Bridge Loans. Charter agrees to make its representatives and senior management and the representatives and senior management of Falcon reasonably available to meet with the Lenders and prospective Lenders and rating agencies and to make customary "road show" presentations at such locations as the Administrative Agent may reasonably suggest. Charter and Falcon shall be solely responsible for the contents of any such information package and presentation (other than information concerning the Lenders and the syndication process) and acknowledge that the Administrative Agent will be using and relying upon the information contained in such information package and presentation without independent verification thereof. In addition, Charter and Falcon represent and covenant that all information provided by Charter and Falcon or its agents to the Administrative Agent or the other Lenders in connection with the transactions contemplated hereunder is and will be complete and correct in all material respects and does not and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. Charter and Falcon agree to supplement such information from time to time until the Closing Date (as defined in Annex B) and, if requested by the Administrative Agent in writing, for a reasonable period thereafter (not to exceed six months) necessary to complete the syndication of the Bridge Loans, so that the representations and covenants contained in the preceding sentence remain correct. 5. Annex A. In connection with arrangements such as this, it is our policy to receive indemnification. Charter and Falcon agree to the provisions with respect to our indemnity and other matters set forth in Annex A which is incorporated by reference into this Commitment Letter. 6. Confidentiality. Please note that this Commitment Letter, the Fee Letter and any written or oral advice provided by the Lenders in connection with this arrangement is exclusively for the information of the Board of Directors of Charter and Falcon and may not be disclosed to any other party or circulated or referred to publicly without the Lenders' prior written consent, except, after providing written notice to the Administrative Agent, pursuant to a subpoena or order issued by a court of competent jurisdiction or by a judicial, administrative or legislative body or committee. In addition, we hereby consent to your disclosure of such advice to your officers, directors, agents and advisors who are directly involved in the consideration of the Bridge Loans to the extent such persons are obligated to hold such advice in confidence and to the filing of this Commitment Letter with the SEC and the description of this Commitment Letter in any SEC filing. 7. Company to Become a Party. Charter agrees to cause Falcon to become jointly and
4 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 4 severally liable for the obligations and liabilities of Charter under this Commitment Letter (including Annex A and Annex B) upon the consummation of the Acquisition. The obligations and liabilities of Charter under Annex A to this Commitment Letter and pursuant to Section 1 of the Fee Letter shall terminate when the Acquisition has been consummated and Falcon has expressly assumed such obligations and liabilities. 8. Additional Matters. Except as provided in Section 7 above, you may not assign any of your rights or be relieved of any of your obligations hereunder without the prior written consent of each of the Lenders. As you know, each of the Lenders is a full service securities firm and as such may from time to time effect transactions, for its own account or the account of customers, and hold positions in securities or options on securities of Charter, Falcon, and their subsidiaries and other companies that may be the subject of this arrangement. In addition, the Administrative Agent may employ the services of its affiliates in providing certain services hereunder and may exchange with such affiliates information concerning Charter, Falcon, and their subsidiaries and other companies that may be the subject of this arrangement. Nothing in this Commitment Letter shall be construed to render this Commitment an "investment" of West Street Fund I, L.L.C. under the terms of the ERISA "Plan Assets" regulation. 9. Supercedes Prior Agreement. This amended and restated Commitment Letter supercedes that certain commitment letter dated October 15, 1999 between GSCP and Charter. The Lenders' commitment hereunder shall terminate 120 days from the date hereof unless the closing of the Bridge Loans, on the terms and subject to the conditions contained herein, shall have been consummated.
5 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 5 Please confirm that the foregoing is in accordance with your understanding by signing and returning to GSCP the enclosed copies of this Commitment Letter, together, if not previously executed and delivered, with the Fee Letter on or before the close of business, on November 2, 1999, whereupon this Commitment Letter and the Fee Letter shall become binding agreements between us. If not signed and returned as described in the preceding sentence by such date, this offer will terminate on such date. We look forward to working with you on this transaction. Very truly yours, GOLDMAN SACHS CREDIT PARTNERS L.P. By: -------------------- Authorized Signatory CHASE By: - ------------------------------- Authorized Signatory CREDIT LYONNAIS NEW YORK BRANCH By: - ------------------------------- Authorized Signatory CREDIT SUISSE FIRST BOSTON By: - ------------------------------- Authorized Signatory FLEET CORPORATE FINANCE, INC. By: - ------------------------------- Authorized Signatory MERRILL LYNCH CAPITAL CORPORATION By: - ------------------------------- Authorized Signatory MORGAN STANLEY SENIOR LENDING, INC. By: - ------------------------------- Authorized Signatory TD (TEXAS), INC. By: - ------------------------------- Authorized Signatory FIRST UNION INVESTORS, INC. By: - ------------------------------- Authorized Signatory PNC BANK, NATIONAL ASSOCIATION By: - ------------------------------- Authorized Signatory SUNTRUST EQUITABLE SECURITIES By: - ------------------------------- Authorized Signatory [/R] Confirmed as of the date above: CHARTER COMMUNICATIONS, INC. By: /s/ Kent D. Kalkwarf ------------------------------- Name: Kent D. Kalkwarf Title: Senior Vice President and Chief Financial Officer The undersigned agrees to be bound by the terms and conditions of this Commitment Letter as if it were an original addressee hereof: CCVII Holdings, L.L.C., the successor by merger to FALCON COMMUNICATIONS, L.P. By: Kent D. Kalkwarf ----------------------------------- Name: Kent D. Kalkwarf Title: Senior Vice President and Chief Financial Officer
6 Charter Communications, Inc. October 15, 1999 Page 9 SCHEDULE I LENDER COMMITMENT ------ ---------- GSCP.........................................$348.75 million CHASE........................................$131.25 million CREDIT LYONNAIS NEW YORK BRANCH.............. 37.50 million CREDIT SUISSE FIRST BOSTON................... 37.50 million FLEET CORPORATE FINANCE, INC. ............... 37.50 million MERRILL LYNCH CAPITAL CORPORATION............ 37.50 million MORGAN STANLEY SENIOR LENDING, INC. .......... 37.50 million TD (TEXAS), INC............................... 37.50 million FIRST UNION INVESTORS, INC. .................. 15.00 million PNC BANK, NATIONAL ASSOCIATION................ 15.00 million SUNTRUST EQUITABLE SECURITIES................. 15.00 million TOTAL........................................ $750.0 million
7 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 6 ANNEX A In the event that any of the Lenders or the Administrative Agent (each, an "INDEMNIFIED PARTY") becomes involved in any capacity in any action, proceeding or investigation brought by or against any person, including stockholders of Charter in connection with or as a result of either this arrangement or any matter referred to in this Commitment Letter or the Fee Letter (together, the "LETTERS"), Charter periodically will reimburse such Indemnified Party for its legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith; provided, however, that if it is found in any such action, proceeding or investigation that any loss, claim, damage, or liability of an Indemnified Party has resulted from the gross negligence, willful misconduct or bad faith of such Indemnified Party in performing the services that are the subject of this letter, such Indemnified Party will repay such portion of the reimbursed amounts that are attributable to expenses incurred in relation to the act or omission of such Indemnified Party that is the subject of such finding. Charter also will indemnify and hold each Indemnified Party harmless against any and all losses, claims, damages or liabilities to any such person in connection with or as a result of either this arrangement or any matter referred to in the Letters except to the extent that any such loss, claim, damage or liability results from the gross negligence, willful misconduct or bad faith of such Indemnified Party in performing the services that are the subject of the Letters. If for any reason the foregoing indemnification is unavailable to any Indemnified Party or insufficient to hold it harmless, then Charter shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative economic interests of Charter and its stockholders on the one hand and such Indemnified Party on the other hand in the matters contemplated by the Letters as well as the relative fault of Charter, on the one hand, and such Indemnified Party, on the other hand, with respect to such loss, claim, damage or liability and any other relevant equitable considerations. The reimbursement, indemnity and contribution obligations of Charter under this paragraph shall be in addition to any liability which Charter may otherwise have, shall extend upon the same terms and conditions to any affiliate of any Indemnified Party and the partners, directors, agents, employees and controlling persons (if any), as the case may be, of such Indemnified Party and any such affiliate, and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of Charter, such Indemnified Party, any such affiliate and any such person. Charter also agrees that neither any Indemnified Party nor any of such affiliates, partners, directors, agents, employees or controlling persons shall have any liability to Charter, any person asserting claims on behalf of or in right of Charter, or any other person in connection with or as a result of either this arrangement or any matter referred to in the Letters except to the extent that any losses, claims, damages, liabilities or expenses incurred by Charter, result from the gross negligence, willful misconduct or bad faith of such Indemnified Party in performing the services that are the subject of the Letters; provided, however, that in no event shall such Indemnified Party or such other parties have any liability for any indirect, consequential or punitive damages in connection with or as a result of such Indemnified Party's or such other parties' activities related to the Bridge Loans. ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY ACTION OR PROCEEDING ARISING IN CONNECTION WITH OR AS A RESULT OF EITHER THIS ARRANGEMENT OR ANY MATTER REFERRED TO IN THE LETTERS IS HEREBY WAIVED BY THE PARTIES HERETO. THE PROVISIONS OF THIS ANNEX A SHALL SURVIVE ANY TERMINATION OR
8 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 7 COMPLETION OF THE ARRANGEMENT PROVIDED BY THE LETTERS, AND THIS COMMITMENT LETTER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.
9 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 8 ANNEX B FALCON HOLDING GROUP, L.P. SUMMARY OF TERMS AND CONDITIONS OF BRIDGE LOANS This Summary of Terms and Conditions outlines certain terms of the Bridge Loans and the Bridge Loan Agreement referred to in the Commitment Letter, of which this Annex B is a part. Certain capitalized terms used herein are defined in the Commitment Letter. BORROWER CCVII Holdings, L.L.C. as the successor by merger to Falcon Communications, L.P. ("FALCON" or the "COMPANY"). LOANS $750 million in aggregate principal amount of Senior Increasing Rate Loans (the "BRIDGE LOANS"). MATURITY One year from the date of the making of the Bridge Loans (the "MATURITY DATE"). If, upon the Maturity Date, any Bridge Loan has not been previously repaid in full, and provided no "CONVERSION DEFAULT" (as defined below) has occurred and is continuing, such Bridge Loan shall be automatically converted into a Term Loan (each A "TERM LOAN") due on the nine-year anniversary of the Maturity Date. At any time on or after the Maturity Date, at the option of the applicable Lender, the Term Loans may be exchanged in whole or in part for Senior Exchange Notes due on the nine-year anniversary of the Maturity Date (the "EXCHANGE NOTES") having an equal principal amount. The initial date of issuance of the Bridge Loans is hereinafter referred to as the "CLOSING DATE." "CONVERSION DEFAULT" shall mean any material default under the Bridge Loan Agreement, any payment default under the Credit Facility (the "CREDIT FACILITY") of Falcon Cable Communications LLC, a wholly owned subsidiary of Falcon, or any other material indebtedness, a bankruptcy default (as defined) or any default under the Engagement Letter or the Fee Letter. The Term Loans will be governed by the provisions of the Bridge Loan Agreement and will have the same terms as the Bridge Loans except as expressly set forth on Exhibit 1 to this Annex B. The Exchange Notes will be issued pursuant to an Indenture that will have the terms set forth on Exhibit 1 to this Annex B.
