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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
Commission File Numbers: 333-57285-01
333-57285
333-57285
Mediacom LLC
Mediacom Capital Corporation*
Mediacom Capital Corporation*
(Exact names of Registrants as specified in their charters)
| New York | 06-1433421 | |
| New York | 06-1513997 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification Numbers) |
100 Crystal Run Road
Middletown, New York 10941
Middletown, New York 10941
(Address of principal executive offices)
(845) 695-2600
(Registrants’ telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Indicate by check mark if the Registrants are well-known seasoned issuers, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the Registrants are not required to file pursuant to Section 13 or
Section 15(d) of the Exchange Act. Yes þ No o
Indicate by check mark whether the Registrants (1) have filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act 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 o No þ
Note: As a voluntary filer, not subject to the filing requirements, the Registrants have filed
all reports under Section 13 or 15(d) of the Exchange Act during the preceding 12 months.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of the Registrants’
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. Not Applicable.
Indicate
by check mark whether the Registrants are large accelerated filers, accelerated
filers, non-accelerated filers, or smaller reporting companies. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
| Large accelerated filers o | Accelerated filers o | Non-accelerated filers þ | Smaller reporting companies o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2
of the Exchange Act). Yes o No þ
State the aggregate market value of the common equity held by non-affiliates of the
Registrants: Not Applicable
Indicate the number of shares outstanding of the Registrants’ common stock: Not Applicable
*Mediacom Capital Corporation meets the conditions set forth in General Instruction I (1)
(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format.
MEDIACOM LLC
2008 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
This Annual Report on Form 10-K is for the year ended December 31, 2008. This Annual Report on
Form 10-K modifies and supersedes periodic reports filed before it. The Securities and Exchange
Commission (“SEC”) allows us to “incorporate by reference” information that we file with them,
which means that we can disclose important information to you by referring you directly to those
documents. Information incorporated by reference is considered to be part of this Annual Report on
Form 10-K. In addition, information that we file with the SEC in the future will automatically
update and supersede information contained in this Annual Report on Form 10-K.
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Mediacom LLC is a New York limited liability company and a wholly-owned subsidiary of Mediacom
Communications Corporation, a Delaware corporation. Mediacom Capital Corporation is a New York
corporation and a wholly-owned subsidiary of Mediacom LLC. Mediacom Capital Corporation was formed
for the sole purpose of acting as co-issuer with Mediacom LLC of debt securities and does not
conduct operations of its own.
References in this Annual Report to “we,” “us,” or “our” are to Mediacom LLC and our direct and
indirect subsidiaries, unless the context specifies or requires otherwise. References in this
Annual Report to “Mediacom” or “MCC” are to Mediacom Communications Corporation.
Cautionary Statement Regarding Forward-Looking Statements
You should carefully review the information contained in this Annual Report and in other reports or
documents that we file from time to time with the SEC.
In this Annual Report, we state our beliefs of future events and of our future financial
performance. In some cases, you can identify those so-called “forward-looking statements” by words
such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” or “continue” or the negative of those words and other comparable words.
These forward-looking statements are subject to risks and uncertainties that could cause actual
results to differ materially from historical results or those we anticipate, many of which are
beyond our control. Factors that could cause actual results to differ from those contained in the
forward-looking statements include, but are not limited to: competition for video, high-speed data
and phone customers; our ability to achieve anticipated customer and revenue growth and to
successfully introduce new products and services; greater than anticipated effects of the current,
or future, economic downturns and other factors which may negatively affect our customers’ demand
for our products and services; increasing programming costs and delivery expenses related to our
products and services; changes in consumer preferences, laws and regulations or technology that may
cause us to change our operational strategies; changes in assumptions underlying our critical
accounting polices which could impact our results; our ability to generate sufficient cash flow to
meet our debt service obligations; liquidity and overall instability in the credit markets which
may impact our ability to refinance our debt, as our revolving credit facility expires in
September 2011 and other substantial debt becomes due in 2013 and beyond, in the same amounts and
on the same terms as we currently enjoy; and the other risks and uncertainties discussed in this
Annual Report on Form 10-K for the year ended December 31, 2008 and other reports or documents that
we file from time to time with the SEC. Statements included in this Annual Report are based upon
information known to us as of the date that this Annual Report is filed with the SEC, and we assume
no obligation to update or alter our forward-looking statements made in this Annual Report, whether
as a result of new information, future events or otherwise, except as required by applicable
federal securities laws.
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PART I
ITEM 1. BUSINESS
Mediacom Communications Corporation
We are a wholly-owned subsidiary of Mediacom Communications Corporation (“Mediacom” or “MCC”), who
is also our manager. Mediacom is the nation’s eighth largest cable company based on the number of
basic video subscribers, or basic subscribers and among the leading cable operators focused on
serving the smaller cities and towns in the United States.
As of
December 31, 2008, Mediacom’s cable systems, which are owned and operated through our
operating subsidiaries and those of Mediacom Broadband LLC (“Mediacom Broadband”), passed an
estimated 2.84 million homes and served approximately 1.32 million basic subscribers and
2.95 million revenue generating units (“RGUs”).
Mediacom Broadband is also a wholly-owned subsidiary of
our manager. A basic subscriber is a customer who purchases one or more video services; RGUs
represent the sum of basic subscribers and digital, HSD and phone customers.
Mediacom is a publicly-owned company, and its Class A common stock is listed on The Nasdaq
Global Select Market under the symbol “MCCC.” Mediacom’s phone number is (845) 695-2600 and its
principal executive offices are located at 100 Crystal Run Road, Middletown, New York 10941; its
website is located at www.mediacomcc.com. The information
on Mediacom’s website is not part of this Annual Report.
Mediacom LLC
Over the last several years, we have introduced a compelling variety of new and advanced services
to consumers made possible by investments in our interactive fiber networks, which have boosted
their capacity, capability and reliability. We now offer greater choice and convenience to our
customers, with a wide and deep array of advanced products and services, including video-on-demand
(“VOD”), high-definition television (“HDTV”), digital video recorders (“DVR”), high-speed data
(“HSD”) and a feature-rich phone service. We provide the triple play bundle of video, HSD and
phone over a single communications platform to substantially all of our markets, a significant
advantage over most competitors in our service areas.
As of December 31, 2008, we served approximately 601,000 basic subscribers, 288,000 digital video
customers or digital customers, 337,000 HSD customers and 114,000
phone customers, totaling
1.34 million RGUs. We provide access to the triple play bundle to 87% of the estimated homes that
our network passes.
Our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and any amendments to such reports filed with or furnished
to the SEC under sections 13(a) or 15(d) of the Securities Exchange act of 1934 are made available
free of charge on Mediacom’s website (follow the “About Us” link to the Investor Relations tab
to “SEC Filings”) as soon as reasonably practicable after such reports are electronically filed
with or furnished to the SEC. Our Code of Ethics was filed with the
SEC on March 29, 2004 as an exhibit to our Annual Report on Form 10-K
for the year ended December 31, 2003.
Recent Developments
Share Exchange Agreement between Mediacom and an affiliate of Morris Communications
On September 7, 2008, Mediacom entered into a Share Exchange Agreement (the “Exchange
Agreement”) with Shivers Investments, LLC (“Shivers”) and Shivers Trading & Operating Company
(“STOC”). Both STOC and Shivers are affiliates of Morris Communications Company, LLC (“Morris
Communications”). STOC, Shivers and Morris Communications are controlled by William S. Morris III,
who together with another Morris Communications representative, Craig S. Mitchell, held two seats
on Mediacom’s Board of Directors.
On
February 13, 2009, Mediacom completed the Exchange Agreement pursuant to which it exchanged
100% of the shares of stock of a wholly-owned subsidiary, which held approximately $110 million of
cash and non-strategic cable systems serving approximately 25,000
basic subscribers contributed by us,
for 28,309,674 shares of Mediacom Class A common stock held by Shivers. Effective upon closing of the transaction,
Messrs. Morris and Mitchell resigned from Mediacom’s
Board of Directors. See the discussion below regarding the Asset Transfer Agreement and Note 7 to our consolidated financial statements for more
information.
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Asset Transfer Agreement with Mediacom and Mediacom Broadband
On
February 11, 2009, certain of our operating subsidiaries executed an Asset Transfer Agreement (the
“Transfer Agreement”) with Mediacom and the operating subsidiaries of Mediacom Broadband, pursuant
to which certain of our cable systems located in Florida, Illinois,
Iowa, Kansas, Missouri and Wisconsin, which serve approximately
45,900 basic subscribers would be exchanged for
certain of Mediacom Broadband’s cable systems located in Illinois, which serve
approximately 42,200 basic subscribers, and a cash payment of $8.2 million (the “Asset Transfer”).
We believe the Asset Transfer will better align our customer base geographically, making our cable
systems more clustered and allowing for more effective management, administration, controls and
reporting of our field operations. The Asset Transfer was completed on February 13, 2009.
As part
of the Transfer Agreement, we contributed to Mediacom cable systems located in
Western North Carolina, which serve approximately 25,000 basic subscribers. These cable systems
were part of the Exchange Agreement noted above. In connection therewith, we received a $74
million cash contribution on February 12, 2009, of which funds had been contributed to Mediacom by
Mediacom Broadband on the same date.
In total, we received $82.2 million under the Transfer Agreement (the “Transfer Proceeds”), which
were used by us to repay a portion of the outstanding balance under the revolving commitments of
our operating subsidiaries’ bank credit facility.
On February 12, 2009, after giving effect to the debt repayment funded by the Transfer Proceeds, our operating subsidiaries borrowed approximately $110 million under the revolving
commitments of our bank credit facility. This represented net new borrowings of about $28 million.
On February 12, 2009, we contributed approximately $110 million to Mediacom to fund their cash
obligation under the Exchange Agreement.
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Description of Our Cable Systems
Overview
The following table provides an overview of selected operating and cable network data for our cable
systems for the years ended December 31:
| 2008(12) | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
Operating Data: |
||||||||||||||||||||
Core Video |
||||||||||||||||||||
Estimated homes passed(1) |
1,370,000 | 1,360,000 | 1,355,000 | 1,347,000 | 1,329,000 | |||||||||||||||
Basic subscribers(2) |
601,000 | 604,000 | 629,000 | 650,000 | 675,000 | |||||||||||||||
Basic penetration(3) |
43.9 | % | 44.4 | % | 46.4 | % | 48.3 | % | 50.8 | % | ||||||||||
Digital Cable |
||||||||||||||||||||
Digital customers(4) |
288,000 | 240,000 | 224,000 | 205,000 | 160,000 | |||||||||||||||
Digital penetration(5) |
47.9 | % | 39.7 | % | 35.6 | % | 31.5 | % | 23.7 | % | ||||||||||
High Speed Data |
||||||||||||||||||||
HSD customers(6) |
337,000 | 299,000 | 258,000 | 212,000 | 162,000 | |||||||||||||||
HSD penetration(7) |
24.6 | % | 22.0 | % | 19.0 | % | 15.7 | % | 12.2 | % | ||||||||||
Phone |
||||||||||||||||||||
Estimated marketable phone
homes(8) |
1,198,000 | 1,150,000 | 950,000 | 250,000 | — | |||||||||||||||
Phone customers(9) |
114,000 | 79,000 | 34,000 | 4,500 | — | |||||||||||||||
Phone penetration(10) |
9.5 | % | 6.9 | % | 3.6 | % | 1.8 | % | — | |||||||||||
Revenue Generating Units(11) |
1,340,000 | 1,222,000 | 1,145,000 | 1,071,500 | 997,000 | |||||||||||||||
| (1) | Represents the estimated number of single residence homes, apartments and condominium units passed
by the cable distribution network. Estimated homes passed is based on the best information
currently available. |
|
| (2) | Represents a dwelling with one or more television sets that receives a package of over-the-air
broadcast stations, local access channels or certain satellite-delivered cable services. Accounts
that are billed on a bulk basis, which typically receive discounted rates, are converted into
full-price equivalent basic subscribers by dividing total bulk billed basic revenues of a
particular system by average cable rate charged to basic subscribers in that system. This
conversion method is consistent with the methodology used in determining payments made to
programmers. Basic subscribers include connections to schools, libraries, local government offices
and employee households that may not be charged for limited and expanded cable services, but may
be charged for digital cable, HSD, phone or other services. Customers who exclusively purchase HSD
and/or phone service are not counted as basic subscribers. Our methodology of calculating the
number of basic subscribers may not be identical to those used by other companies offering similar
services. |
|
| (3) | Represents basic subscribers as a percentage of estimated homes passed. |
|
| (4) | Represents customers receiving digital video services. |
|
| (5) | Represents digital customers as a percentage of basic subscribers. |
|
| (6) | Represents residential HSD customers and small to medium-sized commercial cable modem accounts
billed at higher rates than residential customers. Small to medium-sized commercial accounts
generally represent customers with bandwidth requirements of up to 20 Mbps, and are converted to
equivalent residential HSD customers by dividing their associated revenues by the applicable
residential rate. Customers who take our scalable, fiber-based enterprise network products and
services are not counted as HSD customers. Our methodology of calculating HSD customers may not be
identical to those used by other companies offering similar services. |
|
| (7) | Represents the number of total HSD customers as a percentage of estimated homes passed. |
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| (8) | Represents estimated number of homes to which we offer phone service and is based upon the best
information currently available. |
|
| (9) | Represents customers receiving phone service. |
|
| (10) | Represents the number of total phone customers as a percentage of estimated marketable phone homes. |
|
| (11) | Represents the sum of basic subscribers and digital, HSD and phone customers. |
|
| (12) | Does not reflect the completion of the Transfer Agreement on February 13, 2009.
|
Products and Services
Video
We receive a majority of our revenues from video services; however, our reliance on video services
as a source of revenue has been declining for the past several years, primarily due to increased
contributions from our HSD and phone services, a trend we expect to continue. Basic subscribers and
digital customers are billed on a monthly basis, and generally may discontinue services at any
time. We design our channel line-ups for each system according to demographics, programming
preferences, channel capacity, competition, price sensitivity and local regulation. Monthly
subscription rates and related charges vary according to the type of equipment used by subscribers
and types of services selected by subscribers and customers, which are described below.
Broadcast Basic Service. Our broadcast basic service includes, for a monthly fee, 12 to 20 local
broadcast channels, network and independent stations, limited satellite-delivered programming and
local public, government, home-shopping and leased access channels.
Family Basic Service. Our family basic service includes, for an additional monthly fee, 40 to 55
additional satellite-delivered channels such as CNN, ESPN, Lifetime, MTV, USA Network and TNT.
As of December 31, 2008, we had 601,000 basic subscribers, representing a 43.9% penetration
of estimated homes passed.
Digital Service. We currently offer several programming packages that include digital basic
channels, multichannel premium services, sports channels, digital music channels, an interactive
on-screen program guide and full access to our VOD library. Currently, digital customers receive up
to 230 digital channels, depending on the level of service selected. A digital converter or cable
card is required to receive our digital and other advanced video services. Customers pay a monthly
fee for digital video service, which varies according to the level of service taken and the number
of digital converters in the home. As of December 31, 2008, we had 288,000 digital customers,
representing a 47.9% penetration of our basic subscribers.
Pay-Per-View Service. Our pay-per-view service allows customers to pay to view single showings of
programming on an unedited, commercial-free basis, including feature films, live sporting events,
concerts and other special events.
Video-On-Demand. Mediacom On Demand, our VOD service, provides on-demand access to over 4,000
movies, special events and general interest titles and is available to 71% of our digital
customers. Subscription-based VOD (“SVOD”) premium packages such as Starz!, Showtime and HBO are
included when customers take such premium programming packages, and movies and other programming
can be ordered on a first-run, pay-per-view basis. Our customers enjoy full two-way functionality,
including the ability to start the programs at whatever time is convenient, as well as pause,
rewind and fast forward VOD programming. Due to their limited two-way capability, direct broadcast
satellite (“DBS”) providers are unable to offer a similar product to customers, which gives us a
competitive advantage for these services in our markets.
High-Definition Television. HDTV features high-resolution picture quality, digital sound quality
and a wide-screen, theater-like display when using an HDTV set. Up to 26 high-definition (“HD”)
channels, including most major broadcast networks, leading national cable networks, premium
channels and regional sports networks, are offered free of charge to our digital customers and
represent the most widely-watched programming. We also offer over 100 HD titles on-demand, with
plans to further expand our HD on-demand library in 2009.
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Digital Video Recorders. We make available to our customers HDTV-capable digital converters that
have video recording capability, allowing them to record and store programming for later viewing,
as well as pause and rewind live television. DVR services require the use of an advanced digital
converter for which we charge a monthly fee.
As of December 31, 2008, 31.6% of digital customers received DVR and/or HDTV services.
Mediacom Online
Mediacom Online, our HSD product, offers to consumers packages of competitively priced cable
modem-based services, with downstream speeds of up to 20Mbps, depending on the service selected. We
believe our flagship residential HSD offering, at 8Mbps, is currently the fastest Internet service
in substantially all of our markets. HSD customers who take our “VIP” triple play of video,
Internet and phone enjoy an upgrade to 10 Mbps downstream speeds, free of charge. Our services
include interactive portal, multiple e-mail addresses, personal webspace and local community
content. In 2009, we are introducing an enhanced interactive portal, featuring a single sign-on for
e-mail, local channel lineups, online billing and other Mediacom Online services, as well as
proprietary content including video and other features that are designed to showcase the capability
of faster broadband speeds. As of December 31, 2008, we had 337,000 HSD customers, representing a
24.6% penetration of estimated homes passed.
We are now investing in equipment with DOCSIS 3.0 technology, which will allow us to offer very
high-speed Internet service, commonly referred to as “wideband.” Our manager is now testing
wideband service with download speeds of up to 100Mbps, and we plan to selectively deploy this service
in certain markets in 2009.
Mediacom Phone
Mediacom Phone is our Voice over Internet Protocol (“VoIP”) phone service that offers unlimited
local, regional and long-distance calling within the United States, Puerto Rico, the U.S. Virgin
Islands and Canada for a flat monthly rate, including popular calling features such as Caller ID
with name and number, call waiting, three-way calling and enhanced Emergency 911 dialing. Directory
assistance and voice mail services are available for an additional charge, and international
calling is available at competitive rates. As of December 31, 2008, we marketed phone service to
87% of our 1.37 million estimated homes passed and served 114,000 phone customers, representing a
9.5% penetration of estimated marketable phone homes passed. Substantially all of our phone
customers take multiple services from us; about 84% take the “VIP” triple play and approximately
15% take either video or HSD service in addition to phone.
Mediacom Business Services
We provide a range of advanced data services for the commercial market. For small and medium-sized
businesses, we offer several packages of HSD services that include business e-mail, webspace
storage and several IP address options. Using our fiber-rich regional networks, we also design
customized Internet access and data transport solutions for large businesses, including the
healthcare, financial services and education markets. For wireless communication providers, we
offer point-to-point circuits to carry their voice and HSD traffic.
In 2009, we are launching Mediacom Business Phone service across most of our markets, aimed at
small-to-medium sized businesses. This service will allow us to package video, HSD and phone
services, which will improve our competitive positioning with the local telephone companies.
Advertising
We generate revenues from selling advertising time we receive from programmers, as part of our
license agreements, to local, regional and national advertisers. Our advertising sales
infrastructure includes in-house production facilities, production and administrative employees and
a locally-based sales workforce. In many of our markets, we have entered into agreements commonly
referred to as interconnects with other cable operators to jointly sell local advertising,
simplifying our clients’ purchase of local advertising and expanding their geographic reach. In
some of these markets, we represent the advertising sales efforts of other cable operators; in
other markets, other cable operators represent us. Additionally, national and regional interconnect
agreements have been negotiated with other cable system operators to simplify the purchase of
advertising time by our clients.
In 2009, we plan to offer an advertising “triple-play” to businesses in our markets, combining
traditional video advertising with advertising-supported VOD service and online advertising. Our
advertising-supported VOD service permits interested customers to
view long-form information advertisements, while allowing advertisers
to track non-confidential
aggregate viewing data. Our online advertising business revolves around the introduction of a new
web portal, which will be introduced later this year. Businesses in our markets will have the
ability to advertise to our customers through multiple platforms at competitive prices.
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Marketing and Sales
We primarily focus on marketing our VIP triple play bundles, offering our customers a simple and
easy way to order our products and services, the convenience of a single bill and discounted
pricing compared to pricing on an individual product basis. We have enhanced our VIP offering with
VIP Extra, a loyalty program rewarding customers who subscribe to the triple play with free VOD
movies, faster HSD speeds and retailer discounts.
We employ a wide range of sales channels to reach current and potential customers, including direct
marketing tactics such as direct mail, outbound telemarketing, door-to-door sales and field
technician sales. We have substantially increased our direct door-to-door sales staff recently to
expand our customer base and use our inbound contact centers to raise the awareness of service
offerings. We also employ mass media, including broadcast television, radio, newspaper and outdoor
advertising, to direct people to our inbound call centers or web site and advertise on our own
cable systems to reach our current customers. Direct sales channels have also been established with
national “e-tailers” to capture Internet sales.
Customer Care
Providing superior customer care contributes to customer satisfaction and customer retention and
increases the penetration of our advanced services.
Contact Centers
Our customer care group has several contact centers which are staffed with dedicated customer
service and technical support representatives that respond to customer inquiries on all of our
products and services. Qualified representatives are available 24 hours a day, seven days a week to
assist our customers. We have deployed a virtual contact center technology that helps our customer
care group to function as a single, unified call center and allows us to effectively manage and
leverage resources and reduce answer times through call-routing in a seamless manner. A web-based
service platform called “e-Care” is available to our customers allowing them to order products via
the Internet, manage their payments and receive general technical support and self-help tools to
help troubleshoot technical difficulties.
Network Management and Field Operations
Our principal focus is effective, real-time network management. We have a centralized operations
center whose personnel monitors the health and reliability of our network, using several network
and service monitoring solutions to ensure reliability and performance of our product and services.
Our workflow management system for field technicians promotes on-time customer appointments and
first call resolution to avoid repeat service trips and customer dissatisfaction. Field activity is
scheduled, routed and accounted for seamlessly, including automated appointment confirmations,
along with real time remote technician dispatching and service provisioning. Technicians have
web-based, hand-held tools to determine real-time quality of service at customers’ homes, allowing
us to effectively install new services and efficiently resolve customer-reported issues.
Community Relations
We are dedicated to fostering strong relations with the communities we serve, and believe that our
local involvement strengthens the awareness of our brand. We support local charities and community
causes, with events and campaigns to raise funds and supplies for persons in need, and in-kind
donations that include production services and free airtime on cable networks. We participate in
industry initiatives such as the Cable in the Classroom program, which provides more than 1,500
schools with free video service and more than 60 schools with free high-speed Internet service; and
Get Ready for Digital TV, the cable industry’s 18-month multimedia consumer education initiative
designed to inform cable customers and other consumers about how to manage the transition to
digital broadcast television. We also provide free cable service to almost 2,500 government
buildings, libraries and not-for-profit hospitals, along with free HSD service to about 180 such
sites.
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We develop and provide exclusive local programming for our communities, a service that is not
offered by direct broadcast satellite providers. Several of our cable systems have production
facilities to create local programming, which includes local school sports events, fund-raising
telethons by local chapters of national charitable organizations, local concerts and other
entertainment. We believe our local programming helps build customer loyalty in the communities we
serve.
Franchises
Cable systems are generally operated under non-exclusive franchises granted by local governmental
authorities. Historically, these franchises typically imposed numerous conditions, such as: time
limitations on commencement and completion of construction; conditions of service, including
population density specifications for service, the bandwidth capacity of the system, the broad
categories of programming required, the provision of free service to schools and other public
institutions, and the provision and funding of public, educational and governmental access channels
(“PEG access channels”); a provision for franchise fees; and the maintenance or posting of
insurance or indemnity bonds by the cable operator. Many of the provisions of local franchises are
subject to federal regulation under the Communications Act of 1934, or Communications Act, as
amended (the “Cable Act”).
Many of the states in which we operate have recently enacted comprehensive state-issued franchising
statutes that cede control over our franchises away from local communities and towards state
agencies, such as the various public service commissions that regulate other utilities. As of
December 31, 2008, about 20% of our customer base was under a state-issued franchise. Some of these
states permit us to exchange local franchises for state issued franchises before the expiration
date of the local franchise. These state statutes make the terms and conditions of our franchises
more uniform, and in some cases, eliminate locally imposed requirements such as PEG access
channels.
As of December 31, 2008, we held 992 cable franchises. These franchises provide for the payment of
fees to the issuing authority. In most of our cable systems, such franchise fees are passed through
directly to the customers. The Cable Act prohibits franchising authorities from imposing franchise
fees in excess of 5% of gross revenues from specified cable services and permits the cable operator
to seek renegotiation and modification of franchise requirements if warranted by changed
circumstances.
We have never had a franchise revoked or failed to have a franchise renewed. In addition,
substantially all of our franchises eligible for renewal have been renewed or extended prior to
their stated expirations, and no franchise community has refused to consent to a franchise transfer
to us. The Cable Act provides, among other things, for an orderly franchise renewal process in
which franchise renewal will not be unreasonably withheld or, if renewal is denied and the
franchising authority acquires ownership of the cable system or effects a transfer of the cable
system to another person, the cable operator generally is entitled to the “fair market value” for
the cable system covered by such franchise. The Cable Act also established comprehensive renewal
procedures, which require that an incumbent franchisee’s renewal application be assessed on our own
merits and not as part of a comparative process with competing applications. We believe that we
have satisfactory relationships with our franchising communities.
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Programming Supply
We have various fixed-term contracts to obtain programming for our cable systems from suppliers
whose compensation is typically based on a fixed monthly fee per subscriber or customer. Although
most of our contracts are secured directly, we also negotiate programming contract renewals through
a programming cooperative of which we are a member. In general, we attempt to secure longer-term
programming contracts, which may include marketing support and other incentives from programming
suppliers.
We also have various retransmission consent arrangements with local broadcast station owners,
allowing for carriage of their broadcast television signals on our cable systems. Federal
Communications Commission (“FCC”) rules mandate that every three-years local broadcast station
owners elect either must carry or retransmission consent. The most recent cycle ended on
December 31, 2008, and we were able to reach agreement with all broadcasters whose agreements
expired. Historically, retransmission consent has been contingent upon our carriage of satellite
delivered cable programming offered by companies affiliated with the stations’ owners, or other
forms of non-cash compensation. In the most recently completed cycle, cash payments and, to a
lesser extent, our purchase of advertising time from local broadcast station owners were required
to secure their consent.
We expect our programming costs to remain our largest single expense item for the foreseeable
future. In recent years, we have experienced a substantial increase in the cost of our programming,
particularly sports and local broadcast programming, well in excess of the inflation rate or the
change in the consumer price index. We believe our programming costs will continue to rise in the
future due to increased costs charged by programming suppliers, substantially due to existing
programming.
Technology
Our cable systems are designed as hybrid fiber-optic coaxial (“HFC”) networks that have proven to
be highly flexible in meeting the increasing requirements of our business. This HFC designed
network is engineered to accommodate bandwidth management initiatives that provide increased
capacity and performance for our advanced video and broadband products and services without the
need for costly upgrades. We deliver our signals via laser-fed fiber optical cable from control
centers known as headends and hubs to individual nodes. Coaxial cable is then connected from each
node to the individual homes we serve. Our network design generally provides for six strands of
fiber optic cable extended to each node, with two strands active and four strands “dark” or
inactive for future use.
As of December 31, 2008, about 98% of our cable network had capacity of at least 750 megahertz,
excluding portions that converted to all-digital technology. As of the same date, we operated from
98 headend facilities, and had two regional fiber networks which connect about 65% of our estimated
homes passed, upon which we have overlaid a video transport system that serves approximately 58% of
our video subscriber base. Our regional networks give us greater reach from a central location and
make it more cost efficient to introduce new and advanced services to customers, helping us reduce
equipment, personnel, connectivity charges and other expenditures.
Demand for new services, including additional HDTV channels, requires us to become more efficient
with our bandwidth. For network efficiency purposes, we are moving certain of our video programming
from analog to digital delivery, allowing us to deliver the same programming using less bandwidth.
As channels move from analog to digital delivery, we can offer our customers more HDTV channels,
faster HSD speeds and other advanced products and services using the reclaimed bandwidth. We also
have introduced digital simulcasting across 35% of our cable system, giving digital ready customers
better picture and sound quality for all of their video programming. This engineering duplicates
analog channels as digital channels, and lower-cost digital set-top tuners are programmed to use
the digital channel instead of the analog channel. It is also a necessary and important step toward
an all digital platform and we expect to cover 50% of our customer base with digital simulcasting
by year-end 2009.
Competition
We face intense and increasing competition from various communications and entertainment providers,
principally DBS providers and certain local telephone companies, many of whom have greater
resources than we do. We are also subject to rapid and significant changes and developments in the
marketplace, in technology and in the regulatory and legislative environment. In the past several
years, many of our competitors have expanded their service areas, added features and adopted
aggressive pricing and packaging for services and features that are comparable to the services and
features we offer. We are unable to predict the effects, if any, of such future changes or
developments on our business.
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Video
Direct Broadcast Satellite Providers
DBS providers, principally DirecTV, Inc. and DISH Network Corp., are the cable industry’s most
significant video competitors, having grown their customer base rapidly over the past several
years. They now serve more than 30 million customers nationwide, according to publicly available
information. DBS service has technological constraints due to its limited two-way interactivity,
which restricts their ability to compete with us in interactive video, HSD and phone. In contrast,
our broadband network has full two-way interactivity, giving us a single platform that is capable
of delivering true VOD and SVOD, as well as HSD and phone. DBS providers are seeking to expand
their offerings to include these advanced services, and in many cases have marketing agreements
under which local telephone companies offer DBS service bundled with their phone and HSD services.
These synthetic bundles are generally billed as a single package, and from a consumer standpoint,
appear similar to our triple play bundle. We believe that our delivery of multiple services from a
single broadband platform is, and will continue to be, more cost effective than these arrangements
between DBS providers and local phone companies, giving us a long-term competitive advantage.
