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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, 2010
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 incorporation or organization) |
(I.R.S. Employer Identification Numbers) |
100 Crystal Run Road
Middletown, New York 10941
(Address of principal executive offices)
Middletown, New York 10941
(Address of principal executive offices)
(845) 695-2600
(Registrants’ telephone number)
(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
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 o No þ
Act. Yes o No þ
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 þ No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the Registrant was required to submit and post such files). Yes o No o
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 registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. 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 filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting | |||
| (Do not check if a smaller reporting company) | company o |
Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the
Exchange
Act). Yes o No þ
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
2010 FORM 10-K ANNUAL REPORT
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This Annual Report on Form 10-K is for the year ended December 31, 2010. Any statement contained in
a prior periodic report shall be deemed to be modified or superseded for purposes of this Annual
Report to the extent that a statement herein modifies or supersedes such statement. 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 by referring you directly to
those documents. Information incorporated by reference is considered to be part of this Annual
Report.
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.
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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 “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,”
“plans,” “potential,” “predicts,” “should” or “will,” or the negative of those and other comparable
words. These forward-looking statements are not guarantees of future performance or results, and
are subject to risks and uncertainties that could cause actual results to differ materially from
historical results or those we anticipate as a result of various factors, many of which are beyond
our control. Factors that may cause such differences to occur include, but are not limited to:
| • | increased levels of competition from existing and new competitors; |
| • | lower demand for our video, high-speed data and phone services; |
| • | our ability to successfully introduce new products and services to meet customer demands and preferences; |
| • | changes in laws, regulatory requirements or technology that may cause us to incur additional costs and expenses; |
| • | greater than anticipated increases in programming costs and delivery expenses related to our products and services; |
| • | changes in assumptions underlying our critical accounting policies; |
| • | the ability to secure hardware, software and operational support for the delivery of products and services to our customers; |
| • | disruptions or failures of network and information systems upon which our business relies; |
| • | our reliance on certain intellectual properties; |
| • | our ability to generate sufficient cash flow to meet our debt service obligations; |
| • | our ability to refinance future debt maturities or provide future funding for general corporate purposes and potential strategic transactions, on similar terms as we currently experience; and |
| • | other risks and uncertainties discussed in this Annual Report for the year ended December 31, 2010 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
customers who purchase one or more video services, also known as basic subscribers. Mediacom is
among the leading cable operators focused on serving the smaller cities in the United States, with
a significant customer concentration in the Midwestern and Southeastern regions.
As of December 31, 2010, Mediacom’s cable systems, which are owned and operated through our
operating subsidiaries and those of Mediacom Broadband LLC (“Mediacom Broadband”), passed an
estimated 2.81 million homes in 22 states. Mediacom Broadband is also a wholly-owned subsidiary of
Mediacom. As of the same date, Mediacom served approximately 1.19 million basic subscribers,
731,000 digital video customers, 838,000 high-speed data (“HSD”) customers and 332,000 phone
customers, aggregating 3.09 million revenue generating units (“RGUs”).
As a result of the Going Private Transaction discussed below, Mediacom is wholly-owned by Rocco B.
Commisso, Mediacom’s founder, Chairman and Chief Executive Officer.
Mediacom LLC
As of December 31, 2010, we served approximately 530,000 basic subscribers, 322,000 digital video
customers, 379,000 HSD customers and 157,000 phone customers, aggregating 1.39 million RGUs. As of
the same date, we offered our bundle of video, HSD and phone service to about 92% of the estimated
homes that our network passes.
Through our interactive broadband network, we provide our customers with a wide variety of advanced
products and services, including video services such as digital video, video-on-demand (“VOD”),
high-definition television (“HDTV”) and digital video recorders (“DVRs”), HSD and phone service. We
offer our primary services of video, HSD and phone, which we refer to as our “triple-play” bundle,
to residential and commercial customers in our service areas. We also provide network and transport
services to medium and large sized businesses in our service areas, and sell advertising time we
receive under our programming license agreements to local, regional and national advertisers.
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
(http://www.mediacomcc.com; 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 phone number is (845)
695-2600 and our principal executive offices are located at 100 Crystal Run Road, Middletown, New
York, 10941.