10 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 9 INTEREST The Bridge Loans will initially bear interest at a rate per annum equal to (a) the one-month London interbank offered rate, adjusted for actual reserve costs calculated on the basis of the actual number of days elapsed in a year of 360 days, plus (b) a spread (the "SPREAD") of 400 basis points. If the Bridge Loans are not repaid in whole within three months following the Closing Date, the Spread will increase by 25 basis points at the end of such three-month period and will increase by an additional 25 basis points at the end of each three-month period thereafter. Notwithstanding the foregoing, at no time will the interest rate in effect on the Bridge Loans be less than 9% per annum or exceed 15% per annum and to the extent that the interest payable on the Bridge Loans on any interest payment date on or prior to the Maturity Date is at a rate that exceeds 13% per annum, the Company will have the option to pay such excess interest by capitalizing it to principal on the Bridge Loans. Notwithstanding the foregoing, after the occurrence and during the continuance of a Default or an Event of Default, interest will accrue on the Bridge Loans at the then-applicable rate plus 200 basis points per annum. Interest will be payable at the end of each interest period in arrears and on the date of any prepayment of the Bridge Loans. MANDATORY REPAYMENT The net cash proceeds from (i) any direct or indirect public offering or private placement of any debt or equity securities by the Company or any subsidiary of the Company, (ii) any future bank borrowings other than under the Credit Facility as in effect on the Closing Date and (iii) any future asset sales (subject to certain ordinary course exceptions and other exceptions to be agreed) by the Company or any subsidiary of the Company will be used to redeem the Bridge Loans in each case at 100% of the principal amount of the Bridge Loans redeemed plus accrued interest to the date of the redemption subject, in the case of clauses (ii) and (iii) only, to the required prepayment of any amounts outstanding under the Credit Facility.
11 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 10 CHANGE OF CONTROL Each holder of Bridge Loans will be entitled to require the Company, and the Company must offer, to repay the Bridge Loans held by such holder at a price of 101% of principal amount, plus accrued interest, upon the occurrence of a Change of Control (as defined) of the Company or Charter, subject to the optional redemption provisions described below. OPTIONAL REPAYMENT The Bridge Loans may be prepaid, in whole or in part, at the option of the Company at any time upon three business days' written notice at a price equal to 100% of the principal amount thereof plus accrued interest to the date of redemption. PAYMENTS Payments by the Company will be made by wire transfer of immediately available funds. TRANSFERABILITY AND PARTICIPATIONS Each of the Lenders will be free (with the consent of the Administrative Agent, in its sole discretion, such consent not to be unreasonably withheld after the Closing Date) to sell or transfer all or any part of or any participation in any of the Bridge Loans to any third party and to pledge any or all of the Bridge Loans to any commercial bank or other institutional lender, to the extent permitted by law. MODIFICATION OF THE BRIDGE LOANS Modification of the Bridge Loans may be made with the consent of Lenders holding greater than 50% of the Bridge Loans then outstanding, except that no modification or change may extend the maturity of any Bridge Loan or time of payment of interest of any Bridge Loan, reduce the rate of interest or the principal amount of any Bridge Loan, alter the redemption provisions of any Bridge Loan or reduce the percentage of holders necessary to modify or change the Bridge Loans without the consent of Lenders holding 100% of the Bridge Loans affected thereby.
12 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 11 COST AND YIELD PROTECTION The Lenders will receive cost and yield protection customary for facilities and transactions of this type, including, but not limited to, LIBOR break funding costs, taxes (including but not limited to gross-up provisions for withholding taxes imposed by the United States or any State thereof as a result of a change in law, and income taxes associated with all gross-up payments), changes in capital requirements, guidelines or policies or their interpretation or application, illegality, change in circumstances, reserves and other provisions deemed necessary by the Lenders to provide customary protection for U.S. and non-U.S. financial institutions.
13 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 12 CONDITIONS PRECEDENT The several obligations of the Lenders to make, or cause one of their respective affiliates to make, the Bridge Loans will be subject to closing conditions deemed appropriate by the Lenders for financings of this kind generally and for this transaction in particular, including, without limitation, the following closing conditions: 1. Concurrent Transactions. The Acquisition shall have been consummated and Falcon shall have become a wholly owned subsidiary of Charter. There shall not exist any default or event of default under the Credit Facility, the Bridge Loans, the Bridge Loan Agreement or any of the other Loan Documents, or under other material Indebtedness of the Company or its subsidiaries. Charter shall have completed its initial public offering and obtained at least $2.5 billion of net proceeds therefrom. 2. Due Diligence. Each of the Lenders shall have conducted a due diligence review in form, scope and substance satisfactory to each of the Lenders and shall be satisfied with the results thereof. Such review may include but may not be limited to an examination of (i) the capitalization, corporate and ownership structure of the Company before and after giving effect to the Acquisition, (ii) accounting, legal, regulatory, tax, labor, insurance, pension and environmental liabilities, actual or contingent (which, at the request of the Lenders, shall include an environmental audit satisfactory to the Lenders and their counsel), (iii) material contracts, leases and debt agreements and (iv) the general business, operations, financial condition, management, prospects and value of the Company. The Lenders shall not have become aware of any information relating to conditions or events not previously described to the Lenders or constituting new information or additional developments concerning conditions or events previously disclosed to the Lenders which they, in their judgment, believe may have a material adverse effect on the condition (financial or otherwise), assets, liabilities (contingent or otherwise), properties, solvency, business, management or prospects of Charter. 3. Absence of Certain Changes. No material change in the capital stock or long-term debt of the
14 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 13 Company and its subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, financial position, stockholders' equity, results of operations or prospects of the Company or Charter, shall have occurred since June 30, 1999 (the date of the most recent financial statements that have been delivered to the Lenders as of the date hereof) and no material inaccuracy in such financial statements shall exist. The Company or Charter shall have no material liabilities except those set forth on the balance sheet dated June 30, 1999 and those incurred in the ordinary course of business since such date in amounts that are consistent with past practice. On or after the date hereof (i) no downgrading shall have occurred in the rating accorded the Company's or Charter's debt securities by any "nationally recognized statistical rating organization," as that term is defined by the Securities and Exchange Commission for purposes of Rule 436(g)(2) under the Act, and (ii) no such organization shall have publicly announced that it has under surveillance or review, with possible negative implications, its rating of any of the Company's or Charter's debt securities. 4. Documentation, Legal Matters, etc. The Bridge Loan Agreement and the other definitive documentation evidencing the Bridge Loans shall be prepared by counsel to the Administrative Agent and shall be in form and substance reasonably satisfactory to the Lenders and the Company. All other matters relating to the Acquisition, the Bridge Loan Agreement, the Credit Facility and the transactions contemplated thereby shall be reasonably satisfactory to the Company and the Lenders in all respects and the Lenders shall have received such additional certificates, legal and other opinions, including a third-party opinion with respect to the solvency of the Company, in form and substance reasonably satisfactory to each of the Lenders and their counsel, and such other documentation as they shall request.
15 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 14 5. Market Disruption. There shall not have occurred any disruption or adverse change, as determined by Goldman, Sachs & Co. in its sole discretion, in the financial or capital markets generally, or in the markets for bridge loan syndication, high yield debt or equity securities in particular or affecting the syndication or funding of bridge loans (or the refinancing thereof) that may have a material adverse impact on the ability to sell or place the Permanent Debt Securities or to syndicate the Bridge Loans. 6. Financial Statements. At least 10 days prior to the Closing Date, each of the Lenders shall have received audited financial statements for the three-year period immediately preceding the Acquisition and any appropriate unaudited financial statements for any interim period or periods of the Company and all other recent, probable or pending acquisitions (including pro forma financial statements), all meeting the requirements of Regulation S-X for Form S-1 registration statements and all such financial statements shall be satisfactory in form and substance to each of the Lenders. Such financial statements shall show actual consolidated operating cash flow of the Company (calculated in accordance with Regulation S-X and including only those adjustments that the Administrative Agent agrees are appropriate) for the three-month period ended September 30, 1999 and for the latest three-month period for which statements are available, of not less than $48.5 million.
16 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 15 7. Approvals and Consents. All governmental, shareholder and third-party approvals and consents necessary or desirable in connection with the Acquisition and the financing thereof shall have been received and shall be in full force and effect, and all applicable waiting periods shall have expired without any action being taken by any applicable authority. 8. Litigation, etc.. There shall not exist any action, suit, investigation, litigation or proceeding pending or threatened in any court or before any arbitrator or governmental authority that, in the opinion of the Lenders, affects the Acquisition, the financing thereof or any of the other transactions contemplated hereby, or that could have a material adverse effect on the Company, Charter, the Acquisition, the financing thereof, or any of the transactions contemplated hereby. 9. Availability under Credit Facility. After giving effect to the consummation of the Acquisition, the Company shall have adequate availability under the Credit Facility, in the sole judgment of the Administrative Agent. 10. Payment of Fees and Expenses. All fees and expenses due to the Lenders, GSCP, Goldman Sachs or the Administrative Agent on or before the closing date in connection with the Bridge Loans, pursuant to the Commitment Letter, the Fee Letter, the Engagement Letter or otherwise shall have been paid in full.
17 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 16 COVENANTS The Bridge Loan Agreement will contain such covenants by the Company (with respect to the Company and its subsidiaries) as are usual and customary for financings of this kind or as otherwise deemed appropriate by the Lenders for this transaction in particular (in their sole discretion), based upon the covenants in the Credit Facility, together with such special rights as may be required to comply with the ERISA "Plan Assets" regulation. EVENTS OF DEFAULT The Bridge Loan Agreement will include such events of default (and, as appropriate, grace periods) as are usual and customary for financings of this kind or as otherwise deemed appropriate by the Lenders for this transaction in particular (in their sole discretion), based upon the events of default in the Credit Facility. REPRESENTATIONS AND WARRANTIES The Bridge Loan Agreement will contain such representations and warranties by the Company (with respect to the Company and its subsidiaries) as are usual and customary for financings of this kind or as are otherwise deemed appropriate by each of the Lenders for this transaction in particular (in their sole discretion).