Our ability to compete with DBS service depends, in part, on the programming available to them and
us for distribution. DirecTV and DISH now offer more than 250 and 280 video channels of
programming, respectively, much of it substantially similar to our video offerings. DirecTV also
has exclusive arrangements with the National Football League (“NFL”) and Major League Baseball to
offer sports programming unavailable to us. DBS providers also offer local HD broadcast signals of
the four primary broadcast networks in certain major metropolitan markets across the U.S. DirecTV
currently offers local HD signals in markets covering about 86% of our basic subscribers, and
more than 130 HD channels of national programming; DISH currently offers local HD signals in
markets covering 48% of our basic subscribers, and more than 100 HD channels of national
programming.
We believe our customers prefer the cost savings of the bundled products and services we offer and
the convenience of having a single provider contact for ordering, scheduling, provisioning, billing
and customer care. In addition, we have a meaningful presence in our customers’ communities,
including the proprietary local content we produce in several of our markets. DBS providers are not
locally-based, and therefore do not have the ability to offer locally-produced programming.
Traditional Overbuilds
Cable systems are operated under non-exclusive franchises granted by local authorities; more than
one cable system may legally be built in the same area by another cable operator, a local utility
or other provider. Some of these competitors, such as municipally-owned entities, may be granted
franchises on more favorable terms or conditions, or enjoy other advantages such as exemptions from
taxes or regulatory requirements, to which we are subject. Certain municipalities in our service
areas have constructed their own cable systems in a manner similar to city-provided utility
services. We believe that various entities are currently offering cable service, through wireline
distribution networks, to 8.6% of our estimated homes passed; most of these entities were operating
prior to our ownership of the affected cable systems.
Local Telephone Companies
Local telephone companies can offer video and other services to compete with us and may
increasingly do so in the future. Two major local telephone companies, Verizon Communications Inc.
and AT&T Inc., who have substantial resources, have built and are continuing to build fiber
networks with fiber-to-the-node or fiber-to-the-home technology to replicate the cable industry’s
triple play bundle. Their upgraded networks can now provide video, HSD and phone services that are
comparable to ours, with entry prices similar to those we offer. Based on internal estimates, we
believe that active marketing by AT&T and Verizon, with their reconstructed networks, covers
approximately 4% of our estimated homes passed as of December 31, 2008.
Other
We also have other actual or potential video competitors, including: broadcast television stations;
private home dish earth stations; multichannel multipoint distribution services (“MMDS”), which
deliver programming services over microwave channels licensed by the FCC; satellite master antenna
television systems which use technology similar to MMDS and generally serve condominiums, apartment
complexes and other multiple dwelling units; new services such as wireless local multipoint
distribution service; and potentially new services offered over still developing technologies. We
currently have limited competition from these competitors.
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HSD
Our HSD service competes primarily with digital subscriber line (“DSL”) services offered by local
telephone companies. DSL technology provides Internet access at data transmission speeds greater
than that of standard telephone line or “dial-up” modems. Based upon the speeds we offer, we
believe that our HSD product is superior to comparable DSL offerings in our service areas.
Some local telephone companies, such as AT&T, Qwest Communications International, Inc. and Verizon,
have built and are continuing to build fiber networks that allow them to offer significantly faster
HSD services compared to legacy DSL technology. They are now offering these higher speeds in a
limited number of our markets. DBS providers have attempted to compete with our HSD service, but
their satellite-delivered service has had limited success given their technical constraints. We
expect that DBS providers will continue to explore other options for the provision of HSD services.
Other potential competitors include companies seeking to provide high-speed Internet services using
wireless or other technologies. Many wireless telephone companies offer a mobile data service for
cellular use, and may expand into consumers’ households in the future. Currently, wireless
providers are unable to offer a data service with speeds that compare to our HSD service, but as
their technology improves, this may change in the future. Another technology being used is the
delivery of broadband services to the home via power lines. While this technology is currently only
being used in very limited parts of the country, if electric utilities were to expand into our
service areas, they could become formidable competitors given their resources.
The American Recovery Act of 2009 provides specific funding for broadband development as part of
the economic stimulus package. It is likely that some of our existing and potential competitors
will apply for funds under this program, which if successful may allow them to build or expand
facilities faster, and deploy existing and new services sooner, and to more areas, than they
otherwise would.
Phone
Mediacom Phone principally competes with the phone services offered by local telephone companies,
who may have substantial capital, longstanding customer relationships and extensive existing
facilities. In addition, Mediacom Phone competes with services offered by other VoIP providers that
do not have a traditional facilities-based network, but provide their services through a consumer’s
high-speed Internet connection.
In the last several years, a trend known as “wireless substitution” has developed where certain
phone customers have decided they only need one phone provider, and the provider selected has been
a wireless or cellular phone product. We expect this trend to continue in the future and, given the
current economic downturn, may accelerate as consumers become more cost conscious.
Other Competition
The quality of streaming video over the Internet and into homes and businesses continues to
improve. These services are becoming more accessible as the use of high speed Internet access
becomes more widespread. In the future, we expect that streaming video will increasingly compete
with the video services offered by cable operators and other providers of video services. For
instance, certain programming suppliers are marketing their content directly to consumers through
video streaming over the Internet, bypassing cable operators or DBS providers as video
distributors, although the cable operators may remain as the providers of high-speed Internet
access service.
Employees
As of December 31, 2008, we employed 1,792 full-time and 61 part-time employees. None of our
employees are organized under, or are covered by, a collective bargaining agreement. We consider
our relations with our employees to be satisfactory.
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Legislation and Regulation
General
Federal, state and local laws regulate the development and operation of cable systems and, to
varying degrees, the services we offer. Significant legal requirements imposed on us because of our
status as a cable operator or by the virtue of the services we offer are described below.
Federal Regulation
The Cable Act establishes the principal federal regulatory framework for the industry. The Cable
Act allocates primary responsibility for enforcing the federal policies among the FCC and state and
local governmental authorities.
Subscriber Rates and Program Tiering
The Cable Act and the FCC’s regulations limit the amount cable systems can charge for certain
services. The services included in this regulation are: the lowest level of programming service
offered by the cable operator, which we call Broadcast Basic Service, the installation of cable
service; service calls; and the installation, sale and lease of Broadcast Basic Service equipment.
Federal law exempts cable systems from all rate regulation in communities that are subject to
effective competition, which is defined as existing in a variety of circumstances that are
increasingly satisfied with greater availability of comparable video service from DBS and some
local phone companies. As of December 31, 2008, given the determinations we have received from the
FCC that effective competition exists, substantially all of our basic subscribers are not subject
to rate regulation.
Other than requiring certain types of programming, such as the carriage of local broadcast channels
and any public, governmental or educational access channels to be part of the basic tier, federal
law does not currently impose any other restrictions on the way such channels are provided (e.g.,
on a tier or a la carte). In February 2006, the FCC adopted an order that expressed a preference
that cable operators provide more services individually, or on smaller tiers. The FCC has taken no
action on this matter since then and we cannot predict what action, if any, the FCC will take,
however a requirement to provide channels on smaller tiers, or on an a la carte basis could
adversely affect our business.
In January 2009, the FCC commenced the process for seeking Office of Management and Budget approval
for the collection of information from cable operators in accordance with a November 2007 FCC
decision to determine whether cable systems with at least 36 channels are available to at least
70 percent of U.S. homes and whether 70 percent of households passed by those systems subscribe to
a cable service provider. If that condition exists, the FCC may have additional discretion under
the Cable Act to promulgate additional rules necessary to promote diversity of information sources.
The FCC did not specify what rules it would seek to promulgate. We cannot predict whether this
information collection will ultimately be approved or what action, if any, the FCC may take or how
it could affect our business.
Congress may also consider legislation regarding programming packaging, bundling or a la carte
delivery of programming. Any such requirements could fundamentally change the way in which we
package and price our services. We cannot predict the outcome of any current or future FCC
proceedings or legislation in this area, or the impact of such proceedings on our business at this
time.
Content Regulations
Must Carry and Retransmission Consent
The FCC’s regulations require local commercial television broadcast stations to elect once every
three years whether to require a cable system to carry their stations, subject to certain
exceptions, commonly called must-carry or to negotiate the terms by which the cable system may
carry the station on its cable systems, commonly called retransmission consent. The most recent
elections took effect January 1, 2009.
The Cable Act and the FCC’s regulations require a cable operator to devote up to one-third of its
activated channel capacity for the carriage of local commercial television stations. The Cable Act
and the FCC’s rules also give certain local non-commercial educational television stations carriage
rights, but not the option to negotiate retransmission consent. Additionally, cable systems must
obtain retransmission consent for carriage of all distant commercial television stations, except
for certain commercial satellite-delivered independent superstations such as WGN, commercial radio
stations, and certain low-power television stations.
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Through 2009, Congress barred broadcasters from entering into exclusive retransmission consent
agreements. Congress also requires all parties to negotiate retransmission consent agreements in
good faith.
Must-carry obligations may decrease the attractiveness of the cable operator’s overall programming
offerings by including less popular programming on the channel line-up, while cable operators may
need to provide some form of consideration to broadcasters to obtain retransmission consent to
carry more popular programming. We carry both must-carry broadcast stations and broadcast stations
that have granted retransmission consent. A significant number of local broadcast stations carried
by our cable systems have elected to negotiate for retransmission consent, and we have entered into
retransmission consent agreements with substantially all of them.
In February 2008, the FCC Chairman proposed a requirement that cable operators carry signals of
low-power local television stations, referred to as Class A television stations. Over 500 such
stations exist, mostly in rural areas and they do not currently have must-carry rights. The FCC has
not taken any public action on this proposal. If ultimately imposed, this carriage obligation could
consume valuable bandwidth and force us to drop or prevent us from adding other programming that is
more highly valued by our subscribers.
In February 2009, Congress delayed the final date by which all full-power television stations must
broadcast solely in digital format from February 18, 2009 to June 13, 2009. The legislation and the
FCC’s facilitating rule changes generally empowered broadcasters to choose whether to discontinue
analog transmissions on February 17th, at certain times prior to June 12th or on June 12, 2009.
After ceasing analog transmissions, broadcasters must return their analog spectrum. This change
from analog to digital by broadcast television stations is commonly referred to as the DTV
transition, or the digital transition. Local television stations that surrender their analog
channel and broadcast only digital signals prior to the end of the digital transition may seek
mandatory carriage for their digital signals instead. Stations transmitting in both digital and
analog formats, which is permitted during the transition period, have no carriage rights for the
digital format during the transition unless and until they turn in their analog channel.
After a broadcast station carried pursuant to must-carry has ceased transmitting in analog format,
the FCC has mandated that it is the responsibility of cable operators to ensure that cable
subscribers with analog television sets can continue to view that broadcast station’s signal, thus
creating a “dual carriage” requirement for must-carry signals post-DTV transition. Cable operators
that are not “all-digital” will be required for at least a three year period to provide must-carry
signals to their subscribers in the primary digital format in which the operator receives the
signal (i.e. high definition or standard definition), and downconvert the signal from digital to
analog so that it is viewable to subscribers with analog television sets. Cable systems that are
“all digital” are not required to downconvert must-carry signals into analog, and may provide the
must-carry signals in only in a digital format. The FCC has ordered that the cable operator bear
the cost of any downconversion. The “dual carriage” requirement has the potential of having a
negative impact on us because it reduces available channel capacity and thereby could require us to
either discontinue other channels of programming or restrict our ability to carry new channels of
programming or other services that may be more desirable to our customers.
Tier Buy Through
The Cable Act and the FCC’s regulations require our cable systems, other than those systems which
are subject to effective competition, to permit subscribers to purchase video programming we offer
on a per channel or a per program basis without the necessity of subscribing to any tier of service
other than the basic service tier.
The FCC is reviewing a complaint with respect to another cable operator to determine whether
certain charges routinely assessed by many cable operators, including us, to obtain access to
digital services, violate this “anti-buy-through” provision. Any decision that requires us to
restructure or eliminate such charges would have an adverse effect on our business.
Use of Our Cable Systems by the Government and Unrelated Third Parties
The Cable Act allows local franchising authorities and unrelated third parties to obtain access to
a portion of our cable systems’ channel capacity for their own use. For example, the Cable Act
permits franchising authorities to require cable operators to set aside channels for public,
educational and governmental access programming; and requires a cable system with 36 or more
activated channels to designate a significant portion of that activated channel capacity for
commercial leased access by third parties to provide programming that may compete with services
offered by the cable operator.
The FCC regulates various aspects of third party commercial use of channel capacity on our cable
systems, including: the maximum reasonable rate a cable operator may charge for third party
commercial use of the designated channel capacity; the terms and conditions for commercial use of
such channels; and the procedures for the expedited resolution of disputes concerning rates or
commercial use of the designated channel capacity.
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Migration of PEG channels from analog to digital service tiers frees up bandwidth over which we can
provide a greater variety of other programming or service options. During 2008, such migration,
however, met opposition from some municipalities, members of Congress and FCC officials. Any
legislative or regulatory action to restrict our ability to migrate PEG channels could adversely
affect our ability to provide additional programming desired by viewers.
In February 2008, the FCC released a Report and Order which could allow certain leased access users
lower cost access to channel capacity on cable systems. The new regulations limit fees to 10 cents
per subscriber per month for tiered channels and in some cases, potentially no charge. The
regulations also impose a variety of leased access customer service, information and reporting
standards. In May 2008, a federal appeals court stayed implementation of the new rules. In July
2008, the United States Office of Management and Budget denied approval of the new rules citing the
FCC’s failure to meet substantive requirements of The Paperwork Reduction Act of 1995. In July
2008, the federal appeals court agreed at the request of the FCC to hold the case in abeyance until
the FCC resolved its issues with the Office of Management and Budget. If implemented as
promulgated, these changes will likely increase our costs and could cause additional leased access
activity on our cable systems and thereby require us to either discontinue other channels of
programming or restrict our ability to carry new channels of programming or other services that may
be more desirable to our customers. We cannot, however, predict whether the FCC will ultimately
enact these rules as promulgated, whether it will seek to implement revised rules, or whether it
will attempt to implement any new commercial leased access rules.
Franchise Matters
We have non-exclusive franchises in virtually every community in which we operate that authorize us
to construct, operate and maintain our cable systems. Although franchising matters have
traditionally been regulated at the local level through a franchise agreement and/or a local
ordinance, many states now allow or require cable service providers to bypass the local process and
obtain franchise agreements or equivalent authorizations directly from state government. As of
December 31, 2008, many of the states in which we operate, including California, Florida, Illinois,
Indiana, Iowa, Kansas, Michigan, Missouri, North Carolina and Wisconsin make state-issued
franchises available. State-issued franchises in many states generally allow local telephone
companies or others to deliver services in competition with our cable service without obtaining
equivalent local franchises. In states where available, we are generally able to obtain
state-issued franchises upon expiration of our existing franchises. Our business may be adversely
affected to the extent that our competitors are able to operate under franchises that are more
favorable than our existing local franchises. While most franchising matters are dealt with at the
state and/or local level, the Cable Act provides oversight and guidelines to govern our
relationship with local franchising authorities whether they are at the state, county or municipal
level.
Ownership Limitations
The FCC previously adopted nationwide limits on the number of subscribers under the control of a
cable operator and on the number of channels that can be occupied on a cable system by video
programming in which the cable operator has an interest. The U.S. Court of Appeals for the District
of Columbia Circuit reversed the FCC’s decisions implementing these statutory provisions and
remanded the case to the FCC for further proceedings. In December 2007, the FCC reinstituted a
restriction setting the maximum number of subscribers that a cable operator may serve at 30 percent
nationwide. The FCC also has commenced a rulemaking to review vertical ownership limits and cable
and broadcasting attribution rules.
Registered utility holding companies and their subsidiaries may provide telecommunications and
cable services. The FCC has adopted rules that: (i) affirm the ability of electric service
providers to provide broadband Internet access services over their distribution systems; and
(ii) seek to avoid interference with existing services. Electric utilities could be formidable
competitors to cable system operators.
Cable Equipment
The Cable Act and FCC regulations seek to promote competition in the delivery of cable equipment by
giving consumers the right to purchase set-top converters from third parties as long as the
equipment does not harm the network, does not interfere with services purchased by other customers
and is not used to receive unauthorized services. Over a multi-year phase-in period, the rules also
required multichannel video programming distributors, other than direct broadcast satellite
operators, to separate security from non-security functions in set-top converters to allow third
party vendors to provide set-tops with basic converter functions. To promote compatibility of cable
systems and consumer electronics equipment, the FCC adopted rules implementing “plug and play”
specifications for one-way digital televisions. The rules require cable operators to provide
“CableCard” security modules and support for digital televisions equipped with built-in set-top
functionality. In May 2008, Sony Electronics and members of the cable industry submitted to the FCC
a Memorandum of Understanding (“MOU”) in connection with the development of
tru2waytm — a national two-way “plug and play” platform; other members of the
consumer electronics industry have since joined the MOU.
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Since July 1, 2007, cable operators have been prohibited from issuing to their customers new
set-top terminals that integrate security and basic navigation functions. The FCC has set forth a
number of limited circumstances under which it will grant waivers of this requirement. We obtained
a conditional waiver from the FCC that allowed us to deploy low-cost, integrated set-top boxes in
certain cable systems serving less than five percent of our subscriber base and we have met the
condition to upgrade to all-digital operations in those systems by February 17, 2009. In all other
systems, we remain in full compliance with the rules banning integration of security and basic
navigation functions in set-top terminals.
On March 2, 2009, the FCC issued a Notice of Inquiry to collect information regarding the existence
and availability of advanced technologies to allow blocking of parental selected content that are
compatible with various communications devices or platforms. The Child Safe Viewing Act of 2007
requires that the FCC to issue a report to Congress by August 29, 2009. Congress intends to use
that information to spur development of the next generation of parental control technology.
Additional requirements to permit selective parental blocking could impose additional costs on us.
Pole Attachment Regulation
The Cable Act requires certain public utilities, including all local telephone companies and
electric utilities, except those owned by municipalities and co-operatives, to provide cable
operators and telecommunications carriers with nondiscriminatory access to poles, ducts, conduit
and rights-of-way at just and reasonable rates. This right to access is beneficial to us. Federal
law also requires the FCC to regulate the rates, terms and conditions imposed by such public
utilities for cable systems’ use of utility pole and conduit space unless state authorities have
demonstrated to the FCC that they adequately regulate pole attachment rates, as is the case in
certain states in which we operate. In the absence of state regulation, the FCC will regulate pole
attachment rates, terms and conditions only in response to a formal complaint. The FCC adopted a
new rate formula that became effective in 2001, which governs the maximum rate certain utilities
may charge for attachments to their poles and conduit by companies providing telecommunications
services, including cable operators.
This telecommunications services formula which produces higher maximum permitted attachment rates
applies only to cable systems which elect to offer telecommunications services. The FCC ruled that
the provision of Internet services would not, in and of itself, trigger use of this new formula.
The Supreme Court affirmed this decision and held that the FCC’s authority to regulate rates for
attachments to utility poles extended to attachments by cable operators and telecommunications
carriers that are used to provide Internet service or for wireless telecommunications service. The
Supreme Court’s decision upholding the FCC’s classification of cable modem service as an
information service should strengthen our ability to resist rate increases based solely on the
delivery of cable modem services over our cable systems. As we continue our deployment of cable
telephony and certain other advanced services, utilities may continue to seek to invoke the higher
rates.
As a result of the Supreme Court case upholding the FCC’s classification of cable modem service as
an information service, the 11th Circuit has considered whether there are circumstances in which a
utility can ask for and receive rates from cable operators over and above the rates set by FCC
regulation. In the 11th Circuit’s decision upholding the FCC rate formula as providing pole owners
with just compensation, the 11th Circuit also determined that there were a limited set of
circumstances in which a utility could ask for and receive rates from cable operators over and
above the rates set by the formula including if an individual pole was “full” and where it could
show lost opportunities to rent space presently occupied by another attacher at rates higher than
provided under the rate formula.. After this determination, Gulf Power Company pursued just such a
claim based on these limited circumstances before the FCC. The Administrative Law Judge appointed
by the FCC to determine whether the circumstances were indeed met ultimately determined that Gulf
Power could not demonstrate that the poles at issue were “full.” Gulf Power has appealed this
decision to the full Commission and the appeal is pending. Failing to receive a favorable ruling
there, Gulf Power could pursue its claims in the federal court.
In November 2007, the FCC released a Notice of Proposed Rulemaking (“NPRM”) addressing pole
attachment rental rates, certain terms and conditions of pole access and other issues. The NPRM
calls for a review of long-standing FCC rules and regulations, including the long-standing “cable
rate” formula and considers effectively eliminating cable’s lower pole attachment fees by imposing
a higher unified rate for entities providing broadband Internet service. While we cannot predict
the effect that the outcome of the NPRM will ultimately have on our business, changes to our pole
attachment rate structure could significantly increase our annual pole attachment costs.
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Multiple Dwelling Unit Building Wiring
The FCC has adopted cable inside wiring rules to provide a more specific procedure for the
disposition of residential home wiring and internal building wiring that belongs to an incumbent
cable operator that is forced by the building owner to terminate its cable services in a building
with multiple dwelling units. In 2007, the FCC issued rules voiding existing and prohibiting future
exclusive service contracts for services to multiple dwelling unit or other residential
developments. In March 2008, the FCC enacted a ban on the contractual provisions that provide for
the exclusive provision of telecommunications services to residential apartment buildings and other
multiple tenant environments. The loss of exclusive service rights in existing contracts coupled
with our inability to secure such express rights in the future may adversely affect our business to
subscribers residing in multiple dwelling unit buildings and certain other residential
developments.
Copyright
Our cable systems typically include in their channel line-ups local and distant television and
radio broadcast signals, which are protected by the copyright laws. We generally do not obtain a
license to use this programming directly from the owners of the copyrights associated with this
programming, but instead comply with an alternative federal compulsory copyright licensing process.
In exchange for filing certain reports and contributing a percentage of our revenues to a federal
copyright royalty pool, we obtain blanket permission to retransmit the copyrighted material carried
on these broadcast signals. The nature and amount of future copyright payments for broadcast signal
carriage cannot be predicted at this time.
In 1999, Congress modified the satellite compulsory license in a manner that permits DBS providers
to become more competitive with cable operators. Congress adopted legislation in 2004 extending
this authority for an additional five years. Absent implementation of the recommendations by the
Copyright Office in its 2008 Report to Congress (discussed below) to abandon the current cable and
satellite compulsory licenses, Congress may act to extend the satellite compulsory license beyond
2009. In conjunction with this review, Congress held several hearings in February 2009, some of
which included testimony with respect to the continuation or modification of the cable compulsory
license.
The 2004 legislation also directed the United States Copyright Office to submit a report to
Congress by June 2008 recommending any changes to the cable and satellite licenses that the Office
deems necessary. The Copyright Office’s Report to Congress analyzed copyright compulsory licensing
for the cable and satellite television industries’ carriage of broadcast television signals and
made recommendations as to any necessary revisions. The Copyright Office’s long-term recommendation
was to abandon the cable (Section 111) and satellite (Section 119) compulsory licenses for carriage
of distant broadcast signals, but as an interim measure, create an unified short-term statutory
license to commence when the Section 119 license expires at the end of 2009. In the alternative,
the Copyright Office makes specific recommendations for statutory reform of the cable compulsory
license. Among other things, the Copyright Office recommends that Congress make legislative changes
to treat each non-simulcast multicast stream of a distant signal as a separate signal subject to a
royalty fee, a change that could significantly increase our copyright royalty costs. In addition,
the Copyright Office recommends elimination of the complex formula currently used for calculating
Section 111 royalty fees in favor a flat, per-subscriber, per-signal fee, and elimination of the
minimum fee currently paid even where no distant signals are carried. The impact of these proposal
on our copyright costs cannot be predicted. The Copyright Office Report includes other
recommendations regarding the operation of the Section 111, including placing limits on the number
of distant broadcast signals that can be carried, which can adversely affect the desirability of
the programming we offer to subscribers. The Copyright Office warns that piecemeal modification of
the statutory provisions could upset the delicate statutory structure. The elimination or
substantial modification of the cable compulsory license could adversely affect our ability to
obtain suitable programming and could substantially increase the cost of programming that remains
available for distribution to our subscribers.
The Copyright Office has commenced inquiries soliciting comment on petitions it received seeking
clarification and revisions of certain cable compulsory copyright license reporting requirements
and clarification of certain issues relating to the application of the compulsory license to the
carriage of digital broadcast stations. The petitions seek, among other things, clarification
regarding: (i) inclusion in gross revenues of digital converter fees, additional set fees for
digital service and revenue from required “buy throughs” to obtain digital service; (ii) reporting
of “dual carriage” and multicast signals; and (iii) certain reporting practices, including the
definition of “community.” In May 2008, the Copyright Office terminated a Notice of Inquiry
proceeding, concluding that cable operators must include in their compulsory license royalty
calculation a distant signal carried anywhere in the cable system as if it were carried everywhere
in the system, thus resulting in payments on “phantom signals.” While the Office determined that it
did not have the authority to change the royalty fee structure, it did advocate for updating the
cable system definition as part of its Report to Congress to address this concern. Moreover, the
Copyright Office has not yet acted on a filed petition and may solicit comment on the definition of
the definition of a “network” station for purposes of the compulsory license.
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We cannot predict the outcome of any legislative or agency activity; however, it is possible that
certain changes in the rules or copyright compulsory license fee computations or compliance
procedures could have an adverse affect on our business by increasing our copyright compulsory
license fee costs or by causing us to reduce or discontinue carriage of certain broadcast signals
that we currently carry on a discretionary basis. Further, we are unable to predict the outcome of
any legislative or agency activity related to the right of direct broadcast satellite providers to
deliver local or distant broadcast signals.
Privacy and Data Security
The Cable Act imposes a number of restrictions on the manner in which cable operators can collect,
disclose and retain data about individual system customers and requires cable operators to take
such actions as necessary to prevent unauthorized access to such information. The statute also
requires that the system operator periodically provide all customers with written information about
its policies including the types of information collected; the use of such information; the nature,
frequency and purpose of any disclosures; the period of retention; the times and places where a
customer may have access to such information; the limitations placed on the cable operator by the
Cable Act; and a customer’s enforcement rights. In the event that a cable operator is found to have
violated the customer privacy provisions of the Cable Act, it could be required to pay damages,
attorneys’ fees and other costs. Certain of these Cable Act requirements have been modified by
certain more recent federal laws. Other federal laws currently impact the circumstances and the
manner in which we disclose certain customer information and future federal legislation may further
impact our obligations. In addition, many states in which we operate have also enacted customer
privacy statutes, including obligations to notify customers where certain customer information is
accessed or believed to have been accessed without authorization. These state provisions are in
some cases more restrictive than those in federal law. In February 2009, a federal appellate court
upheld an FCC regulation that requires VoIP subscribers to provide “opt-in” approval before certain
subscriber information can be shared with a business partner for marketing purposes. Moreover, we
are subject to a variety of federal requirements governing certain privacy practices and programs.
During 2008, several members of Congress commenced an inquiry into the use by certain cable
operators of a third-party system that tracked activities of subscribers to facilitate the delivery
of advertising more precisely targeted to each household, a practice known as behavioral
advertising. In February 2009, the Federal Trade Commission issued revised self-regulatory
principles for online behavioral advertising. We cannot predict if there will be additional
regulatory action or whether Congress will enact legislation that impacts the ability to
effectively engage in behavioral advertising in the future. Additionally, future federal and/or
state laws may cover such issues as privacy, access to some types of content by minors, pricing,
encryption standards, consumer protection, electronic commerce, taxation of e-commerce, copyright
infringement and other intellectual property matters. The adoption of such laws or regulations in
the future may decrease the growth of such services and the Internet, which could in turn decrease
the demand for our HSD service, increase our costs of providing such service, impair the ability to
access potential future advertising revenue streams or have other adverse effects on our business,
financial condition and results of operations.
HSD Service
In 2002, the FCC announced that it was classifying Internet access service provided through cable
modems as an interstate information service and determined that gross revenues from such services
should not be included in the revenue base from which franchise fees are calculated. Although the
United States Supreme Court has held that cable modem service was properly classified by the FCC as
an “information service,” freeing it from regulation as a “telecommunications service,” it
recognized that the FCC has jurisdiction to impose regulatory obligations on facilities-based
Internet service providers. The FCC has an ongoing rulemaking process to determine whether to
impose regulatory obligations on such providers, including us. Because of the FCC’s decision, we
are no longer collecting and remitting franchise fees on our high-speed Internet service revenues.
We are unable to predict the ultimate resolution of these matters but do not expect that any
additional franchise fees we may be required to pay will be material to our business and
operations.
In 2005, the FCC issued a non-binding policy statement providing four principles to guide its
policymaking regarding Internet services. According to the policy statement, consumers are entitled
to: (i) access the lawful Internet content of their choice; (ii) run applications and services of
their choice, subject to the needs of law enforcement; (iii) connect their choice of legal devices
that do not harm the network; and (iv) enjoy competition among network providers, application and
service providers, and content providers. These principles are generally referred to as “network
neutrality.” In January 2008, the FCC opened an investigation against another cable operator for
violating its 2005 policy statement by, among other things, allegedly managing user bandwidth
consumption by identifying and restricting the applications being run, and the actual bandwidth
consumed. In August 2008, the FCC took action against another cable provider after determining that
the network management practices of that provider violated the
FCC’s Internet Policy Statement. This decision may establish de
facto standards that limit the network
management
practices that cable operators use to manage bandwidth consumption on their networks. We cannot
predict the outcome of any pending proceedings or any impact these developments may have on the
FCC’s net neutrality requirements as they apply to other Internet access providers.
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Our HSD service enables individuals to access the Internet and to exchange information, generate
content, conduct business and engage in various online activities on an international basis. The
law relating to the liability of providers of these online services for activities of their users
is currently unsettled both within the United States and abroad. Potentially, third parties could
seek to hold us liable for the actions and omissions of our HSD service customers, such as
defamation, negligence, copyright or trademark infringement, fraud or other theories based on the
nature and content of information that our customers use our service to post, download or
distribute. We also could be subject to similar claims based on the content of other websites to
which we provide links or third-party products, services or content that we may offer through our
Internet service. Due to the global nature of the Web, it is possible that the governments of other
states and foreign countries might attempt to regulate its transmissions or prosecute us for
violations of their laws.
