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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ______ to ______.
Commission File Numbers:
333-56679
333-56679-02
333-56679-01
333-56679-03
RENAISSANCE MEDIA GROUP LLC*
RENAISSANCE MEDIA (LOUISIANA) LLC*
RENAISSANCE MEDIA (TENNESSEE) LLC*
RENAISSANCE MEDIA CAPITAL CORPORATION*
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(Exact names of registrants as specified in their charters)
DELAWARE 14-1803051
DELAWARE 14-1801165
DELAWARE 14-1801164
DELAWARE 14-1803049
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12405 POWERSCOURT DRIVE
ST. LOUIS, MISSOURI 63131
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(Address of principal executive offices) (Zip Code)
(314) 965-0555
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(Registrants' telephone number, including area code)
Indicate by check mark whether the registrants: (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrants are accelerated filers (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuers' classes of
common stock, as of the latest practicable date:
All of the limited liability company membership interests of Renaissance
Media (Louisiana) LLC and Renaissance Media (Tennessee) LLC are held by
Renaissance Media Group LLC. All of the issued and outstanding shares of
capital stock of Renaissance Media Capital Corporation are held by
Renaissance Media Group LLC. All of the limited liability company
membership interests of Renaissance Media Group LLC are held by Charter
Communications, LLC (and indirectly by Charter Communications Holdings,
LLC, a reporting company under the Exchange Act). There is no public
trading market for any of the aforementioned limited liability company
membership interests or shares of capital stock.
* Renaissance Media Group LLC, Renaissance Media (Louisiana) LLC, Renaissance
Media (Tennessee) LLC and Renaissance Media Capital Corporation meet the
conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and
are therefore filing this Form with the reduced disclosure format.
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RENAISSANCE MEDIA GROUP LLC
RENAISSANCE MEDIA (LOUISIANA) LLC
RENAISSANCE MEDIA (TENNESSEE) LLC
RENAISSANCE MEDIA CAPITAL CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
PAGE
----
Part I. Financial Information
Item 1. Financial Statements - Renaissance Media Group LLC and Subsidiaries 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 25
Part II. Other Information
Item 1. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 28
Exhibit Index 29
NOTE: Separate financial statements of Renaissance Media Capital Corporation,
Renaissance Media (Louisiana) LLC and Renaissance Media (Tennessee) LLC have not
been presented pursuant to Rule 3-10(b) of Regulation S-X.
This Quarterly Report on Form 10-Q is for the three and nine months ended
September 30, 2003. This Quarterly Report modifies and supersedes documents
filed prior to this Quarterly Report. The SEC allows the Company to "incorporate
by reference" information that the Company files with it, which means that the
Company can disclose important information to you by referring you directly to
those documents. Information incorporated by reference is considered to be part
of this Quarterly Report. In addition, information that the Company files with
the SEC in the future will automatically update and supersede information
contained in this Quarterly Report. In this Quarterly Report, the "Company"
refers to Renaissance Media Group LLC and its wholly-owned finance subsidiaries,
Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee) LLC and
Renaissance Media Capital Corporation, unless the context requires otherwise.
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS:
This Quarterly Report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), regarding, among other things, our plans, strategies and
prospects, both business and financial including, without limitation, the
forward-looking statements set forth in the "Results of Operations" and
"Liquidity and Capital Resources" sections under Part I, Item 2 ("Management's
Discussion and Analysis of Financial Condition and Results of Operations") in
this Quarterly Report. 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 including, without limitation, the factors
described under "Certain Trends and Uncertainties" under Part I, Item 2
("Management's Discussion and Analysis of Financial Condition and Results of
Operations") in this Quarterly Report. Many of the forward-looking statements
contained in this Quarterly Report may be identified by the use of
forward-looking words such as "believe," "expect," "anticipate," "should,"
"planned," "will," "may," "intend," "estimated" and "potential," among others.
Important factors that could cause actual results to differ materially from the
forward-looking statements we make in this Quarterly Report are set forth in
this Quarterly Report and in other reports or documents that we file from time
to time with the United States Securities and Exchange Commission, or the "SEC",
and include, but are not limited to:
- our ability to sustain and grow revenues and cash flows from operating
activities by offering video and data services and to maintain a stable
customer base, particularly in the face of increasingly aggressive
competition from other service providers;
- our ability to comply with all covenants in our indenture, any
violation of which would result in a violation of the indenture and
could trigger a default of other obligations of our affiliates under
cross default provisions;
- availability of funds to meet interest payment obligations under our
debt and to fund our operations and necessary capital expenditures,
either through cash flows from operating activities, further borrowings
or other sources;
- any adverse consequences arising out of our prior restatement of the
financial statements described herein;
- the results of the pending grand jury investigation by the United
States Attorney's Office for the Eastern District of Missouri, the
pending SEC Division of Enforcement investigation and the putative
class action and derivative shareholders litigation against Charter
Communications, Inc., our indirect parent;
- our ability to obtain programming at reasonable prices or pass cost
increases on to our customers;
- general business conditions, economic uncertainty or slowdown; and
- the effects of governmental regulation, including but not limited to
local franchise taxing authorities, on our business.
All forward-looking statements attributable to us or a person acting on our
behalf are expressly qualified in their entirety by this cautionary statement.
We undertake no duty or obligation to update any of the forward-looking
statements after the date of this Quarterly Report.
3
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2003 2002
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(UNAUDITED)
ASSETS
CURRENT ASSETS:
Accounts receivable, less allowance for doubtful accounts of $149
and $278, respectively $ 1,495 $ 2,421
Prepaid expenses and other current assets 229 131
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Total current assets 1,724 2,552
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INVESTMENT IN CABLE PROPERTIES:
Property, plant and equipment, net of accumulated depreciation of
$79,816 and $57,141, respectively 158,894 175,397
Franchises, net of accumulated amortization of $74,821 and $74,797,
respectively 252,365 251,270
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Total investment in cable properties, net 411,259 426,667
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OTHER NONCURRENT ASSETS 4 60
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Total assets $ 412,987 $ 429,279
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LIABILITIES AND MEMBER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 22,644 $ 19,791
Payables to manager of cable systems - related parties 45,286 67,255
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Total current liabilities 67,930 87,046
LONG-TERM DEBT 116,327 113,492
MEMBER'S EQUITY 228,730 228,741
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Total liabilities and member's equity $ 412,987 $ 429,279
============= ============
See accompanying notes to the condensed consolidated financial statements.
4
RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ---------- ----------
(RESTATED) (RESTATED)
REVENUES $ 27,062 $ 26,065 $ 79,894 $ 74,522
----------- ----------- ---------- ----------
COSTS AND EXPENSES:
Operating (excluding depreciation and
amortization and other items listed below) 10,782 10,298 32,384 29,028
Selling, general and administrative 5,193 4,682 14,565 13,826
Depreciation and amortization 8,305 5,093 24,878 14,487
----------- ----------- ---------- ----------
24,280 20,073 71,827 57,341
----------- ----------- ---------- ----------
Income from operations 2,782 5,992 8,067 17,181
----------- ----------- ---------- ----------
OTHER EXPENSE:
Interest expense (2,756) (2,490) (8,078) (7,298)
Other, net -- (101) -- (178)
----------- ----------- ---------- ----------
(2,756) (2,591) (8,078) (7,476)
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Net income (loss) $ 26 $ 3,401 $ (11) $ 9,705
=========== =========== ========== ==========
See accompanying notes to the condensed consolidated financial statements.
5
RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2003 2002
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(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (11) $ 9,705
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation and amortization 24,878 14,487
Noncash interest expense 2,835 7,299
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable 926 220
Prepaid expenses and other assets (98) (207)
Accounts payable and accrued expenses 4,738 1,927
Payables to related party (22,826) (6,980)
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Net cash flows from operating activities 10,442 26,451
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (6,826) (24,219)
Change in accounts payable and accrued expenses related to capital expenditures (2,498) (2,232)
Other, net (1,118) --
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Net cash flows from investing activities (10,442) (26,451)
----------- -----------
NET CHANGE IN CASH -- --
CASH, beginning of period -- --
---------- -----------
CASH, end of period $ -- $ --
========== ===========
See accompanying notes to the condensed consolidated financial statements.
6
RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED)
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements of Renaissance
Media Group LLC (the "Company") include the accounts of the Company and its
wholly-owned finance subsidiaries, Renaissance Media (Louisiana) LLC
("Renaissance Louisiana"), Renaissance Media (Tennessee) LLC ("Renaissance
Tennessee") and Renaissance Media Capital Corporation ("Capital Corporation").
Renaissance Media LLC ("Media") is owned 76% and 24% by Renaissance Louisiana
and Renaissance Tennessee, respectively, and owns all of the operating assets of
the consolidated group.
The Company is an indirect wholly-owned subsidiary of Charter Communications
Operating, LLC ("Charter Operating") from which the Company receives funding as
needed. As of September 30, 2003, the Company owns and operates cable systems
serving approximately 146,100 customers. The Company owns and operates cable
systems that provide a full range of video, data and other advanced broadband
services. The Company also provides commercial high-speed data and video
services and sells advertising and production services. The Company operates
primarily in the states of Tennessee and Louisiana.
The accompanying condensed consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the rules and regulations of
the Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures typically included in the Company's Annual Report on Form
10-K have been condensed or omitted for this Quarterly Report. The accompanying
condensed consolidated financial statements are unaudited and are subject to
review by regulatory authorities. However, in the opinion of management, such
statements include all adjustments, which consist of only normal recurring
adjustments, necessary for a fair presentation of the results for the periods
presented. Interim results are not necessarily indicative of results for a full
year.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant judgments and estimates include capitalization of
labor and overhead costs, depreciation and amortization costs, impairments of
property, plant and equipment and franchises and other contingencies. Actual
results could differ from those estimates.
Reclassifications
Certain 2002 amounts have been reclassified to conform with the 2003
presentation.