18 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 17 TAXES, RESERVE REQUIREMENTS AND INDEMNITIES The Bridge Loan Agreement will provide that all payments will be made free and clear of any taxes (other than franchise taxes and taxes on overall net income), imposts, assessments, withholdings or other deductions whatsoever assessed by the United States or any State thereof and resulting from a change in law. Foreign Lenders will be required to furnish to the Administrative Agent appropriate certificates or other evidence of exemption from U.S. federal tax withholding. The Company will indemnify the Lenders against all increased costs of capital resulting from reserve requirements or otherwise imposed, in each case subject to customary increased costs, capital adequacy and similar provisions to the extent not taken into account in the calculation of the LIBOR Rate. INDEMNITY The Bridge Loan Agreement will contain customary and appropriate provisions relating to indemnity and related matters in a form reasonably satisfactory to the Administrative Agent and the Lenders and acceptable to the Company. GOVERNING LAW AND JURISDICTION The Bridge Loan Agreement will provide that the Company will submit to the non-exclusive jurisdiction and venue of the federal and state courts of the State of New York and will waive any right to trial by jury. New York law will govern the Loan Documents. The foregoing is intended to summarize certain basic terms of the Bridge Loans. It is not intended to be a definitive list of all of the requirements of the Lenders in connection with the Bridge Loans.
19 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 18 EXHIBIT 1 TO ANNEX B SUMMARY OF TERMS AND CONDITIONS OF TERM LOANS AND EXCHANGE NOTES Capitalized terms used herein have the meanings assigned to them in the Summary of Terms and Conditions of Bridge Loans to which this Exhibit 1 is attached. TERM LOANS On the Maturity Date, so long as no Conversion Default has occurred and is continuing, the outstanding Bridge Loans will be automatically converted into Term Loans. The Term Loans will be governed by the provisions of the Bridge Loan Agreement and, except as expressly set forth below, will have the same terms as the Bridge Loans. MATURITY The Term Loans will mature on the ninth anniversary of the Maturity Date. INTEREST RATE The Term Loans will bear interest at a rate per annum equal to (a) the three-month London interbank offered rate, adjusted for reserves calculated on the basis of the actual number of days elapsed in a year of 360 days, plus (b) the Conversion Spread (as defined below). Notwithstanding the foregoing, at no time will the interest rate in effect on the Term Loans exceed 15% per annum and to the extent that the interest payable on the Term Loans on any interest payment date is at a rate that exceeds 13% per annum, the Company will have the option to pay such excess interest by capitalizing it to principal on the Term Loans. "Conversion Spread" with respect to any Term Loans shall mean 500 basis points during the three-month period commencing on the Maturity Date and shall increase by 50 basis points per annum at the beginning of each subsequent three-month period. Notwithstanding the foregoing, after the occurrence and during the continuance of a Default or an Event of Default, interest will accrue on the Term Loans at the then-applicable rate plus 200 basis points per annum. Interest will be payable in arrears at the end of each fiscal quarter of the Company and on the maturity date of the Term Loans.
20 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 19 EXCHANGE NOTES At any time on or after the Maturity Date, upon five or more business days prior notice, the Term Loans may, at the option of a Lender, be exchanged for a principal amount of Exchange Notes equal to 100% of the aggregate principal amount of the Term Loan so exchanged (plus any accrued interest thereon not required to be paid in cash) in connection with a transfer of Exchange Notes to an unaffiliated third party. No Exchange Notes will be issued until the Company receives requests to issue at least $25.0 million in aggregate principal amount of Exchange Notes. The Company will issue Exchange Notes under an indenture which complies with the Trust Indenture Act of 1939, as amended (the "INDENTURE"). The Company will appoint a trustee reasonably acceptable to the holders of the Bridge Loans. The Indenture will be fully executed and delivered on the Closing Date and the Exchange Notes will be fully executed and deposited into escrow on the Closing Date. MATURITY The Exchange Notes will mature on the ninth anniversary of the Maturity Date. INTEREST RATE Each Exchange Note will bear interest at a fixed rate equal to the greater of (x) the interest rate on the Term Loans on the date exchanged or (y) if Falcon continues to be a wholly-owned subsidiary of Charter, the bid side yield on Charter's currently outstanding 8.625% Senior Notes due 2009 (the "CHARTER NOTES"), on the date prior to the date of issuance of the Exchange Notes, plus, in the case of each of clause (x) and (y), 50 basis points; provided that in no event will the interest rate in effect on the Exchange Notes exceed 15% per annum and to the extent that the interest payable on the Exchange Notes exceeds 13% per annum the Company will have the option to pay such excess interest by issuing additional Exchange Notes. OPTIONAL REDEMPTION Exchange Notes will be non-callable until the fifth anniversary of the Closing Date. Thereafter, each Exchange Note will be callable at par plus accrued interest plus a premium equal to one half of the coupon on such Exchange Note, which premium shall decline ratably on each yearly anniversary of the Closing Date to zero on the date that is two years prior to the maturity of the Exchange Notes.
21 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 20 DEFEASANCE PROVISIONS OF EXCHANGE NOTES Customary. MODIFICATION Customary. REGISTRATION RIGHTS The Company will file within 300 days after the Closing Date and will use all commercially reasonable efforts to cause to become effective as soon thereafter as practicable, a shelf registration statement with respect to the Exchange Notes (a "SHELF REGISTRATION STATEMENT"). If a Shelf Registration Statement is filed, the Company will keep such registration statement effective and available (subject to customary exceptions) until it is no longer needed to permit unrestricted resales of the Exchange Notes. If within 90 days from the Maturity Date (the "EFFECTIVENESS DATE") a Shelf Registration Statement for the Exchange Notes has not been declared effective because the Company has failed to use its best efforts to become effective, then the Company will pay liquidated damages in the form of increased interest of 50 basis points per annum on the principal amount of Exchange Notes and Term Loans outstanding to holders of such Exchange Notes and Term Loans who are unable freely to transfer Exchange Notes from and including the 91st day after the Maturity Date to but excluding the effective date of such Shelf Registration Statement. On the 90th day after the Effectiveness Date, the liquidated damages shall increase by 50 basis points per annum, and on each 90 day anniversary of the Effectiveness Date thereafter, shall increase by 50 basis points per annum, to a maximum increase in interest of 100 basis points (such damages to be payable by capitalizing principal on Term Loans or in the form of additional Bridge Loans or Exchange Notes, as applicable, if the interest rate thereon exceeds 13%). The Company will also pay such liquidated damages for any period of time (subject to customary exceptions) following the effectiveness of a Shelf Registration Statement that such Shelf Registration Statement is not available for sales thereunder. All accrued liquidated damages will be paid on each quarterly interest payment date.
22 CHARTER COMMUNICATIONS, INC. OCTOBER 15, 1999 Page 21 COVENANTS The indenture relating to the Exchange Notes will include covenants that are substantially similar to those contained in the indenture governing the Charter Notes, but more restrictive in certain limited respects. EVENTS OF DEFAULT The indenture relating to the Exchange Notes will provide for Events of Default similar to those contained in the indenture governing the Charter Notes. COUNSEL FOR THE LENDERS Latham & Watkins. The foregoing is intended to summarize certain basic terms of the Term Loans and Exchange Notes. It is not intended to be a definitive list of all of the requirements of the Lenders in connection with the Term Loans and Exchange Notes.
1 Exhibit 10.39 September 29, 1999 Charter Communications Holding Company, LLC 12444 Powerscourt Drive, Suite 400 St. Louis, Missouri 63131 Attention: Eloise Engman Re: Proposed Financing Ladies and Gentlemen: Charter Communications Holding Company, LLC ("CHARTER") has advised Bank of Montreal, Chicago Branch ("BANK OF MONTREAL") that in connection with Charter's acquisition (the "ACQUISITION") of all of the membership interests in Avalon Cable LLC, a Delaware limited liability company ("HOLDINGS"), which in turn owns all of the membership interests in Avalon Cable of New England LLC, a Delaware limited liability company ("AVALON NEW ENGLAND"), and Avalon Cable of Michigan LLC, a Delaware limited liability company ("AVALON MICHIGAN"; jointly and severally with Avalon New England (or their respective successors), the "BORROWERS"), the Borrowers wish to obtain $300,000,000 of credit facilities (such credit facilities, as described in the Senior Facilities Term Sheet (the "SENIOR FACILITIES TERM SHEET") attached hereto and incorporated herein by this reference, are the "SENIOR FACILITIES"). The proceeds of the Senior Facilities will be used in connection with the Acquisition, to pay related fees and expenses and for other general purposes. Bank of Montreal is pleased to advise you that it is willing to act as the lead arranger and administrative agent (in such capacity, "ADMINISTRATIVE AGENT") for the Lenders in respect of the Senior Facilities, and will perform the duties and exercise the authority customarily performed and exercised by it in such roles. Such duties shall include the use of commercially reasonable efforts to assemble a syndicate of financial institutions other than Bank of Montreal identified by us in consultation with you (together with Bank of Montreal, the "LENDERS") to provide the necessary commitments for the Senior Facilities. You agree that no other agents, co-agents or arrangers will be appointed and no other titles will be awarded in connection with the Senior Facilities (except as otherwise provided in the Senior Facilities Term Sheet) unless you and we shall so agree. You further agree to promptly inform each of Loan 1
2 Pricing Corporation and Securities Data Corp. that Mercantile Bank shall not be entitled to receive league table credit in connection with the Senior Facilities. Bank of Montreal is pleased to advise you of its commitment to provide up to $50,000,000 of the entire $300,000,000 of Senior Facilities all subject to the terms and conditions set forth herein. The Senior Facilities Term Sheet sets forth the principal terms and conditions on and subject to which Bank of Montreal is willing to make available its portion of the Senior Facilities. It is a condition to Bank of Montreal's commitment hereunder that the portion of the Senior Facilities not being provided by Bank of Montreal shall be provided by the other Lenders. We intend to commence syndication efforts immediately, and you agree actively to assist us in completing a syndication satisfactory to us. Such assistance shall include (a) your using commercially reasonable efforts to ensure that the syndication efforts benefit materially from the existing lending relationships of Charter and its affiliates, (b) direct contact between the proposed Lenders and senior management and advisors of Charter and its affiliates, (c) assistance in the preparation of a Confidential Information Memorandum and other marketing materials to be used in connection with the syndication and (d) the hosting, with us, of one or more conference calls or meetings with prospective Lenders. Bank of Montreal will manage all aspects of the syndication, including decisions as to the selection of institutions to be approached and when they will be approached, when their commitments will be accepted, which institutions will participate, the allocations of the commitments among the Lenders and the amount and distribution of fees among the Lenders, in each case in consultation with you. To assist us in our syndication efforts, you have provided to us on or prior to the date hereof certain information (including financial information and financial projections (as supplemented in the manner referred to in this sentence, such financial projections are referred to herein as the "PROJECTIONS")) with respect to the cable systems (collectively, the "SYSTEMS") currently owned by the Borrowers and the transactions contemplated hereby, and you hereby agree promptly to prepare and provide to us all additional information with respect thereto as Bank of Montreal may reasonably request in connection with the arrangement and syndication of the Senior Facilities. You hereby represent and covenant that (a) all information other than the Projections (the "INFORMATION") that has been or will be made available to any of us by you or any of your representatives, as supplemented from time to time prior to the Closing Date (as defined in the Senior Facilities Term Sheet), shall be complete and correct in all material respects and does not or will not, as so supplemented, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not materially misleading in light of the circumstances under which such statements are made and (b) the Projections that have been or will be made available to any of us by you or any of your representatives have been or will be prepared in good faith based upon reasonable assumptions, it being recognized by Bank of Montreal that the Projections are not to be viewed as fact and that actual results during the period or periods covered by the Projections may differ from the projected results set forth therein by a material amount. You understand that in arranging and syndicating the Senior Facilities Bank of Montreal may use and rely on the Information and Projections without independent verification thereof. 2