We regularly receive notices of claimed infringements by our HSD service users. The owners of
copyrights and trademarks have been increasingly active in seeking to prevent use of the Internet
to violate their rights. In many cases, their claims of infringement are based on the acts of
customers of an Internet service provider — for example, a customer’s use of an Internet service or
the resources it provides to post, download or disseminate copyrighted music, movies, software or
other content without the consent of the copyright owner or to seek to profit from the use of the
goodwill associated with another person’s trademark. In some cases, copyright and trademark owners
have sought to recover damages from the Internet service provider, as well as or instead of the
customer. The law relating to the potential liability of Internet service providers in these
circumstances is unsettled. In 1996, Congress adopted the Digital Millennium Copyright Act, which
is intended to grant ISPs protection against certain claims of copyright infringement resulting
from the actions of customers, provided that the ISP complies with certain requirements. So far,
Congress has not adopted similar protections for trademark infringement claims.
Voice-over-Internet Protocol Telephony
The 1996 amendments to the Cable Act created a more favorable regulatory environment for cable
operators to enter the phone business. Over the past several years, numerous cable operators have
commenced offering VoIP telephony as a competitive alternative to traditional circuit-switched
telephone service. Various states, including states where we operate, have adopted or are
considering differing regulatory treatment, ranging from minimal or no regulation to full-blown
common carrier status. As part of the proceeding to determine any appropriate regulatory
obligations for VoIP telephony, the FCC recently decided that alternative voice technologies, like
certain types of VoIP telephony, should be regulated only at the federal level, rather than by
individual states. Many implementation details remain unresolved, and there are substantial
regulatory changes being considered that could either benefit or harm VoIP telephony as a business
operation. While the final outcome of the FCC proceedings cannot be predicted, it is generally
believed that the FCC favors a “light touch” regulatory approach for VoIP telephony, which might
include preemption of certain state or local regulation. In 2006, the FCC announced that it would
require VoIP providers to contribute to the Universal Service Fund based on their interstate
service revenues. Recently, the FCC issued a Further Notice of Proposed Rulemaking with respect to
possible changes in the intercarrier compensation model in a way that could financially
disadvantage us and benefit some of our competitors. Beginning in 2007, facilities-based broadband
Internet access and interconnected VoIP service providers were required to comply with
Communications Assistance for Law Enforcement Act requirements. It is unknown what conclusions or
actions the FCC may take or the effects on our business.
Despite the FCC’s interpretations to date, the Missouri Public Service Commission has held that
cable operators providing VoIP services must obtain state certification. The decision is being
appealed by that cable provider.
In January 2009, the FCC issued a letter to another cable provider of VoIP service that could
signal a shift in the regulatory classification of VoIP service. In that letter, the FCC questioned
whether the segregation of VoIP for bandwidth management purposes would make it a facilities based
provider of telecommunications services and thus subject to common carrier regulation. We cannot
predict how these issues will be resolved.
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State and Local Regulation
Our cable systems use local streets and rights-of-way. Consequently, we must comply with state and
local regulation, which is typically imposed through the franchising process. Our cable systems
generally are operated in accordance with non-exclusive franchises, permits or licenses granted by
a municipality or other state or local government entity. Our franchises generally are granted for
fixed terms and in many cases are terminable if we fail to comply with material provisions. The
terms and conditions of our franchises vary materially from jurisdiction to jurisdiction. Each
franchise generally contains provisions governing:
| • | franchise fees; |
|
| • | franchise term; |
|
| • | system construction and maintenance obligations; |
|
| • | system channel capacity; |
|
| • | design and technical performance; |
|
| • | customer service standards; |
|
| • | sale or transfer of the franchise; and |
|
| • | territory of the franchise. |
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ITEM 1A. RISK FACTORS
Risks Related to our Operations
Our products and services face a great deal of competition that could adversely affect our
business, financial condition and results of operations.
We operate in a highly competitive industry. In some instances, we compete against companies with
fewer regulatory burdens, easier access to financing, greater resources and operating capabilities,
more brand name recognition and long-standing relationships with regulatory authorities and
customers.
Our principal competitors are DBS providers and local telephone companies. DBS providers,
principally DirecTV and DISH, are our most significant video competitors. They have a video
offering that is, in some respects, similar to our video services, including DVR and some
interactive capabilities and hold exclusive rights to programming such as the NFL that is not
available to us and other video providers. We have lost a significant number of video subscribers
to DBS providers in the past, and will continue to face significant challenges from them. Certain
local telephone companies, including AT&T, Verizon and Qwest, are actively deploying fiber more
extensively in their networks. In the case of AT&T and Verizon, these deployments enable them to
offer video, HSD and phone service to consumers in bundled packages similar to those which we
currently provide. DBS providers in some cases have marketing agreements under which local
telephone companies sell DBS service bundled with their phone and HSD services. These synthetic
bundles are generally billed as a single package, and from a consumer standpoint, appear similar to
our triple play bundle. We also face competition from municipal entities that provide video, HSD
and phone services. Some municipal entities are also exploring building wireless networks to
deliver these services. Many companies have increased their offerings of video content streamed
over the Internet, often accessed free of charge, which could negatively impact demand for our
video services.
Our HSD service faces competition from local telephone companies utilizing their upgraded fiber
networks and/or DSL lines, Wi-Fi, Wi-Max and wireless broadband services provided by wireless
service providers, broadband over power line providers, and from providers of traditional dial-up
Internet access. The American Recovery Act of 2009 provides specific funding for broadband
development as part of the economic stimulus package. It is likely that some of our existing and
potential competitors will apply for funds under this program, which if successful may allow them
to build or expand facilities faster, and deploy existing and new services sooner, and to more
areas, than they otherwise would.
Our phone service faces competition for voice customers from local telephone companies, wireless
telephone service providers, VoIP service and others. Competition in phone service is intensifying
as more consumers are replacing their wireline service with wireless service.
Weakening economic conditions may adversely impact our business, financial condition and results
of operations.
During 2008, the downturn in the global financial markets, the tightening of credit markets and the
collapse of several large financial institutions caused already weak economic conditions to worsen.
Most of our revenues are provided by residential customers who may downgrade their services, or
discontinue some, or all of their services, if these economic conditions persist, or further
weaken.
We may be unable to keep pace with rapid technological change that could adversely affect our
business and our results of operations.
We operate in a rapidly changing environment, and our success depends, in part, on our ability to
enhance existing, or adopt new, technologies to maintain or improve our competitive positioning. It
may be difficult to keep pace with future technological developments, and if we fail to choose
technologies that provide products and services that are preferred by our customers and that are
cost efficient to us, we may experience customer losses and our results of operations may be
adversely affected.
The continuing increases in programming costs may have an adverse affect on our results of
operations.
Programming costs have historically been our largest single expense category and have increased
dramatically over the last several years. The largest increases have come from sports programming
and, more recently, from broadcast stations in the form of retransmission consent fees. We expect
programming costs to continue to increase in the coming years largely as a result of both increased
unit costs charged by the satellite delivered networks we carry, in addition to increasing
financial demands by local broadcast stations to obtain their retransmission consent. If we refuse
to meet the demands of these broadcast station owners, or are unable to negotiate reasonable
contracts with non-broadcast networks, we may not be able to transmit these stations, which may
result in the loss of existing or potential additional subscribers.
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Our video service profit margins have declined over the last several years, as the cost to secure
cable programming and broadcast station retransmission consent outpaces video revenue growth. If we
are unable to increase subscriber rates, or offer additional services to fully offset such
programming costs, our video service margins will continue to deteriorate.
We may be unable to secure necessary hardware, software, telecommunications and operational
support that may impair our ability to provision and service our customers and adversely affect
our business.
Third party firms provide some of the inputs used in delivering our products and services,
including digital set-top converter boxes, DVRs and VOD equipment; routers, provisioning and other
software; the telecommunications network, interconnection agreements and e-mail platform for our
HSD and phone services; fiber optic cable and construction services for expansion and upgrades of
our cable systems; and our customer billing platform. Some of these companies may hold leverage
over us, considering that they are the sole supplier of certain products and services, or that
there is a long lead time and/or significant expense required to transition to another provider. As
a result, our operation depends on the successful operation of these companies. Any delays or
disruptions in the relationship as a result of contractual disagreements, operational or financial
failures on the part of the suppliers, or other adverse events, could negatively affect our ability
to effectively provision and service our customers. Demand for some of these items has increased
with the general growth in demand for Internet and telecommunications services. We typically do not
carry significant inventories of equipment. Moreover, if there are no suppliers that are able to
provide set-top converter boxes that comply with evolving Internet and telecommunications
standards, or that are compatible with other equipment and software that we use, this could
negatively affect our ability to effectively provision and service our customers.
We depend on network and information systems and other technologies. A disruption or failure in
such systems and technologies could have a material adverse affect on our business, financial
condition and results of operations.
Because of the importance of network and information systems and other technologies to our
business, any events affecting these systems and technologies could have a devastating impact on
our business. These events include computer hacking, computer viruses, worms or other disruptive
software, process breakdowns, denial of service attacks and other malicious activities or any
combination of the foregoing, natural disasters, power outages and man-made disasters. Such
occurrences may cause service disruptions, loss of customers and revenues and negative publicity,
and may result in significant expenditures to repair or replace the damaged infrastructure, or
protect from similar occurrences in the future. We may also be negatively affected by the illegal
acquisition and dissemination of data and information, including customer, personnel, and vendor
data, and this may require us to expend significant capital and other resources to remedy any such
security breach.
Our business depends on certain intellectual property rights and on not infringing on the
intellectual property rights of others.
We rely on our copyrights, trademarks and trade secrets, as well as licenses and other agreements
with our vendors and other parties, to use our technologies, conduct our operations and sell our
products and services. Third parties have in the past, and may in the future, assert claims or
initiate litigation related to exclusive patent, copyright, trademark, and other intellectual
property rights to technologies and related standards that are relevant to us. These assertions
have increased over time as a result of our growth and the general increase in the pace of patent
claims assertions, particularly in the United States. Because of the existence of a large number of
patents in the networking field, the secrecy of some pending patents and the rapid rate of issuance
of new patents, it is not economically practical or even possible to determine in advance whether a
product or any of its components infringes or will infringe on the patent rights of others.
Asserted claims and/or initiated litigation can include claims against us or our manufacturers,
suppliers, or customers, alleging infringement of their proprietary rights with respect to our
existing or future products and/or services or components of those products and/or services.
Regardless of the merit of these claims, they can be time-consuming, result in costly litigation
and diversion of technical and management personnel, or require us to develop a non-infringing
technology or enter into license agreements. There can be no assurance that licenses will be
available on acceptable terms and conditions, if at all, or that our indemnification by our
suppliers will be adequate to cover our costs if a claim were brought directly against us or our
customers. Furthermore, because of the potential for high court awards that are not necessarily
predictable, it is not unusual to find even arguably unmeritorious claims settled for significant
amounts. If any infringement or other intellectual property claim made against us by any third
party is successful, if we are required to indemnify a customer with respect to a claim against the
customer, or if we fail to develop non-infringing technology or license the proprietary rights on
commercially reasonable terms and conditions, our business, results of operations, and financial
condition could be adversely affected.
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Some of our cable systems operate in the Gulf Coast region, which historically has experienced
severe hurricanes and tropical storms.
Cable systems serving approximately 17% of our subscribers are located on or near the Gulf Coast in
Alabama, Florida and Mississippi. In 2004 and 2005, three hurricanes impacted these cable systems
to varying degrees causing property damage, service interruption and loss of customers. The Gulf
Coast could experience severe hurricanes in the future. This could adversely impact our results of
operations in affected areas, causing us to experience higher than normal levels of expense and
capital expenditures, as well as the potential loss of customers and revenues.
The
loss of Mediacom’s key personnel could have a material adverse effect on our business.
If any of Mediacom’s key personnel ceases to participate in our business and operations, our
profitability could suffer. Our success is substantially dependent upon the retention of, and the
continued performance by, Mediacom’s key personnel, including Rocco B. Commisso, the Chairman
and Chief Executive Officer of Mediacom. Our debt arrangements provide that a default may result
if Mr. Commisso ceases to be the Chairman and Chief Executive Officer of Mediacom, or if he and
his designees do not constitute a majority of our Executive Committee. Mediacom has not entered into a long-term employment agreement
with Mr. Commisso, and does not currently maintain key man life insurance on Mr. Commisso or other
key personnel. If any of Mediacom’s key personnel cease to
participate in our business and
operations, it could have an adverse effect on our business, financial condition and results of
operations.
Risks Related to our Financial Condition
We are exposed to risks caused by disruptions in the capital and credit markets, which could have
an adverse affect on our business, financial condition and results of operations.
We rely on the capital markets for senior note offerings and on the credit markets for bank credit
arrangements to meet our financial commitments and liquidity needs. Over the past several months,
the U.S. economy entered a recession, with major downturns in financial markets and the collapse or
significant weakening of many banks and other financial institutions. The capital and credit
markets severely tightened, making it extremely difficult for many companies to obtain financing at
all or on terms comparable to those available over the past several years. The disruptions in the
capital and credit markets could adversely affect our ability to refinance on satisfactory terms,
or at all, our scheduled debt maturities in the coming years and could adversely affect our ability
to draw on our revolving credit facilities.
As of December 31, 2008, after giving effect to the Transfer Agreement,
which was completed on February 13, 2009, approximately $284.0 million could be
borrowed under the revolving credit facility of our operating
subsidiaries (the “revolver”), which
expires on September 30, 2011. Beyond 2011, we also face significant principal payments on our
outstanding senior notes, as well as term loans under the bank credit agreement of our operating
subsidiaries. If the current economic conditions were to persist or worsen, we may not be able to
replace the liquidity lost as the revolver expires, or refinance outstanding
balances under the revolver, term loans or senior notes at all or on
acceptable terms. Even if we can secure refinancing, if prevailing credit market conditions persist
or worsen, we would likely pay considerably higher interest rates on any refinancing or new
financing than those we currently pay.
We also could be negatively affected by the weakness or failure of some of the financial
institutions we rely upon for liquidity. Some lenders may not be able to meet their funding
obligations to us under the revolver if they experience shortages of capital or liquidity. If that
were to happen, our other lenders would not be required to fund any shortfalls because their
obligations to us are several, but not joint. If one or more lenders failed to fund, in aggregate,
a significant share of any future borrowings under the revolver, there could be a material adverse
impact upon our financial condition and results of operations.
We also may take measures to conserve cash, including limiting our spending, until the financial
markets stabilize. This may include the deferral of capital expenditures, which could adversely
affect our ability to retain our existing customer base and attract new customers.
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We have substantial debt, we are highly leveraged and we have significant interest payment
requirements, which could limit our operational flexibility and have an adverse affect on our
financial condition and results of operations.
As of December 31, 2008, our total debt was approximately $1.520 billion. Because of our
substantial indebtedness, we are highly leveraged and will continue to be so. As a result, our debt
service obligations require us to use a large portion of our revenues and cash flows to pay
interest, reducing our ability to finance our operations, capital expenditures and other
activities. Our cash interest expense for 2008 was $99.9 million. A portion of our debt, including
outstanding debt under the revolver, has a variable rate of interest determined
by the Eurodollar rate plus a margin or base rate plus a margin. Which varies depending on the ratio of senior indebtedness (as
defined) under the credit facility to system cash flow (as defined). If we incurred additional debt
under the revolver, the Eurodollar rate or base rate were to rise and/or our system cash flow
decreased, we would be required to pay additional interest expense, which would have an adverse
affect on our results of operations.
Our
subsidiaries’ credit agreement (the “credit agreement”) requires compliance with certain financial and other covenants including, but
not limited to, a ratio of senior indebtedness (as defined) to annualized system cash flow (as
defined) of no more than 6.0 to 1.0. The credit agreement also requires compliance with other
covenants including, but not limited to, limitations on mergers and acquisitions, consolidations
and sales of certain assets, liens, the incurrence of additional indebtedness, certain restricted
payments and certain transactions with affiliates. Our senior notes contain financial and other
covenants, though they are generally less restrictive than those
found in the credit agreement. Principal covenants include a limitation on the incurrence of additional indebtedness
based upon a maximum ratio of total indebtedness to cash flow, as
defined in our senior note indentures, of 7.0 to 1.0. These agreements also contain limitations on dividends, investments and
distributions. Complying with these covenants may cause us to take actions that we otherwise would
not take or cause us not to take actions that we otherwise would take.
We cannot assure you that our business will generate sufficient cash flows to permit us to fulfill
our financial covenants or revenues to fulfill our debt service and repay our debt. Our highly
leveraged position exposes us to significant risk in the event of downturns in the economy or our
business.
We are a holding company, and if our operating subsidiaries are unable to make funds available to
us, we may not be able to fund their indebtedness and other obligations.
We are a holding company, and do not have any operations or hold any assets other than our
investments in, and advances to, our operating subsidiaries. Our various operating
subsidiaries conduct all of our consolidated operations and own substantially all of our
consolidated assets. The only source of cash that we have to fund our obligations (including,
without limitation, the payment of interest on, and the repayment of principal of, our outstanding
indebtedness) is the cash that our operating subsidiaries generate from their operations and from
borrowing under the revolver. The operating subsidiaries are separate and
distinct legal entities and have no obligation, contingent or otherwise, to make funds available to
us. The ability of our operating subsidiaries to make funds available to us in the form of
dividends, loans, advances or other payments, will depend upon the operating results of such
subsidiaries, applicable laws and contractual restrictions, including
covenants under the credit agreement and the indentures governing our senior notes that restrict the
ability of the obligors thereunder to make funds available to us.
In the event of a liquidation or reorganization of any of our subsidiaries, the creditors of any of
such subsidiaries, including trade creditors, would be entitled to a claim on the assets of such
subsidiaries prior to any claims of the stockholders of our manager or any such subsidiaries, and
those creditors are likely to be paid in full before any distribution is made to such stockholders.
To the extent that we, or any of our subsidiaries, is a creditor of another of our subsidiaries,
the claims of such creditor could be subordinated to any security interest in the assets of such
subsidiary and/or any indebtedness of such subsidiary senior to that held by such creditor.
A
default under our indentures or our subsidiaries’ credit facility could result in an acceleration of our
indebtedness and other material adverse effects.
The agreements and instruments governing our subsidiaries’ indebtedness contain financial and
operating covenants. The breach of any of these covenants could cause a default, which may result
in the indebtedness becoming immediately due and payable. If this were to occur, we would be unable
to adequately finance our operations. In addition, a default could result in a default or
acceleration of our other indebtedness subject to cross-default provisions. If this occurs, we may
not be able to pay our debts or borrow sufficient funds to refinance them. Even if new financing is
available, it may not be on terms that are acceptable to us. The membership interests of our
operating subsidiaries are pledged as collateral under such
subsidiaries’ credit facility (the “credit facility”).
A default under the credit facility could result in a foreclosure by the lenders on
the membership interests pledged under that facility. Because we are dependent upon our operating subsidiaries for all of our cash flows, a foreclosure would have a
material adverse effect on our business, financial condition and results of operations.
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A lowering of the ratings assigned to our debt securities by ratings agencies may further increase
our future borrowing costs and reduce our access to capital.
Our debt ratings are below the investment grade category, which results in higher borrowing costs.
There can be no assurance that our debt ratings will not be lowered in the future by a rating
agency. While there are no restrictions or covenants tied to our debt ratings under our current
arrangements, a lowering in our debt ratings may further increase our future borrowing costs as
well as reduce our access to capital.
We have a history of net losses and we may continue to generate net losses in the future.
We have
a history of net losses, and may continue to report net losses in the
future. Although we reported net income of $7.4 million for the year
ended December 31, 2008, we reported
net losses of $14.6 million and $19.4 million for the years
ended December 31, 2007 and 2006, respectively. Our
net losses principally result from depreciation and amortization expenses associated with our
acquisitions and the capital expenditures related to expanding and upgrading our cable systems, as
well as interest expense and other financing charges related to our indebtedness, and losses on
derivatives. Should our net losses continue, they may limit our ability to attract needed
financing, and to do so on favorable terms, as such losses may detract some investors from
investing in our securities.
Impairment of our goodwill and other intangible assets could cause significant losses.
As of December 31, 2008, we had approximately $568.1 million of unamortized intangible assets,
including goodwill of $16.6 million and franchise rights of $550.7 million on our consolidated
balance sheets. These intangible assets represented approximately 38% of our total assets.
FASB Statement No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill and other
intangible assets deemed to have indefinite useful lives, such as cable franchise rights, cease to
be amortized. SFAS No. 142 requires that goodwill and certain intangible assets be tested at least
annually for impairment. If we find that the carrying value of goodwill or cable franchise rights
exceeds its fair value, we will reduce the carrying value of the goodwill or intangible asset to
the fair value, and will recognize an impairment loss in our results of operations.
The impairment tests require us to make an estimate of the fair value of intangible assets, which
is determined using a discounted cash flow methodology. Since a number of factors may influence
determinations of fair value of intangible assets, we are unable to predict whether impairments of
goodwill or other indefinite-lived intangibles will occur in the future. Any such impairment would
result in our recognizing a corresponding write-off, which could cause us to report a significant
noncash operating loss. Such impairment could have an adverse effect on our business, financial
condition and results of operations. Our annual impairment analysis was performed as of October 1,
2008 and resulted in no impairment. Given the continuing economic downturn and overall market
conditions, we may be required to conduct an impairment analysis prior to our anniversary date, and
such analysis may result in an impairment of the fair value of our intangible assets.
Risks Related to Legislative and Regulatory Matters
Changes in cable regulations could adversely impact our business.
The cable industry is subject to extensive legislation and regulation at the federal and local
levels, and, in some instances, at the state level. Many aspects of such regulation are currently
the subject of judicial and administrative proceedings and legislative and administrative
proposals, and lobbying efforts by us and our competitors. We expect that court actions and
regulatory proceedings will continue to refine our rights and obligations under applicable federal,
state and local laws. The results of current or future judicial and administrative proceedings and
legislative activities cannot be predicted. Modifications to existing requirements or imposition of
new requirements or limitations could have an adverse impact on our business including those
described below. See “Business — Legislation and Regulation.”
Additional regulation of rates charged for our services could impair future revenues.
Expansion of rate regulation beyond that currently imposed on certain of our cable services or on
any other services we offer could restrict our ability to generate future revenues and thus
adversely affect our business. See “Business — Legislation and Regulation — Federal Regulation —
Subscriber Rates and Program Tiering.”
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Denials of franchise renewals or continued absence of franchise parity can adversely impact our
business.
Where State-Issued Franchises are not available, local franchising authorities may demand
concessions, or other commitments, as a condition to renewal, and these concessions or other
commitments could be costly. Although the Cable Act affords certain protections, there is no
assurance that we will not be compelled to meet their demands in order to obtain renewals.
Our cable systems are operated under non-exclusive franchises. As of December 31, 2008,
approximately 8.6% of the estimated homes passed by our cable systems were served by other cable
operators. Because of the FCC’s actions to speed issuance of local competitive franchises and
because many states in which we operate cable systems have adopted and other states may adopt
legislation to allow others, including local telephone companies, to deliver services in
competition with our cable service without obtaining equivalent local franchises, we may face not
only increasing competition but we may be at a competitive disadvantage due to lack of regulatory
parity. Any of these factors could adversely affect our business. See “Business — Legislation and
Regulation — Federal Regulation — Franchise Matters.”
Changes in carriage requirements could impose additional cost burdens on us.
Any change that increases the amount of content that we must carry on our cable systems can
adversely impact our business by increasing our cost and limiting our ability to carry other
programming more valued by our subscribers or limit our ability to provide other services. For
example, if we are required to carry more than the primary stream of digital broadcast signals or
the signals of “Class A” low power broadcast stations or if the FCC regulations are put into effect
that require us to provide either very low cost or no cost commercial leased access, our business
would be adversely affected. See “Business — Legislation and Regulation — Federal Regulation —
Content Regulations.”
Pending FCC and court proceedings could adversely affect our HSD service.
The regulatory status of providing HSD service by cable companies remains uncertain. If the FCC
imposes additional regulatory burdens or further restricts the methods we may employ to manage the
operation of our network, our costs would increase and our business would be adversely affected.
See “Business — Legislation and Regulation — Federal Regulation — HSD Service.”
Our phone service may become subject to additional regulation.
The regulatory treatment of VoIP services like those we and others offer remains uncertain. The
FCC, Congress, the courts and the states continue to look at issues surrounding the provision of
VoIP, including whether this service is properly classified as a telecommunications service or an
information service. Any changes to existing law as it applies to VoIP or any determination that
results in greater or different regulatory obligations than competing services would result in
increased costs, reduce anticipated revenues and impede our ability to effectively compete or
otherwise adversely affect our ability to successfully roll-out and conduct our telephony business.
See “Business — Legislation and Regulation — Federal Regulation — Voice-over-Internet-Protocol
Telephony.”
Changes in pole attachment regulations or actions by pole owners could significantly increased our
pole attachment costs.
Our cable facilities are often attached to or use public utility poles, ducts or conduits.
Significant change to the FCC’s long-standing pole attachment “cable rate” formula, increases in
pole attachment costs as a result of our provision of Internet, VoIP or other services or pole
owners seeking additional compensation because poles are “full” could increase our pole attachment
costs. Our business, financial condition and results of operations could suffer a material adverse
impact from any significant increased costs, and such increased pole attachment costs could
discourage system upgrades and the introduction of new products and services. See “Business —
Legislation and Regulation — Federal Regulation — Pole Attachment Regulation.”
Changes in compulsory copyright regulations could significantly increase our license fees.
The Copyright Office’s decision regarding payment of copyright fees on “phantom signals” may cause
us to carry fewer “distant” signals in our channel lineups which could preclude carriage of
programming valued by our customers. If the Copyright Office determines that we are required to
treat each digital programming stream as a separate signal for copyright purposes or if other
legislative proposals are enacted that change the compulsory license, our copyright costs could
increase significantly or we may reduce the amount of off-air content that we provide to our
subscribers. If Congress were to completely eliminate the compulsory license, and we are required
to obtain copyright licensing of all broadcast material at the source, that would impose
significant administrative burdens and additional costs that could adversely affect our business.
See “Business — Legislation and Regulation — Federal Regulation — Copyright.”
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Risks
Related to Mediacom’s Chairman and Chief Executive Officer’s Controlling Position
Mediacom’s Chairman and Chief Executive Officer has the ability to control all major corporate decisions,
and a sale of his stock could result in a change of control that would have unpredictable effects.
Rocco B. Commisso, Mediacom’s Chairman and Chief Executive Officer, beneficially owned shares of
its common stock representing approximately 80.8% of the aggregate voting power of all of its
common stock as of December 31, 2008. After completion of the Exchange Agreement on February 13,
2009, Mr. Commisso had aggregate voting power representing approximately 87.8% of all of Mediacom’s common stock. As a result, Mr. Commisso generally has the ability to control the outcome
of all matters requiring approval of Mediacom’s stockholders, including the election of its entire
board of directors, the approval of any merger or consolidation and the sale of all or
substantially all of its assets. In addition, Mr. Commisso’s voting power may have the effect of
discouraging offers to acquire Mediacom because any such acquisition would require his consent.
Pursuant to a Significant Stockholder Agreement, dated September 7, 2008, Mr. Commisso has agreed
not to consummate prior to September 7, 2010 an extraordinary transaction involving Mediacom
without the recommendation of a majority of either (i) the disinterested directors that are members
of Mediacom’s board of directors or (ii) the members of a special committee of Mediacom’s
board consisting of disinterested directors.
We cannot assure you that Mr. Commisso will maintain all or any portion of his ownership in Mediacom, or that he would continue as an officer or director of Mediacom
if he sold a significant part of his stock. The disposition by Mr. Commisso of a sufficient number of shares of
Mediacom’s stock could result in a change in control of our manager and of us, and no assurance
can be given that a change of control would not adversely affect our business, financial condition
or results of operations. A change in control could also result in a default under our debt
arrangements, could require us to offer to repurchase our senior notes at 101% of their principal
amount, and could trigger a variety of federal, state and local regulatory consent requirements.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal physical assets consist of cable operating plant and equipment, including signal
receiving, encoding and decoding devices, headend facilities and distribution systems and equipment
at or near customers’ homes for each of the systems. The signal receiving apparatus typically
includes a tower, antenna, ancillary electronic equipment and earth stations for reception of
satellite signals. Headend facilities are located near the receiving devices. Our distribution
system consists primarily of coaxial and fiber optic cables and related electronic equipment.
Customer premise equipment consists of set-top devices and cable modems. Our cable plant and
related equipment generally are attached to utility poles under pole rental agreements with local
public utilities; although in some areas the distribution cable is buried in underground ducts or
trenches. The physical components of the cable systems require maintenance and periodic upgrading
to improve system performance and capacity. In addition, we maintain a network operations center
with equipment necessary to monitor and manage the status of our HSD network.
We own and lease the real property housing our regional call centers, business offices and
warehouses throughout our operating regions. Our headend facilities, signal reception sites and
microwave facilities are located on owned and leased parcels of land, and we generally own the
towers on which certain of our equipment is located. We own most of our service vehicles. We
believe that our properties, both owned and leased, are in good condition and are suitable and
adequate for our operations.
ITEM 3. LEGAL PROCEEDINGS
We are named as a defendant in a putative class action, captioned Gary Ogg and Janice Ogg v.
Mediacom LLC, pending in the Circuit Court of Clay County, Missouri, originally filed in April
2001. The lawsuit alleges that we, in areas where there was no cable franchise failed to obtain
permission from landowners to place our fiber interconnection cable notwithstanding the possession
of agreements or permission from other third parties. While the parties continue to contest
liability, there also remains a dispute as to the proper measure of damages. Based on a report by
their experts, the plaintiffs claim compensatory damages of approximately $14.5 million. Legal
fees, prejudgment interest, potential punitive damages and other costs could increase that estimate
to approximately $26.0 million. The plaintiffs recently proposed an alternative damage theory of
$42.0 million in compensatory damages. Notwithstanding the verdict in the trial described below, we
remain unable to reasonably determine the amount of our final liability in this lawsuit. Prior to
trial our experts estimated our liability to be within the range of approximately $0.1 million to
$2.3 million. This estimate does not include any estimate of damages for prejudgment interest,
attorneys’ fees or punitive damages.