2. LIQUIDITY AND CAPITAL RESOURCES
The Company has historically required significant cash to fund capital
expenditures, debt service costs and ongoing operations. The Company's long-term
financing structure as of September 30, 2003 includes $116 million of high-yield
debt. None of this financing matures during 2003. The Company's net cash flows
from operating activities were $10 million and $26 million for the nine months
ended September 30, 2003 and 2002, respectively. The Company's ongoing
operations will depend on its ability to generate cash or to receive
contributions from its parent companies and to secure financing in the future.
The Company has historically funded liquidity and capital requirements through
cash flows from operating activities and capital contributions from Charter
Communications, Inc. ("Charter"), Charter Communications Holdings, LLC ("Charter
Holdings") and Charter Operating. The Company expects to remain in compliance
with the covenants under its indenture, and that cash flow from operating
activities will be sufficient to satisfy its liquidity needs until maturity of
the public notes.
The Company expects that it will be reliant on capital contributions from its
parent companies to repay the principal amount of its public notes at maturity.
However, there can be no assurance that the Company's parent companies will have
sufficient liquidity to satisfy this payment when due. In addition, a default
under the covenants governing any of the Company's bond indentures could result
in the acceleration of the Company's payment obligations under its debt and,
under certain circumstances, in cross-defaults under its affiliates' debt
obligations, which could adversely affect its parent companies' ability to
provide the Company with funding.
7
RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED)
(UNAUDITED)
If the Company's business does not generate sufficient cash flows from operating
activities, and sufficient future contributions are not available to the Company
from other sources of financing, it may not be able to repay its debt, grow its
business, respond to competitive challenges, or to fund its other liquidity and
capital needs. As a means of enhancing the Company's liquidity, the Company is
currently attempting to cut costs and reduce capital expenditures.
3. RESTATEMENT OF CONSOLIDATED FINANCIAL RESULTS
As discussed in the Company's 2002 Form 10-K, the Company identified a series of
adjustments that have resulted in the restatement of previously announced
quarterly results for the first three quarters of fiscal 2002. In summary, the
adjustments are grouped into the following categories: (i) launch incentives
from programmers; (ii) customer incentives and inducements; (iii) capitalized
labor and overhead costs; (iv) customer acquisition costs; (v) rebuild and
upgrade of cable systems; and (vi) other adjustments. These adjustments have
been reflected in the accompanying condensed consolidated financial statements
and reduced revenues for the three and nine months ended September 30, 2002 by
$273 and $863, respectively. The Company's consolidated net loss decreased by $5
million and $15 million to a net income position for the three and nine months
ended September 30, 2002, respectively. In addition, as a result of certain of
these adjustments, the Company's statement of cash flows for the nine months
ended September 30, 2002 has been restated. Cash flows from operating activities
for the nine months ended September 30, 2002 decreased by $31. The more
significant categories of adjustments relate to the following as outlined below.
Launch Incentives from Programmers. Amounts previously recognized as advertising
revenue in connection with the launch of new programming channels have been
deferred and recorded in accounts payable and accrued expenses in the year such
launch support was provided, and amortized as a reduction of programming costs
based upon the relevant contract term. These adjustments decreased revenue by
$234 and $717 for the three and nine months ended September 30, 2002,
respectively. The corresponding amortization of such deferred amounts reduced
programming expenses by $290 and $895 for the three and nine months ended
September 30, 2002, respectively.
Customer Incentives and Inducements. Marketing inducements paid to encourage
potential customers to switch from satellite providers to Charter branded
services and enter into multi-period service agreements were previously deferred
and recorded as property, plant and equipment and recognized as depreciation and
amortization expense over the life of customer contracts. These amounts have
been restated as a reduction of revenues of $39 and $146 for the three and nine
months ended September 30, 2002, respectively. Substantially all of these
amounts are offset by reduced depreciation and amortization expense.
Capitalized Labor and Overhead Costs. Certain elements of labor costs and
related overhead allocations previously capitalized as property, plant and
equipment as part of the Company's rebuild activities, customer installations
and new service introductions have been expensed in the period incurred. Such
adjustments increased operating expenses by $561 and $727 for the three and nine
months ended September 30, 2002, respectively.
Customer Acquisition Costs. Certain customer acquisition campaigns were
conducted through third-party contractors in portions of 2002. The costs of
these campaigns were originally deferred and recorded as other assets and
recognized as amortization expense over the average customer contract life.
These amounts have been reported as marketing expense in the period incurred and
totaled $150 and $614 for the three and nine months ended September 30, 2002,
respectively. The Company discontinued this program in the third quarter of 2002
as contracts for third-party vendors expired. Substantially all of these amounts
are offset by reduced depreciation and amortization expense.
Rebuild and Upgrade of Cable Systems. In 2000, Charter initiated a three-year
program to replace and upgrade a substantial portion of its network, which
included a substantial portion of the Company's network. In connection with this
plan, the Company assessed the carrying value of, and the associated depreciable
lives of, various assets to be replaced. It was determined that a portion of
cable distribution system assets, originally treated as subject to replacement,
were not part of the original replacement plan but were to be upgraded and have
remained in service. The Company also determined that certain assets subject to
replacement during the upgrade program were misstated in the allocation of the
purchase price of the acquisition. This adjustment reduced property, plant and
equipment
8
RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED)
(UNAUDITED)
and increased franchise assets by $8 million. In addition, the depreciation
period for the assets subject to replacement was adjusted to more closely align
with the intended service period of these assets rather than the three-year
straight-line life originally assigned. As a result, adjustments were recorded
to reduce depreciation expense by $5 million and $16 million for the three and
nine months ended September 30, 2002, respectively.
Other Adjustments. In addition to the items described above, other adjustments
of expenses include certain tax reclassifications from tax expense to operating
costs and other miscellaneous adjustments. The net impact of these adjustments
to net income is an increase of $112 and $282 for the three and nine months
ended September 30, 2002, respectively.
The following tables summarize the effects of the adjustments on the condensed
consolidated statements of operations and cash flows for the three and nine
months ended September 30, 2002.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
------------------------- --------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED
------------- --------- --------------------------
Revenues $ 26,338 $ 26,065 $ 75,385 $ 74,522
Income from operations 930 5,992 1,843 17,181
Net income (loss) (1,656) 3,401 (5,622) 9,705
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30, 2002
-----------------------------
AS PREVIOUSLY
REPORTED RESTATED
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Net cash flows from operating activities $ 26,482 $ 26,451
Net cash flows from investing activities (26,482) (26,451)
4. FRANCHISES
On January 1, 2002, the Company adopted SFAS No. 142, which eliminates the
amortization of indefinite lived intangible assets. Accordingly, beginning
January 1, 2002, all franchises that qualify for indefinite life treatment under
SFAS No. 142 are no longer amortized against earnings but instead will be tested
for impairment annually, or more frequently as warranted by events or changes in
circumstances. During the first quarter of 2002, the Company had an independent
appraiser perform valuations of its franchises as of January 1, 2002. Based on
the guidance prescribed in Emerging Issues Task Force (EITF) Issue No. 02-7,
Unit of Accounting for Testing of Impairment of Indefinite-Lived Intangible
Assets, franchises were aggregated into essentially inseparable asset groups to
conduct the valuations. The asset groups generally represent geographic clusters
of the Company's cable systems, which management believes represents the highest
and best use of those assets. Fair value was determined based on estimated
discounted future cash flows using reasonable and appropriate assumptions that
are consistent with internal forecasts. The appraiser assessed that the fair
value of each of the Company's asset groups exceeded their carrying amount. As a
result, no impairment charge was recorded upon adoption.
In determining whether its franchises have an indefinite life, the Company
considered the exclusivity of the franchise, its expected costs of franchise
renewals, and the technological state of the associated cable systems with a
view to whether or not the Company is in compliance with any technology
upgrading requirements. Based on the Company's assessment, all franchises
qualified for indefinite-life treatment.
9
RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED)
(UNAUDITED)
Franchise amortization expense for the three and nine months ended September 30,
2003 was $14 and $24, respectively, and $0 for the three and nine months ended
September 30, 2002, which represents the amortization relating to franchise
renewals. Franchise renewals are amortized on a straight-line basis over 10
years. For each of the next five years, amortization expense relating to these
franchises is expected to be approximately $40. Actual amortization expense to
be reported in future periods could differ from these estimates as a result of
new intangible asset acquisitions, changes in useful lives and other relevant
factors.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following as of the dates
presented:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Deferred revenue $ 5,140 $ 6,163
Accrued interest 5,243 --
State sales tax 3,903 4,266
Other accounts payable and accrued expenses 8,358 9,362
------------ -----------
$ 22,644 $ 19,791
============ ===========
6. LONG-TERM DEBT
Long-term debt consists of the following as of the dates presented:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -----------
10% senior discount notes $ 114,413 $ 114,413
Unamortized net premium (discount) 1,914 (921)
----------- -----------
$ 116,327 $ 113,492
=========== ===========
In 1998, Renaissance Louisiana, Renaissance Tennessee and Capital Corporation
issued $163 million principal amount at maturity of 10.000% senior discount
notes due April 15, 2008 (the "Notes") for proceeds of $100 million.
Approximately $49 million of such notes were repurchased in May 1999. The Notes
began accruing cash interest on April 15, 2003. From and after April 15, 2003,
the Notes bear interest, payable semi-annually in cash, at a rate of 10% per
annum on April 15 and October 15 of each year, commencing October 15, 2003. The
Company has fully and unconditionally guaranteed the notes.
The fair market value of the Notes was $117 million and $93 million as of
September 30, 2003 and December 31, 2002, respectively. The fair market value of
the Notes is based on quoted market prices.
7. COMPREHENSIVE LOSS
Comprehensive loss is equal to net loss for the three and nine months ended
September 30, 2003 and 2002.
8. INCOME TAXES
The Company is a single member limited liability company not subject to income
tax. The Company holds all operations through indirect subsidiaries. The
majority of these indirect subsidiaries are limited liability companies that are
also not subject to income tax. A certain indirect subsidiary is a corporation
that is subject to income tax, but has no operations and has not generated any
taxable income since inception. Any taxable income that would be generated by
the Company would be the responsibility of the Company's equity owner. As such,
the Company has not provided for income taxes in the accompanying condensed
consolidated financial statements.
RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED)
(UNAUDITED)
9. CONTINGENCIES
Fourteen putative federal class action lawsuits (the "Federal Class Actions")
have been filed against Charter, the Company's manager and indirect parent, and
certain of Charter's former and present officers and directors in various
jurisdictions allegedly on behalf of all purchasers of Charter's securities
during the period from either November 8 or November 9, 1999 through July 17 or
July 18, 2002. Unspecified damages are sought by the plaintiffs. In general, the
lawsuits allege that Charter utilized misleading accounting practices and failed
to disclose these accounting practices and/or issued false and misleading
financial statements and press releases concerning Charter's operations and
prospects.
In October 2002, Charter filed a motion with the Judicial Panel on Multidistrict
Litigation (the "Panel") to transfer the Federal Class Actions to the Eastern
District of Missouri. On March 12, 2003, the Panel transferred the six Federal
Class Actions not filed in the Eastern District of Missouri to that district for
coordinated or consolidated pretrial proceedings with the eight Federal Class
Actions already pending there. The Panel's transfer order assigned the Federal
Class Actions to Judge Charles A. Shaw. By virtue of a prior court order,
StoneRidge Investment Partners LLC became lead plaintiff upon entry of the
Panel's transfer order. StoneRidge subsequently filed a Consolidated Amended
Complaint. The Court subsequently consolidated the Federal Class Actions for
pretrial purposes. On June 19, 2003, following a pretrial conference with the
parties, the Court issued a Case Management Order setting forth a schedule for
the pretrial phase of the consolidated class action. Motions to dismiss the
Consolidated Amended Complaint have been filed.
On September 12, 2002, a shareholders derivative suit (the "State Derivative
Action") was filed in Missouri state court against Charter and its then current
directors, as well as its former auditors. A substantively identical derivative
action was later filed and consolidated into the State Derivative Action. The
plaintiffs allege that the individual defendants breached their fiduciary duties
by failing to establish and maintain adequate internal controls and procedures.
Unspecified damages, allegedly on Charter's behalf, are sought by the
plaintiffs.
Separately, on February 12, 2003, a shareholders derivative suit (the "Federal
Derivative Action"), was filed against Charter and its then current directors in
the United States District Court for the Eastern District of Missouri. The
plaintiff alleges that the individual defendants breached their fiduciary duties
and grossly mismanaged Charter by failing to establish and maintain adequate
internal controls and procedures. Unspecified damages, allegedly on Charter's
behalf, are sought by the plaintiffs.
In addition to the Federal Class Actions, the State Derivative Action and the
Federal Derivative Action, six putative class action lawsuits have been filed
against Charter and certain of its then current directors and officers in the
Court of Chancery of the State of Delaware (the "Delaware Class Actions"). The
Delaware Class Actions are substantively identical and generally allege that the
defendants breached their fiduciary duties by participating or acquiescing in a
purported and threatened attempt by Defendant Paul Allen to purchase shares and
assets of Charter at an unfair price. The lawsuits were brought on behalf of
Charter's securities holders as of July 29, 2002, and seek unspecified damages
and possible injunctive relief. No such proposed transaction by Mr. Allen has
been presented.
The lawsuits discussed above are each in preliminary stages. No reserves have
been established for those matters because the Company believes they are either
not estimable or not probable. Charter has advised the Company that it intends
to vigorously defend the lawsuits.
In August 2002, Charter became aware of a grand jury investigation being
conducted by the United States Attorney's Office for the Eastern District of
Missouri into certain of its accounting and reporting practices, focusing on how
Charter reported customer numbers and its reporting of amounts received from
digital set-top terminal suppliers for advertising. The U.S. Attorney's Office
has publicly stated that Charter is not currently a target of the investigation.
Charter has also been advised by the U.S. Attorney's Office that no member of
its board of directors, including its Chief Executive Officer, is a target of
the investigation. On July 24, 2003, a federal grand jury charged four former
officers of Charter with conspiracy and mail and wire fraud, alleging improper
accounting and reporting practices focusing on revenue from digital set-top
terminal suppliers and inflated subscriber account numbers. On July 25, 2003,
one of the former officers who was indicted entered a guilty plea. Charter has
advised the Company that it is fully cooperating with the investigation.
11
RENAISSANCE MEDIA GROUP LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT WHERE INDICATED)
(UNAUDITED)
On November 4, 2002, Charter received an informal, non-public inquiry from the
Staff of the Securities and Exchange Commission (SEC). The SEC has subsequently
issued a formal order of investigation dated January 23, 2003, and subsequent
document and testimony subpoenas. The investigation and subpoenas generally
concern Charter's prior reports with respect to its determination of the number
of customers, and various of its other accounting policies and practices
including its capitalization of certain expenses and dealings with certain
vendors, including programmers and digital set-top terminal suppliers. Charter
has advised the Company that it is fully cooperating with the SEC Staff.
Charter has advised us that they are unable to predict the outcome of the
lawsuits and the government investigations described above. An unfavorable
outcome in the lawsuits or the government investigations described above could
have a material adverse effect on Charter's and the Company's results of
operations and financial condition.
Charter is generally required to indemnify each of the named individual
defendants in connection with these matters pursuant to the terms of its Bylaws
and (where applicable) such individual defendants' employment agreements.
Pursuant to the terms of certain employment agreements and in accordance with
the Bylaws of Charter, in connection with the pending grand jury investigation,
SEC investigation and the above described lawsuits, Charter's current directors
and its current and former officers have been advanced certain costs and
expenses incurred in connection with their defense.
In addition to the matters set forth above, Charter and the Company are also
party to other lawsuits and claims that arose in the ordinary course of
conducting its business. In the opinion of management, after taking into account
recorded liabilities, the outcome of these other lawsuits and claims will not
have a material adverse effect on the Company's consolidated financial position
or results of operations.
Charter has directors' and officers' liability insurance coverage that it
believes is available for these matters, where applicable, and subject to the
terms, conditions and limitations of the respective policies.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Reference is made to "Certain Trends and Uncertainties" of this section and
"Cautionary Statement Regarding Forward-Looking Statements," which describe
important factors that could cause actual results to differ from expectations
and non-historical information contained herein. In addition, this section
should be read in conjunction with the Annual Reports on Form 10-K of
Renaissance Media Group LLC and subsidiaries and Charter Communications
Holdings, LLC (Charter Holdings) for the year ended December 31, 2002.
All comparisons and references in this Form 10-Q to results for the nine months
ended September 30, 2002 are to the restated results. See "Restatement of
Consolidated Financial Results" below and Note 3 to our condensed consolidated
financial statements contained in "Item 1. Financial Statements" for a more
detailed discussion of the restatement.
"We," "us" and "our" refer to Renaissance Media Group LLC and its wholly-owned
finance subsidiaries, Renaissance Media (Louisiana) LLC, Renaissance Media
(Tennessee) LLC and Renaissance Media Capital Corporation.
INTRODUCTION
We have a history of net losses. Historically our net losses were principally
attributable to the substantial interest costs we incurred because of our high
level of debt, the significant depreciation expenses that we incurred resulting
from the extensive capital investments we had made in our cable properties and
the amortization of our franchise intangibles. We expect interest cost and
depreciation expenses will remain substantial. However, with the adoption of
Statement of Financial Accounting Standards No. 142, we no longer are required
to amortize indefinite-lived assets (franchises) but rather test for impairment
on an annual basis.
The first cash interest payment on our public notes was due in October 2003. We
are now required to pay interest in cash each April and October. In addition,
our outstanding public notes will mature in 2008. We expect that we will be
reliant on loans and capital contributions from our parent companies to repay
our public notes at maturity. However, there can be no assurances that our
parent companies will have sufficient liquidity to provide funds to us to
satisfy this payment when due.
RESTATEMENT OF CONSOLIDATED FINANCIAL RESULTS
As discussed in our 2002 Form 10-K, we identified a series of adjustments that
have resulted in the restatement of previously announced quarterly results for
the first three quarters of fiscal 2002. In summary, the adjustments are grouped
into the following categories: (i) launch incentives from programmers; (ii)
customer incentives and inducements; (iii) capitalized labor and overhead costs;
(iv) customer acquisition costs; (v) rebuild and upgrade of cable systems; and
(vi) other adjustments. These adjustments have been reflected in the
accompanying condensed consolidated financial statements and reduced revenues
for the three and nine months ended September 30, 2002 by $273 and $863,
respectively. Our consolidated net loss decreased by $5 million and $15 million
to a net income position for the three and nine months ended September 30, 2002,
respectively. In addition, as a result of certain of these adjustments, our
statement of cash flows for the nine months ended September 30, 2002 has been
restated. Cash flows from operating activities for the nine months ended
September 30, 2002 decreased by $31. The more significant categories of
adjustments relate to the following as outlined below (dollars in thousands,
except where indicated).
Launch Incentives from Programmers. Amounts previously recognized as advertising
revenue in connection with the launch of new programming channels have been
deferred and recorded in accounts payable and accrued expenses in the year such
launch support was provided, and amortized as a reduction of programming costs
based upon the relevant contract term. These adjustments decreased revenue by
$234 and $717 for the three and nine months ended September 30, 2002,
respectively. The corresponding amortization of such deferred amounts reduced
programming expenses by $290 and $895 for the three and nine months ended
September 30, 2002, respectively.
Customer Incentives and Inducements. Marketing inducements paid to encourage
potential customers to switch from satellite providers to Charter branded
services and enter into multi-period service agreements were previously deferred
and recorded as property, plant and equipment and recognized as depreciation and
amortization expense over the life of customer contracts. These amounts have
been restated as a reduction of revenues of $39 and $146
13
for the three and nine months ended September 30, 2002, respectively.
Substantially all of these amounts are offset by reduced depreciation and
amortization expense.