3 As consideration for our commitments hereunder and our agreements to perform the services described herein, you agree to pay to us the nonrefundable fees as set forth in the Senior Facilities Term Sheet and in the Fee Schedule (the "FEE SCHEDULE") attached hereto and incorporated herein by reference, in the amounts and at the times set forth therein. Bank of Montreal shall be entitled, with your consent (which shall not be unreasonably withheld), to change the pricing, terms and structure of the Senior Facilities if Bank of Montreal determines that such changes are advisable to insure a successful syndication of the Senior Facilities. The commitment hereunder is subject to the agreements in this paragraph. Bank of Montreal's commitment hereunder and agreement to perform the services described herein are subject to (i) Bank of Montreal's completion of and satisfaction in all respects with a due diligence investigation of Holdings, Borrowers and the Systems, (ii) there not occurring or becoming known to Bank of Montreal any change, occurrence or development that could reasonably be expected to have a material adverse effect on the business, operations, property or condition (financial or otherwise) of Holdings, Borrowers and the Systems, (iii) Bank of Montreal not becoming aware after the date hereof of any information or other matter (including any matter relating to financial models and underlying assumptions relating to the Projections) that in Bank of Montreal's judgment is inconsistent in a material and adverse manner with any information or other matter disclosed to Bank of Montreal prior to the date hereof, (iv) there not having occurred a material disruption of or material adverse change in conditions in the financial, banking or capital markets that, in Bank of Montreal's judgment, could impair the syndication of the Senior Facilities, (v) Bank of Montreal's satisfaction that prior to and during the syndication of the Senior Facilities, except as otherwise agreed by Bank of Montreal, there shall be no competing offering, placement or arrangement of any debt securities or bank financing by or on behalf of Charter, or by any of its affiliates on behalf or in respect of Charter, other than the contemplated credit facilities for CC VI Operating Company, LLC so long as the syndication thereof is coordinated with the syndication of the Senior Facilities in a manner reasonably satisfactory to Bank of Montreal, (vi) the negotiation, execution and delivery on or before March 1, 2000 of definitive documentation with respect to the Senior Facilities satisfactory to Bank of Montreal, and (vii) the other conditions set forth or referred to in the Senior Facilities Term Sheet. The terms and conditions of Bank of Montreal's commitment hereunder and of the Senior Facilities are not limited to those set forth herein and in the Senior Facilities Term Sheet. Those matters that are not covered by the provisions hereof and of the Senior Facilities Term Sheet are subject to the approval and agreement of Bank of Montreal and Borrowers. You agree (a) to indemnify and hold harmless Bank of Montreal, their affiliates and their respective officers, directors, employees, advisors, and agents (each, an "INDEMNIFIED PERSON") from and against any and all losses, claims, damages and liabilities to which any such indemnified person may become subject arising out of or in connection with this letter (this "COMMITMENT LETTER"), the Senior Facilities, the use of the proceeds thereof, the Acquisition or any related transaction or any claim, litigation, investigation or proceeding relating to any of the foregoing, regardless of whether any indemnified person is a party thereto, and to reimburse each indemnified person upon demand for any legal or other expenses incurred in connection with 3
4 investigating or defending any of the foregoing, provided that the foregoing indemnity will not, as to any indemnified person, apply to losses, claims, damages, liabilities or related expenses to the extent they are found by a final, non-appealable judgment of a court to arise from the willful misconduct or gross negligence of such indemnified person, and (b) to reimburse Bank of Montreal and their affiliates on demand for all reasonable out-of-pocket expenses (including due diligence expenses, syndication expenses, rating agency fees and expenses, and reasonable fees, charges and disbursements of counsel) incurred directly in connection with the Senior Facilities and any related documentation (including this Commitment Letter and the definitive financing documentation) or the administration, amendment, modification or waiver thereof. No indemnified person shall be liable for any damages arising from the unauthorized interception by others of Information or other materials obtained through electronic, telecommunications or other information transmission systems or for any special, indirect, consequential or punitive damages in connection with the Senior Facilities. You acknowledge that Bank of Montreal and its affiliates (the term "BANK OF MONTREAL" as used below in this paragraph being understood to include such affiliates) may be providing debt financing, equity capital or other services (including financial advisory services) to other companies in respect of which you may have conflicting interests regarding the transactions described herein and otherwise. Bank of Montreal shall not use confidential information obtained from you by virtue of the transactions contemplated by this Commitment Letter or its other relationships with you in connection with the performance by Bank of Montreal of services for other companies, and Bank of Montreal will not furnish any such information to other companies. You also acknowledge that Bank of Montreal has no obligation to use in connection with the transactions contemplated by this Commitment Letter, or to furnish to you, confidential information obtained from other companies. This Commitment Letter shall not be assignable by you without the prior written consent of Bank of Montreal (and any purported assignment without such consent shall be null and void), is intended to be solely for the benefit of the parties hereto and Borrowers and is not intended to confer any benefits upon, or create any rights in favor of, any person other than the parties hereto and Borrowers. This Commitment Letter may not be amended or waived except by an instrument in writing signed by you and Bank of Montreal. This Commitment Letter may be executed in any number of counterparts, each of which shall be an original, and all of which, when taken together, shall constitute one agreement. Delivery of an executed signature page of this Commitment Letter by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. This Commitment Letter shall be governed by, and construed in accordance with, the laws of the State of New York. This Commitment Letter is delivered to you on the understanding that neither this Commitment Letter, the Senior Facilities Term Sheet or the Fee Schedule nor any of their terms or substance shall be disclosed, directly or indirectly, to any other person except (a) to the officers, agents and advisors of Charter and Borrowers who are directly involved in the consideration of this matter or (b) as may be compelled in a judicial or administrative proceeding or as otherwise required by law (in which case you agree to inform us prior thereto), provided that the foregoing restrictions shall cease to apply (except in respect of the Fee Schedule and its terms and substance) after this Commitment Letter has been accepted by you. 4
5 Bank of Montreal agrees to keep confidential all non-public information provided to it by you pursuant to the transactions described herein that is designated by you as confidential; provided that the foregoing shall not prevent Bank of Montreal from disclosing any such information (a) on a confidential basis, to any prospective Lender or any affiliate of any prospective Lender, (b) to the officers, agents and advisors of Bank of Montreal who are directly involved in the consideration of this matter, (c) to rating agencies in connection with the rating of the Senior Facilities or (d) as may be compelled in a judicial or administrative proceeding or as otherwise required by law or by regulatory authorities (in which case Bank of Montreal agrees to inform you prior thereto). We understand that you have asked us to regard as confidential all non-public information previously provided to Bank of Montreal, other than general information regarding the cable television industry. The compensation, reimbursement, indemnification and confidentiality provisions contained herein and in the Fee Schedule shall remain in full force and effect regardless of whether definitive financing documentation shall be executed and delivered and notwithstanding the termination of this Commitment Letter or any of the commitments hereunder, provided that the immediately preceding paragraph shall be superseded by the definitive documentation for the Senior Facilities. If the foregoing correctly sets forth our agreement, please indicate your acceptance of the terms hereof and of the Senior Facilities Term Sheet and the Fee Schedule by returning to us executed counterparts hereof, not later than 5:00 p.m., New York City time, on September 30, 1999. This offer will automatically expire at such time in the event we have not received such executed counterparts in accordance with the immediately preceding sentence. 5
6 We are pleased to have been given the opportunity to assist you in connection with this important financing. Very truly yours, BANK OF MONTREAL, CHICAGO BRANCH By /s/ Mike Silverman _____________________________________ Name: Mike Silverman Title: Director ACCEPTED AND AGREED TO AS OF THE DATE FIRST ABOVE WRITTEN: CHARTER COMMUNICATIONS HOLDING COMPANY, LLC By /s/ Eloise Engman ____________________________________ Name: Eloise Engman Title: Vice President, Finance & Acquisition 6
7 FEE SCHEDULE STRUCTURING FEE: $150,000 payable to Bank of Montreal, earned upon the date of your acceptance of the Commitment Letter to which this Fee Schedule is attached and payable on the Closing Date. UPFRONT FEE: (i) For Administrative Agent and each Co-Arranger (as such terms are defined in the Senior Facilities Term Sheet; each, an "AGENT"), the sum of (x) 1.0% multiplied by such Agent's final allocated commitment amount of the Senior Facilities on the Closing Date plus (y) $50,000 earned and payable to such Agent on the Closing Date, and (ii) for each Lender (other than the Agents) that commits to provide a portion of the Senior Facilities, a fee to be determined which shall be earned and payable to such Lender on its allocated commitment on the Closing Date. AGENT'S FEE: $35,000 annual fee payable to the Administrative Agent in advance on the Closing Date and each anniversary thereof. All fees (or portions thereof), once paid, are non-refundable. Fees set forth above are in addition to any fees, indemnities or reimbursements described in the Senior Facilities Term Sheet or the Commitment Letter. All fees shall be paid to the Administrative Agent for its own account or for distribution, as appropriate, to the other Agents and Lenders, in each case as set forth on this Fee Schedule. 7