28
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On March 9, 2009, a jury trial commenced solely for the claim of Gary and Janice Ogg, the
designated class representatives. On March 19, 2009, the jury rendered a verdict in favor of Gary
and Janice Ogg setting compensatory damages of $8,863 and punitive damages of $35,000. This verdict
is not yet final. Although we believe that the particular circumstances of each class member may
result in a different measure of damages for each member, if the same measure of compensatory
damages was used for each member, the aggregate compensatory damages would be approximately $16.2
million. We intend to file motions with respect to the verdict and vigorously defend against the
claims made by the other members of the class, including at trial, and on appeal, if necessary.
We
believe that the amount of actual liability would not
have a significant effect on our consolidated financial position, results of operations, cash flows
or business. There can be no assurance, however, that the actual liability
ultimately determined for all members of the class would not
exceed our estimated range or any amount derived from the verdict rendered on March 19, 2009. We
have tendered the lawsuit to our insurance carrier for defense and indemnification. The carrier has
agreed to defend us under a reservation of rights, and a declaratory judgment action is pending
regarding the carrier’s defense and coverage responsibilities.
We are involved in various other legal actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these other matters will not have a material
adverse effect on our consolidated financial position, results of operations, cash flows or
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANTS’ COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
There is no public trading market for our equity, all of which is held by our manager.
ITEM 6. SELECTED FINANCIAL DATA
In the table below, we provide you with selected
historical consolidated statement of operations
data and cash flow data for the years ended December 31, 2004
through 2008 and balance sheet data
as of December 31, 2004 through 2008, which are derived from our audited consolidated financial
statements (except other data and operating data).
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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| Year Ended December 31, | ||||||||||||||||||||
| 2008(11) | 2007 | 2006(12) | 2005 | 2004 | ||||||||||||||||
| (Amounts in thousands, except per share data and operating data) | ||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||
Revenues |
$ | 615,859 | $ | 565,913 | $ | 529,156 | $ | 485,705 | $ | 472,187 | ||||||||||
Costs and expenses: |
||||||||||||||||||||
Service costs |
267,321 | 245,968 | 222,334 | 199,568 | 185,123 | |||||||||||||||
Selling, general and administrative expenses |
110,605 | 104,694 | 101,149 | 94,313 | 86,807 | |||||||||||||||
Management fee expense — parent |
11,805 | 10,358 | 9,747 | 10,048 | 8,691 | |||||||||||||||
Depreciation and amortization |
109,883 | 113,597 | 104,678 | 101,467 | 107,282 | |||||||||||||||
Operating income |
116,245 | 91,296 | 91,248 | 80,309 | 84,284 | |||||||||||||||
Interest expense, net |
(99,639 | ) | (118,386 | ) | (112,895 | ) | (102,000 | ) | (97,790 | ) | ||||||||||
Loss on early extinguishment of debt |
— | — | (4,624 | ) | (4,742 | ) | — | |||||||||||||
(Loss) gain
on derivatives, net |
(23,321 | ) | (9,951 | ) | (7,080 | ) | 5,917 | 5,196 | ||||||||||||
Gain on sale of assets and investments, net |
— | — | — | 2,628 | 5,885 | |||||||||||||||
(Loss) gain on sale of cable systems, net |
(170 | ) | 8,826 | — | — | — | ||||||||||||||
Investment from other affiliate(1) |
18,000 | 18,000 | 18,000 | 18,000 | 18,000 | |||||||||||||||
Other expense, net |
(3,726 | ) | (4,411 | ) | (4,068 | ) | (4,406 | ) | (6,599 | ) | ||||||||||
Net income (loss) |
$ | 7,389 | $ | (14,626 | ) | $ | (19,419 | ) | $ | (4,294 | ) | $ | 8,976 | |||||||
Balance Sheet Data (end of period): |
||||||||||||||||||||
Total assets |
$ | 1,499,125 | $ | 1,467,146 | $ | 1,486,383 | $ | 1,492,010 | $ | 1,491,900 | ||||||||||
Total debt |
$ | 1,520,000 | $ | 1,505,500 | $ | 1,548,356 | $ | 1,468,781 | $ | 1,473,177 | ||||||||||
Total member’s deficit |
$ | (304,261 | ) | $ | (267,650 | ) | $ | (251,020 | ) | $ | (123,601 | ) | $ | (119,307 | ) | |||||
Cash Flow Data: |
||||||||||||||||||||
Net cash flows provided by (used in): |
||||||||||||||||||||
Operating activities |
$ | 186,383 | $ | 103,927 | $ | 133,394 | $ | 111,333 | $ | 137,793 | ||||||||||
Investing activities |
$ | (141,695 | ) | $ | (83,469 | ) | $ | (99,911 | ) | $ | (109,718 | ) | $ | (81,520 | ) | |||||
Financing activities |
$ | (44,213 | ) | $ | (22,374 | ) | $ | (28,448 | ) | $ | (7,280 | ) | $ | (57,559 | ) | |||||
Other Data: |
||||||||||||||||||||
Adjusted OIBDA(2) |
$ | 226,557 | $ | 205,346 | $ | 196,337 | $ | 181,916 | $ | 191,589 | ||||||||||
Adjusted OIBDA margin(3) |
36.8 | % | 36.3 | % | 37.1 | % | 37.4 | % | 40.6 | % | ||||||||||
Ratio of earnings to fixed charges(4) |
1.07 | — | — | — | 1.08 | |||||||||||||||
Operating Data: (end of period) |
||||||||||||||||||||
Estimated homes passed(5) |
1,370,000 | 1,360,000 | 1,355,000 | 1,347,000 | 1,329,000 | |||||||||||||||
Basic subscribers(6) |
601,000 | 604,000 | 629,000 | 650,000 | 675,000 | |||||||||||||||
Digital customers(7) |
288,000 | 240,000 | 224,000 | 205,000 | 160,000 | |||||||||||||||
HSD customers(8) |
337,000 | 299,000 | 258,000 | 212,000 | 162,000 | |||||||||||||||
Phone customers(9) |
114,000 | 79,000 | 34,000 | 4,500 | — | |||||||||||||||
RGUs(10) |
1,340,000 | 1,222,000 | 1,145,000 | 1,071,500 | 997,000 | |||||||||||||||
| (1) | Investment income from
affiliate represents the investment income on our $150.0 million
preferred equity investment in Mediacom Broadband. See Note 11. |
|
| (2) | “Adjusted OIBDA” is not a financial measure calculated in accordance
with generally accepted accounting principles (GAAP) in the United
States. We define Adjusted OIBDA as operating income before
depreciation and amortization and non-cash, share-based compensation
charges. |
|
Adjusted OIBDA is one of the primary measures used by management to
evaluate our performance and to forecast future results. It is also a
significant performance measure in our annual incentive compensation
programs. We believe Adjusted OIBDA is useful for investors because it
enables them to access our performance in a manner similar to the
methods used by management, and provides a measure that can be used to
analyze, value and compare the companies in the cable industry, which
may have different depreciation and amortization policies, as well as
different non-cash, share-based compensation programs. Adjusted OIBDA
and similar measures are used in calculating compliance with the
covenants of our debt arrangements. A limitation of Adjusted OIBDA,
however, is that it excludes depreciation and amortization, which
represents the periodic costs of certain capitalized tangible and
intangible assets used in generating revenues in our business.
Management utilizes a separate process to budget, measure and evaluate
capital expenditures. In addition, Adjusted OIBDA has the limitation of not reflecting the effect of our non-cash, share-based compensation
charges.
|
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Adjusted OIBDA should not be regarded as an alternative to either
operating income or net income (loss) as an indicator of operating
performance nor should it be considered in isolation or a substitute
for financial measures prepared in accordance with GAAP. We believe
that operating income is the most directly comparable GAAP financial
measure to Adjusted OIBDA. |
||
The following represents a reconciliation of Adjusted OIBDA to
operating income, which is the most directly comparable GAAP measure
(dollars in thousands): |
| Year Ended December 31, | ||||||||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
Adjusted OIBDA |
$ | 226,557 | $ | 205,346 | $ | 196,337 | $ | 181,916 | $ | 191,589 | ||||||||||
Non-cash, share-based compensation charges(A) |
(429 | ) | (453 | ) | (411 | ) | (140 | ) | (23 | ) | ||||||||||
Depreciation and amortization |
(109,883 | ) | (113,597 | ) | (104,678 | ) | (101,467 | ) | (107,282 | ) | ||||||||||
Operating income |
$ | 116,245 | $ | 91,296 | $ | 91,248 | $ | 80,309 | $ | 84,284 | ||||||||||
| (A) | Includes approximately $9, $10, $28, $23 and $26 for the years ended December 31,
2008, 2007, 2006, 2005 and 2004, respectively, related to the issuance of other
share-based awards. |
| (3) | Represents Adjusted OIBDA as a percentage of revenues. See note 2 above. |
|
| (4) | Earnings were insufficient to cover fixed charges by $14.4 million, $19.6 million and $4.9 million for the years ended
December 31, 2007, 2006, and 2005, respectively. Refer to Exhibit 12.1 |
|
| (5) | Represents an estimate of the number of single residence homes, apartments and condominium units passed by the cable
distribution network. Estimated homes passed is based on the best available information. |
|
| (6) | Represents a dwelling with one or more television sets that receives a package of over-the-air broadcast stations,
local access channels or certain satellite-delivered cable services. Accounts that are billed on a bulk basis, which
typically receive discounted rates, are converted into full-price equivalent basic subscribers by dividing total bulk
billed basic revenues of a particular system by the average cable rate charged to basic subscribers in that system.
This conversion method is consistent with the methodology used in determining payments to programmers. Basic
subscribers include connections to schools, libraries, local government offices and employee households that may not be
charged for limited and expanded cable services, but may be charged for digital cable, HSD, phone or other services.
Customers who exclusively purchase HSD and/or phone service are not counted as basic subscribers. Our methodology of
calculating the number of basic subscribers may not be identical to those used by other companies offering similar
services. |
|
| (7) | Represents customers that receive digital video services. |
|
| (8) | Represents residential HSD customers and small to medium-sized commercial cable modem accounts billed at higher rates
than residential customers. Small to medium-sized commercial accounts generally represent customers with bandwidth
requirements of up to 20Mbps, and are converted to equivalent residential HSD customers by dividing their associated
revenues by the applicable residential rate. Our HSD customers exclude large commercial accounts. Our methodology of
calculating HSD customers may not be identical to those used by other companies offering similar services. |
|
| (9) | Represents estimated number of homes to which we market phone service, and is based upon the best available information. |
|
| (10) | Represents the sum of basic subscribers and digital, HSD and phone customers. |
|
| (11) | Does not give effect to the
completion of the Transfer Agreement on February 13, 2009 and the $110 million
contribution that we made to Mediacom on
February 12, 2009. See Note 7. |
|
| (12) | Effective January 1, 2006, we adopted SFAS No. 123(R). See Note 9 to our
consolidated financial statements. |
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Reference is made to the “Risk Factors” in Item 1A for a discussion of important factors that could
cause actual results to differ from expectations and any of our forward-looking statements
contained herein. The following discussion should be read in conjunction with our audited
consolidated financial statements as of and for the years ended December 31, 2008, 2007 and 2006.
Overview
We are a wholly-owned subsidiary of Mediacom Communications Corporation (“MCC” or “Mediacom”).
Through our interactive broadband network, we provide our customers with a wide array of advanced
products and services, including video services such as VOD, HDTV and DVRs, in addition to HSD and
phone service. We offer triple-play bundles of video, HSD and phone to 87% of our estimated homes
passed. Bundled products and services offer our customers a single provider contact for ordering,
provisioning, billing and customer care.
As of December 31, 2008, our cable systems passed an estimated 1.37 million homes and served
601,000 basic subscribers. We provide digital video services to 288,000 customers, representing a
digital penetration of 47.9% of our basic subscribers; HSD service to 337,000 customers,
representing a HSD penetration of 24.6% of our estimated homes passed; and phone service to 114,000
customers, representing a penetration of 9.5% of our estimated marketable phone homes.
We evaluate our performance, in part, by measuring the number of RGUs we serve. As of December 31,
2008, we served 1.34 million RGUs, representing an increase of 9.7% over the prior year.
Revenues, Costs and Expenses
Video revenues primarily represent monthly subscription fees charged to customers for our core
cable products and services (including basic and digital cable programming services, wire
maintenance, equipment rental and services to commercial establishments), pay-per-view charges,
installation, reconnection and late payment fees and other ancillary revenues. HSD revenues
primarily represent monthly fees charged to customers, including small to medium sized commercial
establishments, for our HSD products and services and equipment rental fees, as well as fees
charged to medium to large sized businesses for our scalable, fiber- based enterprise network
products and services. Phone revenues primarily represent monthly fees charged to customers.
Advertising revenues represent the sale of advertising time on various channels.
Significant service costs include: programming expenses; employee expenses related to wages and
salaries of technical personnel who maintain our cable network, perform customer installation
activities and provide customer support; HSD costs, including costs of bandwidth connectivity and
customer provisioning; phone service costs, including delivery and other expenses; and field
operating costs, including outside contractors, vehicle, utilities and pole rental expenses.
Video programming costs, which are generally paid on a per subscriber basis, represent our largest
single expense and have historically increased due to both increases in the rates charged for
existing programming services and the introduction of new programming services to our customers.
These costs are expected to continue to grow principally because of contractual unit rate increases
and the increasing demands of television broadcast station owners for retransmission consent fees.
As a consequence, it is expected that our video gross margins will decline as increases in
programming costs outpace growth in video revenues.
Significant selling, general and administrative expenses include: wages and salaries for our call
centers, customer service and support and administrative personnel; franchise fees and taxes;
marketing; bad debt; billing; advertising; and office costs related to telecommunications and
office administration.
Management fee expense reflects charges incurred under management arrangements with our parent,
MCC.
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Adjusted OIBDA
We define Adjusted OIBDA as operating income before depreciation and amortization and non-cash,
share-based compensation charges. Adjusted OIBDA is one of the primary measures used by management
to evaluate our performance and to forecast future results but is not a financial measure
calculated in accordance with generally accepted accounting principles (GAAP) in the United States. It is also a significant performance measure in our
annual incentive compensation programs.
We believe Adjusted OIBDA is useful for investors because it enables them to assess our performance
in a manner similar to the methods used by management, and provides a measure that can be used to
analyze, value and compare the companies in the cable industry, which may have different
depreciation and amortization policies, as well as different non-cash, share-based compensation
programs. Adjusted OIBDA and similar measures are used in calculating compliance with the covenants
of our debt arrangements. A limitation of Adjusted OIBDA, however, is that it excludes depreciation
and amortization, which represents the periodic costs of certain capitalized tangible and
intangible assets used in generating revenues in our business. Management utilizes a separate
process to budget, measure and evaluate capital expenditures. In addition, Adjusted OIBDA has the
limitation of not reflecting the effect of the non-cash, share-based compensation charges.
Adjusted OIBDA should not be regarded as an alternative to either operating income or net income
(loss) as an indicator of operating performance nor should it be considered in isolation or as a
substitute for financial measures prepared in accordance with GAAP. We believe that operating
income is the most directly comparable GAAP financial measure to Adjusted OIBDA.
Actual Results of Operations
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
The following table sets forth the unaudited consolidated statements of operations for the years
ended December 31, 2008 and 2007 (dollars in thousands and percentage changes that are not
meaningful are marked NM):
| Year Ended December 31, | ||||||||||||||||
| 2008 | 2007 | $ Change | % Change | |||||||||||||
Revenues |
$ | 615,859 | $ | 565,913 | $ | 49,946 | 8.8 | % | ||||||||
Costs and expenses: |
||||||||||||||||
Service costs |
267,321 | 245,968 | 21,353 | 8.7 | % | |||||||||||
Selling, general and administrative expenses |
110,605 | 104,694 | 5,911 | 5.6 | % | |||||||||||
Management fee expense |
11,805 | 10,358 | 1,447 | 14.0 | % | |||||||||||
Depreciation and amortization |
109,883 | 113,597 | (3,714 | ) | (3.3 | %) | ||||||||||
Operating income |
116,245 | 91,296 | 24,949 | 27.3 | % | |||||||||||
Interest expense, net |
(99,639 | ) | (118,386 | ) | 18,747 | (15.8 | %) | |||||||||
Loss on derivatives, net |
(23,321 | ) | (9,951 | ) | (13,370 | ) | NM | |||||||||
(Loss) gain on sale of cable systems, net |
(170 | ) | 8,826 | (8,996 | ) | NM | ||||||||||
Investment income from affiliate |
18,000 | 18,000 | — | NM | ||||||||||||
Other
expense, net |
(3,726 | ) | (4,411 | ) | 685 | (15.5 | %) | |||||||||
Net income (loss) |
$ | 7,389 | $ | (14,626 | ) | $ | 22,015 | (150.5 | %) | |||||||
Adjusted OIBDA |
$ | 226,557 | $ | 205,346 | $ | 21,211 | 10.3 | % | ||||||||
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The following represents a reconciliation of Adjusted OIBDA to operating income, which is the most
directly comparable GAAP measure (dollars in thousands):
| Year Ended December 31, | ||||||||||||||||
| 2008 | 2007 | $ Change | % Change | |||||||||||||
Adjusted OIBDA |
$ | 226,557 | $ | 205,346 | $ | 21,211 | 10.3 | % | ||||||||
Non-cash, share-based compensation charges(1) |
(429 | ) | (453 | ) | 24 | (5.3 | %) | |||||||||
Depreciation and amortization |
(109,883 | ) | (113,597 | ) | 3,714 | (3.3 | %) | |||||||||
Operating income |
$ | 116,245 | $ | 91,296 | $ | 24,949 | 27.3 | % | ||||||||
| (1) | Includes approximately $9
and $10 for the years ended December 31, 2008 and 2007, respectively,
related to the issuance of other share-based awards. |
Revenues
The following table sets forth revenue and selected subscriber, customer and average monthly
revenue statistics for the years ended December 31, 2008 and 2007 (dollars in thousands, except per
subscriber data):
| Year Ended December 31, | ||||||||||||||||
| 2008 | 2007 | $ Change | % Change | |||||||||||||
Video |
$ | 408,536 | $ | 398,481 | $ | 10,055 | 2.5 | % | ||||||||
HSD |
146,970 | 125,914 | 21,056 | 16.7 | % | |||||||||||
Phone |
40,359 | 21,732 | 18,627 | 85.7 | % | |||||||||||
Advertising |
19,994 | 19,786 | 208 | 1.1 | % | |||||||||||
Total |
$ | 615,859 | $ | 565,913 | $ | 49,946 | 8.8 | % | ||||||||
| Year Ended December 31, | Increase | |||||||||||||||
| 2008 | 2007 | (Decrease) | % Change | |||||||||||||
Basic subscribers |
601,000 | 604,000 | (3,000 | ) | (0.5 | %) | ||||||||||
Digital customers |
288,000 | 240,000 | 48,000 | 20.0 | % | |||||||||||
HSD Customers |
337,000 | 299,000 | 38,000 | 12.7 | % | |||||||||||
Phone customers |
114,000 | 79,000 | 35,000 | 44.3 | % | |||||||||||
RGUs(1) |
1,340,000 | 1,222,000 | 118,000 | 9.7 | % | |||||||||||
Average total monthly revenue per basic subscriber (2) |
$ | 85.18 | $ | 76.50 | $ | 8.68 | 11.3 | % | ||||||||
| (1) | RGUs represent the total of basic subscribers and digital, HSD and phone customers. |
|
| (2) | Represents total average monthly revenues for the year divided by total average
basic subscribers during such period. |
Revenues rose 8.8%, largely attributable to the growth in our HSD and phone customers, as well as
basic video price increases. RGUs grew 9.7% and average total monthly revenue per basic subscriber
was 11.4% higher than the prior year.
Video revenues increased 2.5%, primarily due to basic video rate increases and customer growth in
our advanced video products and services, offset in part by a lower number of basic subscribers.
During the year ended December 31, 2008, we lost 3,000 basic subscribers, compared to a reduction
of 25,000 basic subscribers in the prior year. which includes a significant number of basic
subscribers lost in connection with the retransmission consent dispute with an owner of a major
television broadcast group and the sale during the period of cable systems serving on a net basis
4,100 basic subscribers. Digital customers grew by 48,000, as compared to an increase of 16,000 in
the prior year. We ended the year with 288,000 digital customers, which represents a 47.9%
penetration of basic subscribers.
As of December 31, 2008, 31.6% of digital customers received DVR and/or HDTV services,
as compared to 30.7% in the prior year.
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HSD revenues rose 16.7%, principally due to a 12.7% increase in HSD customers and, to a lesser
extent, growth in our enterprise network products and services. HSD customers grew by 38,000, as
compared to a gain of 41,000 in the prior year. We ended the year with 337,000 customers, or a
24.6% penetration of estimated homes passed.
Phone revenues grew 85.7%, primarily due to a 44.3% increase in phone customers and, to a lesser
extent, a reduction in discounted pricing. Phone customers grew by 35,000, as compared to a gain of
45,000 in the prior year. We ended the year with 114,000 customers, which represents a 9.5%
penetration of our estimated marketable phone homes. As of December 31, 2008, our phone service was
marketed to 87% of our 1.37 million estimated homes passed.
Advertising revenues increased 1.1%, largely as a result of greater national advertising in our
service areas, mostly offset by a sharp decrease in automotive advertising.
Costs and Expenses
Service costs rose 8.7%, primarily due to higher programming, phone service and field operating
expenses, offset in part by lower HSD service costs. Programming expenses grew 8.5%, principally as
a result of higher contractual rates charged by our programming vendors. Phone service costs rose
67.4%, mainly due to the growth in phone customers. Field operating expenses grew 13.0%, primarily
due to greater vehicle fuel and repair expenses, higher pole rental charges and lower
capitalization of overhead costs, offset in part by lower insurance costs. HSD expenses decreased
18.9% due to a reduction in product delivery costs, offset in part by HSD customer growth. Service
costs as a percentage of revenues were 43.4% and 43.5% for the years ended December 31, 2008 and
2007, respectively.
Selling, general and administrative expenses rose 5.6%, principally due to higher customer service
employee costs and marketing expenses, offset in part by a decrease in billing expenses. Customer
service employee costs rose 13.4% as a result of higher staffing levels at our call centers.
Marketing expenses grew 11.5%, primarily due to higher staffing levels, more frequent direct
mailing campaigns,a greater use of third-party sales support and greater expenses tied to sales
activity, offset in part by a reduction in other advertising. Billing expenses fell 10.5%,
primarily due to more favorable rates charged by our billing service provider. Selling, general and
administrative expenses as a percentage of revenues were 18.0% and 18.5% for the years ended
December 31, 2008 and 2007, respectively.
Management
fee expense rose 14.0%, reflecting higher overhead charges by MCC. As a
percentage of revenues, management fee expense was 1.9% and 1.8% for the years ended December 31,
2008 and 2007, respectively.
Depreciation
and amortization decreased 3.3%, largely as a result of an increase in the useful
lives of certain fixed assets, offset in part by increased deployment of shorter-lived customer
premise equipment.
Adjusted OIBDA
Adjusted OIBDA rose 10.3%, due to growth in HSD, phone and video revenues, offset in part by higher
service costs and, to a lesser extent, selling, general and administrative expenses.
Operating Income
Operating income grew 27.3%, primarily due to the increase in Adjusted OIBDA.
Interest Expense, Net
Interest expense, net, decreased 15.8%, primarily due to lower market interest rates on variable
rate debt, offset in part by higher average indebtedness.
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Loss on Derivatives, Net
We enter into interest rate exchange agreements, or “interest rate swaps,” with counterparties to
fix the interest rate on a portion of our variable rate debt to reduce the potential volatility in
our interest expense that would otherwise result from changes in variable market interest rates. As
of December 31, 2008, we had interest rate swaps with an aggregate notional amount of $1.1 billion,
of which $0.5 billion and $0.1 billion are forward starting swaps, which commence during the years
ending December 31, 2009 and 2010, respectively. These swaps have not been designated as hedges for
accounting purposes. The changes in their mark-to-market values are derived primarily from changes
in market interest rates and the decrease in their time to maturity. As a result of the quarterly
mark-to-market valuation of these interest rate swaps, we recorded losses on derivatives amounting
to $23.3 million and $10.0 million, based upon information provided by our counterparties, for the
years ended December 31, 2008 and 2007, respectively.
(Loss) Gain on Sale of Cable Systems, Net
During the year ended December 31, 2007, we sold a cable system for $24.7 million and recorded a
net gain on sale of $8.8 million.
Other Expense, Net
Other
expense, net was $3.7 million and $4.4 million for the years ended December 31, 2008 and
2007, respectively. During the year ended December 31, 2008 and 2007, other expense, net, included
revolving credit facility commitment fees and deferred financing costs.
Investment Income from Affiliate
Investment income from affiliate was $18.0 million for the years ended December 31, 2008 and 2007,
respectively. This amount represents the investment income on our $150.0 million preferred equity
investment in Mediacom Broadband.
Net
Income (Loss)
As a
result of the factors described above, we reported net income for the year ended December 31,
2008 of $7.4 million, as compared to a net loss of $14.6 million for the year ended December 31,
2007.
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Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
The following table sets forth the unaudited consolidated statements of operations for the years
ended December 31, 2007 and 2006 (dollars in thousands and percentage changes that are not
meaningful are marked NM):
| Year Ended December 31, | ||||||||||||||||
| 2007 | 2006 | $ Change | % Change | |||||||||||||
Revenues |
$ | 565,913 | $ | 529,156 | $ | 36,757 | 6.9 | % | ||||||||
Costs and expenses: |
||||||||||||||||
Service costs |
245,968 | 222,334 | 23,634 | 10.6 | % | |||||||||||
Selling, general and administrative expenses |
104,694 | 101,149 | 3,545 | 3.5 | % | |||||||||||
Management fee expense |
10,358 | 9,747 | 611 | 6.3 | % | |||||||||||
Depreciation and amortization |
113,597 | 104,678 | 8,919 | 8.5 | % | |||||||||||
Operating income |
91,296 | 91,248 | 48 | 0.1 | % | |||||||||||
Interest expense, net |
(118,386 | ) | (112,895 | ) | (5,491 | ) | 4.9 | % | ||||||||
Loss on early extinguishment of debt |
— | (4,624 | ) | 4,624 | NM | |||||||||||
Loss on derivatives, net |
(9,951 | ) | (7,080 | ) | (2,871 | ) | 40.6 | % | ||||||||
Gain on sale of cable systems, net |
8,826 | — | 8,826 | NM | ||||||||||||
Investment income from affiliate |
18,000 | 18,000 | — | NM | ||||||||||||
Other expense |
(4,411 | ) | (4,068 | ) | (343 | ) | 8.4 | % | ||||||||
Net loss |
$ | (14,626 | ) | $ | (19,419 | ) | $ | 4,793 | (24.7 | %) | ||||||
Adjusted OIBDA |
$ | 205,346 | $ | 196,337 | $ | 9,009 | 4.6 | % | ||||||||
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The following represents a reconciliation of Adjusted OIBDA to operating income, which is the most
directly comparable GAAP measure (dollars in thousands):
| Year Ended December 31, | ||||||||||||||||
| 2007 | 2006 | $ Change | % Change | |||||||||||||
Adjusted OIBDA |
$ | 205,346 | $ | 196,337 | $ | 9,009 | 4.6 | % | ||||||||
Non-cash, share-based compensation charges(1) |
(453 | ) | (411 | ) | (42 | ) | 10.2 | % | ||||||||
Depreciation and amortization |
(113,597 | ) | (104,678 | ) | (8,919 | ) | 8.5 | % | ||||||||
Operating income |
$ | 91,296 | $ | 91,248 | $ | 48 | 0.1 | % | ||||||||
| (1) | Includes approximately $10 and $28 for the years ended December 31, 2007 and
2006, respectively, related to the issuance of other share-based awards. |
Revenues
The following table sets forth revenue and selected subscriber, customer and average monthly
revenue statistics for the years ended December 31, 2007 and
2006 (dollars in thousands, except
per subscriber data):
Note: Certain reclassifications have been made to the prior year’s amounts to conform to the
current year’s presentation.
| Year Ended December 31, | ||||||||||||||||
| 2007 | 2006 | $ Change | % Change | |||||||||||||
Video |
$ | 398,481 | $ | 396,094 | $ | 2,387 | 0.6 | % | ||||||||
HSD |
125,914 | 106,168 | 19,746 | 18.6 | % | |||||||||||
Phone |
21,732 | 7,166 | 14,566 | 203.3 | % | |||||||||||
Advertising |
19,786 | 19,728 | 58 | 0.3 | % | |||||||||||
Total |
$ | 565,913 | $ | 529,156 | $ | 36,757 | 6.9 | % | ||||||||
| Year Ended December 31, | Increase | |||||||||||||||
| 2007 | 2006 | (Decrease) | % Change | |||||||||||||
Basic subscribers |
604,000 | 629,000 | (25,000 | ) | (4.0 | %) | ||||||||||
Digital customers |
240,000 | 224,000 | 16,000 | 7.1 | % | |||||||||||
HSD Customers |
299,000 | 258,000 | 41,000 | 15.9 | % | |||||||||||
Phone customers |
79,000 | 34,000 | 45,000 | 132.4 | % | |||||||||||
RGUs |
1,222,000 | 1,145,000 | 77,000 | 6.7 | % | |||||||||||
Average total monthly revenue per basic subscriber |
$ | 76.50 | $ | 68.95 | $ | 7.54 | 10.9 | % | ||||||||
Revenues rose 6.9% largely attributable to the growth in our data and phone customers. RGUs grew
6.7%, and average total monthly revenue per basic subscriber was 10.9% higher than the prior year.
Video revenues increased 0.6%, due to higher service fees from our advanced video products and
services such as DVRs and HDTV, offset by a lower number of basic subscribers. During the year
ended December 31, 2007, we lost 25,000 basic subscribers, including a significant number of basic
subscribers lost in connection with the retransmission consent dispute with the owner of a major
television broadcast group and the sale during the period of cable systems serving on a net basis
4,100 basic subscribers, as compared to a loss of 21,000 basic subscribers in the prior year.
Digital customers grew by 16,000, as compared to an increase of 19,000 in the prior year. We ended
the year with 240,000 digital customers, representing a 39.7% penetration of basic subscribers. As
of December 31, 2007, 29.1% of digital customers received DVR and/or HDTV services, as compared to
18.9% the prior year.