Capitalized Labor and Overhead Costs. Certain elements of labor costs and
related overhead allocations previously capitalized as property, plant and
equipment as part of our rebuild activities, customer installations and new
service introductions have been expensed in the period incurred. Such
adjustments increased operating expenses by $561 and $727 for the three and nine
months ended September 30, 2002, respectively.
Customer Acquisition Costs. Certain customer acquisition campaigns were
conducted through third-party contractors in portions of 2002. The costs of
these campaigns were originally deferred and recorded as other assets and
recognized as amortization expense over the average customer contract life.
These amounts have been reported as marketing expense in the period incurred and
totaled $150 and $614 for the three and nine months ended September 30, 2002,
respectively. We discontinued this program in the third quarter of 2002 as
contracts for third-party vendors expired. Substantially all of these amounts
are offset by reduced depreciation and amortization expense.
Rebuild and Upgrade of Cable Systems. In 2000, Charter Communications Inc.
(Charter) initiated a three-year program to replace and upgrade a substantial
portion of its network, which included a portion of our network. In connection
with this plan, we assessed the carrying value of, and the associated
depreciable lives of, various assets to be replaced. It was determined that a
portion of cable distribution system assets, originally treated as subject to
replacement, were not part of the original replacement plan but were to be
upgraded and have remained in service. We also determined that certain assets
subject to replacement during the upgrade program were misstated in the
allocation of the purchase price of the acquisition. This adjustment reduced
property, plant and equipment and increased franchise assets by $8 million. In
addition, the depreciation period for the assets subject to replacement was
adjusted to more closely align with the intended service period of these assets
rather than the three-year straight-line life originally assigned. As a result,
adjustments were recorded to reduce depreciation expense by $5 million and $16
million for the three and nine months ended September 30, 2002, respectively.
Other Adjustments. In addition to the items described above, other adjustments
of expenses include certain tax reclassifications from tax expense to operating
costs and other miscellaneous adjustments. The net impact of these adjustments
to net income is an increase of $112 and $282 for the three and nine months
ended September 30, 2002, respectively.
The following tables summarize the effects of the adjustments on the condensed
consolidated statements of operations and cash flows for the three and nine
months ended September 30, 2002 (dollars in thousands).
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
-------------------------- --------------------------
AS PREVIOUSLY AS PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED
-------------------------- ------------- ----------
Revenues $ 26,338 $ 26,065 $ 75,385 $ 74,522
Income from operations 930 5,992 1,843 17,181
Net income (loss) (1,656) 3,401 (5,622) 9,705
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30, 2002
---------------------------
AS PREVIOUSLY
REPORTED RESTATED
--------------- ---------
Net cash flows from operating activities $ 26,482 $ 26,451
Net cash flows from investing activities (26,482) (26,451)
14
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We disclosed our critical accounting policies and the means by which we develop
estimates therefor in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our 2002 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
The following table summarizes amounts and the percentages of total revenues for
certain items for the periods indicated (dollars in thousands):
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
2003 2002
------------------ -------------------
(RESTATED)
Revenues $ 79,894 100% $ 74,522 100%
---------- --- ---------- ---
Costs and expenses:
Operating (excluding depreciation and amortization and
other items listed below) 32,384 41% 29,028 39%
Selling, general and administrative 14,565 18% 13,826 19%
Depreciation and amortization 24,878 31% 14,487 19%
---------- ---- ---------- ---
71,827 90% 57,341 77%
---------- ---- ---------- ---
Income from operations 8,067 10% 17,181 23%
---------- ----------
Other expense:
Interest expense (8,078) (7,298)
Other expenses -- (178)
---------- ----------
(8,078) (7,476)
---------- ----------
Net income (loss) $ (11) $ 9,705
========== ==========
REVENUES. Revenues increased $5.4 million, or 7%, to $79.9 million for the nine
months ended September 30, 2003 from $74.5 million for the nine months ended
September 30, 2002. This increase is principally the result of increases in the
number of high-speed data and digital video customers as well as price increases
for video and data services, and is offset somewhat by the decline in analog
video customers. At September 30, 2003, we have 2,200 analog video customers,
2,000 digital video customers and 2,000 high-speed data customers that were
obtained through promotional programs and are in their free service period.
These free service periods generally expire in November 2003. We believe this
strategy will reposition our services to these consumers and build a foundation
for expected increases in revenues in the future. We have instituted specific
retention programs in the fourth quarter for customers added from these
promotional offers which include offering additional incremental services such
as video-on-demand, subscription video-on-demand and increased speed and
broadband content for our high-speed data platform. Our goal is to increase
revenues by reversing our analog video customer losses, implementing limited
price increases on certain services and packages and increasing revenues from
incremental high-speed data services, digital video and commercial services to
new and existing customers.
15
In the third quarter of 2003, we changed our revenue classifications. Commercial
revenue, which was included within the video, high-speed data, and other revenue
line items on our statements of operations, is now broken out as a separate
component of revenue. Revenues by service offering are as follows (dollars in
thousands):
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
2003 2002 2003 OVER 2002
------------------------- ------------------------- -------------------------
% OF % OF %
AMOUNT REVENUES AMOUNT REVENUES CHANGE CHANGE
---------- ---------- ---------- ---------- ---------- ----------
Video $ 61,437 77% $ 59,083 79% $ 2,354 4%
High-speed data 7,106 9% 3,785 5% 3,321 88%
Advertising sales 3,751 5% 4,373 6% (622) (14)%
Commercial 1,733 2% 1,343 2% 390 29%
Other 5,867 7% 5,938 8% (71) 1%
---------- --- ---------- --- ----------
$ 79,894 100% $ 74,522 100% $ 5,372 7%
========== === ========== === ==========
Video revenues consist primarily of revenues from analog and digital video
services. Video revenues increased by $2.4 million, or 4%, to $61.4 million for
the nine months ended September 30, 2003 as compared to $59.1 million for the
nine months ended September 30, 2002. The increase was primarily due to rate
increases and the addition of digital video customers, offset somewhat by the
decline in analog video customers.
High-speed data revenues increased $3.3 million, or 88%, from $3.8 million for
the nine months ended September 30, 2002 to $7.1 million for the nine months
ended September 30, 2003. The increase was primarily due to the addition of
high-speed data customers. We increased the number of our high-speed data
customers within our existing service areas and were able to offer this service
to more of our customers, as the estimated percentage of homes passed that could
receive high-speed data service increased as a result of our system upgrades.
Advertising sales revenues consist primarily of revenues from commercial
advertising customers, programmers and other vendors. Advertising sales
decreased $622, or 14%, for the nine months ended September 30, 2003 compared to
the nine months ended September 30, 2002. For the nine months ended September
30, 2003 and 2002, we received $198 and $1.0 million, respectively, in
advertising revenue from vendors.
Commercial revenues consist primarily of revenues from commercial analog,
digital and high-speed data services. Commercial revenues increased $390, or
29%, from $1.3 million for the nine months ended September 2002 to $1.7 million
for the nine months ended September 30, 2003 primarily due to an increase in
commercial high-speed data revenues.
Other revenues consist primarily of revenues from franchise fees, late payment
fees, customer installations, wire maintenance fees, home shopping, equipment
rental, dial-up Internet service and other miscellaneous revenues. Other
revenues decreased $71, or 1%, for the nine months ended September 30, 2002 as
compared to the nine months ended September 30, 2003. The decrease was primarily
due to a decrease in franchise fees due to a Federal Communications Commission
ruling in March 2002, no longer requiring the collection of franchise fees for
high-speed data services.
16
OPERATING EXPENSES. Operating expenses increased by $3.4 million, or 12%, from
$29.0 million for the nine months ended September 30, 2002 to $32.4 million for
the nine months ended September 30, 2003. Total programming costs paid to
programmers were $20.5 million and $19.0 million, representing 29% and 33% of
total costs and expenses for the nine months ended September 30, 2003 and 2002,
respectively. Key expense components as a percentage of revenues are as follows
(dollars in thousands):
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
2003 2002 2003 OVER 2002
------------------------- ------------------------- -------------------------
% OF % OF %
AMOUNT REVENUES AMOUNT REVENUES CHANGE CHANGE
---------- ---------- ---------- ---------- ---------- ----------
Programming costs $ 20,510 26% $ 18,985 26% $ 1,525 8%
Advertising sales 1,746 2% 1,690 2% 56 3%
Service costs 10,128 13% 8,353 11% 1,775 21%
---------- -- ---------- -- ----------
$ 32,384 41% $ 29,028 39% $ 3,356 12%
========== == ========== == ==========
Programming costs consist primarily of costs paid to programmers for the
provision of analog, premium and digital channels and pay-per-view programs. The
increase in programming costs of $1.5 million, or 8%, was primarily due to price
increases, particularly in sports programming, and an increased number of
channels carried on our systems and an increase in digital video customers,
partially offset by decreases in analog video customers. Programming costs were
offset by the amortization of payments received from programmers in support of
launches of new channels against programming costs of $1.4 million and $1.3
million for the nine months ended September 30, 2003 and 2002, respectively.
Our cable programming costs have increased, in every year we have operated, in
excess of customary inflationary and cost-of-living type increases, and they are
expected to continue to increase due to a variety of factors, including
additional programming being provided to customers as a result of system
rebuilds that increase channel capacity, increased costs to produce or purchase
cable programming, increased costs from certain previously discounted
programming, and inflationary or negotiated annual increases. Our increasing
programming costs will result in declining video product margins to the extent
we are unable to pass on cost increases to our customers. We expect to partially
offset any resulting margin compression from our traditional core services with
revenue from other video services, increased incremental high-speed data
revenues, advertising revenues and commercial services revenue.