8 - -------------------------------------------------------------------------------- $300,000,000 CREDIT FACILITIES AVALON CABLE OF NEW ENGLAND LLC AVALON CABLE OF MICHIGAN LLC Summary of Proposed Terms and Conditions I. Parties Avalon Cable of New England LLC, a Delaware limited liability company ("Avalon Borrowers: New England"), and Avalon Cable of Michigan LLC, a Delaware limited liability company ("Avalon Michigan"), or their respective successors, as joint and several borrowers (collectively, the "Borrowers"). Guarantors: Avalon Cable LLC, a Delaware limited liability company ("Holdings"), and each Borrower's direct and indirect domestic subsidiaries, other than "non-recourse" subsidiaries described in clause (e) under the heading "Negative Covenants" below (collectively, the "Guarantors"; the Borrowers and the Guarantors, collectively, are the "Loan Parties"). Lead Arranger and Book Runner: Bank of Montreal (in such capacity, "Lead Arranger"). Administrative Agent: Bank of Montreal (in such capacity, the "Administrative Agent"). Syndication Agents: First Union National Bank and PNC Bank, National Association (in such capacity, collectively, the "Syndication Agents"). Co-Documentation Agents: Mercantile Bank and Bank of Montreal (in such capacity, collectively, the "Co-Documentation Agents"). Co-Arrangers: First Union National Bank, PNC Bank, National Association and Mercantile Bank (in such capacity, collectively, the "Co-Arrangers"). Lenders: A syndicate of banks, financial institutions and other entities selected in the syndication process (collectively, the "Lenders"). II. Types and Amounts of Facilities 1. Term B Facilities Amount and Tenor: Term B Loan Facility: A 9-year term loan facility (the "Term B Loan Facility") in an aggregate principal amount equal to $125,000,000 (the loans thereunder being the "Term B Loans"). The Term B Loans shall be repayable in quarterly installments in aggregate amounts for each year the Term B Loan Facility is outstanding (expressed as a percentage of the aggregate amount borrowed) as set forth below: - -------------------------------------------------------------------------------- 1
9 - -------------------------------------------------------------------------------- Year Amount ---- ------ 4 1.0% 5 1.0% 6 1.0% 7 1.0% 8 1.0% 9 95.0% In addition to the foregoing, the Credit Documentation (as defined below) will provide for additional term loans and/or revolving loan facilities, at the election of Borrowers (collectively, the "Incremental Facility"), in an aggregate principal amount of up to $75,000,000 (the loans thereunder are the "Incremental Loans"). The Incremental Facility shall not initially be effective but may be activated, in whole or in part, subject to certain limits, at any time prior to December 31, 2003 at the request of the Borrowers with consent required only from those Lenders (including new Lenders that are reasonably acceptable to the Administrative Agent and the Borrowers) that agree, in their sole discretion, to participate in such Incremental Facility. In the event that the Term B Loans are optionally prepaid or the Revolving Facility (as defined below) is optionally permanently reduced, up to $37,500,000 of the amount so prepaid or reduced may be applied to increase the $75,000,000 of incremental capacity described above. The Incremental Facility will be governed by the covenants, conditions to borrowing, interest periods, representations and warranties and events of default contained in the Credit Documentation; provided, however, that the weighted average life and final maturity shall not be less than that of the Revolving Facility. Availability: The Term B Loans shall be made in a single drawing on the Closing Date (as defined below). If the Borrowers have not refinanced (with subordination terms satisfactory to the Lead Arranger) by March 31, 2008 their currently outstanding 9.375% Senior Subordinated Notes due December 1, 2008 (the "Senior Subordinated Notes") or Holdings' 11.875% Senior Discount Notes due December 1, 2008 (the "Senior Discount Notes"), the Term B Loan maturity will be accelerated to June 30, 2008. Maturity: 9 years from the Closing Date (subject to acceleration as described under the heading "Availability" above). Purpose: The proceeds of the Term B Loans shall be used in connection with the Acquisition (as defined below) and for general purposes. 2. Revolving Facility Amount and Tenor: 8-1/2 year reducing revolving loan facility (the "Revolving Facility"; the commitments thereunder are the "Revolving Commitments"; the Revolving Facility, the Term B Facilities and the Incremental Facility, if any, collectively, are the "Credit Facilities") in the amount of $175,000,000 (the loans thereunder, together with (unless the context otherwise requires) the Swingline Loans referred to below, being the "Revolving Loans"). The Revolving Commitments shall be permanently reduced in quarterly installments in the aggregate amounts for each year - -------------------------------------------------------------------------------- 2
10 - -------------------------------------------------------------------------------- the Revolving Facility is outstanding (expressed as a percentage of the aggregate amount of the original Revolving Commitments) as set forth below: Year Reduction ---- --------- 4 5.0% 5 15.0% 6 20.0% 7 22.0% 8 24.0% 8-1/2 14.0% The extensions of credit under the Revolving Facility shall be prepaid to the extent that the aggregate amount thereof exceeds the aggregate amount of the Revolving Commitments as so reduced. Subject to the terms and conditions described above, Lenders may make available to the Borrowers, at the Borrowers' request, one or more additional revolving loan facilities as part of the Incremental Facility. Availability: The Revolving Facility shall be available on a revolving basis during the period commencing on the Closing Date and ending on the date that is 8-1/2 years after the Closing Date (subject to the following proviso, the "Revolving Termination Date"), subject to the Borrowers' compliance with the terms and conditions contained herein; provided that if the Borrowers have not refinanced (with subordination terms satisfactory to the Lead Arranger) by March 31, 2008 their currently outstanding Senior Subordinated Notes or Senior Discount Notes, the Revolving Facility shall immediately become due and payable on such date. Swingline Loans: A portion of the Revolving Facility not in excess of $15,000,000 shall be available for swing line loans (the "Swingline Loans") from the Administrative Agent on same-day notice. Any such Swingline Loans will reduce availability under the Revolving Facility on a dollar-for-dollar basis. Each Lender under the Revolving Facility shall acquire, under certain circumstances, an irrevocable and unconditional pro rata participation in each Swingline Loan. Maturity: The Revolving Termination Date. Purpose: The proceeds of the Revolving Loans shall be used in connection with the Acquisition and for general purposes, including permitted acquisitions. III. Certain Payment Provisions Fees and Interest Rates: As set forth on Annex I. Optional Prepayments and Loans may be prepaid on 3 business days' Commitment Reductions: prior written notice in minimum amounts of $500,000 for ABR Loans (as defined in Annex I) and $1,000,000 for Eurodollar Loans (as defined in Annex I). Revolving Commitments may be reduced on 3 business days' prior written notice in minimum amounts of $1,000,000. Optional prepayments and optional commitment reductions of each of the Term B Loan Facility, the - -------------------------------------------------------------------------------- 3
11 Revolving Facility and the Incremental Facility shall be applied ratably to the respective scheduled installments and scheduled reductions (as applicable) thereof. Optional prepayments of any term loans may not be reborrowed. Mandatory Prepayments: Loans shall be prepaid with 100% of the net cash proceeds of any sale or other disposition (including as a result of casualty or condemnation) by the Borrowers or any of their respective subsidiaries of any assets, excluding permitted asset exchanges where no cash consideration is received, sales of inventory or obsolete or worn-out property in the ordinary course of business and certain other exceptions. Proceeds described in this paragraph shall not be required to be applied to make prepayments if (i) the Borrowers identify a potential acquisition of assets in a permitted line of business and notify the Administrative Agent in writing of such acquisition within 12 months of the relevant disposition, (ii) such identified acquisition is consummated within 18 months of such disposition, and (iii) if such net cash proceeds arise from insurance settlements, the Borrowers redeploy such net cash proceeds within 270 days of receipt. Mandatory prepayments and mandatory commitment reductions of each of the Term B Loan Facility, the Revolving Facility and the Incremental Facility shall be applied ratably to the respective scheduled installments and scheduled reductions (as applicable) thereof. Mandatory prepayments of any term loans may not be reborrowed. IV. Collateral The obligations of each Loan Party in respect of the Credit Facilities, any interest rate protection agreements in respect thereof provided by any Lender (or any affiliate of a Lender) and any letters of credit provided by any Lender (or any affiliate of a Lender) outside of the Credit Facilities (subject, in the case of such letters of credit, to the limit referred to in clause (c) under the heading "Negative Covenants" below) shall be secured by a perfected first priority security interest in all equity interests or intercompany obligations held by Holdings, the Borrowers or any of the Guarantors (limited to equity interests and intercompany obligations of the Borrowers in the case of pledges made by Holdings and 66% of the equity interests of foreign subsidiaries). V. Certain Conditions Initial Conditions: The initial funding under the Credit Facilities shall be subject to the satisfaction of the following conditions (the date upon which such conditions are satisfied being the "Closing Date"). (a) Each Loan Party shall have executed and delivered satisfactory definitive credit documentation (the "Credit Documentation"). (b) The acquisition (the "Acquisition") of Holdings and the Borrowers, and of the cable systems currently owned by the Borrowers, shall have been consummated; the Borrowers shall hold all of such cable systems upon and after consummation of the Acquisition; and the debt assumed or retained by the Borrowers and their respective subsidiaries in connection therewith (other than the Senior Subordinated Notes and the Credit Facilities) shall not exceed an amount to be agreed upon. (c) The Lenders, the Administrative Agent and the Lead Arranger shall - -------------------------------------------------------------------------------- 4
12 - -------------------------------------------------------------------------------- have received all fees required to be paid, and all expenses for which invoices have been presented, on or before the Closing Date. (d) All material governmental and third party approvals necessary in connection with the financings contemplated by the Credit Facilities shall have been obtained and be in full force and effect. (e) The Lenders shall have received (i) the audited financial statements of the Borrowers for the fiscal year ended December 31, 1998 and the unaudited financial statements of the Borrowers for the fiscal quarter ended June 30, 1999 and (ii) all other available audited and unaudited financial statements for the Borrowers for the most recent fiscal quarter or fiscal year, as the case may be, for which such financial statements are available. (f) The Lenders shall have received satisfactory projections for the period from the Closing Date through the final maturity of the Term B Loans. (g) All documents and instruments required to perfect the Administrative Agent's first priority security interest in the collateral under the Credit Facilities shall have been executed. (h) Holdings and its affiliates and subsidiaries shall not be subject to contractual or other restrictions of a material nature that would be violated by the financings contemplated hereby. (i) The Borrowers shall have delivered such legal opinions, documents and other instruments as are customary for transactions of this type. On-Going Conditions: The making of each extension of credit shall be conditioned upon (a) the accuracy in all material respects of all representations and warranties in the Credit Documentation (including, without limitation, the material adverse change and litigation representations) and (b) there being no default or event of default in existence at the time of, or after giving effect to the making of, such extension of credit. As used herein and in the Credit Documentation, a "material adverse change" shall mean any event, development or circumstance that has had or could reasonably be expected to have a material adverse effect on (a) the business, operations, property or condition (financial or otherwise) of the Borrowers and their respective subsidiaries, taken as a whole, or (b) the validity or enforceability of any material provision of the Credit Documentation or the rights and remedies of the Administrative Agent and the Lenders thereunder. VI. Certain Documentation The Credit Documentation shall contain Matters representations, warranties, covenants and events of default customary for financings of this type and other terms deemed appropriate by the Lenders, including, without limitation: Representations and Warranties: Financial statements (including pro forma financial statements); absence of material undisclosed liabilities; no material adverse change; existence; material compliance with law; power and authority; enforceability of Credit Documentation; no conflict with law or material contractual obligations; no material litigation; no default; ownership of property; - -------------------------------------------------------------------------------- 5