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HSD revenues rose 18.6%, primarily due to a 15.9% year-over-year increase in HSD customers. HSD
customers grew by 41,000, as compared to a gain of 46,000 in the prior year, ending the year with
299,000 customers, or a 22.0% penetration of estimated homes passed.
Phone revenues grew 203.3%, primarily due to a 132.4% year-over-year increase in phone customers.
Phone customers grew by 45,000, as compared to a gain of 29,500 in the prior year, ending the year
with 79,000 customers, or a 6.9% penetration of estimated marketable phone homes. As of
December 31, 2007, Mediacom Phone was marketed to nearly 85% of our 1.36 million estimated homes
passed.
Advertising revenues remained relatively flat year-over-year, despite a meaningful decline in
political advertising from the prior year.
Costs and Expenses
Service costs rose 10.6%, primarily due to customer growth in our phone and HSD services and
increases in programming expenses. Recurring expenses related to our phone and HSD services grew
52.3%, commensurate with the significant increase of our phone and HSD customers. Programming
expense rose 5.6%, principally as a result of higher unit costs charged by our programming vendors,
offset in part by a lower number of basic subscribers.
Selling, general and administrative expenses rose 3.5%, principally due to higher marketing, bad
debt and billing expenses, offset in part by reductions in telecommunications and employee benefit
costs. Marketing costs rose by 11.6%, largely due to increases in direct mailing campaigns, higher
salaries, sales commissions and recruiting costs and an increase in expenses related to product and
service advertising. Bad debt expenses grew by 18.9%, primarily due to higher average write-offs
per delinquent account, unusually low write-offs of uncollectable accounts in the prior year and
increased collection expense. Billing expenses rose by 4.2%, largely due to increased processing,
bank and credit card fees. Selling, general and administrative expenses as a percentage of revenues
were 18.5% and 19.1% for the years ended December 31, 2007 and 2006, respectively.
Management fee expense increased 6.3%, reflecting higher overhead charges by MCC. As a percentage
of revenues, management fee expense was 1.8% for each of the years ended December 31, 2007 and 2006.
Depreciation and amortization rose 8.5%, primarily due to an overall increase in capital spending.
Adjusted OIBDA
Adjusted OIBDA rose 4.6%, due to revenue growth, especially in HSD and phone, offset in part by
increases in service costs and selling, general and administrative expenses.
Operating Income
Operating income was flat year-over-year, largely due to higher depreciation and amortization and
service costs, substantially offset by the growth in Adjusted OIBDA.
Interest Expense, Net
Interest expense, net, increased by 4.9%, primarily due to higher average indebtedness, the
expiration of certain interest rate hedging agreements with favorable rates and higher market
interest rates on variable rate debt.
Loss on Derivatives, Net
As of December 31, 2007, we had interest rate swaps with an aggregate notional amount of
$400.0 million. The changes in their mark-to-market values are derived primarily from changes in
market interest rates, the decrease in their time to maturity and the creditworthiness of the
counterparties. These swaps have not been designated as hedges for accounting purposes. As a result
of the quarterly mark-to-market valuation of these interest rate swaps, we recorded losses on
derivatives amounting to $10.0 million and $7.1 million based upon information provided by our
counterparties for the years ended December 31, 2007 and 2006, respectively.
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Loss on Early Extinguishment of Debt
We incurred a loss of $4.6 million for the year ended December 31, 2006, as a result of call
premiums paid and the write-off of deferred financing costs associated with various refinancing
transactions occurring in the year ended December 31, 2006
Investment Income from Affiliate
Investment income from affiliate was $18.0 million for the years ended December 31, 2007 and 2006,
respectively. This amount represents the investment income on our $150.0 million preferred equity
investment in Mediacom Broadband.
Net Loss
As a result of the factors described above, we incurred a net loss for the year ended December 31,
2007 of $14.6 million, as compared to a net loss of $19.4 million for the year ended December 31,
2006.
Liquidity and Capital Resources
We have invested, and will continue to invest, in our network to enhance our reliability and
capacity, and in the further deployment of advanced products and services. Our capital spending
today is devoted primarily to customer growth and the deployment of advanced services. We have a
high level of indebtedness and incur significant amounts of interest expense each year. We believe
that we will meet interest expense and principal payments, capital spending and other requirements
through a combination of our net cash flows from operating activities, dividends from our preferred
equity investment in Mediacom Broadband, borrowing availability under our bank credit
facility and our ability to secure future external financing. However, there is no assurance that
we will be able to obtain sufficient future financing, or, if we were able to do so, that the terms
would be favorable to us.
As of December 31, 2008, our total debt was $1.520 billion. Of this amount, $30.5 million matures
during the year ending December 31, 2009. During the ended December 31, 2008, we paid cash interest
of $99.9 million, net of capitalized interest. As of December 31, 2008, about 74% of our
outstanding indebtedness was at fixed interest rates or subject to interest rate protection.
Recent Developments in the Credit Markets
In light of the unprecedented volatility in financial markets, we continue to assess the impact, if
any, of recent market developments, including the bankruptcy, restructuring or merging of certain
banks and investment banks on our financial position. These assessments include a review of our
continued access to liquidity in the credit markets and counterparty creditworthiness.
In this severely tightened credit environment, we believe we have sufficient liquidity to meet our
requirements over the next two years. We fund our liquidity needs for capital investment, working
capital, and other financial commitments through cash flow from continuing operations and available
revolving credit commitments aggregating $311.8 million as of December 31, 2008. We have
$30.5 million of debt maturities in 2009 and $56.5 million of debt maturities in 2010. At this
time, we are not aware of any banks being in a position where they would be unable
to fund borrowings made under our revolving credit commitments (the
“revolver”). The turmoil in the financial
markets may create additional risks in the foreseeable future, including the failure of additional
banks, which could reduce amounts available to us under the revolver. If the
current economic conditions were to persist or worsen, we may not be able to replace the liquidity
lost as the revolver expires, or refinance
outstanding balances under the maturing revolver, term loans or senior notes at all or on acceptable terms. Even if we
can secure refinancing, if prevailing credit market conditions persist or worsen, we would likely
pay considerably higher interest rates on any refinancing or new financing than those we currently
pay.
Bank
Credit Facility
Our operating subsidiaries have a $1.217 billion bank credit facility (the “credit facility”)
expiring in 2015, of which $895.0 million was outstanding as of
December 31, 2008. The credit
facility consists of the $400.0 million revolver, a $180.0 million term loan and a
$637.0 million term loan. Continued access to the credit facility is subject to our remaining in
compliance with the covenants of the credit facility, including covenants tied to our operating
performance, principally the requirement that we maintain a maximum ratio of total senior debt to
cash flow, as defined in our credit agreement, of 6.0 to 1.0. The average interest rates on
outstanding debt under the credit facility as of December 31, 2008 and 2007 were 3.5% and
6.7%, respectively, including the effect of the interest rate exchange agreements discussed below.
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The credit facility is collateralized by our pledge of all of our ownership interests in our
operating subsidiaries, and is guaranteed by us on a limited recourse basis to the extent of such
ownership interests.
As of
December 31, 2008, approximately $10.2 million of letters
of credit were issued under the credit facility to various parties as collateral for our performance relating to insurance
and franchise requirements.
Interest Rate Exchange Agreements
We use interest rate exchange agreements, or interest rate swaps, to fix the applicable Eurodollar
portion of debt under the credit facility. As of December 31, 2008, we had current interest rate
swaps with various banks pursuant to which the interest rate on $500.0 million was fixed at a
weighted average rate of approximately 4.6%. As of the same date, about 74% of our outstanding
indebtedness was at fixed interest rates or subject to interest rate protection. These agreements
have been accounted for on a mark-to-market basis as of, and for the year ended December 31, 2008.
Our current interest rate swaps are scheduled to expire in the amounts of: $300.0 million and
$200.0 million during the years ended December 31, 2009 and 2010, respectively.
In 2008, we entered into forward starting interest rate swaps that fixed rates for two years at
approximately 3.2% on $300.0 million of floating rate debt, commencing in 2009 and 2.9% on $100.0
million of floating rate debt commencing in 2010. We also entered forward starting interest rate
swaps that fixed rates for three years at approximately 2.8% on $200.0 million of floating rate
debt, commencing in 2009. These agreements have been accounted for on a mark-to-market basis as
of, and for the year ended December 31, 2008.
Although we may be exposed to future losses in the event of counterparties’ non-performance, we do
not expect such losses, if any, to be material.
Senior Notes
We have issued senior notes totaling $625.0 million as of December 31, 2008. The indentures
governing our senior notes also contain financial and other covenants, though they are generally
less restrictive than those found in the credit facility and do not require us to maintain
any financial ratios. Principal covenants include a limitation on the incurrence of additional
indebtedness based upon a maximum ratio of total indebtedness to cash flow, as defined in these
debt agreements, of 7.0 to 1.0. These agreements also contain limitations on dividends, investments
and distributions.
Covenant Compliance and Debt Ratings
For all periods through December 31, 2008,
we were in compliance with all of the covenants under
the credit facility and other debt arrangements. We believe that we will not have any
difficulty complying with any of the applicable covenants in the foreseeable future.
Our future access to the debt markets and the terms and conditions we receive are influenced by
our, and Mediacom’s credit ratings. Mediacom’s corporate credit ratings are B1 with a stable
outlook by Moody’s, and B+, with a stable outlook, by
Standard and Poor’s. There are no covenants,
events of default, borrowing conditions or other terms in the credit
facility or our
other debt arrangements that are based on changes in Mediacom’s and our credit ratings assigned by any
rating agency to Mediacom and us. Any future downgrade to our, or Mediacom’s, credit ratings could increase the
interest rate on future debt issuance and adversely impact our, and Medicom’s, ability to raise
additional funds.
Operating Activities
Net cash flows provided by operating activities were $186.4 million for the year ended December 31,
2008, primarily due to Adjusted OIBDA of $226.6 million and a positive net change
in our assets and liabilities of $43.2 million, offset in part by interest expense of $99.6 million. The net change
in our operating assets and liabilities was principally due to an increase in accounts payable and
accrued expenses of $45.5 million.
Net cash flows provided by operating activities were $103.9 million for the year ended December 31,
2007, primarily due to Adjusted OIBDA of $205.3 million, offset in part by interest expense of
$118.4 million. The net change in our operating assets and liabilities was a positive $1.2
million, primarily due to an increase in accounts payable and accrued expenses of $9.7 million and,
to a lesser extent, a decrease in deferred revenue of $2.0 million,
mostly offset
by an increase in our prepaid
and other assets of $8.1 million and, to a lesser extent, a decrease in accounts receivable, net,
of $1.8 million.
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Investing Activities
Net cash flows used in investing activities were $141.7 million for the year ended December 31,
2008. Capital expenditures were higher by $40.8 million, and represented all of the net cash flows
used in investing activities in the current year. The increase in capital expenditures was largely
due to higher spending on upgrades and
rebuilds of existing plant to increase bandwidth capacity, scalable infrastructure for digital
equipment and customer premise equipment as a result of customer growth.
Net cash flows used in investing activities were $83.5 million for the year ended December 31,
2007, a decrease of $16.4 million over the prior year. Capital expenditures of $100.9 million
represented most of the net cash flows used in investing activities and were offset in part by
proceeds received from the sale of cable systems, net of acquisitions, of approximately $17.4
million. The increase in capital expenditures was primarily due to higher spending on customer
premise equipment and related installation activities as a result of customer growth, as well as on
scalable infrastructure for HSD and digital equipment.
Financing Activities
Net cash flows used in financing activities were $44.2 million for the year ended December 31,
2008, principally due to net capital distributions to Mediacom of $44.0 million and other financing
activities, including book overdrafts, of $14.7 million, which were funded in part by net bank
financing of $14.5 million.
Net cash flows used in financing activities were $22.4 million for the year ended December 31,
2007, primarily due to net repayments of debt of $42.9 million, offset in part by other financing
activities, including book overdrafts, of $22.5 million.
Share Exchange Agreement between Mediacom and an affiliate of Morris Communications
On September 7, 2008, Mediacom entered into a Share Exchange Agreement (the “Exchange
Agreement”) with Shivers Investments, LLC (“Shivers”) and Shivers Trading & Operating Company
(“STOC”). Both STOC and Shivers are affiliates of Morris Communications Company, LLC (“Morris
Communications”). STOC, Shivers and Morris Communications are controlled by William S. Morris III,
who together with another Morris Communications representative, Craig S. Mitchell, held two seats
on Mediacom’s Board of Directors.
On February 13, 2009, Mediacom completed the Exchange Agreement pursuant to which it exchanged
100% of the shares of stock of a wholly-owned subsidiary, which held approximately $110 million of
cash and non-strategic cable systems serving approximately 25,000
basic subscribers contributed by us,
for 28,309,674 shares of Mediacom Class A common stock held by Shivers. Effective upon closing of the transaction,
Messrs. Morris and Mitchell resigned from Mediacom’s Board of Directors. See the discussion
regarding the Asset Transfer Agreement and Note 7 to our consolidated financial statements for more
information.
Asset Transfer Agreement with Mediacom and Mediacom Broadband
On
February 11, 2009, certain of our operating subsidiaries executed an Asset Transfer Agreement (the
“Transfer Agreement”) with MCC and the operating subsidiaries of Mediacom Broadband, pursuant
to which certain of our cable systems located in Florida, Illinois,
Iowa, Kansas, Missouri and Wisconsin, which serve approximately
45,900 basic subscribers would be exchanged for
certain of Mediacom Broadband’s cable systems located in Illinois, which serve
approximately 42,200 basic subscribers, and a cash payment of $8.2 million (the “Asset Transfer”).
We believe the Asset Transfer will better align our customer base geographically, making our cable
systems more clustered and allowing for more effective management, administration, controls and
reporting of our field operations. The Asset Transfer was completed on February 13, 2009.
As part of the Transfer Agreement, we contributed to Mediacom cable systems located in
Western North Carolina, which serve approximately 25,000 basic subscribers. These cable systems
were part of the Exchange Agreement noted above. In connection therewith, we received a $74
million cash contribution on February 12, 2009, of which funds had been contributed to Mediacom by
Mediacom Broadband on the same date.
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In total, we received $82.2 million under the Transfer Agreement (the “Transfer Proceeds”), which
were used by us to repay a portion of the outstanding balance under the revolving commitments of
our operating subsidiaries’ bank credit facility.
On February 12, 2009, after giving effect to the debt repayment funded by the Transfer Proceeds as
noted above, our operating subsidiaries borrowed approximately $110 million under the revolving
commitments of our bank credit facility. This represented net new borrowings of about $28 million.
On February 12, 2009, we contributed approximately
$110 million to Mediacom to fund their cash
obligation under the Exchange Agreement. The effective rate of this borrowing was
1.61% as of February 12, 2009.
Contractual Obligations and Commercial Commitments
The following table summarizes our contractual obligations and commercial commitments, and the
effects they are expected to have on our liquidity and cash flow, for the five years subsequent to
December 31, 2008 and thereafter (dollars in thousands)*:
| Operating | Interest | Purchase | ||||||||||||||||||
| Debt | Leases | Expense(1) | Obligations(2) | Total | ||||||||||||||||
2009 |
$ | 30,500 | $ | 2,494 | $ | 88,255 | $ | 22,199 | $ | 143,448 | ||||||||||
2010-2011 |
318,000 | 3,924 | 152,525 | 10,416 | 484,865 | |||||||||||||||
2012-2013 |
567,000 | 2,216 | 71,900 | 114 | 641,230 | |||||||||||||||
Thereafter |
604,500 | 5,421 | 9,469 | — | 619,390 | |||||||||||||||
Total cash obligations |
$ | 1,520,000 | $ | 14,055 | $ | 322,149 | $ | 32,729 | $ | 1,888,933 | ||||||||||
| * | Refer to Note 5 to our consolidated financial statements for a
discussion of our long-term debt, and to Note 10 for a discussion of
our operating leases and other commitments and contingencies. |
|
| (1) | Interest payments on floating rate debt and interest rate swaps are
estimated using amounts outstanding as of December 31, 2008 and the
average interest rates applicable under such debt obligations. |
|
| (2) | We have contracts with programmers who provide video programming
services to our subscribers. Our contracts typically provide that we
have an obligation to purchase video programming for our subscribers
as long as we deliver cable services to such subscribers. We have no
obligation to purchase these services if we are not providing cable
services, except when we do not have the right to cancel the
underlying contract or for contracts with a guaranteed minimum
commitment. We have included such amounts in our Purchase Obligations
above, as follows: $8.4 million for 2009 and $0.4 million for
2010-2013. |
Critical Accounting Policies
The preparation of our financial statements requires us to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. Periodically, we evaluate our estimates, including those
related to doubtful accounts, long-lived assets, capitalized costs and accruals. We base our
estimates on historical experience and on various other assumptions that we believe are reasonable.
Actual results may differ from these estimates under different assumptions or conditions. We
believe that the application of the critical accounting policies discussed below requires
significant judgments and estimates on the part of management. For a summary of our accounting
policies, see Note 2 of our consolidated financial statements.
Property, Plant and Equipment
We capitalize the costs of new construction and replacement of our cable transmission and
distribution facilities and new service installation in accordance with SFAS No. 51, “Financial
Reporting by Cable Television Companies.” Costs associated with subsequent installations of
additional services not previously installed at a customer’s dwelling are capitalized to the extent
such costs are incremental and directly attributable to the installation of such additional
services. Capitalized costs include all direct labor and materials as well as certain indirect
costs. Capitalized costs are recorded as additions to property, plant and equipment and depreciated
over the average life of the related assets. We use standard costing models, developed from actual
historical costs and relevant operational data, to determine our capitalized amounts. These models
include labor rates, overhead rates and standard time inputs to
perform various installation and construction activities. The development of these standards
involves significant judgment by management, especially in the development of standards for our
newer, advanced products and services in which historical data is limited. Changes to the estimates
or assumptions used in establishing these standards could be material. We perform periodic evaluations of the estimates used to determine the amount of costs that are capitalized.
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Any
changes to these estimates, which may be significant, are applied in the period in which the
evaluations were completed.
Valuation and Impairment Testing of Indefinite-lived Intangibles
As of December 31, 2008, we had approximately $568.1 billion of unamortized intangible assets,
including goodwill of $16.6 million and franchise rights of $550.7 billion on our consolidated
balance sheets. These intangible assets represented approximately 38% of our total assets.
Our cable systems operate under non-exclusive cable franchises, or franchise rights, granted by
state and local governmental authorities for varying lengths of time. We acquired these franchise
rights through acquisitions of cable systems over the past several years. These acquisitions were
accounted for using the purchase method of accounting. The value of a franchise is derived from the
economic benefits we receive from the right to solicit new subscribers and to market new products
and services, such as advanced digital television, HSD and phone, in a specific market territory.
We concluded that our franchise rights have an indefinite useful life since, among other things,
there are no legal, regulatory, contractual, competitive, economic or other factors limiting the
period over which these franchise rights contribute to our revenues and cash flows. Goodwill is the
excess of the acquisition cost of an acquired entity over the fair value of the identifiable net
assets acquired. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we do not
amortize franchise rights and goodwill. Instead, such assets are tested annually for impairment or
more frequently if impairment indicators arise.
We follow the provisions of SFAS No. 142 to test our goodwill and franchise rights for impairment.
We assess the fair values of each cable system cluster using discounted cash flow methodology,
under which the fair value of cable franchise rights are determined in a direct manner. This
assessment involves significant judgment, including certain assumptions and estimates that
determine future cash flow expectations and other future benefits, which are consistent with the
expectations of buyers and sellers of cable systems in determining fair value. These assumptions
and estimates include discount rates, revenues per customer, market penetration as a percentage of
homes passed and operating margin. We also consider market transactions, market valuations and
other valuations using multiples of operating income before depreciation and amortization to
confirm the reasonableness of fair values determined by the discounted cash flow methodology.
Significant impairment in value resulting in impairment charges may result if the estimates and
assumptions used in the fair value determination change in the future, and such impairments could
potentially be material.
Based on the guidance outlined in EITF No. 02-7, “Unit of Accounting for Testing Impairment of
Indefinite-Lived Intangible Assets,” we determined that the unit of accounting, or reporting unit,
for testing goodwill and franchise rights for impairment resides at a cable system cluster level.
Such level reflects the financial reporting level managed and reviewed by the corporate office
(i.e., chief operating decision maker) as well as how we allocated capital resources and utilize
the assets. Lastly, the reporting unit level reflects the level at which the purchase method of
accounting for our acquisitions was originally recorded. We have one reporting unit for the purpose
of applying SFAS No. 142, Mediacom LLC.
In accordance with SFAS No. 142, we are required to determine goodwill impairment using a two-step
process. The first step compares the fair value of a reporting unit with our carrying amount,
including goodwill. If the fair value of the reporting unit exceeds our carrying amount, goodwill
of the reporting unit is considered not impaired and the second step is unnecessary. If the
carrying amount of a reporting unit exceeds our fair value, the second step is performed to measure
the amount of impairment loss, if any. The second step compares the implied fair value of the
reporting unit’s goodwill, calculated using the residual method, with the carrying amount of that
goodwill. If the carrying amount of the goodwill exceeds the implied fair value, the excess is
recognized as an impairment loss.
The impairment test for our franchise rights and other intangible assets not subject to
amortization consists of a comparison of the fair value of the intangible asset with its carrying
value. If the carrying value of the intangible asset exceeds its fair value, the excess is
recognized as an impairment loss.
Since our adoption of SFAS No. 142 in 2002, we have not recorded any impairments as a result of our
impairment testing. We completed our most recent impairment test as of October 1, 2008, which
reflected no impairment of our franchise rights, goodwill or other intangible assets.
Mediacom’s Class A common stock price has had significant volatility during the fourth quarter
of 2008, along with a precipitous drop in equity securities’ prices across all sectors of the
United States. Because there has not been a change in the fundamentals of our business, we do not
believe that our manager’s stock price is the sole indicator of the underlying value of the assets
in our reporting units. We have therefore determined that this short-term volatility
in our
manager’s stock price does not qualify as a triggering event under SFAS No. 142, and as such, no
interim impairment test is required as of December 31, 2008.
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We could record impairments in the future if there are changes in the long-term fundamentals of our
business, in general market conditions or in the regulatory landscape that could prevent us from
recovering the carrying value of our long-lived intangible assets. In the near term, the economic
conditions currently affecting the U.S. economy and how that may impact the fundamentals of our
business, together with the recent volatility in our stock price, may have a negative impact on the
fair values of the assets in our reporting units. A hypothetical decline of 20% in the fair values
determined for goodwill, cable franchise rights and other finite-lived intangible assets at our
Mediacom LLC reporting unit, would not result in any impairment loss as of October 1, 2008.
Share-based Compensation
We estimate the fair value of stock options granted using the Black-Scholes option-pricing model.
This fair value is then amortized on a straight-line basis over the requisite service periods of
the awards, which is generally the vesting period. This option-pricing model requires the input of
highly subjective assumptions, including the option’s expected life and the price volatility of the
underlying stock. The estimation of stock awards that will ultimately vest requires judgment, and
to the extent actual results or updated estimates differ from our current estimates, such amounts
will be recorded as a cumulative adjustment in the periods the estimates are revised. Actual
results, and future changes in estimates, may differ substantially from our current estimates.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair
Value Measurements.” SFAS No. 157 establishes a single authoritative definition of fair value, sets
out a framework for measuring fair value and expands on required disclosures about fair value
measurement. Effective January 1, 2008, we adopted SFAS No. 157 for our financial assets and
liabilities. In February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2,
“Effective Date of FASB Statement No. 157,” which delays the effective date of SFAS No. 157 for
nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually), to fiscal years
beginning after November 15, 2008 and interim periods within those fiscal years. We are evaluating
the impact of our nonfinancial assets and liabilities which include goodwill and other intangible
assets. SFAS No. 157 establishes a framework for measuring fair value under generally accepted
accounting principles and expands disclosures about fair value measurement. The adoption of
SFAS No. 157 on January 1, 2008 did not have a material effect on our consolidated financial
statements.
The following sets forth our financial assets and liabilities measured at fair value on a recurring
basis at December 31, 2008. These assets and liabilities have been categorized according to the
three-level fair value hierarchy established by SFAS No. 157, which prioritizes the inputs used in
measuring fair value.
• Level 1 — Quoted market prices in active markets for identical assets or liabilities.
• Level 2 — Observable market based inputs or unobservable inputs that are corroborated by
market data.
• Level 3 — Unobservable inputs that are not corroborated by market data.
As of December 31, 2008, our interest rate swap liabilities, net, were valued at $32.8 million
using Level 2 inputs.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities — Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other items at fair value.
This Statement is effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. We adopted SFAS No. 159 as of January 1, 2008. We did not elect the fair value
option of SFAS No. 159.
In December 2007, the FASB issued SFAS No. 141 (R), “Business Combinations,” which continues to
require the treatment that all business combinations be accounted for by applying the acquisition
method. Under the acquisition method, the acquirer recognizes and measures the identifiable assets
acquired, the liabilities assumed, and any contingent consideration and contractual contingencies,
as a whole, at their fair value as of the acquisition date. Under SFAS No. 141 (R), all transaction
costs are expensed as incurred.
SFAS No. 141 (R) replaces SFAS No. 141. The guidance in SFAS No. 141 (R) will be applied
prospectively to business combinations for which the acquisition date is on or after the beginning
of the first annual reporting period beginning after December 15, 2008.
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In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51.” SFAS No. 160 requires that a noncontrolling interest
(previously referred to as a minority interest) be separately reported in the equity section of the
consolidated entity’s balance sheet. SFAS No. 160 also established accounting and reporting
standards for: (i) ownership interests in subsidiaries held by parties other than the parent,
(ii) the amount of consolidated net income attributable to the parent and to the noncontrolling
interest, (iii) changes in a parent’s ownership interest, (iv) the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated and (v) sufficient
disclosures to identify the interest of the parent and the noncontrolling owners. SFAS No. 160 is
effective for fiscal years beginning on or after December 15, 2008. We are currently assessing the
potential impact that the adoption of SFAS No. 160 will have on our consolidated financial
statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities — an amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced disclosures
about an entity’s derivative and hedging activities and thereby improves the transparency of
financial reporting. SFAS No. 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application encouraged. We have not
completed our evaluation of SFAS No. 161 to determine the impact that adoption will have on our
consolidated financial condition or results of operations.
Inflation and Changing Prices
Our systems’ costs and expenses are subject to inflation and price fluctuations. Such changes in
costs and expenses can generally be passed through to subscribers. Programming costs have
historically increased at rates in excess of inflation and are expected to continue to do so. We
believe that under the FCC’s existing cable rate regulations we may increase rates for cable
services to more than cover any increases in programming. However, competitive conditions and other
factors in the marketplace may limit our ability to increase our rates.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we use interest rate swaps with counterparties to fix the
interest rate on a portion of our variable interest rate debt. As of December 31, 2008, we had
$500.0 million of interest rate swaps with various banks with a weighted average fixed rate of
approximately 4.6%. We also had several forward starting interest rate swaps with a fixed rate of
approximately 3.0%, $500.0 million and $100.0 million of floating rate debt, which commence during
the years ended December 31, 2009 and 2010, respectively. The fixed rates of the interest rate
swaps are offset against the applicable Eurodollar rate to determine the related interest expense.
Under the terms of the interest rate swaps, we are exposed to credit risk in the event of
nonperformance by the other parties; however, we do not anticipate the nonperformance of any of our
counterparties. At December 31, 2008, based on the mark-to-market valuation, we would have paid
approximately $32.8 million, including accrued interest, if we terminated these interest rate
swaps. Our current interest rate swaps are scheduled to expire in the amounts of $300.0 million and
$200.0 million during the years ended December 31, 2009 and 2010. See Notes 2 and 5 to our
consolidated financial statements.
Our interest rate swaps and financial contracts do not contain credit rating triggers that could
affect our liquidity.
The table below provides the expected maturity and estimated fair value of our debt as of
December 31, 2008 (all dollars in thousands).
| Bank Credit | ||||||||||||
| Senior Notes | Facilities | Total | ||||||||||
Expected Maturity: |
||||||||||||
January 1, 2009 to December
31, 2009 |
$ | — | $ | 30,500 | $ | 30,500 | ||||||
January 1, 2010 to December
31, 2010 |
— | 56,500 | 56,500 | |||||||||
January 1, 2011 to December
31, 2011 |
125,000 | 136,500 | 261,500 | |||||||||
January 1, 2012 to December
31, 2012 |
— | 60,500 | 60,500 | |||||||||
January 1, 2013 to December
31, 2013 |
500,000 | 6,500 | 506,500 | |||||||||
Thereafter |
— | 604,500 | 604,500 | |||||||||
Total |
$ | 625,000 | $ | 895,000 | $ | 1,520,000 | ||||||
Fair Value |
$ | 472,500 | $ | 562,787 | $ | 1,035,287 | ||||||
Weighted Average Interest Rate |
9.2 | % | 3.5 | % | 5.8 | % | ||||||
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MEDIACOM LLC AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Contents
| Page | ||||
| 49 | ||||
| 50 | ||||
| 51 | ||||
| 52 | ||||
| 53 | ||||
| 54 | ||||
| 71 | ||||
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Report of Independent Registered Public Accounting Firm
To the Member of Mediacom LLC:
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Mediacom LLC and its subsidiaries at
December 31, 2008 and December 31, 2007, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2008 in conformity with accounting
principles generally accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We conducted our audits
of these statements in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
March 27, 2009
PricewaterhouseCoopers LLP
New York, New York
March 27, 2009
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MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2008 | 2007 | |||||||
| ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash |
$ | 10,060 | $ | 9,585 | ||||
Accounts receivable, net of allowance for doubtful accounts of $1,127 and $900 |
36,033 | 34,415 | ||||||
Prepaid expenses and other current assets |
7,575 | 8,485 | ||||||
Total current assets |
53,668 | 52,485 | ||||||
Preferred equity investment in affiliated company |
150,000 | 150,000 | ||||||
Investment in cable systems: |
||||||||
Property, plant and equipment, net of accumulated depreciation of $1,102,831
and $1,002,953 |
718,467 | 686,987 | ||||||
Franchise rights |
550,709 | 550,763 | ||||||
Goodwill |
16,642 | 16,642 | ||||||
Subscriber lists, net of accumulated amortization of $132,305 and $137,745 |
761 | 1,013 | ||||||
Total investment in cable systems |
1,286,579 | 1,255,405 | ||||||
Other assets, net of accumulated amortization of $14,440 and $15,159 |
8,878 | 9,256 | ||||||
Total assets |
$ | 1,499,125 | $ | 1,467,146 | ||||
| LIABILITIES AND MEMBER’S DEFICIT |
||||||||
CURRENT LIABILITIES |
||||||||
Accounts payable, accrued expenses and other current liabilities |
$ | 238,337 | $ | 189,063 | ||||
Deferred revenue |
24,828 | 22,879 | ||||||
Current portion of long-term debt |
30,500 | 26,500 | ||||||
Total current liabilities |
293,665 | 238,442 | ||||||
Long-term debt, less current portion |
1,489,500 | 1,479,000 | ||||||
Other non-current liabilities |
20,221 | 17,354 | ||||||
Total liabilities |
1,803,386 | 1,734,796 | ||||||
Commitments and contingencies (Note 10) |
||||||||
MEMBER’S DEFICIT |
||||||||
Capital contributions |
394,517 | 438,517 | ||||||
Accumulated deficit |
(698,778 | ) | (706,167 | ) | ||||
Total member’s deficit |
(304,261 | ) | (267,650 | ) | ||||
Total liabilities and member’s deficit |
$ | 1,499,125 | $ | 1,467,146 | ||||
The accompanying notes are an integral part of these statements.