Advertising sales expenses consist of costs related to traditional advertising
services, including salaries and benefits and commissions. Advertising sales
expenses increased $56 due to an increase in sales commissions. Service costs
consist primarily of service personnel salaries and benefits, franchise fees,
system utilities, Internet service provider fees, maintenance and pole rent
expense. The increase in service costs of $1.8 million, or 21%, resulted
primarily from additional activity associated with on-going infrastructure
maintenance.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $739 from $13.8 million for the nine months
ended September 30, 2002 to $14.6 million for the nine months ended September
30, 2003. Key components of expense as a percentage of revenues are as follows
(dollars in thousands):
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
2003 2002 2003 OVER 2002
------------------------- ------------------------- -------------------------
% OF % OF %
AMOUNT REVENUES AMOUNT REVENUES CHANGE CHANGE
---------- ---------- ---------- ---------- ---------- ----------
General and
administrative $ 13,518 17% $ 11,667 16% $ 1,851 16%
Marketing 1,047 1% 2,159 3% (1,112) (52)%
---------- -- ---------- -- ----------
$ 14,565 18% $ 13,826 19% $ 739 5%
========== == ========== == ==========
General and administrative expenses consist primarily of salaries and benefits,
rent expense, billing costs, bad debt expense and property taxes. The increase
in general and administrative expenses of $1.9 million, or 16%, resulted
primarily from increases in customer service costs and network related expenses.
These increases were partially
17
offset by a decrease in bad debt expense of $1.2 million as we continue to
realize benefits from our strengthened credit policies.
Marketing expenses decreased $1.1 million, or 52%, due to reduced promotional
activity related to our service offerings including reductions in advertising,
telemarketing and direct sales activities. However, we expect marketing expenses
to increase in subsequent quarters.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense
increased by $10.4 million, or 72%, from $14.5 million for the nine months ended
September 30, 2002 to $24.9 million for the nine months ended September 30,
2003. This increase was due primarily to an increase in depreciation expense
related to additional capital expenditures in 2003 and 2002.
INTEREST EXPENSE, NET. Interest expense increased $780, or 11%, to $8.1 million
for the nine months ended September 30, 2003 from $7.3 million for the nine
months ended September 30, 2002. This increase is a result of the accretion and
cash interest associated with our senior discount notes.
NET INCOME (LOSS). Net income decreased $9.7 million to a loss of $11 for the
nine months ended September 30, 2003 from income of $9.7 million for the nine
months ended September 30, 2002 as a result of the combination of the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
INTRODUCTION
This section contains a discussion of our liquidity and capital resources,
including a discussion of our cash position, sources and uses of cash, access to
debt facilities and other financing sources, historical financing activities,
cash needs, capital expenditures and outstanding debt. The first part of this
section, entitled "Overview" summarizes our outstanding debt and provides an
overview of these topics. The second part of this section, entitled "Historical
Operating, Financing and Investing Activities" provides information regarding
the cash provided from or used in our operating, financing and investing
activities during the nine months ended September 30, 2003 and 2002. The third
part of this section, entitled "Capital Expenditures" provides more detailed
information regarding our historical capital expenditures and our planned
capital expenditures going forward.
OVERVIEW
Our business requires significant cash to fund capital expenditures, debt
service costs and ongoing operations. We have historically funded our operating
activities through cash flows from operating activities. We have funded capital
requirements through cash flows from operating activities and capital
contributions from our parent companies. The mix of funding sources changes from
period to period, but for the nine months ended September 30, 2003, 100% of our
funding requirements were from cash flows from operating activities.
Accordingly, during 2003, we expect to fund our liquidity and capital
requirements principally through cash flows from operating activities.
The principal amount of our senior notes was $114 million as of September 30,
2003. The senior notes began accruing cash interest on April 15, 2003. From and
after April 15, 2003, the senior notes bear interest, payable semi-annually in
cash, at a rate of 10% per annum on April 15 and October 15 of each year, with
interest payments commencing October 15, 2003. We have fully and unconditionally
guaranteed the senior notes.
The fair market value of the senior notes was $117 million and $93 million as of
September 30, 2003 and December 31, 2002, respectively. The fair market value of
the senior notes is based on quoted market prices.
See the Section entitled "Liquidity and Capital Resources" of "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our 2002 Annual Report on Form 10-K for a description of our
senior notes indenture, including certain terms, restrictions and covenants.
We expect to remain in compliance with the covenants under our indenture, and
that cash flows from operating activities will be sufficient to satisfy our
liquidity needs until maturity of the public notes. We expect that we will be
reliant on loans and capital contributions from our parent companies to repay
the principal amount of our public notes at maturity.
18
However, there can be no assurance that our parent companies will have
sufficient liquidity to provide funds to us to satisfy this payment when due. In
addition, a default under the covenants governing our bond indenture could
result in the acceleration of our payment obligations under our debt and, under
certain circumstances, in cross-defaults under our affiliates' debt obligations,
which could adversely affect our parent companies' ability to provide us with
funding.
It is unclear whether we will have access to sufficient capital to repay our
public notes when they mature in 2008. Cash flows from operating activities may
not be sufficient, on their own, to permit us to satisfy these obligations.
Traditionally, we have relied on our affiliates' ability to access the public
debt and equity markets as a source of capital. Charter and Charter Holding's
outstanding debt, liquidity and corporate credit ratings have been downgraded by
Moody's Investors Service Inc. and Standard and Poor's Rating Services. As a
result of our parent companies' significant levels of debt, current market
conditions and these downgrades, we expect to fund our cash needs during 2003
from cash flows from operating activities.
Increased funding requirements from customer demand for digital video or
high-speed data services, or the need to offer certain services in certain of
our markets in order to compete effectively could make us reliant on our parent
companies' ability to make loans and capital contributions to us. Consequently,
our financial condition and results of operations could suffer materially.
If, at any time, additional capital or borrowing capacity is required beyond
amounts internally generated or available through traditional debt financings by
us, we would consider:
- further reducing our expenses and capital expenditures, which would
likely impair our ability to increase revenue;
- selling assets; or
- seeking funding from our parent companies through the issuance of debt
or equity by our parent companies, including Charter, Charter Holdings,
CCH II, LLC (CCH II), CCO Holdings, LLC or Charter Communications
Operating, LLC (Charter Operating), the proceeds of which could be
contributed to us.
If the above strategies were not successful, ultimately, we could be forced to
restructure our obligations or seek protection under the bankruptcy laws. In
addition, if we need to raise additional capital or find it necessary to engage
in a recapitalization or other similar transaction, our noteholders might not
receive all principal and interest payments to which they are contractually
entitled.
Although in the past, Mr. Allen and his affiliates have purchased equity from
Charter and Charter Communications Holding Company, LLC (Charter Holdco) for the
purpose of funding capital contributions to us, there is no obligation for Mr.
Allen or his affiliates to purchase equity from or contribute or loan funds to
us or to our subsidiaries in the future.
As a means of enhancing our liquidity, we are currently attempting to cut costs,
reduce capital expenditures and exploring sales of assets.
HISTORICAL OPERATING, FINANCING AND INVESTING ACTIVITIES
We did not hold any cash and cash equivalents as of September 30, 2003 and
December 31, 2002.
OPERATING ACTIVITIES. Net cash provided by operating activities for the nine
months ended September 30, 2003 and 2002 was $10 million and $26 million,
respectively. Operating activities provided $16 million less cash during the
nine months ended September 30, 2003 compared to the corresponding period in
2002 primarily due to the $16 million reduction in the payable to related party
during the nine months ended September 30, 2003 compared to the corresponding
period in 2002.
INVESTING ACTIVITIES. Net cash used in investing activities for the nine months
ended September 30, 2003 and 2002 was $10 million and $26 million, respectively.
Investing activities used $16 million less cash during the nine months ended
September 30, 2003 compared to the corresponding period in 2002 primarily as a
result of reductions in capital expenditures.
19
CAPITAL EXPENDITURES
We have substantial ongoing capital expenditure requirements. We made purchases
of property, plant and equipment of $7 million and $24 million for the nine
months ended September 30, 2003 and 2002, respectively. The majority of the
capital expenditures relates to our customer premise equipment and rebuild and
upgrade program. Upgrading our cable systems has enabled us to offer digital
television, high-speed data services, video-on-demand, interactive services,
additional channels and tiers, and expanded pay-per-view options to a larger
customer base. Our capital expenditures in 2003 were funded from cash flows from
operating activities. In addition, during the nine months ended September 30,
2003 and 2002, our liabilities related to capital expenditures decreased by
$266.
During 2003, we expect to spend approximately $10 million to $20 million in the
aggregate on capital expenditures. We expect our capital expenditures in 2003
will be lower than 2002 levels because our rebuild and upgrade activities are
largely completed, as a greater portion of our workforce is focused on
maintenance and period related activities, our purchases of digital set-top
terminals have declined and the value of installation related activities has
declined.
CERTAIN TRENDS AND UNCERTAINTIES
The following discussion highlights a number of trends and uncertainties, in
addition to those discussed elsewhere in this Quarterly Report and in the
Critical Accounting Policies and Estimates section of Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in our
2002 Annual Report on Form 10-K, that could materially impact our business,
results of operations and financial condition.
LIQUIDITY. Our business requires significant cash to fund capital expenditures,
debt service costs and ongoing operations. Our funding of ongoing operations
will depend on our ability to generate cash and to secure financing in the
future. We have historically funded liquidity and capital requirements through
cash flows from operating activities and capital contributions from our indirect
parent companies. We believe, however, that at this time our indirect parent
companies have limited access to the debt and equity markets in light of their
significant levels of debt, current market conditions and downgrades to their
debt securities.
As the principal amounts come due in 2008, it is unclear whether we will have
access to sufficient capital to satisfy these principal repayment obligations.
Cash flows from operating activities and other existing sources of funds may not
be sufficient, on their own, to permit us to satisfy these obligations.
If our business does not generate sufficient cash flows from operating
activities, and sufficient future contributions are not available to us from
other sources of financing, we may not be able to repay our debt, grow our
business, respond to competitive challenges, or to fund our other liquidity and
capital needs. As a means of enhancing our liquidity, we are currently
attempting to cut costs, reduce capital expenditures and exploring sales of
assets.