13 - -------------------------------------------------------------------------------- liens; intellectual property; taxes; Federal Reserve regulations; ERISA; Investment Company Act; subsidiaries; environmental matters; solvency; labor matters; year 2000 matters; accuracy of disclosure; and creation and perfection of security interests. Affirmative Covenants: Delivery of unaudited quarterly financial statements within 60 days of quarter end, audited annual financial statements with 120 days of year end, reports, annual accountants' "no default" certificate, accountants' letters (if submitted), subscriber reports, annual budget (within 60 days after the beginning of each fiscal year), officers' certificates and other information requested by the Lenders; payment of other obligations; continuation of business and maintenance of existence and material rights and privileges; compliance with laws and material contractual obligations; maintenance of property and insurance; maintenance of books and records; right of the Lenders to inspect property and books and records; notices of defaults, litigation and other material events; material compliance with environmental laws; further assurances (including, without limitation, with respect to security interests in after-acquired equity interests and intercompany obligations); and agreement to obtain interest rate protection to the extent necessary to provide that at least 50% of the principal amount of term indebtedness of Holdings and its subsidiaries is effectively subject to a fixed rate, on terms satisfactory to the Administrative Agent, at all times following the date which is 90 days after the Closing Date during which the Leverage Ratio (as defined below) is greater than 4.50 to 1.00. Financial Covenants: Maximum ratio of Total Debt (as defined in Annex II) to annualized Operating Cash Flow (as defined in Annex II) (the "Leverage Ratio") as follows: Period Leverage Ratio ------ -------------- Closing Date to 12/30/01 6.25:1.00 12/31/01 to 12/30/02 6.00:1.00 12/31/02 to 12/30/03 5.50:1.00 12/31/03 to 12/30/04 5.00:1.00 12/31/04 to 12/30/05 4.75:1.00 12/31/05 and thereafter 4.50:1.00 Maximum ratio of Senior Debt to annualized Operating Cash Flow (the "Senior Leverage Ratio") of 4.75 to 1.00 (such maximum ratio only being required to be complied with until the Leverage Ratio is less than 5:00 to 1.00). Minimum ratio of Operating Cash Flow to cash interest expense (the "Interest Coverage Ratio") of 1.75 to 1.0. Minimum ratio of annualized Operating Cash Flow to pro forma debt service (the "Debt Service Coverage Ratio") of 1.25 to 1.0. For the purposes of the financial covenants, (i) all calculations will be made with respect to the Borrowers and their respective consolidated subsidiaries, (ii) Operating Cash Flow for the purposes of the Interest Coverage Ratio shall be determined on a rolling four-quarter basis, - -------------------------------------------------------------------------------- 6
14 - -------------------------------------------------------------------------------- (iii) annualized Operating Cash Flow shall equal Operating Cash Flow for the most recent quarter multiplied by four, (iv) all determinations of Operating Cash Flow shall be made before giving effect to the payment of management fees, (v) cash interest expense shall be determined on a rolling four-quarter basis, except that until four fiscal quarters have passed since the Closing Date, such amount shall be determined for the number of full fiscal quarters subsequent to the Closing Date and then annualized, (vi) pro forma debt service shall be determined on the basis of scheduled principal for the four-quarter period commencing after the last day of the most recent fiscal period and historical interest expense calculated in the manner described in clause (v) above and (vii) interest expense (including interest expense for purposes of calculating pro forma debt service) shall include distributions made by the Borrowers used to pay debt service of Holdings or any of their respective affiliates, including but not limited to payment of interest on the Senior Discount Notes and payment of the Mandatory Payment of Accrued Interest. Negative Covenants: Limitations on: (i) indebtedness; (ii) liens; (iii) guarantee obligations; (iv) mergers, consolidations, liquidations and dissolutions; (v) sales of assets; (vi) distributions and other payments in respect of equity interests and subordinated indebtedness; (vii) investments, loans and advances; (viii) optional payments and modifications of certain debt instruments; (ix) transactions with affiliates; (x) sale-leasebacks; (xi) changes in fiscal year; (xii) negative pledge clauses and clauses restricting subsidiary distributions; (xiii) changes in lines of business; (xiv) certain intercompany transactions (primarily relating to corporate separateness and tax sharing arrangements); and (xv) changes in passive holding company status of Holdings. Only those negative covenants described in clauses (i), (ii), (iii), (iv), (x), (xii), (xiv) and (xv) above will apply to Holdings. The negative covenants shall be subject to various exceptions, including the following: (a) The Borrowers will be permitted to incur (i) indebtedness under the Credit Facilities, (ii) unsecured subordinated indebtedness incurred to refinance the Senior Subordinated Notes, so long as such indebtedness has no scheduled amortization prior to the date that is one year after the final maturity of the Credit Facilities, and (iii) additional unsecured indebtedness not exceeding an amount to be determined, so long as (x) both before and after giving effect to the incurrence thereof, no default (including, on a pro forma basis, under the financial covenants) shall be in effect, (y) no subsidiary of any Borrower will be permitted to guarantee such indebtedness and (z) the covenants and default provisions applicable to such indebtedness shall be no more restrictive than those applicable to the Credit Facilities. (b) The Borrowers may issue subordinated notes to Paul G. Allen and his affiliates on terms customary for intercompany subordinated debt and satisfactory to the Administrative Agent (the "Affiliate Subordinated Debt"), and such Affiliate Subordinated Debt may be prepaid with Loans or indebtedness of the type described in clause (a) above. (c) The Borrowers and their respective subsidiaries may obtain letters of - -------------------------------------------------------------------------------- 7
15 credit outside of the Credit Facilities (secured by the same collateral that secures the Credit Facilities) in an aggregate face amount of up to $10,000,000. (d) So long as no default shall be in existence or would result therefrom, the Borrowers and their respective subsidiaries will be permitted to (i) consummate asset swaps ("Asset Swaps") for fair market value, so long as (x) the assets received are held by the Borrowers or any of their respective wholly owned subsidiaries, and (y) the properties to be swapped do not account for more than 25% of Operating Cash Flow for the preceding 12 months in any one instance or 35% of Operating Cash Flow during the term of the Credit Facilities, and (ii) consummate asset dispositions ("Asset Sales") not exceeding, in the aggregate, 25% of Operating Cash Flow for the preceding 12 months in any one instance or 35% of Operating Cash Flow during the term of the Credit Facilities. Asset Sales and Asset Swaps that are in excess of the respective thresholds require the prior written approval of Required Lenders (as defined below). Asset Sales in excess of $40 million and Asset Swaps of property generating cash flow in excess of 10% of Operating Cash Flow for the preceding 12 months require that the Borrowers submit evidence of pro forma covenant compliance for the contemplated transaction(s). In addition, dispositions of assets acquired after the Closing Date shall be permitted, and shall be disregarded for the purposes of the limitations set forth in the preceding sentences, so long as (i) a definitive agreement to consummate each such disposition is executed no later than twelve months after the relevant assets are acquired and (ii) each such disposition is consummated within eighteen months after the relevant assets are acquired. Excess cash received in any one swap or series of related swaps shall be counted against the limitation on Asset Sales and shall be subject to the same reinvestment provisions. Excess cash paid for any one swap or series of related swaps shall be counted against the limitation on Permitted Acquisitions described in clause (f) below. (e) Cable systems may be contributed to joint ventures constituting "non-recourse" subsidiaries so long as (i) such disposition is permitted pursuant to clause (d) above, (ii) both before and after giving effect thereto, no default (including, on a pro forma basis, under the financial covenants) shall be in effect, (iii) after giving effect thereto, the Leverage Ratio shall be equal to or lower than the Leverage Ratio in effect immediately prior thereto, (iv) no operating cash flow (except to the extent that dividends are received in cash) or indebtedness of such joint venture shall be included for the purposes of calculating Operating Cash Flow or indebtedness of the Borrowers and their respective subsidiaries and (v) the equity interest received in connection therewith shall be pledged as collateral. Non-recourse subsidiaries shall not be subject to the covenants contained in the Credit Documentation. (f) Up to $100,000,000 may be expended (with assumption of debt being included as an expenditure) in connection with acquisitions ("Permitted Acquisitions") of cable systems (including through purchases of 100% of the equity interests of any entity whose assets consist of cable systems), in each case subject to pro forma compliance with the financial covenants with pro forma covenant calculations provided for acquisitions in which the amount expended exceeds $40,000,000 (provided that such - -------------------------------------------------------------------------------- 8
16 - -------------------------------------------------------------------------------- $100,000,000 limit will not apply if either (i) both before and after giving effect to an acquisition, the Interest Coverage Ratio is greater than 2.10 to 1 or (ii) the relevant acquisition is financed with the proceeds of a capital contribution made directly or indirectly by Paul G. Allen). The Borrowers will be required to execute any documentation necessary or advisable to perfect the Lenders' security interest in any new collateral. (g) So long as no default shall be in existence or would result therefrom, the Borrowers may make distributions to any direct or indirect parent of the Borrowers (i) for the purpose of paying interest (including the Mandatory Payment of Accrued Interest) on any notes issued by such parent (to the extent required to be paid in cash), so long as, after giving effect to any such dividend, the Interest Coverage Ratio is greater than 2.10 to 1.0, (ii) for any purpose so long as, after giving effect to any such dividend, the Leverage Ratio is less than 3.50 to 1.0, (iii) for the purpose of making payments of principal and interest on Affiliate Subordinated Debt, (iv) for the purpose of paying management fees in accordance with the provisions outlined under clause (i) below, (v) for the purpose of paying interest on indebtedness of Holdings (x) incurred to refinance the Senior Discount Notes or (y) the proceeds of which are contributed to the Borrowers, and (vi) for the purpose of paying "pass-through" tax obligations of the holders of equity interests in the Borrowers and Holdings. (h) So long as no default shall be in existence or would result therefrom, the Borrowers may make and maintain (i) customary cash and cash equivalent investments, (ii) investments in existence on the Closing Date, and (iii) additional investments in an aggregate maximum amount to be determined. (i) So long as no default shall be in existence or would result therefrom, the Borrowers may pay, or make distributions to Holdings to pay, to certain affiliates in respect of any permitted investment made after the Closing Date up to 1.0% of the aggregate enterprise value of such permitted investment. (j) So long as no default shall be in existence or would result therefrom, up to 3.50% of annual gross operating revenues may be expensed by the Borrowers in respect of management fees, with up to 2.0% payable in cash with the remainder deferred. Amounts previously deferred may be paid when the Leverage Ratio is less than 4.5 to 1.0, subject to pro forma covenant compliance. The obligation of the Borrowers to pay such management fees shall be contractually subordinated to their obligation to repay the Loans. (k) Holdings shall be permitted to incur any indebtedness, so long as such indebtedness has no scheduled amortization prior to the date that is one year after the final maturity of the Credit Facilities and either (1) such indebtedness is incurred to refinance the Senior Discount Notes or (2) the proceeds of such indebtedness are contributed to the Borrowers. Events of Default: Nonpayment of principal when due; nonpayment of interest, fees or other amounts after a grace period to be agreed upon; material inaccuracy of representations and warranties; violation of covenants (subject, in the - -------------------------------------------------------------------------------- 9