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MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Revenues |
$ | 615,859 | $ | 565,913 | $ | 529,156 | ||||||
Costs and expenses: |
||||||||||||
Service costs (exclusive of depreciation
and amortization) |
267,321 | 245,968 | 222,334 | |||||||||
Selling, general and administrative expenses |
110,605 | 104,694 | 101,149 | |||||||||
Management fee expense |
11,805 | 10,358 | 9,747 | |||||||||
Depreciation and amortization |
109,883 | 113,597 | 104,678 | |||||||||
Operating income |
116,245 | 91,296 | 91,248 | |||||||||
Interest expense, net |
(99,639 | ) | (118,386 | ) | (112,895 | ) | ||||||
Loss on early extinguishment of debt |
— | — | (4,624 | ) | ||||||||
Loss on derivatives, net |
(23,321 | ) | (9,951 | ) | (7,080 | ) | ||||||
(Loss) gain on sale of cable systems, net |
(170 | ) | 8,826 | — | ||||||||
Investment income from affiliate |
18,000 | 18,000 | 18,000 | |||||||||
Other
expense, net |
(3,726 | ) | (4,411 | ) | (4,068 | ) | ||||||
Net income (loss) |
$ | 7,389 | $ | (14,626 | ) | $ | (19,419 | ) | ||||
The accompanying notes are an integral part of these statements.
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MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER’S DEFICIT
| Capital | Accumulated | |||||||||||
| Contributions | Deficit | Total | ||||||||||
| (All dollar amounts in thousands) | ||||||||||||
Balance, December 31, 2005 |
$ | 548,521 | $ | (672,122 | ) | $ | (123,601 | ) | ||||
Net loss |
— | (19,419 | ) | (19,419 | ) | |||||||
Capital distributions |
(108,000 | ) | — | (108,000 | ) | |||||||
Balance, December 31, 2006 |
$ | 440,521 | $ | (691,541 | ) | $ | (251,020 | ) | ||||
Net loss |
— | (14,626 | ) | (14,626 | ) | |||||||
Capital distributions |
(2,004 | ) | — | (2,004 | ) | |||||||
Balance, December 31, 2007 |
$ | 438,517 | $ | (706,167 | ) | $ | (267,650 | ) | ||||
Net income |
— | 7,389 | 7,389 | |||||||||
Capital distributions |
(104,000 | ) | — | (104,000 | ) | |||||||
Capital contributions |
60,000 | — | 60,000 | |||||||||
Balance, December 31, 2008 |
$ | 394,517 | $ | (698,778 | ) | $ | (304,261 | ) | ||||
The accompanying notes are an integral part of these statements.
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MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
| 2008 | 2007 | 2006 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income (loss) |
$ | 7,389 | $ | (14,626 | ) | $ | (19,419 | ) | ||||
Adjustments to reconcile net (loss) income to net cash provided by
operating activities: |
||||||||||||
Depreciation and amortization |
109,883 | 113,597 | 104,678 | |||||||||
Loss on derivatives, net |
23,321 | 9,951 | 7,080 | |||||||||
Loss (gain) on sale of cable systems, net |
170 | (8,826 | ) | — | ||||||||
Amortization of deferred financing costs |
2,039 | 2,225 | 2,427 | |||||||||
Share-based compensation |
420 | 443 | 383 | |||||||||
Loss on early extinguishment of debt |
— | — | 2,999 | |||||||||
Changes in assets and liabilities, net of effects from acquisitions: |
||||||||||||
Accounts receivable, net |
(1,788 | ) | (1,770 | ) | (4,901 | ) | ||||||
Prepaid expenses and other assets |
(532 | ) | (8,053 | ) | 1,194 | |||||||
Accounts payable and accrued expenses |
45,466 | 9,723 | 38,905 | |||||||||
Deferred revenue |
1,949 | 2,016 | 2,263 | |||||||||
Other non-current liabilities |
(1,934 | ) | (753 | ) | (2,215 | ) | ||||||
Net cash flows provided by operating activities |
$ | 186,383 | $ | 103,927 | $ | 133,394 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Capital expenditures |
(141,695 | ) | (100,876 | ) | (99,911 | ) | ||||||
Acquisition of cable system |
— | (7,274 | ) | — | ||||||||
Proceeds from sale of cable systems, net |
— | 24,681 | ||||||||||
Net cash flows used in investing activities |
$ | (141,695 | ) | $ | (83,469 | ) | $ | (99,911 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
New borrowings |
300,000 | 113,034 | 828,000 | |||||||||
Repayment of debt |
(285,500 | ) | (155,890 | ) | (748,425 | ) | ||||||
Capital contributions from MCC |
60,000 | — | — | |||||||||
Capital distribution to MCC |
(104,000 | ) | (2,004 | ) | (108,000 | ) | ||||||
Other financing activities — book overdrafts |
(14,713 | ) | 22,486 | (23 | ) | |||||||
Net cash flows used in financing activities |
$ | (44,213 | ) | $ | (22,374 | ) | $ | (28,448 | ) | |||
Net increase (decrease) in cash |
475 | (1,916 | ) | 5,035 | ||||||||
CASH, beginning of period |
9,585 | 11,501 | 6,466 | |||||||||
CASH, end of period |
$ | 10,060 | $ | 9,585 | $ | 11,501 | ||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||||||
Cash paid during the period for interest, net of amounts capitalized |
$ | 99,911 | $ | 123,589 | $ | 110,931 | ||||||
The accompanying notes are an integral part of these statements.
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MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Mediacom LLC (and collectively with our subsidiaries, “we” or “us”), a New York limited liability
company wholly-owned by Mediacom Communications Corporation (“Mediacom” or “MCC”), is involved in
the acquisition and operation of cable systems serving smaller cities and towns in the United
States.
We rely on our parent, MCC, for various services such as corporate and administrative support. The
financial position, results of operations and cash flows of MCC could differ from those that would
have resulted had we operated autonomously or as an entity independent of MCC. See Notes 6 and 7.
Mediacom Capital Corporation, a New York corporation wholly-owned by us, co-issued public debt
securities, jointly and severally, with us. Mediacom Capital Corporation has no assets (other than
a $100 receivable from affiliate), operations, revenues or cash flows. Therefore, separate
financial statements have not been presented for this entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation of Consolidated Financial Statements
The consolidated financial statements include the accounts of us and our subsidiaries. All
significant intercompany transactions and balances have been eliminated. The preparation of the
consolidated financial statements in conformity with generally accepted accounting principles in
the United States of America 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. The accounting estimates that require management’s most difficult and subjective
judgments include: assessment and valuation of intangibles, accounts receivable allowance, useful
lives of property, plant and equipment, share-based compensation, and the recognition and
measurement of income tax assets and liabilities. Actual results could differ from those and other
estimates. Effective January 1, 2006, we adopted
SFAS No. 123(R), “Share-Based Compensation.” See
Note 9.
Revenue Recognition
Revenues from video, HSD and phone services are recognized when the services are provided to our
customers. Credit risk is managed by disconnecting services to customers who are deemed to be
delinquent. Installation revenues are recognized as customer connections are completed because
installation revenues are less than direct installation costs. Advertising sales are recognized in
the period that the advertisements are exhibited. Under the terms of our franchise agreements, we
are required to pay local franchising authorities up to 5% of our gross revenues derived from
providing cable services. We normally pass these fees through to our customers. Franchise fees are
reported in their respective revenue categories and included in selling, general and administrative
expenses.
Franchise fees imposed by local governmental authorities are collected on a monthly basis from our
customers and are periodically remitted to the local governmental authorities. Because franchise
fees are our obligation, we present them on a gross basis with a corresponding operating expense.
Franchise fees reported on a gross basis amounted to approximately $11.7 million, $12.0 million and
$12.3 million for the years ended December 31, 2008, 2007 and 2006, respectively.
Allowance for Doubtful Accounts
The allowance for doubtful accounts represents our best estimate of probable losses in the accounts
receivable balance. The allowance is based on the number of days outstanding, customer balances,
historical experience and other currently available information. During the year ended December 31,
2006, we revised our estimate of probable losses in the accounts receivable of our advertising
business to better reflect historical collection experience. The change in estimate resulted in a
benefit to the consolidated statement of operations of $0.1 million for the year ended December 31,
2006.
During the years ended December 31, 2008 and 2006, we revised our estimate of probable losses in
the accounts receivable of our video, HSD and phone business to better reflect historical
collection experience. The change in estimate resulted in a loss of
$0.3 million and income of $0.5 million in our consolidated statement of operations for
the years ended
December 31, 2008 and 2006, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Concentration of Credit Risk
Our accounts receivable are comprised of amounts due from subscribers in varying regions throughout
the United States. Concentration of credit risk with respect to these receivables is limited due to
the large number of customers comprising our customer base and their geographic dispersion. We
invest our cash with high quality financial institutions.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Additions to property, plant and equipment
generally include material, labor and indirect costs. Depreciation is calculated on a straight-line
basis over the following useful lives:
Buildings
|
40 Years | |
Leasehold improvements
|
Life of respective lease | |
Cable systems and equipment and subscriber devices
|
5 to 20 years | |
Vehicles
|
3 to 5 years | |
Furniture, fixtures and office equipment
|
5 years |
We capitalize improvements that extend asset lives and expense repairs and maintenance as incurred.
At the time of retirements, write-offs, sales or other dispositions of property, the original cost
and related accumulated depreciation are removed from the respective accounts and the gains or
losses are included in depreciation and amortization expense in the consolidated statement of
operations.
We capitalize the costs associated with the construction of cable transmission and distribution
facilities, new customer installations and indirect costs associated with our telephony product.
Costs include direct labor and material, as well as certain indirect costs including interest. We
perform periodic evaluations of certain estimates used to determine the amount and extent that such
costs that are capitalized. Any changes to these estimates, which may be significant, are applied
in the period in which the evaluations were completed. The costs of disconnecting service at a
customer’s dwelling or reconnecting to a previously installed dwelling are charged as expense in
the period incurred. Costs associated with subsequent installations of additional services not
previously installed at a customer’s dwelling are capitalized to the extent such costs are
incremental and directly attributable to the installation of such additional services. See also
Note 3.
Capitalized Software Costs
We account for internal-use software development and related costs in accordance with AICPA
Statement of Position No. 98-1, “Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.” Software development and other related costs consist of external and
internal costs incurred in the application development stage to purchase and implement the software
that will be used in our telephony business. Costs incurred in the development of application and
infrastructure of the software is capitalized and will be amortized over our respective estimated
useful life of 5 years. During the years ended December 31, 2008 and 2007, we capitalized
approximately $0.3 million and $0.2 million, respectively of software development costs.
Capitalized software had a net book value of $3.9 million and $3.6 million as of December 31, 2008
and 2007, respectively.
Marketing and Promotional Costs
Marketing and promotional costs are expensed as incurred and were $11.7 million, $12.0 million and
$11.7 million for the years ended December 31, 2008, 2007 and 2006, respectively.
Intangible Assets
Our cable systems operate under non-exclusive cable franchises, or franchise rights, granted by
state and local governmental authorities for varying lengths of time. We acquired these cable
franchises through acquisitions of cable systems and were accounted for using the purchase method
of accounting. As of December 31, 2008, we held 992 franchises in areas located throughout the
United States. The value of a franchise is derived from the economic benefits we receive from the
right to solicit new subscribers and to market new products and services, such as advanced digital
television, HSD and phone, in a specific market territory.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We concluded that our franchise rights
have an indefinite useful life since, among other things, there are no legal, regulatory,
contractual, competitive, economic or other factors limiting the period over which these franchise
rights contribute to our revenues and cash flows. Goodwill is the excess of the acquisition cost of
an acquired entity over the fair value of the identifiable net assets acquired. In accordance with
SFAS No. 142, “Goodwill and Other Intangible Assets,” we do not amortize franchise rights and
goodwill. Instead, such assets are tested annually for impairment or more frequently if impairment
indicators arise.
We follow the provisions of SFAS No. 142 to test our goodwill and franchise rights for impairment.
We assess the fair values of each cable system cluster using discounted cash flow methodology,
under which the fair value of cable franchise rights are determined in a direct manner. This
assessment involves significant judgment, including certain assumptions and estimates that
determine future cash flow expectations and other future benefits, which are consistent with the
expectations of buyers and sellers of cable systems in determining fair value. These assumptions
and estimates include discount rates, revenues per customer, market penetration as a percentage of
homes passed and operating margin. We also consider market transactions, market valuations and
other valuations using multiples of operating income before depreciation and amortization to
confirm the reasonableness of fair values determined by the discounted cash flow methodology.
Significant impairment in value resulting in impairment charges may result if the estimates and
assumptions used in the fair value determination change in the future, and such impairments could
potentially be material.
Based on the guidance outlined in EITF No. 02-7, “Unit of Accounting for Testing Impairment of
Indefinite-Lived Intangible Assets,” we determined that the unit of accounting, or reporting unit,
for testing goodwill and franchise rights for impairment resides at a cable system cluster level.
Such level reflects the financial reporting level managed and reviewed by the corporate office
(i.e., chief operating decision maker) as well as how we allocated capital resources and utilize
the assets. Lastly, the reporting unit level reflects the level at which the purchase method of
accounting for our acquisitions was originally recorded. We have one reporting unit for the purpose
of applying SFAS No. 142, Mediacom LLC.
In accordance with SFAS No. 142, we are required to determine goodwill impairment using a two-step
process. The first step compares the fair value of a reporting unit with our carrying amount,
including goodwill. If the fair value of the reporting unit exceeds our carrying amount, goodwill
of the reporting unit is considered not impaired and the second step is unnecessary. If the
carrying amount of a reporting unit exceeds our fair value, the second step is performed to measure
the amount of impairment loss, if any. The second step compares the implied fair value of the
reporting unit’s goodwill, calculated using the residual method, with the carrying amount of that
goodwill. If the carrying amount of the goodwill exceeds the implied fair value, the excess is
recognized as an impairment loss.
The impairment test for our franchise rights and other intangible assets not subject to
amortization consists of a comparison of the fair value of the intangible asset with its carrying
value. If the carrying value of the intangible asset exceeds its fair value, the excess is
recognized as an impairment loss.
Since our adoption of SFAS No. 142 in 2002, we have not recorded any impairments as a result of our
impairment testing. We completed our most recent impairment test as of October 1, 2008, which
reflected no impairment of our franchise rights, goodwill or other intangible assets.
MCC’s Class A common stock price has had significant volatility during the fourth quarter
of 2008, along with a precipitous drop in equity securities’ prices across all sectors of the
United States. Because there has not been a change in the fundamentals of our business, we do not
believe that our manager’s stock price is the sole indicator of the underlying value of the assets
in our reporting units. We have therefore determined that this short-term volatility in our
manager’s stock price does not qualify as a triggering event under SFAS No. 142, and as such, no
interim impairment test is required as of December 31, 2008.
Other finite-lived intangible assets, which consist primarily of subscriber lists and covenants not
to compete, continue to be amortized over their useful lives of 5 to 10 years and 5 years,
respectively. Amortization expense for the years ended December 31, 2008, 2007 and 2006 was
approximately $0.2 million, $0.2 million and $0.1 million, respectively. Our estimated aggregate
amortization expense for 2009 through 2011 and beyond are $0.2 million, $0.2 million, $0.2 million
and $0.2 million, respectively.
Other Assets
Other assets, net, primarily include financing costs and original issue discount incurred to raise
debt. Financing costs are deferred and amortized as other expense and original issue discounts are
deferred and amortized as interest expense over the expected term of such financings.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Segment Reporting
SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information,” requires the
disclosure of factors used to identify an enterprise’s reportable segments. Our operations are
organized and managed on the basis of cable system clusters that represent operating segments
within our service area. Each operating segment derives our revenues from the delivery of similar
products and services to a customer base that is also similar. Each operating segment deploys
similar technology to deliver our products and services and operates within a similar regulatory
environment. In addition, each operating segment has similar economic characteristics. Management
evaluated the criteria for aggregation of the operating segments under SFAS No. 131 and believes
that we meet each of the respective criteria set forth. Accordingly, management has identified
broadband services as our one reportable segment.
Accounting for Derivative Instruments
We account for derivative instruments in accordance with SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” SFAS No. 138, “Accounting for Certain Derivative Instruments
and Certain Hedging Activities-an amendment of FASB Statement No. 133,” and SFAS No. 149 “Amendment
of Statement 133 on Derivative Instruments and Hedging Activities.” These pronouncements require
that all derivative instruments be recognized on the balance sheet at fair value. We enter into
interest rate swaps to fix the interest rate on a portion of our variable interest rate debt to
reduce the potential volatility in our interest expense that would otherwise result from changes in
market interest rates. Our derivative instruments are recorded at fair value and are included in
other current assets, other assets and other liabilities of our consolidated balance sheet. Our
accounting policies for these instruments are based on whether they meet our criteria for
designation as hedging transactions, which include the instrument’s effectiveness, risk reduction
and, in most cases, a one-to-one matching of the derivative instrument to our underlying
transaction. Gains and losses from changes in fair values of derivatives that are not designated as
hedges for accounting purposes are recognized in the consolidated statement of operations. We have
no derivative financial instruments designated as hedges. Therefore, changes in fair value for the
respective periods were recognized in the consolidated statement of operations.
Accounting for Asset Retirement
We adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” on January 1, 2003.
SFAS No. 143 addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement costs. We reviewed our
asset retirement obligations to determine the fair value of such liabilities and if a reasonable
estimate of fair value could be made. This entailed the review of leases covering tangible
long-lived assets as well as our rights-of-way under franchise agreements. Certain of our franchise
agreements and leases contain provisions that require restoration or removal of equipment if the
franchises or leases are not renewed. Based on historical experience, we expect to renew our
franchise or lease agreements. In the unlikely event that any franchise or lease agreement is not
expected to be renewed, we would record an estimated liability. However, in determining the fair
value of our asset retirement obligation under our franchise agreements, consideration will be
given to the Cable Communications Policy Act of 1984, which generally entitles the cable operator
to the “fair market value” for the cable system covered by a franchise, if renewal is denied and
the franchising authority acquires ownership of the cable system or effects a transfer of the cable
system to another person. Changes in these assumptions based on future information could result in
adjustments to estimated liabilities.
Upon adoption of SFAS No. 143, we determined that in certain instances, it is obligated by
contractual terms or regulatory requirements to remove facilities or perform other remediation
activities upon the retirement of our assets. We initially recorded a $6.0 million asset in
property, plant and equipment and a corresponding liability of $6.0 million. As of December 31,
2008 and 2007, the corresponding asset, net of accumulated amortization, was $1.6 million and
$2.2 million, respectively.
Accounting for Long-Lived Assets
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
we periodically evaluate the recoverability and estimated lives of our long-lived assets, including
property and equipment and intangible assets subject to amortization, whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable or the useful life
has changed. The measurement for such impairment loss is based on the fair value of the asset,
typically based upon the future cash flows discounted at a rate commensurate with the risk
involved. Unless presented separately, the loss is included as a component of either depreciation
expense or amortization expense, as appropriate.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Programming Costs
We have various fixed-term carriage contracts to obtain programming for our cable systems from
content suppliers whose compensation is generally based on a fixed monthly fee per customer. These
programming contracts are subject to negotiated renewal. Programming costs are recognized when we
distribute the related programming. These programming costs are usually payable each month based on
calculations performed by us and are subject to adjustments based on the results of periodic audits
by the content suppliers. Historically, such audit adjustments have been immaterial to our total
programming costs. Some content suppliers offer financial incentives to support the launch of a
channel and ongoing marketing support. When such financial incentives are received, we defer them
within non-current liabilities in our consolidated balance sheets and recognizes such amounts as a
reduction of programming costs (which are a component of service costs in the consolidated
statement of operations) over the carriage term of the programming contract.
Share-based Compensation
We
adopted SFAS No. 123(R) on January 1, 2006 (see Note 9). We estimate the fair value of stock
options granted using the Black-Scholes option-pricing model. This fair value is then amortized on
a straight-line basis over the requisite service periods of the awards, which is generally the
vesting period. This option-pricing model requires the input of highly subjective assumptions,
including the option’s expected life and the price volatility of the underlying stock. The
estimation of stock awards that will ultimately vest requires judgment, and to the extent actual
results or updated estimates differ from our current estimates, such amounts will be recorded as a
cumulative adjustment in the periods the estimates are revised. Actual results, and future changes
in estimates, may differ substantially from our current estimates.
Comprehensive Income
SFAS No. 130, “Reporting Comprehensive Income,” requires companies to classify items of other
comprehensive income by their nature in the financial statements and display the accumulated
balance of other comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. We have had no other
comprehensive income items to report.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year
presentation.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair
Value Measurements.” SFAS No. 157 establishes a single authoritative definition of fair value, sets
out a framework for measuring fair value and expands on required disclosures about fair value
measurement. Effective January 1, 2008, we adopted SFAS No. 157 for our financial assets and
liabilities. In February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2,
“Effective Date of FASB Statement No. 157,” which delays the effective date of SFAS No. 157 for
nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually), to fiscal years
beginning after November 15, 2008 and interim periods within those fiscal years. We are evaluating
the impact of our nonfinancial assets and liabilities which include goodwill and other intangible
assets. SFAS No. 157 establishes a framework for measuring fair value under generally accepted
accounting principles and expands disclosures about fair value measurement. The adoption of
SFAS No. 157 on January 1, 2008 did not have a material effect on our consolidated financial
statements.
The following sets forth our financial assets and liabilities measured at fair value on a recurring
basis at December 31, 2008. These assets and liabilities have been categorized according to the
three-level fair value hierarchy established by SFAS No. 157, which prioritizes the inputs used in
measuring fair value.
• Level 1 — Quoted market prices in active markets for identical assets or liabilities.
• Level 2 — Observable market based inputs or unobservable inputs that are corroborated by
market data.
• Level 3 — Unobservable inputs that are not corroborated by market data.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2008, our interest rate swap liabilities, net, were valued at $32.8 million
using Level 2 inputs.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities — Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other items at fair value.
This Statement is effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. We adopted SFAS No. 159 as of January 1, 2008. We did not elect the fair value
option of SFAS No. 159.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” which continues to
require the treatment that all business combinations be accounted for by applying the acquisition
method. Under the acquisition method, the acquirer recognizes and measures the identifiable assets
acquired, the liabilities assumed, and any contingent consideration and contractual contingencies,
as a whole, at their fair value as of the acquisition date. Under SFAS No. 141(R), all transaction
costs are expensed as incurred. SFAS No. 141 (R) replaces SFAS No. 141. The guidance in
SFAS No. 141 (R) will be applied prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning after December 15,
2008. Any impact will be dependent on the terms of future business combinations.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51.” SFAS No. 160 requires that a noncontrolling interest
(previously referred to as a minority interest) be separately reported in the equity section of the
consolidated entity’s balance sheet. SFAS No. 160 also established accounting and reporting
standards for: (i) ownership interests in subsidiaries held by parties other than the parent;
(ii) the amount of consolidated net income attributable to the parent and to the noncontrolling
interest; (iii) changes in a parent’s ownership interest; (iv) the valuation of retained
noncontrolling equity investments when a subsidiary is deconsolidated; and (v) sufficient
disclosures to identify the interest of the parent and the noncontrolling owners. SFAS No. 160 is
effective for fiscal years beginning on or after December 15, 2008. We are currently assessing the
potential impact that the adoption of SFAS No. 160 will have on our consolidated financial
statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities — an amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced disclosures
about an entity’s derivative and hedging activities and thereby improves the transparency of
financial reporting. SFAS No. 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application encouraged. We have not
completed our evaluation of SFAS No. 161 to determine the impact that adoption will have on our
consolidated financial condition or results of operations.
3. PROPERTY, PLANT AND EQUIPMENT
As of December 31, 2008 and 2007, property, plant and equipment consisted of (dollars in
thousands):
| December 31, | December 31, | |||||||
| 2008 | 2007 | |||||||
Cable systems, equipment and subscriber devices |
$ | 1,743,864 | $ | 1,618,089 | ||||
Vehicles |
36,295 | 32,349 | ||||||
Furniture, fixtures and office equipment |
22,889 | 21,696 | ||||||
Buildings and leasehold improvements |
16,706 | 16,278 | ||||||
Land and land improvements |
1,544 | 1,528 | ||||||
| 1,821,298 | 1,689,940 | |||||||
Accumulated depreciation |
(1,102,831 | ) | (1,002,953 | ) | ||||
Property, plant and equipment, net |
$ | 718,467 | $ | 686,987 | ||||
Change in Estimate — Useful lives
Effective July 1, 2008, we changed the estimated useful lives of certain plant and equipment within
our cable systems due to the initial deployment of all digital video technology both in the network
and at the customer’s home. These changes in asset lives were based on our plans and our experience
thus far in executing such plans, to deploy all digital video technology across certain of our
cable systems. This technology affords us the opportunity to increase network capacity without costly
upgrades and, as such, extends the useful lives of cable plant by four years. We have also begun to
provide all digital set-top boxes to our customer base as part of this all digital network
deployment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In connection with the all digital set-top launch, we have reviewed the asset lives of
our customer premise equipment and determined that their useful lives should be extended by two
years. While the timing and extent of current deployment plans are subject to modification,
management believes that extending the useful lives is appropriate and will be subject to ongoing
analysis. The weighted average useful lives of such fixed assets changed as follows:
| Useful lives (in years) | ||||||||
| From | To | |||||||
Plant and
equipment |
12 | 16 | ||||||
Customer
premise equipment |
5 | 7 | ||||||
These changes were made on a prospective basis effective July 1, 2008 and resulted in a reduction
of depreciation expense and a corresponding increase in net income of approximately $5.6 million.
Depreciation expense for the years ended December 31, 2008, 2007 and 2006 was approximately
$109.6 million, $113.4 million, and $104.7 million, respectively. As of December 31, 2008 and 2007,
we had property under capitalized leases of $4.7 million and $4.7 million, respectively, before
accumulated depreciation, and $1.9 million and $1.9 million, respectively, net of accumulated
depreciation. During the years ended December 31, 2008 and 2007, we incurred gross interest costs
of $101.8 million and $120.3 million, respectively, of which $2.1 million and $1.7 million was
capitalized. See Note 2.
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following as of December 31, 2008 and
December 31, 2007 (dollars in thousands):
| December 31, | December 31, | |||||||
| 2008 | 2007 | |||||||
Accounts payable — affiliates |
$ | 111,070 | $ | 48,823 | ||||
Accrued interest |
28,377 | 27,957 | ||||||
Liability under interest rate exchange agreements |
18,519 | — | ||||||
Accrued programming costs |
17,175 | 17,844 | ||||||
Accrued taxes and fees |
13,224 | 17,383 | ||||||
Accrued payroll and benefits |
10,706 | 9,369 | ||||||
Accrued service costs |
8,241 | 10,879 | ||||||
Accrued property, plant and equipment |
8,037 | 4,376 | ||||||
Book overdrafts (1) |
7,782 | 22,497 | ||||||
Subscriber advance payments |
5,523 | 5,962 | ||||||
Accrued telecommunications costs |
2,788 | 6,726 | ||||||
Accounts payable |
416 | 8,579 | ||||||
Other accrued expenses |
6,479 | 8,668 | ||||||
Accounts payable, accrued expenses and other current
liabilities |
$ | 238,337 | $ | 189,063 | ||||
| (1) | Book overdrafts represent outstanding checks in excess of funds on
deposit at our disbursement accounts. We transfer funds from our
depository accounts to our disbursement accounts upon daily
notification of checks presented for payment. Changes in book
overdrafts are reported as part of cash flows from financing
activities in our consolidated statement of cash flows. |
5. DEBT
As of December 31, 2008 and 2007, debt consisted of (dollars in thousands):
| December 31, | December 31, | |||||||
| 2008 | 2007 | |||||||
Bank credit facility |
$ | 895,000 | $ | 880,500 | ||||
77/8% Senior Notes due 2011 |
125,000 | 125,000 | ||||||
91/2% Senior Notes due 2013 |
500,000 | 500,000 | ||||||
Capital lease obligations |
— | — | ||||||
| 1,520,000 | 1,505,500 | |||||||
Less: Current portion |
30,500 | 26,500 | ||||||
Total long-term debt |
$ | 1,489,500 | $ | 1,479,000 | ||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Bank Credit Facility
Our operating subsidiaries maintain a $1.217 billion senior secured credit facility (the “credit
facility”). The credit facility originally consisted of a revolving credit facility (the
“revolver”) with a $400.0 million revolving credit commitment, a $200.0 million term loan (“term loan A”) and a $550.0 million term loan (“term loan B”). In May 2006, we refinanced the
term loan B with a new term loan (“term loan C”) in the amount of $650.0 million. The revolver expires on September 30, 2011, and its commitment amount is
not subject to scheduled reductions prior to maturity.