If we need to seek alternative sources of financing, there can be no assurance
that we will be able to obtain the requisite financing or that such financing,
if available, would not have terms that are materially disadvantageous to our
existing debt holders. Although Mr. Allen and his affiliates have purchased
equity from Charter and Charter Holdco in the past, there is no obligation for
Mr. Allen or his affiliates to purchase equity or contribute or lend funds to us
or to our subsidiaries in the future.
If we or our parent companies are unable to raise needed capital, ultimately, we
could be forced to restructure our obligations or seek protection under the
bankruptcy laws. In addition, if we find it necessary to engage in a
recapitalization or other similar transaction, our noteholders might not receive
all principal and interest payments to which they are contractually entitled.
RESTRICTIVE COVENANTS. The indenture governing our publicly held notes contains
a number of significant covenants that could adversely impact our business. In
particular, our indenture restricts our and our subsidiaries' ability to:
- incur additional debt;
- pay dividends on equity or repurchase equity;
- grant liens;
- make investments;
- sell all or substantially all of our assets or merge with or into other
companies;
20
- sell assets;
- enter into sale-leasebacks;
- in the case of restricted subsidiaries, create or permit to exist
dividend or payment restrictions with respect to the bond issuers,
guarantee the bond issuers' debt, or issue specified equity interests;
and
- engage in certain transactions with affiliates.
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
indenture governing our publicly held notes that could result in acceleration of
our publicly held notes and could in certain cases, result in cross-defaults
under our affiliates' debt obligations. Any default under our indenture might
adversely affect our growth, our financial condition and our results of
operations and our ability to make payments on our publicly held notes.
PARENT LEVEL LIQUIDITY CONCERNS. Our indirect parent companies have a
substantial amount of debt. Any financial or liquidity problems of our indirect
parent companies would likely cause serious disruption to our business and have
a material adverse effect on our operations and results. Any such event would
likely adversely impact our credit rating, and our relations with customers and
suppliers, which could in turn further impair our ability to obtain financing
and operate our business. Further, to the extent that any such event results in
a change of control of Charter (whether through a bankruptcy, receivership or
other reorganization of Charter and/or Charter Holdco, or otherwise), it could
require a change of control repurchase offer under our outstanding notes.
SECURITIES LITIGATION AND GOVERNMENT INVESTIGATIONS. A number of Federal Class
Actions were filed against Charter and certain of its former and present
officers and directors alleging violations of securities law. The Federal Class
Actions have been consolidated for pretrial purposes into a Consolidated Federal
Class Action. In addition, a number of other lawsuits have been filed against
Charter in other jurisdictions. A shareholders derivative suit was filed in the
United States District Court for the Eastern District of Missouri, and several
class action lawsuits were filed in Delaware state court against Charter and
certain of its then current directors and officers. Finally, two derivative
suits were filed in Missouri state court against Charter, its then current
directors and its former independent auditor; these actions were consolidated
during the fourth quarter of 2002. The federal derivative suit, the Delaware
class actions and the consolidated derivative suit each allege that the
defendants breached their fiduciary duties.
In August 2002, Charter became aware of a grand jury investigation being
conducted by the United States Attorney's Office for the Eastern District of
Missouri into certain of its accounting and reporting practices focusing on how
it reported customer numbers and Charter's reporting of amounts received from
digital set-top terminal suppliers for advertising. The U.S. Attorney's Office
has publicly stated that Charter is not currently a target of the investigation.
Charter has also been advised by the U.S. Attorney's Office that no member of
its board of directors, including its Chief Executive Officer, is a target of
the investigation. On July 24, 2003, a federal grand jury charged four former
officers of Charter with conspiracy and mail and wire fraud, alleging improper
accounting and reporting practices focusing on revenue from digital set-top
terminal suppliers and inflated subscriber account numbers. On July 25, 2003,
one of the former officers who was indicted entered a guilty plea. Charter has
advised us that it is fully cooperating with the investigation.
In November 2002, Charter received an informal, non-public inquiry from the
Staff of the Securities and Exchange Commission (SEC). The SEC has subsequently
issued a formal order of investigation dated January 23, 2003, and subsequent
document and testimony subpoenas. The investigation and subpoenas generally
concern Charter's prior reports with respect to the determination of the number
of its customers, and various of its other accounting policies and practices,
including its capitalization of certain expenses and dealings with certain
vendors, including programmers and digital set-top terminal suppliers. Charter
has advised us that it is fully cooperating with the SEC staff.
Due to the inherent uncertainties of litigation and investigations, Charter has
advised us that it cannot predict the ultimate outcome of these proceedings. In
addition, its restatement may lead to additional allegations in the pending
securities class and
21
derivative actions against Charter, or to additional claims being filed or to
investigations being expanded or commenced. These proceedings, and Charter's
actions in response to these proceedings, could result in substantial costs,
substantial potential liabilities and the diversion of management's attention,
all of which could affect adversely the market price of our publicly-traded
notes, as well as our ability to meet future operating and financial estimates
and to execute our business and financial strategies. To the extent that the
foregoing matters are not covered by insurance, our limited liability company
agreement and those of our limited liability company subsidiaries, and the
bylaws of our corporate subsidiary, may require each entity to indemnify Charter
and the above directors and current and former officers in connection with such
matters.
COMPETITION. 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-established relationships with regulatory authorities and customers.
Increasing consolidation in the cable industry and the repeal of certain
ownership rules may provide additional benefits to certain of our competitors,
either through access to financing, resources or efficiencies of scale.
Our principal competitor for video services throughout our territory is direct
broadcast satellite television services, also known as DBS. Competition from
DBS, including intensive marketing efforts and aggressive pricing, has had an
adverse impact on our ability to retain customers. Local telephone companies and
electric utilities can compete in this area, and they increasingly may do so in
the future. The subscription television industry also faces competition from
free broadcast television and from other communications and entertainment media.
With respect to our Internet access services, we face competition, including
intensive marketing efforts and aggressive pricing, from telephone companies and
other providers of "dial-up" and digital subscriber line technology, also known
as DSL. Further loss of customers to DBS or other alternative video and data
services could have a material negative impact on our business.
Mergers, joint ventures and alliances among franchise, wireless or private cable
operators, satellite television providers, local exchange carriers and others,
and the repeal of certain ownership rules may provide additional benefits to
some of our competitors, either through access to financing, resources or
efficiencies of scale, or the ability to provide multiple services in direct
competition with us.
STREAMLINING OF OPERATIONS. In the past, Charter (our manager) experienced rapid
growth from acquisitions of a number of smaller cable operators and the rapid
rebuild and rollout of advanced services. Our future success will depend in part
on our ability to standardize and streamline our operations. The failure to
implement a consistent corporate culture and management, operating or financial
systems or procedures necessary to standardize and streamline our operations and
effectively operate our enterprise could have a material adverse effect on our
business, results of operations and financial condition. In addition, our
ability to properly manage our operations will be impacted by our ability to
attract, retain and incentivize experienced, qualified, professional management.
SERVICES. We expect that a substantial portion of our near term growth will be
achieved through revenues from high-speed data services, digital video, bundled
service packages, and to a lesser extent various commercial services that take
advantage of cable's broadband capacity. The technology involved in our product
and service offerings generally requires that we have permission to use
intellectual property and that such property not infringe on rights claimed by
others. We may not be able to offer these advanced services successfully to our
customers or provide adequate customer service and these advanced services may
not generate adequate revenues. Also, if the vendors we use for these services
are not financially viable over time, we may experience disruption of service
and incur costs to find alternative vendors. In addition, if it is determined
that the product being utilized infringes on the rights of others, we may be
sued or be precluded from using the technology.
INCREASING PROGRAMMING COSTS. Programming has been, and is expected to continue
to be, our largest operating 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.
PUBLIC NOTES PRICE VOLATILITY. The market price of our publicly-traded notes has
been and is likely to continue to be highly volatile. We expect that the price
of our securities may fluctuate in response to various factors, including the
factors described throughout this section and various other factors which may be
beyond our control. These factors beyond our control could include: financial
forecasts by securities analysts; new conditions or trends in the cable or
telecommunications industry; general economic and market conditions and
specifically, conditions related to the
22
cable or telecommunications industry; any further downgrade of our or our
affiliates' debt ratings; announcement of the development of improved or
competitive technologies; the use of new products or promotions by us or our
competitors; changes in accounting rules; and new regulatory legislation adopted
in the United States.
In addition, the securities market in general, and the market for cable
television securities in particular, have experienced significant price
fluctuations. Volatility in the market price for companies may often be
unrelated or disproportionate to the operating performance of those companies.
These broad market and industry factors may seriously harm the market price of
our public notes, regardless of our operating performance. In the past,
securities litigation has often commenced following periods of volatility in the
market price of a company's securities, and recently such purported class action
lawsuits were filed against Charter.
ECONOMIC SLOWDOWN; GLOBAL CONFLICT. It is difficult to assess the impact that
the general economic slowdown and global conflict will have on future
operations. However, the economic slowdown has resulted and could continue to
result in reduced spending by customers and advertisers, which could reduce our
revenues, and also could affect our ability to collect accounts receivable and
maintain customers. In addition, any prolonged military conflict would
materially and adversely affect our revenues from our systems providing services
to military installations. If we experience reduced operating revenues, it could
negatively affect our ability to make expected capital expenditures and could
also result in our inability to meet our obligations under our financing
agreements. These developments could also have a negative impact on our
financing and variable interest rate agreements through disruptions in the
market or negative market conditions.
LONG-TERM INDEBTEDNESS - CHANGE OF CONTROL PAYMENTS. We may not have the ability
to obtain the funds necessary to fulfill our obligations under our public notes
following a change of control. A change of control under our public notes would
require us to make an offer to repurchase our outstanding public notes. A
failure by us to make or complete a change of control offer would place us in
default of this agreement.
REGULATION AND LEGISLATION. Cable systems are extensively regulated at the
federal, state, and local level, including rate regulation of basic service and
equipment and municipal approval of franchise agreements and their terms, such
as franchise requirements to upgrade cable plant and meet specified customer
service standards. Cable operators also face significant regulation of their
channel carriage. 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
programming, and unaffiliated commercial leased access programming. 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 multiple channels added by
digital broadcasters. The Federal Communications Commission is currently
conducting a proceeding in which it is considering this channel usage
possibility, although it recently issued a tentative decision against such dual
carriage. In addition, the carriage of new high-definition broadcast and
satellite programming services over the next few years may consume significant
amounts of system capacity without contributing to proportionate increases in
system revenue.