17 case of certain affirmative covenants, to a grace period to be agreed upon); cross-default to indebtedness in an aggregate amount in excess of $20,000,000; bankruptcy events; certain ERISA events; termination or suspension of material licenses; material judgments; actual or asserted invalidity of any guarantee, security document or security interest; and a Change of Control. "Change of Control" shall be defined as (a) the failure of Paul G. Allen (including his estate, heirs and certain other related entities) to maintain a 25% economic interest in the Borrowers or to maintain voting control of the Borrowers, (b) the failure of any of the Borrowers to be an indirect subsidiary of Charter Communications Holding Company, LLC, (c) (i) the failure of any of the Borrowers to be a direct wholly owned subsidiary of (x) Holdings, (y) a wholly owned subsidiary of Holdings or (z) a wholly owned subsidiary of a successor Holdings or (ii) the failure of any such parent referred to in clause (i) above to execute and deliver a guaranty and equity pledge agreement securing the Credit Facilities within a time period to be agreed upon. Voting: Amendments and waivers with respect to the Credit Documentation shall require the approval of Lenders holding more than 50% (the "Required Lenders") of the aggregate amount of the Term B Loans, Revolving Commitments and the loans and unused commitments, if any, under the Incremental Facility (with each Lender and its related "approved funds," if any, voting as a single unit), except that (a) the consent of each Lender directly affected thereby shall be required with respect to (i) reductions in the amount or extensions of the scheduled date of amortization or maturity of any Loan, (ii) reductions in the rate of interest or any fee or extensions of any due date thereof and (iii) increases in the amount or extensions of the expiry date of any Lender's commitment and (b) the consent of 100% of the Lenders shall be required with respect to (i) modifications to any of the voting percentages and (ii) releases of material subsidiary Guarantors or all or substantially all of the collateral (other than pursuant to permitted asset dispositions). Assignments and Participations: The Lenders shall be permitted to assign and sell participations in their Loans and commitments, subject, in the case of assignments (other than to another Lender or to an affiliate of a Lender), to the consent of the Administrative Agent and the Borrowers (which consent in each case shall not be unreasonably withheld). Non-pro rata assignments shall be permitted. In the case of partial assignments (other than to another Lender or to an affiliate of a Lender), unless otherwise agreed by the Borrowers and the Administrative Agent, (i) the minimum assignment amount shall be $5,000,000 and (ii) the minimum amount retained by the assigning Lender shall be $3,000,000 (with the amounts described herein being aggregated in respect of each Lender and its related "approved funds," if any). Each assignment shall be subject to the payment of a $3,500 processing fee to the Administrative Agent. Participants shall have the same benefits as the Lenders with respect to yield protection and increased cost provisions. Voting rights of participants shall be limited to those matters set forth in clause (a) under the heading "Voting" above with respect to which the affirmative vote of the Lender from which it purchased its participation would be required. Pledges of Loans in accordance with applicable law shall be permitted without restriction. Yield Protection: The Credit Documentation shall contain customary provisions (a) - -------------------------------------------------------------------------------- 10
18 protecting the Lenders against increased costs or loss of yield resulting from changes in reserve, tax, capital adequacy and other requirements of law and from the imposition of or changes in withholding or other taxes and (b) indemnifying the Lenders for "breakage costs" incurred in connection with, among other things, any prepayment of a Eurodollar Loan on a day other than the last day of an interest period with respect thereto. Expenses and Indemnification: The Borrowers shall pay (a) all reasonable out-of-pocket expenses of the Administrative Agent and the Lead Arranger associated with the syndication of the Credit Facilities and the preparation, execution, delivery and administration of the Credit Documentation and any amendment or waiver with respect thereto (including the reasonable fees, disbursements and other charges of counsel to the Administrative Agent) and (b) all out-of-pocket expenses of the Administrative Agent and the Lenders (including the fees, disbursements and other charges of one firm of counsel to the Administrative Agent and one additional firm of counsel to the Lenders) in connection with the enforcement of the Credit Documentation. The Administrative Agent, the Lead Arranger and the Lenders (and their affiliates and their respective officers, directors, employees, advisors and agents) will have no liability for, and will be indemnified and held harmless against, any losses, claims, damages, liabilities or expenses incurred in respect of the financing contemplated hereby or the use or the proposed use of proceeds thereof, except to the extent they are found by a final, non-appealable judgment of a court to arise from the willful misconduct or gross negligence of the relevant indemnified person. Governing Law and Forum: State of New York. Counsel to the Administrative O'Melveny and Myers LLP. Agent and the Lead Arranger: - -------------------------------------------------------------------------------- 11
19 - -------------------------------------------------------------------------------- Annex I to Term Sheet --------------------- Interest and Certain Fees ------------------------- Interest Rate Options: The Borrowers may elect that the Loans comprising each borrowing bear interest at a rate per annum equal to the ABR plus the Applicable Margin or the Eurodollar Rate plus the Applicable Margin, provided, that all Swingline Loans shall bear interest based upon the ABR. As used herein: "ABR" means the higher of (i) the rate of interest publicly announced by the Administrative Agent as its prime rate in effect (the "Prime Rate") and (ii) the federal funds effective rate from time to time plus 0.5%. "Applicable Margin" means the rate determined pursuant to the pricing grid set forth below: - --------------------------------------------------------------------------------------------------------------- Applicable Margin for Applicable Applicable Applicable Eurodollar Margin for ABR Margin for Margin for ABR Leverage Ratio Loans Loans Eurodollar Loans (Term B (Revolving (Revolving Loans (Term B Loans) Loans) Loans) Loans) - --------------------------------------------------------------------------------------------------------------- Greater than or Equal to 6.00 to 1.00 1.875% 0.875% 2.750% 1.750% Greater than or Equal to 5.50 to 1.00 1.625% 0.625% 2.750% 1.750% Less than 6.00 to 1.00 Greater than or Equal to 5.00 to 1.00 1.500% 0.500% 2.750% 1.750% Less than 5.50 to 1.00 Greater than or Equal to 4.50 to 1.00 1.375% 0.375% 2.500% 1.500% Less than 5.00 to 1.00 Greater than or Equal to 4.00 to 1.00 1.250% 0.250% 2.500% 1.500% Less than 4.50 to 1.00 Less than 4.00 to 1.00 1.000% 0.000% 2.500% 1.500% - --------------------------------------------------------------------------------------------------------------- With respect to the pricing grid, (i) pricing corresponding to a Leverage Ratio of less than 6.00 to 1.0 will not be available until the date (the "Adjustment Date") on which financial statements have been delivered in respect of the fiscal quarter ending March 31, 2000 and (ii) while an event of default is in existence, pricing shall revert to the highest grid rates. "Eurodollar Rate" means the rate (adjusted for statutory reserve requirements for eurocurrency liabilities) for eurodollar deposits for a period equal to one, two, three or six months (or twelve months, with consent of all Lenders), as selected by the Borrowers, appearing on Page 3750 of the Dow Jones Markets screen. - -------------------------------------------------------------------------------- I-1
20 - -------------------------------------------------------------------------------- Interest Payment Dates: In the case of Loans bearing interest based upon the ABR ("ABR Loans"), quarterly in arrears. In the case of Loans bearing interest based upon the Eurodollar Rate ("Eurodollar Loans"), on the last day of each relevant interest period and, in the case of any interest period longer than three months, on each successive date three months after the first day of such interest period. Commitment Fees: The Borrowers shall pay a commitment fee calculated at the rate of 0.375% per annum on the average daily unused portion of the Revolving Facility, payable quarterly in arrears, provided that, from and after the Adjustment Date, such rate shall be reduced to 0.250% per annum at any time when the Leverage Ratio is less than 5.00 to 1.0 (so long as no event of default is in existence). Swingline Loans shall, for purposes of the commitment fee calculations only, not be deemed to be a utilization of the Revolving Facility. Default Rate: At any time when the Borrowers are in default in the payment of any amount of principal due under the Credit Facilities, all outstanding Loans shall bear interest at 2% above the rate otherwise applicable thereto. Overdue interest, fees and other amounts shall bear interest at 2% above the rate applicable to the relevant ABR Loans. Rate and Fee Basis: All per annum rates shall be calculated on the basis of a year of 360 days (or 365/366 days, in the case of ABR Loans the interest rate payable on which is then based on the Prime Rate) for actual days elapsed. - -------------------------------------------------------------------------------- I-2
21 - -------------------------------------------------------------------------------- Annex II To Term Sheet - ---------------------- Definitions ----------- Mandatory Payment of Prior to December 1, 2003, interest on the Accrued Interest: Senior Discount Notes will accrete at an annual rate of 11 7/8% per annum, compounded semi-annually, but will not be paid until December 1, 2003. On December 1, 2003, the "Issuers" (as defined in the Section Discount Notes) will be required to redeem an amount equal to $369.79 per $1,000 principal amount at maturity of each Senior Discount Note then outstanding ($72,479,000, the "Accreted Interest Redemption Amount"). The Accreted Interest Redemption Amount represents (i) the excess of the aggregate accreted principal amount of all Senior Discount Notes outstanding on December 1, 2003 over the aggregate issue price thereof less (ii) an amount equal to one year's simple uncompounded interest on the aggregate issue price of such Senior Discount Notes at a rate per annum equal to the stated interest rate on the Senior Discount Notes. Operating Cash Flow: Operating Cash Flow for any period shall mean pre-tax income (excluding any extraordinary gains and losses) plus (a) depreciation, amortization and other non-cash charges; (b) interest expense; and (c) management fees (whether or not they are paid); minus (d) other non-cash income. For purposes of calculating the Leverage Ratio and the Senior Leverage Ratio, Operating Cash Flow shall be adjusted for acquisitions and dispositions as if such acquisitions and/or dispositions had occurred on the first day of such period. Total Debt: Total Debt shall mean the sum of all indebtedness for borrowed money, guarantees and letters of credit to the extent that they support third-party indebtedness, seller paper and capitalized lease obligations of Borrowers and their subsidiaries. Total Debt does not include the Senior Discount Notes. - -------------------------------------------------------------------------------- II-1