Term
loan A matures on September 30, 2012, and since March 31, 2008, has been subject to
quarterly reductions ranging from 2.50% to 9.00% of the original amount. Term loan C matures on
January 31, 2015, and is subject to quarterly reductions of 0.25% that began on March 31, 2007 and
extend through December 31, 2014, with a final payment at maturity representing 92.00% of the
original principal amount.
As of
December 31, 2008, the maximum commitment available under the revolver was $400.0 million, and
the revolver had an outstanding balance of $78.0 million. As of the same date, term loans A and
C had outstanding balances of $180.0 million and $637.0 million, respectively.
The
credit agreement of the credit facility (the “credit agreement”) provides for interest at
varying rates based upon various borrowing options and certain financial ratios, and for commitment
fees of 1/2% to 5/8% per annum on the unused portion of the available revolving credit commitment.
Interest on outstanding revolver and term loan A balances is payable at either the Eurodollar rate
plus a floating percentage ranging from 1.00% to 2.00% or the base rate plus a floating percentage
ranging from 0% to 1.00%. Interest on term loan C is payable at either the Eurodollar rate plus
a floating percentage ranging from 1.50% to 1.75% or the base rate plus a floating percentage
ranging from 0.50% to 0.75%.
For the year ended December 31, 2008, the outstanding debt under term loan A was reduced by
$20.0 million, or 10.00% of the original principal amount, and the outstanding debt under term
loan C was reduced by $6.5 million, or 1.00% of the original principal amount.
For the year ending December 31, 2009, the outstanding debt under term loan A will be reduced
by $24.0 million, or 12.00% of the original principal amount, and the outstanding debt under term loan C will be reduced by $6.5 million, or 1.00% of the original principal amount.
The credit agreement requires compliance with certain financial covenants, including the
requirement that we maintain a ratio of senior indebtedness (as defined) to annualized system cash
flow (as defined) of no more than 6.0 to 1.0. The credit agreement also requires compliance with
other covenants including, but not limited to, limitations on mergers and acquisitions,
consolidations and sales of certain assets, liens, the incurrence of additional indebtedness,
certain restricted payments and certain transactions with affiliates.
The credit agreement is collateralized by our pledge of all our ownership interests in our
operating subsidiaries, and is guaranteed by us on a limited recourse basis to the extent of such
ownership interests.
The average interest rates on outstanding debt under the credit facility as of December 31,
2008 and 2007 were 3.5% and 6.7%, respectively, including the effect of the interest rate swaps
discussed below. As of December 31, 2008, we had unused credit commitments of approximately
$311.8 million under the credit facility, all of which could be borrowed and used for
general corporate purposes based on the terms and conditions of our debt arrangements.
As of December 31, 2008, approximately $10.2 million of letters of credit were issued to various
parties as collateral for our performance relating primarily to insurance and franchise
requirements. The amount paid to obtain these letters of credit was immaterial.
Interest
Rate Exchange Agreements
We use interest rate exchange agreements, or interest rate swaps, to fix the applicable Eurodollar
portion of debt under the credit facility. As of December 31, 2008, we had current interest rate
swaps with various banks pursuant to which the interest rate on $500.0 million was fixed at a
weighted average rate of approximately 4.6%. As of the same date, about 74% of our outstanding
indebtedness was at fixed interest rates or subject to interest rate protection. Our swaps have not
been designated as hedges for accounting purposes. These agreements have been accounted for on a
mark-to-market basis as of, and for, the year ended December 31, 2008. Our current interest rate
swaps are scheduled to expire in the amounts of: $300.0 million and $200.0 million during the years
ended December 31, 2009 and 2010, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In 2008, we entered into forward starting interest rate swaps that fixed rates for two years at
approximately 3.2% on $300.0 million of floating rate debt
commencing in 2009, and 2.9% on $100.0
million of floating rate debt commencing in 2010. We also entered forward starting interest rate
swaps that fixed rates for three years at approximately 2.8% on $200.0 million of floating rate
debt, commencing in 2009. These agreements have been accounted for on a mark-to-market basis as
of, and for the year ended December 31, 2008.
Although we may be exposed to future losses in the event of counterparties’ non-performance, we do
not expect such losses, if any, to be material.
The fair value of the interest rate swaps is the estimated amount that we would receive or pay to
terminate such agreements, taking into account market interest rates and the remaining time to
maturities. As of December 31, 2008, based on the mark-to-market valuation, we recorded on our
consolidated balance sheet a net accumulated liability for derivatives of $32.8 million. As a
result of the mark-to-market valuations on these interest rate swaps, we recorded a loss on
derivatives of $23.3 million and $10.0 million for the years ended December 31, 2008 and 2007,
respectively.
Senior Notes
On
February 26, 1999, we and our wholly-owned subsidiary, Mediacom
Capital Corporation, a New York
corporation, jointly issued $125.0 million aggregate principal
amount of 7 ⅞% senior notes due
February 2011 (the “7 ⅞% Senior Notes”). The 7 ⅞% Senior Notes are unsecured obligations of
ours, and the indenture for the 7 ⅞% Senior Notes stipulates, among other things,
restrictions on incurrence of indebtedness, distributions, mergers and asset sales and has
cross-default provisions related to other debt of ours.
On
January 24, 2001, we and Mediacom Capital Corporation jointly issued $500.0 million
aggregate principal amount of 9 ½% senior notes due
January 2013 (the “9 ½% Senior Notes”). The
9 ½% Senior Notes are unsecured obligations of ours, and the indenture for the 9
½% Senior Notes stipulates, among other things, restrictions on incurrence of indebtedness,
distributions, mergers, and asset sales and has cross-default provisions related to other debt of
ours.
Our senior notes contain financial and other covenants, though they are generally less restrictive
than those found in the credit facility. Principal covenants include a limitation on the
incurrence of additional indebtedness based upon a maximum ratio of total indebtedness to cash
flow, as defined in these debt agreements, of 7.0 to 1.0. These agreements also contain limitations
on dividends, investments and distributions.
For all periods through December 31, 2008, we were in compliance with all of the covenants under
our bank credit and senior note agreements. There are no covenants, events of default, borrowing
conditions or other terms in the credit facility or our other debt arrangements that are based on
changes in our credit ratings assigned by any rating agency.
Loss on Early Extinguishment of Debt
For the year ended December 31, 2006, we recorded in our consolidated statement of operations a
loss on early extinguishment of debt of $4.6 million, representing $1.6 million of bank fees and
the write-off of $3.0 million of unamortized deferred financing costs. There was no loss on early
extinguishment of debt in the years ended December 31, 2007 and 2008.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair Value and Debt Maturities
As of December 31, 2008, the fair values of our Senior Notes and Bank Credit Facilities are as
follows (dollars in thousands):
7
7/8%
Senior Notes due 2011 |
$ | 97,500 | ||
9
1/2%
Senior Notes due 2013 |
375,000 | |||
| $ | 472,500 | |||
Bank Credit Facility |
$ | 562,787 | ||
The stated maturities of all debt outstanding as of December 31, 2008 are as follows (dollars in
thousands):
2009 |
$ | 30,500 | ||
2010 |
56,500 | |||
2011 |
261,500 | |||
2012 |
60,500 | |||
2013 |
506,500 | |||
Thereafter |
604,500 | |||
Total |
$ | 1,520,000 | ||
6. MEMBER’S EQUITY
As a wholly-owned subsidiary of MCC, our business affairs, including our financing decisions, are
directed by MCC. For the years ended December 31, 2008, 2007 and 2006, we paid cash dividends to
MCC of approximately $104.0 million, $2.0 million and $108.0 million, respectively, as permitted
under our debt arrangements.
On
February 11, 2009, certain of our operating subsidiaries executed an Asset Transfer Agreement (the
“Transfer Agreement”) with MCC and the operating subsidiaries of Mediacom Broadband, pursuant
to which certain of our cable systems located in Florida, Illinois,
Iowa, Kansas, Missouri and Wisconsin, which serve approximately
45,900 basic subscribers would be exchanged for
certain of Mediacom Broadband’s cable systems located in Illinois, which serve
approximately 42,200 basic subscribers, and a cash payment of $8.2 million (the “Asset Transfer”).
We believe the Asset Transfer will better align our customer base geographically, making the cable
systems more clustered and allowing for more effective management, administration, controls and
reporting of our field operations. The Asset Transfer was completed on February 13, 2009. No gain
or loss is being recorded on the Asset Transfer because we and Mediacom Broadband are under common
control. See Note 7.
7. RELATED PARTY TRANSACTIONS
MCC manages us pursuant to a management agreement with each operating subsidiary. Under the
management agreements, MCC has full and exclusive authority to manage our day-to-day operations and
conduct our business. We remain responsible for all expenses and liabilities relating to the
construction, development, operation, maintenance, repair, and ownership of our systems. Management
fees for the years ended December 31, 2008, 2007 and 2006 amounted to approximately $11.8 million,
$10.4 million, and $9.7 million, respectively.
As compensation for the performance of its services, subject to certain restrictions, MCC is
entitled under each management agreement to receive management fees in an amount not to exceed 4.5%
of the annual gross operating revenues of each of the operating subsidiaries. MCC is also entitled
to the reimbursement of all expenses necessarily incurred in its capacity as manager.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We are preferred equity investor in Mediacom Broadband LLC, a wholly-owned subsidiary of MCC. See
Note 11 for a discussion of the transactions between Mediacom Broadband LLC and ourselves.
Share
Exchange Agreement between MCC and an affiliate of Morris Communications
On
September 7, 2008, MCC entered into a Share Exchange Agreement (the “Exchange
Agreement”) with Shivers Investments, LLC (“Shivers”) and Shivers Trading & Operating Company
(“STOC”). Both STOC and Shivers are affiliates of Morris Communications Company, LLC (“Morris
Communications”). STOC, Shivers and Morris Communications are controlled by William S. Morris III,
who together with another Morris Communications representative, Craig S. Mitchell, held two seats
on MCC’s Board of Directors.
On
February 13, 2009, MCC completed the Exchange Agreement pursuant to which it exchanged
100% of the shares of stock of a wholly-owned subsidiary, which held approximately $110 million of
cash and non-strategic cable systems serving approximately 25,000
basic subscribers contributed by us,
for 28,309,674 shares of Mediacom Class A common stock held by Shivers. Effective upon closing of the transaction,
Messrs. Morris and Mitchell resigned from MCC’s
Board of Directors.
Asset Transfer Agreement with Mediacom and Mediacom Broadband
On
February 11, 2009, certain of our operating subsidiaries executed an Asset Transfer Agreement (the
“Transfer Agreement”) with MCC and the operating subsidiaries of Mediacom Broadband, pursuant
to which certain of our cable systems located in Florida, Illinois,
Iowa, Kansas, Missouri and Wisconsin, which serve approximately
45,900 basic subscribers would be exchanged for
certain of Mediacom Broadband’s cable systems located in Illinois, which serve
approximately 42,200 basic subscribers, and a cash payment of $8.2 million (the “Asset Transfer”).
We believe the Asset Transfer will better align our customer base geographically, making our cable
systems more clustered and allowing for more effective management, administration, controls and
reporting of our field operations. The Asset Transfer was completed on February 13, 2009.
As part of the Transfer Agreement, we contributed to MCC cable systems located in
Western North Carolina, which serve approximately 25,000 basic subscribers. These cable systems
were part of the Exchange Agreement noted above. In connection therewith, we received a $74
million cash contribution on February 12, 2009, of which funds had been contributed to MCC by
Mediacom Broadband on the same date.
In total, we received $82.2 million under the Transfer Agreement (the “Transfer Proceeds”), which
were used by us to repay a portion of the outstanding balance under the revolving commitments of
our operating subsidiaries’ bank credit facility.
On February 12, 2009, after giving effect to the debt repayment funded by the Transfer Proceeds as
noted above, our operating subsidiaries borrowed approximately $110 million under the revolving
commitments of the credit facility. This represented net new borrowings of about $28 million.
On February 12, 2009, we contributed approximately
$110 million to MCC to fund their cash
obligation under the Exchange Agreement defined above.
8. EMPLOYEE BENEFIT PLANS
Substantially
all our employees are eligible to participate in MCC’s contribution plan pursuant
to the Internal Revenue Code Section 401(k) (the “Plan”). Under such Plan, eligible employees may
contribute up to 15% of their current pretax compensation. MCC’s Plan permits, but does not require,
matching contributions and non-matching (profit sharing) contributions to be made by us up to a
maximum dollar amount or maximum percentage of participant contributions, as determined annually by
us. We presently match 50%
on the first 6% of employee contributions. Our contributions under the Plan totaled approximately
$0.9 million, $0.8 million and $0.7 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9. SHARE-BASED COMPENSATION
Share-based Compensation
In April 2003, we adopted MCC’s 2003 Incentive Plan, or “2003 Plan,” which amended and restated
MCC’s 1999 Stock Option Plan and incorporated into the 2003 Plan options that were previously
granted outside the 1999 Stock Option Plan. The 2003 Plan was approved by MCC’s stockholders in
June 2003 and provides for the grant of incentive stock options, nonqualified stock options,
restricted shares, and other stock-based awards, in addition to annual incentive awards. The
contractual life of share-based awards granted under the 2003 Plan is no more than 10 years. We
deliver shares from treasury upon the exercise of stock options or the conversion of restricted
stock units. The 2003 Plan has 21.0 million shares of common stock available for issuance in
settlement of awards. As of December 31, 2008, approximately 13.8 million shares remained available
for issuance under the 2003 Plan.
Effective January 1, 2006, we adopted SFAS No. 123(R) using the modified prospective method.
SFAS No. 123(R) revises SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB
Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires the cost of
all share-based payments to employees, including grants of employee stock options, to be recognized
in the financial statements based on their fair values at the grant date, or the date of later
modification, over the requisite service period. In addition, SFAS 123(R) requires unrecognized
cost, based on the amounts previously disclosed in our pro forma footnote disclosure, related to
options vesting after the date of initial adoption to be recognized in the financial statements
over the remaining requisite service period.
Under this method, prior periods are not restated and the amount of compensation cost recognized
includes: (i) compensation cost for all share-based payments granted prior to, but not yet vested
as of January 1, 2008, based on the grant date fair value estimated in accordance with the
provisions of SFAS No. 123; and (ii) compensation cost for all share-based payments granted
subsequent to January 1, 2008, based on the grant date fair value estimated in accordance with the
provisions of SFAS No. 123(R). We use the Black-Scholes option pricing model which requires
extensive use of accounting judgment and financial estimates, including estimates of the expected
term employees will retain their vested stock options before exercising them, the estimated
volatility of our stock price over the expected term, and the number of options that will be
forfeited prior to the completion of their vesting requirements. Application of alternative
assumptions could produce significantly different estimates of the fair value of share-based
compensation and consequently, the related amounts recognized in the consolidated statements of
operations. The provisions of SFAS No. 123(R) apply to new stock awards and stock awards
outstanding, but not yet vested, on the effective date. In March 2005, the SEC issued SAB No. 107,
“Share-Based Payment,” relating to SFAS No. 123(R). We have applied the provisions of SAB No. 107
in our adoption.
Impact of the Adoption of SFAS No. 123(R)
Upon adoption of SFAS 123(R), we recognize share-based compensation expenses associated with share
awards on a straight-line basis over the requisite service period using the fair value method. The
incremental share-based compensation expense recognized due to the adoption of SFAS 123(R) was
approximately $0.1 million for the year ended December 31, 2006. Compensation expense related to
restricted stock units was recognized before the implementation of SFAS No. 123(R). Results for
prior periods have not been restated.
Total share-based compensation expense was as follows (dollars in thousands, except per share
data):
| Year Ended | Year Ended | Year Ended | ||||||||||
| December 31, | December 31, | December 31, | ||||||||||
| 2008 | 2007 | 2006 | ||||||||||
Share-based compensation expense by type of award: |
||||||||||||
Employee stock options |
$ | 37 | $ | 39 | $ | 118 | ||||||
Employee stock purchase plan |
51 | 57 | 64 | |||||||||
Restricted stock units |
332 | 347 | 201 | |||||||||
Total share-based compensation expense |
$ | 420 | $ | 443 | $ | 383 | ||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As required by SFAS No. 123(R), we made an estimate of expected forfeitures and is recognizing
compensation costs only for those equity awards expected to vest. The total future compensation
cost related to unvested share-based awards that are expected to vest was $1.1 million as of
December 31, 2008, which will be recognized over a weighted average period of 0.9 years.
In November 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “Transition Election
Related to Accounting for Tax Effects of Shared-Based Payment Awards.” MCC has elected the
“short-cut” method to calculate the historical pool of windfall tax benefits.
Valuation Assumptions
As required by SFAS 123(R), we estimated the fair value of stock options and shares purchased under
MCC’s employee stock purchase plan, using the Black-Scholes valuation model and the straight-line
attribution approach with the following weighted average assumptions:
| Employee Stock | Employee Stock | |||||||||||||||||||||||
| Option Plans | Purchase Plans | |||||||||||||||||||||||
| Year Ended | Year Ended | |||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||
| 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | |||||||||||||||||||
Dividend yield |
0 | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||||||
Expected volatility |
48.0 | % | 38.0 | % | 56.0 | % | 33.0 | % | 33.0 | % | 33.0 | % | ||||||||||||
Risk free interest rate |
2.3 | % | 4.6 | % | 4.7 | % | 3.0 | % | 4.3 | % | 4.7 | % | ||||||||||||
Expected option life
(in years) |
6.9 | 6.3 | 4.3 | 0.5 | 0.5 | 0.5 | ||||||||||||||||||
Forfeiture rate |
11.5 | % | 14.0 | % | 14.0 | % | — | — | — | |||||||||||||||
MCC does not expect to declare dividends. Expected volatility is based on a combination of implied
and historical volatility of MCC’s Class A common stock. For the years ended December 31, 2006, and
2007, we elected the simplified method in accordance with SAB 107 to estimate the option life of
share-based awards. For the year ended December 31, 2008, we estimated the option life of
share-based awards using historical data and other factors. The risk free interest rate is based on
the U.S. Treasury yield in effect at the date of grant. The forfeiture rate is based on trends in
actual option forfeitures. The awards are subject to annual vesting periods not to exceed 6 years
from the date of grant.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarized the activity of MCC’s option plans for the year ended December 31,
2008, 2007 and 2006:
| Weighted Average | ||||||||||||||||
| Remaining | Aggregate | |||||||||||||||
| Weighted Average | Contractual | Intrinsic Value | ||||||||||||||
| Shares | Exercise Price | Term (In years) | (in thousands) | |||||||||||||
Outstanding at January 1, 2006 |
1,146,270 | $ | 17.69 | |||||||||||||
Granted |
15,000 | 5.66 | ||||||||||||||
Exercised |
— | — | ||||||||||||||
Forfeited |
(137,092 | ) | 17.50 | |||||||||||||
Expired |
— | — | ||||||||||||||
Outstanding at December 31, 2006 |
1,024,178 | $ | 17.55 | 3.6 | $ | 141 | ||||||||||
Vested or expected to vest at
December 31, 2006 |
1,017,575 | 17.54 | 3.6 | $ | 129 | |||||||||||
Exercisable at December 31, 2006 |
977,014 | $ | 18.00 | 3.5 | $ | 56 | ||||||||||
Outstanding at January 1, 2007 |
1,024,178 | $ | 17.55 | |||||||||||||
Granted |
18,000 | 8.00 | ||||||||||||||
Exercised |
(17,250 | ) | 5.92 | |||||||||||||
Forfeited |
(103,955 | ) | 14.66 | |||||||||||||
Expired |
— | — | ||||||||||||||
Outstanding at December 31, 2007 |
920,973 | $ | 17.90 | 2.6 | $ | — | ||||||||||
Vested or expected to vest at
December 31, 2007 |
920,028 | 17.91 | 2.6 | $ | — | |||||||||||
Exercisable at December 31, 2007 |
914,223 | $ | 17.98 | 2.6 | $ | — | ||||||||||
Outstanding at January 1, 2008 |
920,973 | $ | 17.90 | |||||||||||||
Granted |
52,500 | 3.88 | ||||||||||||||
Exercised |
— | — | ||||||||||||||
Forfeited |
(82,290 | ) | 17.76 | |||||||||||||
Expired |
— | — | ||||||||||||||
Outstanding at December 31, 2008 |
891,183 | $ | 17.09 | 2.1 | $ | 22 | ||||||||||
Vested or expected to vest at
December 31, 2008 |
883,203 | 17.20 | 2.0 | $ | 19 | |||||||||||
Exercisable at December 31, 2008 |
834,183 | $ | 17.97 | 1.6 | $ | — | ||||||||||
The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value,
based on MCC’s stock price of $4.30, $4.59 and $8.04 per share as of December 31, 2008, 2007 and
2006, respectively, which would have been received by the option holders had all option holders
exercised their options as of that date.
The weighted average exercise price at the date of grant of a Class A common stock option granted
under MCC’s option plan during the years ended December 31, 2008, 2007 and 2006 was $4.37, $8.00,
and $5.66, respectively. During the years ended December 31, 2008, 2007 and 2006, approximately
1,125, 2,125 and 70,005 stock options vested with a weighted average exercise price of $8.00 $6.94
and $14.34, respectively. The proceeds we received resulting from the exercise of stock options
during 2008, 2007 and 2006 were immaterial.
The following table summarizes information concerning stock options outstanding as of December 31,
2008:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||||||||
| Weighted | Weighted | |||||||||||||||||||||||||||||||||||
| Average | Weighted | Average | Weighted | |||||||||||||||||||||||||||||||||
| Range of | Number of | Remaining | Average | Aggregate | Number of | Remaining | Average | Aggregate | ||||||||||||||||||||||||||||
| Exercise | Shares | Contractual | Exercise | Intrinsic Value | Shares | Contractual | Exercise | Intrinsic Value | ||||||||||||||||||||||||||||
| Prices | Outstanding | Life | Price | (In thousands) | Outstanding | Life | Price | (in thousands) | ||||||||||||||||||||||||||||
$ |
3.00 — $12.00 | 111,886 | 7.0 | $ | 6.04 | $ | 22 | 54,886 | 4.2 | $ | 7.99 | $ | — | |||||||||||||||||||||||
$ |
12.01 — $18.00 | 197,310 | 2.2 | 17.67 | — | 197,310 | 2.2 | 17.67 | — | |||||||||||||||||||||||||||
$ |
18.01 — $22.00 | 581,987 | 1.1 | 19.01 | — | 581,987 | 1.1 | 19.01 | — | |||||||||||||||||||||||||||
| 891,183 | 2.1 | $ | 17.09 | $ | 22 | 834,183 | 1.6 | $ | 17.97 | $ | — | |||||||||||||||||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted Stock Units
We grant restricted stock units (“RSUs”) to certain employees and directors (together, the
“participants”) in MCC’s Class A common stock. Awards of RSUs are valued by reference to shares of
common stock that entitle participants to receive, upon the settlement of the unit, one share of
common stock for each unit. The awards are subject to annual vesting periods not exceeding 4 years
from the date of grant. We made estimates of expected forfeitures based on historic voluntary
termination behavior and trends of actual RSU forfeitures and recognized compensation costs for
equity awards expected to vest. The aggregate intrinsic value of outstanding RSUs was $0.9 million
based on the closing stock price of $4.30 per share of MCC’s Class A common stock at December 31,
2008.
The following table summarizes the activity of our restricted stock unit awards for the year
ended December 31, 2008:
| Number of | Weighted | |||||||
| Non-Vested | Average Grant | |||||||
| Share Unit Awards | Date Fair Value | |||||||
Unvested Awards at January 1, 2006 |
100,500 | $ | 5.49 | |||||
Granted |
60,100 | 5.72 | ||||||
Awards Vested |
(6,275 | ) | 5.69 | |||||
Forfeited |
(6,075 | ) | 5.71 | |||||
Unvested Awards at December 31, 2006 |
148,250 | $ | 5.56 | |||||
Granted |
87,300 | 7.99 | ||||||
Awards Vested |
(19,675 | ) | 5.71 | |||||
Forfeited |
(6,225 | ) | 7.47 | |||||
Unvested Awards at December 31, 2007 |
209,650 | $ | 6.50 | |||||
Granted |
141,800 | 4.58 | ||||||
Awards Vested |
(96,075 | ) | 6.03 | |||||
Forfeited |
(39,900 | ) | 6.06 | |||||
Unvested Awards at December 31, 2008 |
215,475 | $ | 5.53 | |||||
Employee Stock Purchase Plan
MCC maintains an employee stock purchase plan (“ESPP”). Under the plan, eligible employees are
allowed to participate in the purchase of shares of MCC’s Class A common stock at a minimum 15%
discount on the date of the allocation. Shares purchased by employees amounted to 48,080, 30,856
and 36,524 for the years ended December 31, 2008, 2007 and 2006, respectively. The net proceeds to
us were approximately $0.2 million for each of the years ended December 31, 2008, 2007 and 2006,
respectively.
10. COMMITMENTS AND CONTINGENCIES
Lease and Rental Agreements
Under various lease and rental agreements for offices, warehouses and computer terminals, we had
rental expense of approximately $3.2 million, $3.2 million and $3.0 million for the years ended
December 31, 2008, 2007 and 2006, respectively. Future minimum annual rental payments are as
follows (dollars in thousands):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2009 |
$ | 2,494 | ||
2010 |
2,199 | |||
2011 |
1,725 | |||
2012 |
1,330 | |||
2013 |
886 | |||
Thereafter |
5,421 | |||
Total |
$ | 14,055 | ||
In addition, we rent utility poles in our operations generally under short-term arrangements, but
we expect these arrangements to recur. Total rental expense for utility poles was approximately
$6.2 million, $4.7 million and $5.2 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
Letters of Credit
As of December 31, 2008, approximately $10.2 million of letters of credit were issued to various
parties to secure our performance relating to insurance and franchise requirements. The fair value
of such letters of credit was immaterial.
Legal Proceedings
We are named as a defendant in a putative class action, captioned Gary Ogg and Janice Ogg v. Mediacom LLC, pending in the Circuit Court of Clay County, Missouri, originally filed in April 2001. The lawsuit alleges that we, in areas where there was no cable franchise failed to obtain permission from landowners to place
our fiber interconnection cable notwithstanding the possession of agreements or permission from other third parties. While the parties continue to contest liability, there also remains a dispute as to the proper measure of damages. Based on a report by their experts, the plaintiffs claim compensatory damages of approximately $14.5 million. Legal fees, prejudgment interest, potential
punitive damages and other costs could increase that estimate to
approximately $26.0 million. The plaintiffs recently proposed an alternative damage theory of $42.0 million in compensatory damages. Notwithstanding the verdict in the trial described below, we remain unable to reasonably determine the amount of our final liability in this lawsuit. Prior to trial our experts estimated our liability to be within the range of approximately $0.1 million
to $2.3 million. This estimate does not include any estimate of damages for prejudgment interest, attorneys’ fees or punitive damages.
On March 9, 2009, a jury trial commenced solely for the claim of Gary and Janice Ogg, the designated class representatives. On March 19, 2009, the jury rendered a verdict in favor of Gary and Janice Ogg setting compensatory damages of $8,863 and punitive damages of $35,000. This verdict is not yet final. Although we believe
that the particular circumstances of each class member may result in a different measure of damages for each member, if the same measure of compensatory damages was used for each member, the aggregate compensatory damages would be approximately $16.2 million. We intend to file motions with respect to the verdict and vigorously defend against the claims made by the other members of the
class, including at trial, and on appeal, if necessary.
We
believe that the amount of actual liability would not have a significant effect on our consolidated financial
position, results of operations, cash flows or business. There can be
no assurance, however, that the
actual liability ultimately determined for all members of the class would not exceed our estimated range or
any amount derived from the verdict rendered on March 19, 2009. We have tendered the
lawsuit to our insurance carrier for defense and indemnification. The carrier has agreed to defend us under a reservation of rights, and a declaratory judgment action is pending regarding the carrier’s defense and coverage responsibilities.
We, our parent company and other subsidiaries or other affiliated companies are also involved in
various other legal actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these other matters will not have a material adverse effect
on our consolidated financial position, results of operations, cash flows or business.
11. PREFERRED EQUITY INVESTMENT
In July 2001, we made a $150.0 million preferred equity investment in Mediacom Broadband LLC, a
Delaware limited liability company wholly-owned by MCC, that was funded with borrowings under the
our bank credit facilities. The preferred equity investment has a 12% annual cash dividend, payable
quarterly in cash. For each of the years ended December 31, 2008, 2007 and 2006, we received in
aggregate $18.0 million in cash dividends on the preferred equity.
12. SALE OF ASSETS, INVESTMENTS AND CABLE SYSTEMS, NET
We recorded a net gain on the sale of cable systems amounting to $8.8 million for the year ended
December 31, 2007 due to the sale of certain cable systems in Iowa and South Dakota.
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MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. SUBSEQUENT EVENTS
On February 13, 2009, MCC completed the Exchange Agreement pursuant to which it exchanged
100% of the shares of stock of a wholly-owned subsidiary, which held approximately $110 million of
cash and non-strategic cable systems serving approximately 25,000
basic subscribers contributed by us,
for 28,309,674 shares of Mediacom Class A common stock held by Shivers Investments. See Note 7.
On
February 11, 2009, certain of our operating subsidiaries executed an Asset Transfer Agreement (the
“Transfer Agreement”) with MCC and the operating subsidiaries of Mediacom Broadband, pursuant
to which certain of our cable systems located in Florida, Illinois,
Iowa, Kansas, Missouri and Wisconsin, which serve approximately
45,900 basic subscribers would be exchanged for
certain of Mediacom Broadband’s cable systems located in Illinois, which serve
approximately 42,200 basic subscribers, and a cash payment of $8.2 million (the “Asset Transfer”).
The Asset Transfer was completed on February 13, 2009. See Note 7.
As part of the Transfer Agreement, we contributed to MCC cable systems located in
Western North Carolina, which serve approximately 25,000 basic subscribers. These cable systems
were part of the Exchange Agreement noted above. In connection therewith, we received a $74
million cash contribution on February 12, 2009, of which funds had been contributed to MCC by
Mediacom Broadband on the same date.
In total, we received $82.2 million under the Transfer Agreement (the “Transfer Proceeds”), which
were used by us to repay a portion of the outstanding balance under the revolving commitments of
our operating subsidiaries’ bank credit facility.
On February 12, 2009, after giving effect to the debt repayment funded by the Transfer Proceeds as
noted above, our operating subsidiaries borrowed approximately $110 million under the revolving
commitments of the credit facility. This represented net new borrowings of about $28 million.