There is also uncertainty whether local franchising authorities, state
regulators, the Federal Communications Commission, or the U.S. Congress will
impose obligations on cable operators to provide unaffiliated Internet service
providers with regulated access to cable plant. 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 open access obligations could adversely impact our
profitability and discourage system upgrades and the introduction of new
products and services. The United States Court of Appeals for the Ninth Circuit
recently vacated in part a Federal Communications Commission ruling defining
cable modem service as an "information service" and remanded for further
proceedings. The Ninth Circuit held that cable modem service is not "cable
service" but is part "telecommunications service" and part "information
service." The decision will likely be appealed, but it may possibly lead to
cable operators having to contribute to the federal government's universal
service fund, to open access requirements, and to other common carrier
regulations. As we offer other advanced services over our cable system, we are
likely to face additional calls for regulation of our capacity and operation.
These regulations, if adopted, could adversely affect our operations.
A recent court decision concerning the Digital Millenium Copyright Act ("DMCA")
has enabled copyright owners to obtain expedited subpoenas compelling disclosure
by Internet service providers of the names of customers that are otherwise known
only by an Internet protocol, or IP, address or screen name. This has led to a
marked increase in the volume of subpoenas received by us, as copyright owners
seek to constrain the use of peer-to-peer networks for unauthorized copying and
distribution of copyrighted works. Internet service providers also have a DMCA
23
obligation to adopt and implement a policy of terminating the accounts of repeat
copyright infringers. The increased activity and responsibilities in this area
pose an additional burden on our operations.
CONTINGENCIES
SECURITIES CLASS ACTIONS AND DERIVATIVE SUITS AGAINST CHARTER. Fourteen putative
federal class action lawsuits (the "Federal Class Actions") have been filed
against Charter, our manager and indirect parent, and certain of its former and
present officers and directors in various jurisdictions allegedly on behalf of
all purchasers of Charter's securities during the period from either November 8
or November 9, 1999 through July 17 or July 18, 2002. Unspecified damages are
sought by the plaintiffs. In general, the lawsuits allege that Charter utilized
misleading accounting practices and failed to disclose these accounting
practices and/or issued false and misleading financial statements and press
releases concerning Charter's operations and prospects. The Federal Class
Actions were specifically and individually identified in prior public filings
made by Charter. In October 2002, Charter filed a motion with the Judicial Panel
on Multidistrict Litigation (the "Panel") to transfer the Federal Class Actions
to the Eastern District of Missouri. On March 12, 2003, the Panel transferred
the six Federal Class Actions not filed in the Eastern District of Missouri to
that district for coordinated or consolidated pretrial proceedings with the
eight Federal Class Actions already pending there. The Panel's transfer order
assigned the Federal Class Actions to Judge Charles A. Shaw. By virtue of a
prior court order, StoneRidge Investment Partners LLC became lead plaintiff upon
entry of the Panel's transfer order. StoneRidge subsequently filed a
Consolidated Amended Complaint. The Court subsequently consolidated the Federal
Class Actions for pretrial purposes. On June 19, 2003, following a pretrial
conference with the parties, the Court issued a Case Management Order setting
forth a schedule for the pretrial phase of the consolidated class action.
Motions to dismiss the Consolidated Amended Complaint have been filed.
On September 12, 2002, a shareholders derivative suit (the "State Derivative
Action") was filed in Missouri state court against Charter and its then current
directors, as well as its former auditors. A substantively identical derivative
action was later filed and consolidated into the State Derivative Action. The
plaintiffs allege that the individual defendants breached their fiduciary duties
by failing to establish and maintain adequate internal controls and procedures.
Unspecified damages, allegedly on Charter's behalf, are sought by the
plaintiffs.
Separately, on February 12, 2003, a shareholders derivative suit (the "Federal
Derivative Action"), was filed against Charter and its then current directors in
the United States District Court for the Eastern District of Missouri. The
plaintiff alleges that the individual defendants breached their fiduciary duties
and grossly mismanaged Charter by failing to establish and maintain adequate
internal controls and procedures. Unspecified damages, allegedly on Charter's
behalf, are sought by the plaintiffs.
In addition to the Federal Class Actions, the State Derivative Action and the
Federal Derivative Action, six putative class action lawsuits have been filed
against Charter and certain of its then current directors and officers in the
Court of Chancery of the State of Delaware (the "Delaware Class Actions"). The
Delaware Class Actions are substantively identical and generally allege that the
defendants breached their fiduciary duties by participating or acquiescing in a
purported and threatened attempt by Defendant Paul Allen to purchase shares and
assets of Charter at an unfair price. The lawsuits were brought on behalf of
Charter's securities holders as of July 29, 2002, and seek unspecified damages
and possible injunctive relief. No such proposed transaction by Mr. Allen has
been presented.
The lawsuits discussed above are each in preliminary stages. No reserves have
been established for those matters because the Company believes they are either
not estimable or not probable. Charter has advised us that it intends to
vigorously defend the lawsuits.
GOVERNMENT INVESTIGATIONS. In August 2002, Charter became aware of a grand jury
investigation being conducted by the United States Attorney's Office for the
Eastern District of Missouri into certain of its accounting and reporting
practices, focusing on how Charter reported customer numbers and its reporting
of amounts received from digital set-top terminal suppliers for advertising. The
U.S. Attorney's Office has publicly stated that Charter is not currently a
target of the investigation. Charter has also been advised by the U.S.
Attorney's Office that no member of its board of directors, including its Chief
Executive Officer, is a target of the investigation. On July 24, 2003, a federal
grand jury charged four former officers of Charter with conspiracy and mail and
wire fraud, alleging improper accounting and reporting practices focusing on
revenue from digital set-top terminal suppliers and inflated subscriber account
numbers. On July 25, 2003, one of the former officers who was indicted entered a
guilty plea. Charter has advised us that it is fully cooperating with the
investigation.
24
On November 4, 2002, Charter received an informal, non-public inquiry from the
Staff of the Securities and Exchange Commission (SEC). The SEC has subsequently
issued a formal order of investigation dated January 23, 2003, and subsequent
document and testimony subpoenas. The investigation and subpoenas generally
concern Charter's prior reports with respect to its determination of the number
of customers, and various of its other accounting policies and practices
including its capitalization of certain expenses and dealings with certain
vendors, including programmers and digital set-top terminal suppliers. Charter
has advised us that it is fully cooperating with the SEC Staff.
OUTCOME. Charter has advised us that it is unable to predict the outcome of the
lawsuits and the government investigations described above. An unfavorable
outcome in the lawsuits or the government investigations described above could
have a material adverse effect on Charter's and our results of operations and
financial condition.
INDEMNIFICATION. Charter is generally required to indemnify each of the named
individual defendants in connection with these matters pursuant to the terms of
its Bylaws and (where applicable) such individual defendants' employment
agreements. Pursuant to the terms of certain employment agreements and in
accordance with the Bylaws of Charter, in connection with the pending grand jury
investigation, SEC investigation and the above described lawsuits, Charter's
current directors and its current and former officers have been advanced certain
costs and expenses incurred in connection with their defense. Certain of the
individual defendants also serve or have served as our officers and directors.
The limited liability company agreements of the Company and its limited
liability company subsidiaries, and the bylaws of its corporate subsidiary,
may require each such entity to indemnify Charter and the individual named
defendants in connection with the matters set forth above.
INSURANCE. Charter has directors' and officers' liability insurance coverage
that it believes is available for these matters, where applicable, and subject
to the terms, conditions and limitations of the respective policies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, management, including our
Chief Executive Officer and interim Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures with respect to the information generated for use in this Quarterly
Report. The evaluation was based in part upon reports and affidavits provided by
a number of executives. Based upon, and as of the date of that evaluation, our
Chief Executive Officer and interim Chief Financial Officer concluded that the
disclosure controls and procedures were effective to provide reasonable
assurances that information required to be disclosed in the reports we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Commission's
rules and forms.
There was no change in our internal control over financial reporting during the
quarter ended September 30, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
In designing and evaluating the disclosure controls and procedures, our
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance of
achieving the desired control objectives and management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Based upon the above evaluation, our management
believes that our controls do provide such reasonable assurances.
25
PART II. OTHER INFORMATION.
ITEM 1. LEGAL PROCEEDINGS.
In addition to those matters disclosed under the heading "Contingencies" of Part
I, Item 2 "Management's Discussion and Analysis of Financial Condition and
Results of Operations", we are involved from time to time in routine legal
matters and other claims incidental to our business. We believe that the
resolution of such routine matters and other incidental claims, taking into
account established reserves and insurance, will not have a material adverse
impact on our consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 23, 2003, at the annual meeting of Renaissance Media Capital
Corporation, the sole shareholder voted 100 shares (100% of outstanding shares)
in favor of electing Carl E. Vogel as the sole director.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibit
Number Description of Document
- ------- -----------------------
3.1 Certificate of Incorporation of Renaissance Media Capital
Corporation and all amendments thereto. (Incorporated by
reference to the corresponding exhibit of the Registration
Statement of Renaissance Media Group LLC, Renaissance Media
(Louisiana) LLC, Renaissance Media (Tennessee) LLC and
Renaissance Media Capital Corporation on Form S-4 (Commission
File Nos. 333-56679, 333-56679-02, 333-56679-01 and
333-56679-03, respectively), filed on June 12, 1998)).
3.2 By-laws of Renaissance Media Capital Corporation. (Incorporated
by reference to the corresponding exhibit of the Registration
Statement of Renaissance Media Group LLC, Renaissance Media
(Louisiana) LLC, Renaissance Media (Tennessee) LLC and
Renaissance Media Capital Corporation on Form S-4 (Commission
File Nos. 333-56679, 333-56679-02, 333-56679-01 and
333-56679-03, respectively), filed on June 12, 1998)).