1 Exhibit 21.1 Subsidiaries Charter Communications Holding Company, LLC Charter Communications Holdings, LLC Charter Communications Holdings Capital Corporation Charter Communications Operating, LLC Charter Communications Properties LLC Cencom Cable Entertainment, LLC Charter Communications Entertainment, LLC Charter Communications Entertainment II, LLC American Cable Entertainment Company, LLC Charter Communications Entertainment I, LLC Charter Advertising Saint Louis, L.L.C. Long Beach, LLC Charter Communications Services, LLC Charter Cable Operating Company, LLC Marcus Cable Partners, L.L.C. Marcus Cable, Inc. Marcus Cable Associates, L.L.C. Marcus Cable of Alabama, L.L.C. Marcus Fiberlink, L.L.C. Charter Communications, LLC Peachtree Cable TV, LLC Peachtree Cable TV, L.P. CF Finance LaGrange, Inc. Charter-LaGrange, L.L.C. Charter RMG, LLC Renaissance Media Group, LLC Renaissance Media Capital Corporation Renaissance Media (Tennessee), LLC Renaissance Media (Louisiana), LLC Renaissance Media, LLC Charter-Helicon, LLC Helicon Partners I, LP HPI Acquisitions Co., LLC Vista Broadband Communications, LLC Interlink Communications Partners, LLC Rifkin Acquisition Partners, L.L.C. Rifkin Acquisition Capital Corp. CCO Property, LLC CCO Purchasing, LLC Robin Media Group, Inc. The Helicon Group, L.P. Helicon Network Solutions, L.P. Helicon Online, L.P. Helicon Capital Corp. Cable Equities of Colorado Management Corp. Cable Equities Colorado L.L.C. Tennessee, LLC Charter Rascals, L.L.C. Charter Gateway, LLC
1 Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports covering the audited financial statements of Charter Communications, Inc., Charter Communications Holding Company, LLC, CCA Group, CharterComm Holdings, L.P., Long Beach Acquisition Corp., Sonic Communications Cable Television Systems, and Greater Media Cablevision Systems (and to all references to our Firm) included in or made a part of this registration statement. /s/ ARTHUR ANDERSEN LLP St. Louis, Missouri November 4, 1999
1 Exhibit 23.3 INDEPENDENT AUDITORS' CONSENT The Board of Directors Charter Communications, Inc.: We consent to the use of our report on the consolidated balance sheets of Marcus Cable Holdings, LLC and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, members' equity/partners' capital and cash flows for each of the years in the three-year period ended December 31, 1998 included herein and to the reference to our firm under the heading "Experts" in the registration statement, as amended (Amendment No. 5). /s/ KPMG LLP Dallas, Texas November 4, 1999
1 Exhibit 23.4 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 22, 1999 (except for Note 11, as to which the date is February 24, 1999), with respect to the consolidated financial statements of Renaissance Media Group LLC included in Amendment No. 5 to the Registration Statement on Form S-1 (No. 333-83887) and related Prospectus of Charter Communications, Inc. for the registration of shares of its Class A Common Stock. /s/ ERNST & YOUNG LLP New York, New York November 4, 1999
1 Exhibit 23.5 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 22, 1999, with respect to the combined financial statements of the Picayune MS, Lafourche LA, St. Tammany LA, St. Landry LA, Pointe Coupee LA and Jackson TN cable television systems included in Amendment No. 5 to the Registration Statement on Form S-1 (No. 333-83887) and related Prospectus of Charter Communications, Inc. for the registration of shares of its Class A Common Stock. /s/ ERNST & YOUNG LLP New York, New York November 4, 1999
1 Exhibit 23.6 INDEPENDENT AUDITORS' CONSENT The Board of Directors Charter Communications, Inc.: We consent to the inclusion in the registration statement on Form S-1, as amended (Amendment No. 5) of Charter Communications, Inc. of our report relating to the combined balance sheets of Helicon Partners I, L.P. and affiliates as of December 31, 1997 and 1998 and the related combined statements of operations, changes in partners' deficit, and cash flows for each of the years in the three-year period ended December 31, 1998 included herein and to the reference to our firm under the heading "Experts" in the registration statement. /s/ KPMG LLP New York, New York November 4, 1999
1 Exhibit 23.7 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of Charter Communications, Inc. of our report dated April 20, 1999, relating to the combined financial statements of InterMedia Cable Systems, which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" in such Registration Statement. /s/ PRICEWATERHOUSECOOPERS LLP San Francisco, California November 4, 1999
1 Exhibit 23.8 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1 of Charter Communications, Inc. of our reports dated March 19, 1999, relating to the financial statements of Rifkin Acquisition Partners, L.L.L.P., and Rifkin Cable Income Partners LP, which appear in such Registration Statement. We also consent to the references to us under the headings "Experts" in such Registration Statement. /s/ PRICEWATERHOUSECOOPERS LLP Denver, Colorado November 4, 1999
1 Exhibit 23.9 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to use of our reports dated February 19, 1999, with respect to the consolidated financial statements of R/N South Florida Cable Management Limited Partnership and Indiana Cable Associates, Ltd. included in Amendment No. 5 to the Registration Statement on Form S-1 and related Prospectus of Charter Communications, Inc. for the registration of Class A common stock. /s/ ERNST & YOUNG LLP Denver, Colorado November 4, 1999
1 Exhibit 23.10 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Amendment No. 5 to Form S-1 for Charter Communications, Inc. (i) of our report dated March 30, 1999, except as to the agreement with Charter Communications, Inc. under which Charter Communications, Inc. agreed to purchase Avalon Cable LLC's cable television systems and assume some of their debt described in Note 12 which is as of May 13, 1999, relating to the financial statements of Avalon Cable LLC as of December 31, 1998 and 1997 and for the year ended December 31, 1998 and for the period from September 4, 1997 (inception) through December 31, 1997; (ii) of our report dated March 30, 1999, except as to the agreement with Charter Communications, Inc. under which Charter Communications, Inc. agreed to purchase Avalon Cable LLC's cable television systems and assume some of their debt described in Note 13 which is as of May 13, 1999, relating to the financial statements of Avalon Cable of Michigan Holdings, Inc., as of December 31, 1998 and 1997 and for the year ended December 31, 1998 and for the period from September 4, 1997 (inception) through December 31, 1997; and (iii) of our report dated March 30, 1999 relating to the consolidated financial statements of Cable Michigan, Inc. and Subsidiaries as of December 31, 1997 and November 5, 1998 and for each of the two years in the period ended December 31, 1997 and for the period from January 1, 1998 through November 5, 1998 which appear in such Registration Statement. We also consent to the references to us under the headings "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP New York, New York November 4, 1999
1 Exhibit 23.11 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Amendment No. 5 to Form S-1 for Charter Communications, Inc. of our report dated September 11, 1998, relating to the financial statements of Amrac Clear View, a Limited Partnership, as of May 28, 1998 and for the period from January 1, 1998 through May 28, 1998 which appear in such Registration Statement. We also consent to the references to us under the headings "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts November 4, 1999
1 Exhibit 23.12 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Amendment No. 5 to Form S-1 for Charter Communications, Inc. of our report dated February 13, 1998, relating to the financial statements of Amrac Clear View, a Limited Partnership, as of December 31, 1997 and 1996 and for the three years in the period ended December 31, 1997 which appear in such Registration Statement. We also consent to the references to us under the headings "Experts" in such Registration Statement. /s/ Greenfield, Altman, Brown, Berger & Katz, P.C. Canton, Massachusetts November 4, 1999
1 Exhibit 23.13 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Amendment No. 5 to Form S-1 of Charter Communications, Inc. of our report dated March 30, 1999 relating to the combined financial statements of the Combined Operations of Pegasus Cable Television of Connecticut, Inc. and the Massachusetts Operations of Pegasus Cable Television, Inc. as of December 31, 1996, and 1997 and June 30, 1998 and for each of the three years in the period ended December 31, 1997 and the period from January 1, 1998 through June 30, 1998 which appear in such Registration Statement. We also consent to the references to us under the headings "Experts" in such Registration Statement. /s/ PricewaterhouseCoopers LLP Philadelphia, Pennsylvania November 4, 1999
1 Exhibit 23.14 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated March 5, 1999, with respect to the consolidated financial statements of Falcon Communications, L.P. included in Amendment No. 5 to the Registration Statement on Form S-1 and related Prospectus of Charter Communications, Inc. for the registration of its Class A common stock. /s/ ERNST & YOUNG LLP Los Angeles, California November 4, 1999
1 Exhibit 23.15 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Tele-Communications, Inc.: We consent to the inclusion in the registration statement on Form S-1, as amended (Amendment No. 5) of Charter Communications, Inc. of our report, dated June 21, 1999, relating to the combined balance sheets of the TCI Falcon Systems (as defined in Note 1 to the combined financial statements) as of September 30, 1998 and December 31, 1997, and the related combined statements of operations and parent's investment, and cash flows for the nine-month period ended September 30, 1998 and for each of the years in the two-year period ended December 31, 1997 included herein and to the reference to our firm under the heading "Experts" in the registration statement. /s/ KPMG LLP Denver, Colorado November 4, 1999
1 Exhibit 23.16 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Tele-Communications, Inc.: We consent to the inclusion in the registration statement on Form S-1, as amended (Amendment No. 5) of Charter Communications, Inc. of our report dated April 2, 1999, with respect to the combined balance sheets of Bresnan Communications Group Systems (as defined in Note 1 to the combined financial statements) as of December 31, 1997 and 1998, and the related combined statements of operations and parents' investment and cash flows for each of the years in the three-year period ended December 31, 1998 included herein and to the reference to our firm under the heading "Experts" in the registration statement. /s/ KPMG LLP Denver, Colorado November 4, 1999
1 Exhibit 23.17 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated March 11, 1999, except for Notes 1 and 8, as to which the dates are May 12, 1999 and June 22, 1999, respectively, with respect to the combined financial statements of Fanch Cable Systems (comprised of components of TWFanch-one Co. and TWFanch-two Co.) included in Amendment No. 5 to the Registration Statement on Form S-1 and related Prospectus of Charter Communications, Inc. for the registration of Class A common stock. /s/ ERNST & YOUNG LLP Denver, Colorado November 4, 1999
1 Exhibit 23.18 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated March 16, 1998, with respect to the combined financial statements of the Picayune MS, Lafourche LA, St. Tammany LA, St. Landry LA, Pointe Coupee LA and Jackson TN cable television systems included in Amendment No. 5 to the Registration Statement on Form S-1 (No. 333-83887) and related Prospectus of Charter Communications, Inc. for the registration of shares of its Class A Common Stock. /s/ ERNST & YOUNG LLP New York, New York November 4, 1999
1 Exhibit 99.3 November __, 1999 Charter Communications, Inc. 12444 Powerscourt Drive St. Louis, MO 63131 Ladies and Gentlemen: The undersigned hereby consents to being nominated and acting as a director of Charter Communications, Inc. (the "Company") and to being named as a director or director nominee in the Company's Registration Statement on Form S-1 (file no. 333-83887). /s/ Howard L. Wood -------------------------------- Name: Howard L. Wood