On February 12, 2009, we contributed approximately
$110 million to MCC to fund their cash
obligation under the Exchange Agreement.
On March 9, 2009, a jury trial commenced solely for the claim of Gary and Janice Ogg, the designated class representatives. On March 19, 2009, the jury rendered a verdict in favor of Gary and Janice Ogg setting compensatory damages of $8,863 and punitive damages of $35,000. This verdict is not yet final. Although we believe that the particular
circumstances of each class member may result in a different measure of damages for each member, if the same measure of compensatory damages was used for each member, the aggregate compensatory damages would be approximately $16.2 million. We intend to file motions with respect to the verdict and vigorously defend against the claims made by the other members of the class, including at trial,
and on appeal, if necessary. See Note 10.
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Schedule II
MEDIACOM LLC AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
| Additions | Deductions | |||||||||||||||||||||||
| Balance at | Charged to | Charged to | Charged to | Charged to | ||||||||||||||||||||
| beginning | costs and | other | costs and | other | Balance at | |||||||||||||||||||
| of period | expenses | accounts | expenses | accounts | end of period | |||||||||||||||||||
December 31, 2006 |
||||||||||||||||||||||||
Allowance for doubtful accounts: |
||||||||||||||||||||||||
Current receivables |
$ | 1,235 | $ | 1,361 | $ | — | $ | 1,803 | $ | — | $ | 793 | ||||||||||||
December 31, 2007 |
||||||||||||||||||||||||
Allowance for doubtful accounts: |
||||||||||||||||||||||||
Current receivables |
$ | 793 | $ | 2,054 | $ | — | $ | 1,947 | $ | — | $ | 900 | ||||||||||||
December 31, 2008 |
||||||||||||||||||||||||
Allowance for doubtful accounts: |
||||||||||||||||||||||||
Current receivables |
$ | 900 | $ | 1,069 | $ | — | $ | 842 | $ | — | $ | 1,127 | ||||||||||||
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Mediacom LLC
Under the supervision and with the participation of the management of Mediacom LLC,
including Mediacom LLC’s Chief Executive Officer and Chief Financial
Officer, Mediacom LLC evaluated the
effectiveness of Mediacom LLC’s disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based upon that evaluation, Mediacom LLC’s Chief Executive Officer and Chief Financial Officer
concluded that Mediacom LLC’s disclosure controls and procedures were effective as of December 31, 2008.
There
has not been any change in Mediacom LLC’s internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2008
that has materially affected, or is reasonably likely to materially affect, Mediacom LLC’s internal control
over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of Mediacom LLC is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act as a process designed by, or under the supervision of Mediacom LLC’s
principal executive and principal financial officers and effected by Mediacom LLC’s manager,
management and other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and procedures that:
| • | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect
the transactions and dispositions of the assets of Mediacom LLC; |
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| • | provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of Mediacom LLC are being made only in accordance with
authorizations of management and the manager of Mediacom LLC, and |
| • | provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of Mediacom LLC’s assets that could have a material effect on the
financial statements. |
Because
of Mediacom LLC’s inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risks that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management
assessed the effectiveness of Mediacom LLC’s internal control over financial reporting as of
December 31, 2008. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on this assessment, management determined that, as of
December 31, 2008, Mediacom LLC’s internal control over financial reporting was effective.
This
annual report does not include an attestation report of
Mediacom LLC’s registered public accounting firm regarding internal
control over financial reporting. Management’s report was not
subject to attestation by Mediacom LLC’s registered public
accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit Mediacom LLC to provide only
management’s report in this Annual Report.
Mediacom Capital Corporation
Under the supervision and with the participation of the management of Mediacom Capital Corporation
(“Mediacom Capital”), including Mediacom Capital’s Chief Executive Officer and Chief Financial
Officer, Mediacom Capital evaluated the effectiveness of Mediacom Capital’s disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this report. Based upon that evaluation, Mediacom
Capital’s Chief Executive Officer and Chief Financial Officer concluded that Mediacom Capital’s
disclosure controls and procedures were effective as of
December 31, 2008.
There has not been any change in Mediacom Capital’s internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended
December 31, 2008 that has materially affected, or is reasonably likely to materially affect,
Mediacom Capital’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management of Mediacom Capital is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the
supervision of Mediacom Capital’s principal executive and principal financial officers and effected
by Mediacom Capital’s board of directors, management and other personnel to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
| • | pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of Mediacom Capital;
|
| • | provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of Mediacom Capital are being made only in
accordance with authorizations of management and directors of Mediacom Capital; and |
| • | provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of Mediacom Capital’s assets that could have a material
effect on the financial statements. |
Because of Mediacom Capital’s inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risks that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Mediacom Capital’s internal control over financial
reporting as of December 31, 2008. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on this assessment, management determined that, as of
December 31, 2008, Mediacom Capital’s internal control over financial reporting was effective.
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This annual report does not include an attestation report of Mediacom Capital’s registered public
accounting firm regarding internal control over financial reporting. Management’s report was not
subject to attestation by Mediacom Capital’s registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit Mediacom Capital to provide
only management’s report in this annual report.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
MCC is our sole member and manager. MCC serves as manager of our operating subsidiaries. The
executive officers of Mediacom LLC and the directors and executive officers of MCC and Mediacom
Capital are:
| Name |
Age |
Title |
||||||
Rocco B. Commisso
|
59 | Chairman and Chief Executive Officer of MCC; Chief Executive Officer of Mediacom LLC; and Chief Executive Officer and Director of Mediacom Capital Corporation | ||||||
Mark E. Stephan
|
52 | Executive Vice President, Chief Financial Officer and Director of MCC; Executive Vice President and Chief Financial Officer of Mediacom LLC; and Executive Vice President and Chief Financial Officer of Mediacom Capital Corporation | ||||||
John G. Pascarelli
|
47 | Executive Vice President, Operations of MCC | ||||||
Italia Commisso Weinand
|
55 | Senior Vice President, Programming and Human Resources of MCC | ||||||
Joseph E. Young
|
60 | Senior Vice President, General Counsel and Secretary of MCC | ||||||
Charles J. Bartolotta
|
54 | Senior Vice President, Customer Operations of MCC | ||||||
Calvin G. Craib
|
54 | Senior Vice President, Business Development of MCC | ||||||
Brian M. Walsh
|
43 | Senior Vice President and Corporate Controller of MCC | ||||||
Thomas V. Reifenheiser
|
73 | Director of MCC | ||||||
Natale S. Ricciardi
|
60 | Director of MCC | ||||||
Robert L. Winikoff
|
62 | Director of MCC | ||||||
Rocco
B. Commisso has 30 years of experience with the cable
industry and has served as MCC’s Chairman and Chief Executive
Officer, and our Chief Executive Officer since founding our predecessor company in July 1995. From 1986 to 1995,
he served as Executive Vice President, Chief Financial Officer and a director of Cablevision
Industries Corporation. Prior to that time, Mr. Commisso served as Senior Vice President of Royal
Bank of Canada’s affiliate in the United States from 1981, where he founded and directed a
specialized lending group to media and communications companies. Mr. Commisso began his association
with the cable industry in 1978 at The Chase Manhattan Bank, where he managed the bank’s lending
activities to communications firms including the cable industry. He serves on the board of
directors and executive committees of the National Cable Television Association and Cable
Television Laboratories, Inc., and on the board of directors of C-SPAN and the National Italian
American Foundation. Mr. Commisso holds a Bachelor of Science in Industrial Engineering and a
Master of Business Administration from Columbia University.
Mark
E. Stephan has 22 years of experience with the cable
industry and has served as MCC’s, and our Executive
Vice President and Chief Financial Officer since July 2005. Prior to that he was Executive Vice
President, Chief Financial Officer and Treasurer since November 2003 and our Senior Vice President,
Chief Financial Officer and Treasurer since the commencement of our operations in March 1996.
Before joining us, Mr. Stephan served as Vice President, Finance for Cablevision Industries from
July 1993. Prior to that time, Mr. Stephan served as Manager of the telecommunications and media
lending group of Royal Bank of Canada.
John
G. Pascarelli has 28 years of experience in the cable
industry and has served as MCC’s
Executive Vice President, Operations since November 2003. Prior to that he was our Senior Vice
President, Marketing and Consumer Services from June 2000 and our Vice President of Marketing from
March 1998. Before joining our manager in March 1998, Mr. Pascarelli served as Vice President,
Marketing for Helicon Communications Corporation from January 1996 to February 1998 and as
Corporate Director of Marketing for Cablevision Industries from 1988 to 1995. Prior to that time,
Mr. Pascarelli served in various marketing and system
management capacities for Continental Cablevision, Inc., Cablevision Systems and Storer
Communications. Mr. Pascarelli is a member of the board of directors of the Cable and
Telecommunications Association for Marketing.
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Italia
Commisso Weinand has 32 years of experience in the cable
industry. Before joining MCC in April 1996, Ms. Weinand served as Regional Manager for Comcast Corporation from July
1985. Prior to that time, Ms. Weinand held various management positions with Tele-Communications,
Inc., Times Mirror Cable and Time Warner, Inc. Ms. Weinand is the sister of Mr. Commisso.
Joseph E. Young has 24 years of experience with the cable industry. Before joining MCC in
November 2001 as Senior Vice President, General Counsel, Mr. Young served as Executive Vice
President, Legal and Business Affairs, for LinkShare Corporation, an Internet-based provider of
marketing services, from September 1999 to October 2001. Prior to that time, he practiced corporate
law with Baker & Botts, LLP from January 1995 to September 1999. Previously, Mr. Young was a
partner with the Law Offices of Jerome H. Kern and a partner with Shea & Gould.
Charles J. Bartolotta has 26 years of experience in the cable industry. Before joining MCC
in October 2000, Mr. Bartolotta served as Division President for AT&T Broadband, LLC from July
1998, where he was responsible for managing an operating division serving nearly three million
customers. Prior to that time, he served as Regional Vice President of Tele-Communications, Inc.
from January 1997 and as Vice President and General Manager for TKR Cable Company from 1989. Prior
to that time, Mr. Bartolotta held various management positions with Cablevision Systems
Corporation.
Calvin G. Craib has 27 years of experience in the cable industry, and has served as MCC’s
Senior Vice President, Business Development since August 2001. He also assumed responsibility of
Corporate Finance in June 2008. Prior to that time, Mr. Craib was MCC’s Vice President,
Business Development since April 1999. Before joining MCC in April 1999, he served as Vice
President, Finance and Administration for Interactive Marketing Group from June 1997 to December
1998 and as Senior Vice President, Operations, and Chief Financial Officer for Douglas
Communications from January 1990 to May 1997. Prior to that time, Mr. Craib served in various
financial management capacities at Warner Amex Cable and Tribune Cable.
Brian M. Walsh has 21 years of experience in the cable industry and has served as MCC’s
Senior Vice President and Corporate Controller since February 2005. Prior to that time, he was MCC’s Senior Vice President, Financial Operations from November 2003, our manager’s Vice
President, Finance and Assistant to the Chairman from November 2001, our manager’s Vice President
and Corporate Controller from February 1998 and our manager’s Director of Accounting from November
1996. Before joining MCC in April 1996, Mr. Walsh held various management positions with
Cablevision Industries from 1988 to 1995.
Thomas V. Reifenheiser served for more than seven years as a Managing Director and Group Executive
of the Global Media and Telecom Group of Chase Securities Inc. until his retirement in September
2000. He joined Chase in 1963 and had been the Global Media and Telecom Group Executive since 1977.
He also had been a member of the Management Committee of The Chase Manhattan Bank. Mr. Reifenheiser
is also a member of the board of directors of Cablevision Systems Corporation, Lamar Advertising
Company and Citadel Broadcasting Corporation.
Natale S. Ricciardi has held various management positions with Pfizer Inc. for more than the past
seven years. Mr. Ricciardi joined Pfizer in 1972 and currently serves as Senior Vice President,
Pfizer Inc. and President, Pfizer Global Manufacturing, with responsibility for all of Pfizer’s
manufacturing and supply activities. He is a member of the Pfizer Executive Leadership Team.
Robert L. Winikoff has been a partner of the law firm of Sonnenschein Nath & Rosenthal, LLP since
August 2000. Prior to that time, he was a partner of the law firm of Cooperman Levitt Winikoff
Lester & Newman, P.C. for more than five years. Sonnenschein Nath & Rosenthal, LLP currently serves
as our outside general counsel, and prior to such representation, Cooperman Levitt Winikoff
Lester & Newman, P.C. served as our outside general counsel from 1995.
The
board of directors of MCC has adopted a code of ethics applicable to
all of our
employees, including our chief executive officer, chief financial officer and chief accounting
officer. This code of ethics was filed as an exhibit to our Annual Report on Form 10-K for the year
ended December 31, 2003.
ITEM 11. EXECUTIVE COMPENSATION
The executive officers and directors of MCC are compensated exclusively by MCC and do not receive
any separate compensation from Mediacom LLC or Mediacom Capital. MCC acts as our manager and in
return receives a management fee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Mediacom Capital is a wholly-owned subsidiary of Mediacom LLC. MCC is the sole member of Mediacom
LLC. The address of MCC is 100 Crystal Run Road, Middletown, New York 10941.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Management Agreements
Pursuant to management agreements between MCC and our operating subsidiaries, MCC is entitled to
receive annual management fees in amounts not to exceed 4.5% of our gross operating revenues. For
the year ended December 31, 2008, MCC received $11.8 million of such management fees, approximately
1.9% of gross operating revenues.
Share
Exchange Agreement and Asset Transfer Agreement
On
September 7, 2008, MCC entered into a Share Exchange Agreement (the “Exchange
Agreement”) with Shivers Investments, LLC (“Shivers”) and Shivers Trading & Operating Company
(“STOC”). Both STOC and Shivers are affiliates of Morris Communications Company, LLC (“Morris
Communications”). STOC, Shivers and Morris Communications are controlled by William S. Morris III,
who together with another Morris Communications representative, Craig S. Mitchell, held two seats
on MCC’s Board of Directors.
On
February 13, 2009, MCC completed the Exchange Agreement pursuant to which it exchanged
100% of the shares of stock of a wholly-owned subsidiary, which held approximately $110 million of
cash and non-strategic cable systems serving approximately 25,000
basic subscribers contributed by us,
for 28,309,674 shares of Mediacom Class A common stock held by Shivers. Effective upon closing of the transaction,
Messrs. Morris and Mitchell resigned from MCC’s
Board of Directors.
On
February 11, 2009, certain of our operating subsidiaries executed an Asset Transfer Agreement (the
“Transfer Agreement”) with MCC and the operating subsidiaries of Mediacom Broadband, pursuant
to which we will exchange certain of our cable systems located in Florida, Illinois,
Iowa, Kansas, Missouri and Wisconsin, which serve approximately 45,900 basic subscribers for
certain of Mediacom Broadband’s cable systems located in Illinois, which serve
approximately 42,200 basic subscribers, and a cash payment of $8.2 million (the “Asset Transfer”).
We believe the Asset Transfer will better align our customer base geographically, making our cable
systems more clustered and allowing for more effective management, administration, controls and
reporting of our field operations. The Asset Transfer was completed on February 13, 2009.
As part of the Transfer Agreement, we contributed to MCC cable systems located in
Western North Carolina, which serve approximately 25,000 basic subscribers. These cable systems
were part of the Exchange Agreement noted above. In connection therewith, we received a $74
million cash contribution on February 12, 2009, of which funds had been contributed to MCC by
Mediacom Broadband on the same date.
In total, we received $82.2 million under the Transfer Agreement (the “Transfer Proceeds”), which
were used by us to repay a portion of the outstanding balance under the revolving commitments of
our operating subsidiaries’ bank credit facility.
On February 12, 2009, after giving effect to the debt repayment funded by the Transfer Proceeds as
noted above, our operating subsidiaries borrowed approximately $110 million under the revolving
commitments of the credit facility. This represented net new borrowings of about $28 million.
On February 12, 2009, we contributed approximately
$110 million to MCC to fund their cash
obligation under the Exchange Agreement defined above.
Other Relationships
In July 2001, we made a $150.0 million preferred equity investment in Mediacom Broadband that
was funded with borrowings under our bank credit facilities. The preferred equity investment has a
12% annual cash dividend, payable quarterly in cash. For the year ended December 31, 2008, we
received in aggregate $18.0 million in cash dividends on the preferred equity.
Investment banking firms or their affiliates have in the past engaged in transactions with and
performed services for us and our affiliates in the ordinary course of business, including
commercial banking, financial advisory and investment banking services. Furthermore, these
companies or their affiliates may perform similar services for us and our affiliates in the future.
Affiliates of certain of these companies are agents and lenders under our bank credit facilities.
The Bank of New York, an affiliate of BNY Capital Markets, Inc., acts as trustee for our senior
notes.
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Our allocated portion of fees from MCC for professional services provided by our independent
auditor in each of the last two fiscal years, in each of the following categories are as follows
(dollars in thousands):
| 2008 | 2007 | |||||||
Audit fees |
$ | 520 | $ | 520 | ||||
Audit-related fees |
17 | 15 | ||||||
Tax fees |
5 | — | ||||||
All other fees |
— | — | ||||||
Total |
$ | 542 | $ | 535 | ||||
Audit fees include fees associated with the annual audit (including Sarbanes-Oxley procedures), the
reviews of our quarterly reports on Form 10-Q and annual reports on Form 10-K. Audit-related fees
include fees associated with the audit of an employee benefit plan and transaction reviews.
Tax
fees include fees related to tax planning and associated tax
computations.
The audit committee of our manager has adopted a policy that requires advance approval of all
audit, audit-related, tax services, and other services performed by our independent auditor. The
policy provides for pre-approval by the audit committee of specifically defined audit and non-audit
services. Unless the specific service has been previously pre-approved with respect to that year,
the audit committee must approve the permitted service before the independent auditor is engaged to
perform it.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| (a) | Financial Statements |
Our financial statements as set forth in the Index to Consolidated Financial Statements under
Part II, Item 8 of this Form 10-K are hereby incorporated by reference.
| (b) | Exhibits |
The following exhibits, which are numbered in accordance with Item 601 of Regulation S-K, are filed
herewith or, as noted, incorporated by reference herein:
| Exhibit | ||||
| Number |
Exhibit Description |
|||
2.1
|
Asset Transfer Agreement, dated February 11, 2009, by and among Mediacom Communications Corporation, certain
operating subsidiaries of Mediacom LLC and the operating subsidiaries of Mediacom Broadband(1) |
|||
3.1
|
(a) | Articles of Organization of Mediacom LLC filed July 17, 1995(2) |
||
3.1
|
(b) | Certificate of Amendment of the Articles of Organization of Mediacom LLC filed December 8, 1995(2) |
||
3.2
|
Fifth Amended and Restated Operating Agreement of Mediacom LLC(3) |
|||
3.3
|
Certificate of Incorporation of Mediacom Capital Corporation filed March 9, 1998(2) |
|||
3.4
|
By-Laws of Mediacom Capital Corporation(2) |
|||
4.1
|
Indenture
relating to 7
7/8% senior notes due 2011 of Mediacom LLC and Mediacom Capital Corporation(4) |
|||
4.2
|
Indenture relating to 9 1/2% senior notes due 2013 of Mediacom LLC and Mediacom Capital Corporation(5) |
|||
10.1
|
(a) | Credit Agreement, dated as of October 21, 2004, among the operating subsidiaries of Mediacom LLC, the lenders
thereto and JPMorgan Chase Bank, as administrative agent for the lenders(6) |
||
10.1
|
(b) | Amendment No. 1, dated as of May 5, 2006, to the Credit Agreement, dated as of October 21, 2004, among the
operating subsidiaries of Mediacom LLC, the lenders thereto and JPMorgan Chase Bank, as administrative agent for
the lenders(7) |
||
10.1
|
(c) | Amendment No. 2, dated as of June 11, 2007, to the Credit Agreement, dated as of October 21, 2004, among the
operating subsidiaries of Mediacom LLC, the lenders party thereto and JPMorgan Chase Bank as administrative
agent for the lenders(8) |
||
10.1
|
(d) | Amendment No. 3, dated as of June 11, 2007, to the Credit Agreement, dated of October 21, 2004, among the
operating subsidiaries of Mediacom LLC, the lenders party thereto and JPMorgan Chase Bank, as administrative
agent for the lenders(8) |
||
10.2
|
Incremental Facility Agreement, dated as of May 5, 2006, between the operating subsidiaries of Mediacom LLC, the
lenders signatory thereto and JPMorgan Chase Bank, N.A., as administrative agent(7) |
|||
12.1
|
Schedule of Computation of Ratio of Earnings to Fixed Charges |
|||
14.1
|
Code of Ethics(9) | |||
21.1
|
Subsidiaries of Mediacom LLC | |||
23.1
|
Consent of PricewaterhouseCoopers LLP | |||
31.1
|
Rule 15(d) -14(a) Certifications of Mediacom LLC | |||
31.2
|
Rule 15(d) -14(a) Certifications of Mediacom Capital Corporation |
|||
32.1
|
Section 1350 Certifications of Mediacom LLC | |||
32.2
|
Section 1350 Certifications of Mediacom Capital Corporation |
|||
| (1) | Filed as an exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2008 of MCC |
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and incorporated herein by reference. |
||
| (2) | Filed as an exhibit to the Registration Statement on Form S-4 (File
No. 333-57285) of Mediacom LLC and Mediacom Capital Corporation and
incorporated herein by reference. |
|
| (3) | Filed as an exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 of MCC,
Mediacom LLC and Mediacom Capital Corporation and incorporated herein
by reference. |
|
| (4) | Filed as an exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 of Mediacom LLC and Mediacom Capital
Corporation and incorporated herein by reference. |
|
| (5) | Filed as an exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2000 of MCC
and incorporated herein by reference. |
|
| (6) | Filed as an exhibit to the Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2004 of MCC and incorporated herein by reference. |
|
| (7) | Filed as an exhibit to the Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2006 of MCC and incorporated herein by reference. |
|
| (8) | Filed as an exhibit to the Quarterly Report of Form 10-Q for the
quarterly period ended June 30, 2007 of MCC and incorporated herein by reference. |
|
| (9) | Filed as an exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2003 of Mediacom LLC and incorporated herein
by reference. |
(c) Financial Statement Schedule |
The financial statement schedule — Schedule II — Valuation and Qualifying Accounts — is part of this Form 10-K.
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on our behalf by the undersigned, thereunto duly authorized.
| Mediacom LLC | ||||
March 27, 2009 |
||||
| By: | /s/ Rocco B. Commisso | |||
| Rocco B. Commisso | ||||
| Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
Signature |
Title |
Date |
||
| /s/ Rocco B.Commisso
Rocco B.Commisso |
Chief Executive Officer (principal executive officer) |
March 27, 2009 | ||
| /s/ Mark E. Stephan
Mark E. Stephan |
Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer) |
March 27, 2009 |
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on our behalf by the undersigned, thereunto duly authorized.
| Mediacom Capital Corporation | ||||
March 27, 2009 |
||||
| By: | /s/ Rocco B. Commisso | |||
| Rocco B. Commisso | ||||
| Chief Executive Officer and Director | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
Signature |
Title |
Date |
||
| /s/ Rocco B. Commisso
Rocco B. Commisso |
Chief Executive Officer and Director (principal executive officer) |
March 27, 2009 | ||
| /s/ Mark E. Stephan
Mark E. Stephan |
Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer) |
March 27, 2009 |
80
Table of Contents
Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the
Securities Exchange Act of 1934 by Registrants Which Have not Registered Securities Pursuant to
Section 12 of the Securities Exchange Act of 1934.
The Registrants have not sent and will not send any proxy material to their security holders. A
copy of this annual report on Form 10-K will be sent to holders of the Registrants’ outstanding
debt securities.
81
Exhibit 12.1
Mediacom LLC
Schedule of Computation of Ratio of Earnings to Fixed Charges
| For the Years ended December 31, | ||||||||||||||||||||
| 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
Earnings: |
||||||||||||||||||||
(Loss) income before income taxes |
$ | 7,389 | $ | (14,626 | ) | $ | (19,419 | ) | $ | (4,294 | ) | $ | 8,976 | |||||||
Interest expense, net |
99,639 | 118,386 | 112,895 | 102,000 | 97,790 | |||||||||||||||
Amortization of capitalized interest |
1,706 | 1,939 | 1,702 | 1,525 | 1,356 | |||||||||||||||
Amortization of debt issuance costs |
2,039 | 2,225 | 2,427 | 3,009 | 5,642 | |||||||||||||||
Interest component of rent expense(1) |
3,133 | 2,617 | 2,716 | 2,776 | 2,623 | |||||||||||||||
Earnings available for fixed charges |
$ | 113,906 | $ | 110,541 | $ | 100,321 | $ | 105,016 | $ | 116,387 | ||||||||||
Fixed Charges: |
||||||||||||||||||||
Interest expense, net |
$ | 99,639 | $ | 118,386 | $ | 112,895 | $ | 102,000 | $ | 97,790 | ||||||||||
Capitalized interest |
2,131 | 1,729 | 1,893 | 2,106 | 1,545 | |||||||||||||||
Amortization of debt issuance cost |
2,039 | 2,225 | 2,427 | 3,009 | 5,642 | |||||||||||||||
Interest component of rent expense(1) |
3,133 | 2,617 | 2,716 | 2,776 | 2,623 | |||||||||||||||
Total fixed charges |
$ | 106,942 | $ | 124,957 | $ | 119,931 | $ | 109,891 | $ | 107,600 | ||||||||||
Ratio of earnings to fixed charges |
1.07 | — | — | — | 1.08 | |||||||||||||||
Deficiency of earnings over fixed charges |
$ | — | $ | (14,416 | ) | $ | (19,610 | ) | $ | (4,875 | ) | $ | — | |||||||
| (1) | A reasonable approximation (one-third) is deemed to be the interest
factor included in rental expense. |
Exhibit 21.1
Subsidiaries of Mediacom LLC
| State of Incorporation | Names under which | |||
|
Subsidiary |
or Organization |
subsidiary does business |
||
Mediacom Arizona LLC
|
Delaware | Mediacom Arizona Cable Net | ||
| Mediacom Cable LLC | ||||
Mediacom California LLC
|
Delaware | Mediacom California LLC | ||
Mediacom Capital Corporation
|
New York | Mediacom Capital Corporation | ||
Mediacom Delaware LLC
|
New York | Mediacom Delaware LLC | ||
| Maryland Mediacom Delaware | ||||
Mediacom Illinois LLC
|
Delaware | Mediacom Illinois LLC | ||
Mediacom Indiana LLC
|
Delaware | Mediacom Indiana LLC | ||
Mediacom Indiana Partnerco LLC
|
Delaware | Mediacom Indiana Partnerco | ||
Mediacom Indiana Holdings, L.P.
|
Delaware | Mediacom Indiana Holdings, L.P. | ||
Mediacom Iowa LLC
|
Delaware | Mediacom Iowa LLC | ||
Mediacom Minnesota LLC
|
Delaware | Mediacom Minnesota LLC | ||
Mediacom Southeast LLC
|
Delaware | Mediacom Southeast LLC | ||
| Mediacom New York LLC | ||||
Mediacom Wisconsin LLC
|
Delaware | Mediacom Wisconsin LLC | ||
Zylstra Communications Corporation
|
Minnesota | Zylstra Communications Corporation | ||
Illini Cable Holding, Inc.
|
Illinois | Illini Cable Holding, Inc. | ||
Illini Cablevision of Illinois, Inc.
|
Illinois | Illini Cablevision of Illinois, Inc. |
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3
(Nos. 333-82124-01 and 333-82124-04) of Mediacom LLC and Mediacom Capital Corporation of our report
dated March 27, 2009 relating to the financial statements and financial statement schedule, which
appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
March 27, 2009
PricewaterhouseCoopers LLP
New York, New York
March 27, 2009
Exhibit 31.1
CERTIFICATIONS
I, Rocco B. Commisso, certify that:
(1) I have reviewed this report on Form 10-K of Mediacom LLC;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
(5) The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons performing the equivalent function):
a) significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting.
| By: | /s/ Rocco B. Commisso | |||
| Rocco B. Commisso | ||||
| Chief Executive Officer |
March 27, 2009
Exhibit 31.1
I, Mark E. Stephan, certify that:
(1) I have reviewed this report on Form 10-K of Mediacom LLC;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
(5) The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting.
| By: | /s/ Mark E. Stephan | |||
| Mark E. Stephan | ||||
| Chief Financial Officer |
March 27, 2009
Exhibit 31.2
I, Rocco B. Commisso, certify that:
(1) I have reviewed this report on Form 10-K of Mediacom Capital Corporation;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986;
b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
(5) The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting.
| By: | /s/ Rocco B. Commisso | |||
| Rocco B. Commisso | ||||
| Chief Executive Officer |
March 27, 2009
Exhibit 31.2
I, Mark E. Stephan, certify that:
(1) I have reviewed this report on Form 10-K of Mediacom Capital Corporation;
(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
(3) Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
(4) The registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
(5) The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting.
| By: | /s/ Mark E. Stephan | |||
| Mark E. Stephan | ||||
| Chief Financial Officer |
March 27, 2009
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Mediacom LLC (the “Company”) on Form 10-K for the period
ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), Rocco B. Commisso, Chief Executive Officer and Mark E. Stephan, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
| By: | /s/ Rocco B. Commisso | |||
| Rocco B. Commisso | ||||
| Chief Executive Officer | ||||
March 27, 2009 |
||||
| By: | /s/ Mark E. Stephan | |||
| Mark E. Stephan | ||||
| Chief Financial Officer |
March 27, 2009
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Mediacom Capital Corporation (the “Company”) on Form 10-K
for the period ended December 31, 2008 as filed with the Securities and Exchange Commission on the
date hereof (the “Report”), Rocco B. Commisso, Chief Executive Officer and Mark E. Stephan, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to
§ 906 of the Sarbanes-Oxley Act of 2002, that:
(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
| By: | /s/ Rocco B. Commisso | |||
| Rocco B. Commisso | ||||
| Chief Executive Officer | ||||
March 27, 2009 |
||||
| By: | /s/ Mark E. Stephan | |||
| Mark E. Stephan | ||||
| Chief Financial Officer |
March 27, 2009