3.3 Certificate of Formation of Renaissance Media (Louisiana) LLC.
(Incorporated by reference to the corresponding exhibit of the
Registration Statement of Renaissance Media Group LLC,
Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee)
LLC and Renaissance Media Capital Corporation on Form S-4
(Commission File Nos. 333-56679, 333-56679-02, 333-56679-01 and
333-56679-03, respectively), filed on June 12, 1998)).
3.4 Certificate of Formation of Renaissance Media, LLC.
(Incorporated by reference to the corresponding exhibit of the
Annual Report on Form 10-K of Renaissance Media Group LLC,
Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee)
and Renaissance Media Capital Corporation, filed March 30, 2000
(Commission File Nos. 333-56679, 333-56679-02, 333-56679-01 and
333-56679-03, respectively)).
3.5 Certificate of Formation of Renaissance Media (Tennessee) LLC.
(Incorporated by reference to the corresponding exhibit of the
Registration Statement of Renaissance Media Group LLC,
Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee)
LLC and Renaissance Media Capital Corporation on Form S-4
(Commission File Nos. 333-56679, 333-56679-02, 333-56679-01 and
333-56679-03, respectively), filed on June 12, 1998)).
3.7 Certificate of Formation of Renaissance Media Group LLC.
(Incorporated by reference to the corresponding exhibit of the
Registration Statement of Renaissance Media Group LLC,
Renaissance Media (Louisiana) LLC, Renaissance Media (Tennessee)
LLC and Renaissance Media Capital Corporation on Form S-4
(Commission File Nos. 333-56679, 333-56679-02, 333-56679-01 and
333-56679-03, respectively), filed on June 12, 1998)).
3.9 Amended and Restated Limited Liability Agreement of Renaissance
Media Group LLC, dated June 19, 2003.*
3.10 Amended and Restated Limited Liability Agreement of Renaissance
Media (Louisiana) LLC, dated April 29, 1999. (Incorporated by
reference to the corresponding exhibit of the Quarterly Report
on Form 10-Q of Renaissance Media Group LLC, Renaissance Media
(Louisiana) LLC, Renaissance Media (Tennessee) LLC and
Renaissance Media Capital Corporation for the quarter ended June
30,
26
1999, filed on May 17, 1999 (Commission File Nos. 333-56679,
333-56679-02, 333-56679-01 and 333-56679-03, respectively)).
3.11 Amended and Restated Limited Liability Agreement of Renaissance
Media (Tennessee) LLC, dated April 29, 1999. (Incorporated by
reference to the corresponding exhibit of the Quarterly Report
on Form 10-Q of Renaissance Media Group LLC, Renaissance Media
(Louisiana) LLC, Renaissance Media (Tennessee) LLC and
Renaissance Media Capital Corporation for the quarter ended June
30, 1999, filed on May 17, 1999 (Commission File Nos. 333-56679,
333-56679-02, 333-56679-01 and 333-56679-03, respectively)).
3.12 Amended and Restated Limited Liability Agreement of Renaissance
Media LLC, dated April 29, 1999. (Incorporated by reference to
the corresponding exhibit of the Quarterly Report on Form 10-Q
of Renaissance Media Group LLC, Renaissance Media (Louisiana)
LLC, Renaissance Media (Tennessee) LLC and Renaissance Media
Capital Corporation for the quarter ended June 30, 1999, filed
on May 17, 1999 (Commission File Nos. 333-56679, 333-56679-02,
333-56679-01 and 333-56679-03, respectively)).
31.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of
1934. *
31.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of
1934. *
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer). *
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer). *
* filed herewith
(b) REPORTS ON FORM 8-K
None.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrants have duly caused this Quarterly Report to be signed on their
behalf by the undersigned, thereunto duly authorized.
RENAISSANCE MEDIA GROUP LLC
RENAISSANCE MEDIA (LOUISIANA) LLC
RENAISSANCE MEDIA (TENNESSEE) LLC
Dated: November 12, 2003 By: CHARTER COMMUNICATIONS, INC.,
-----------------------------
Registrants' Manager
By: /s/ Steven A. Schumm
--------------------
Name: Steven A. Schumm
Title: Executive Vice President and
Chief Administrative Officer and
interim Chief Financial Officer
(Principal Financial Officer) of
Charter Communications, Inc.
(Manager);
Renaissance Media Group LLC,
Renaissance Media (Louisiana) LLC; and
Renaissance Media (Tennessee) LLC
By: /s/ Paul E. Martin
-------------------
Name: Paul E. Martin
Title: Senior Vice President and
Corporate Controller (Principal
Accounting Officer) of Charter
Communications, Inc. (Manager);
Renaissance Media Group LLC;
Renaissance Media (Louisiana) LLC; and
Renaissance Media (Tennessee) LLC
Dated: November 12, 2003 RENAISSANCE MEDIA CAPITAL CORPORATION
By: /s/ Steven A. Schumm
-------------------
Name: Steven A. Schumm
Title: Executive Vice President and
Chief Administrative Officer and
interim Chief Financial Officer
(Principal Financial Officer)
By: /s/ Paul E. Martin
-------------------
Name: Paul E. Martin
Title: Senior Vice President and Corporate
Controller
(Principal Accounting Officer)
28
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------- -----------------------
3.1 Certificate of Incorporation of Renaissance Media Capital
Corporation and all amendments thereto. (Incorporated by
reference to the corresponding exhibit of the Registration
Statement of Renaissance Media Group LLC, Renaissance Media
(Louisiana) LLC, Renaissance Media (Tennessee) LLC and
Renaissance Media Capital Corporation on Form S-4 (Commission
File Nos. 333-56679, 333-56679-02, 333-56679-01 and
333-56679-03, respectively), filed on June 12, 1998)).
3.2 By-laws of Renaissance Media Capital Corporation. (Incorporated
by reference to the corresponding exhibit of the Registration
Statement of Renaissance Media Group LLC, Renaissance Media
(Louisiana) LLC, Renaissance Media (Tennessee) LLC and
Renaissance Media Capital Corporation on Form S-4 (Commission
File Nos. 333-56679, 333-56679-02, 333-56679-01 and
333-56679-03, respectively), filed on June 12, 1998)).
3.3 Certificate of Formation of Renaissance Media (Louisiana) LLC.
(Incorporated by reference to the corresponding exhibit of the
Registration Statement of Renaissance Media Group LLC,
Renaissance Media (Louisiana) LLC, Renaissance Media
(Tennessee) LLC and Renaissance Media Capital Corporation on
Form S-4 (Commission File Nos. 333-56679, 333-56679-02,
333-56679-01 and 333-56679-03, respectively), filed on June 12,
1998)).
3.4 Certificate of Formation of Renaissance Media, LLC.
(Incorporated by reference to the corresponding exhibit of the
Annual Report on Form 10-K of Renaissance Media Group LLC,
Renaissance Media (Louisiana) LLC, Renaissance Media
(Tennessee) and Renaissance Media Capital Corporation, filed
March 30, 2000 (Commission File Nos. 333-56679, 333-56679-02,
333-56679-01 and 333-56679-03, respectively)).
3.5 Certificate of Formation of Renaissance Media (Tennessee) LLC.
(Incorporated by reference to the corresponding exhibit of the
Registration Statement of Renaissance Media Group LLC,
Renaissance Media (Louisiana) LLC, Renaissance Media
(Tennessee) LLC and Renaissance Media Capital Corporation on
Form S-4 (Commission File Nos. 333-56679, 333-56679-02,
333-56679-01 and 333-56679-03, respectively), filed on June 12,
1998)).
3.7 Certificate of Formation of Renaissance Media Group LLC.
(Incorporated by reference to the corresponding exhibit of the
Registration Statement of Renaissance Media Group LLC,
Renaissance Media (Louisiana) LLC, Renaissance Media
(Tennessee) LLC and Renaissance Media Capital Corporation on
Form S-4 (Commission File Nos. 333-56679, 333-56679-02,
333-56679-01 and 333-56679-03, respectively), filed on June 12,
1998)).
3.9 Amended and Restated Limited Liability Agreement of Renaissance
Media Group LLC, dated June 19, 2003. *
3.10 Amended and Restated Limited Liability Agreement of Renaissance
Media (Louisiana) LLC, dated April 29, 1999. (Incorporated by
reference to the corresponding exhibit of the Quarterly Report
on Form 10-Q of Renaissance Media Group LLC, Renaissance Media
(Louisiana) LLC, Renaissance Media (Tennessee) LLC and
Renaissance Media Capital Corporation for the quarter ended
June 30, 1999, filed on May 17, 1999 (Commission File Nos.
333-56679, 333-56679-02, 333-56679-01 and 333-56679-03,
respectively)).
3.11 Amended and Restated Limited Liability Agreement of Renaissance
Media (Tennessee) LLC, dated April 29, 1999. (Incorporated by
reference to the corresponding exhibit of the Quarterly Report
on Form 10-Q of Renaissance Media Group LLC, Renaissance Media
(Louisiana) LLC, Renaissance Media (Tennessee) LLC and
Renaissance Media Capital Corporation for the quarter ended
June 30, 1999, filed on May 17, 1999 (Commission File Nos.
333-56679, 333-56679-02, 333-56679-01 and 333-56679-03,
respectively)).
3.12 Amended and Restated Limited Liability Agreement of Renaissance
Media LLC, dated April 29, 1999. (Incorporated by reference to
the corresponding exhibit of the Quarterly Report on Form 10-Q
of Renaissance Media Group LLC, Renaissance Media (Louisiana)
LLC, Renaissance Media (Tennessee) LLC and Renaissance Media
Capital Corporation for the quarter ended June 30, 1999, filed
on May 17, 1999 (Commission File Nos. 333-56679, 333-56679-02,
333-56679-01 and 333-56679-03, respectively)).
31.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of
1934. *
31.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) under the
29
Securities Exchange Act of 1934. *
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer). *
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer). *
* filed herewith
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