2010 Developments
New Financings
On April 23, 2010, we completed financing transactions (the “new financings”) that provided for a
new term loan in the principal amount of $250 million and amendments to our existing bank credit
facility (the “credit facility”) which, among other things, extended the termination date, and
reduced the commitments thereunder, on certain of our total revolving credit commitments. The net
proceeds from the new term loan were used to repay an existing term loan and the full balance of
outstanding revolving credit loans under our credit facility. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources —
Capital Structure — New Financings” and Note 5 in our Notes to Consolidated Financial Statements
for more information.
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Going Private Transaction
On November 12, 2010, Mediacom entered into an Agreement and Plan of Merger (the “Merger
Agreement”), by and among Mediacom, JMC Communications LLC (“JMC”) and Rocco B. Commisso, who was
also the sole member and manager of JMC (the
“Going Private Transaction”). Pursuant to the Merger
Agreement, among other things, each share of Mediacom common stock (other than shares held by Mr.
Commisso, JMC, or any of their respective affiliates, shares held in treasury by Mediacom and
shares held by stockholders who have perfected their appraisal rights under Delaware law) would be
converted into the right to receive $8.75 in cash upon stockholder approval of the Merger
Agreement.
At a special meeting of stockholders on March 4, 2011, Mediacom’s stockholders voted to adopt the
Merger Agreement and, on the same date, the Going Private Transaction was closed. As a result, JMC
was merged with and into Mediacom, with Mediacom continuing as the surviving corporation, a private
company that is wholly-owned by Mr. Commisso. The Going Private Transaction consideration was
approximately $367 million, and was funded, in part, by distributions to Mediacom by us, consisting
of $100 million of drawdowns under our revolving credit facility and cash on hand, with the balance
funded by Mediacom Broadband.
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:
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Operating Data: |
||||||||||||||||||||
Core Video |
||||||||||||||||||||
Estimated homes passed(1) |
1,292,000 | 1,286,000 | 1,370,000 | 1,360,000 | 1,355,000 | |||||||||||||||
Basic subscribers(2) |
530,000 | 548,000 | 601,000 | 604,000 | 629,000 | |||||||||||||||
Basic penetration(3) |
41.0 | % | 42.6 | % | 43.9 | % | 44.4 | % | 46.4 | % | ||||||||||
Digital Cable |
||||||||||||||||||||
Digital customers(4) |
322,000 | 300,000 | 288,000 | 240,000 | 224,000 | |||||||||||||||
Digital penetration(5) |
60.8 | % | 54.7 | % | 47.9 | % | 39.7 | % | 35.6 | % | ||||||||||
High Speed Data |
||||||||||||||||||||
HSD customers(6) |
379,000 | 350,000 | 337,000 | 299,000 | 258,000 | |||||||||||||||
HSD penetration(7) |
29.3 | % | 27.2 | % | 24.6 | % | 22.0 | % | 19.0 | % | ||||||||||
Phone |
||||||||||||||||||||
Estimated marketable phone homes(8) |
1,186,000 | 1,180,000 | 1,198,000 | 1,150,000 | 950,000 | |||||||||||||||
Phone customers(9) |
157,000 | 135,000 | 114,000 | 79,000 | 34,000 | |||||||||||||||
Phone penetration(10) |
13.2 | % | 11.4 | % | 9.5 | % | 6.9 | % | 3.6 | % | ||||||||||
Revenue Generating Units(11) |
1,388,000 | 1,333,000 | 1,340,000 | 1,222,000 | 1,145,000 | |||||||||||||||
| (1) | Represents the estimated number of single residence homes, apartments and condominium units passed by our cable distribution network. Estimated homes passed are 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 generally 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. 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 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 |
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| 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 by our cable distribution network. | |
| (8) | Represents the 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. Small to medium-sized commercial accounts are converted to equivalent residential phone customers by dividing their associated revenues by the applicable residential rate. Our methodology of calculating phone customers may not be identical to those used by other companies offering similar services. | |
| (10) | Represents the number of total phone customers as a percentage of our estimated marketable phone homes. | |
| (11) | Represents the sum of basic subscribers and digital, HSD and phone customers. |
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Our Service Areas
Approximately 66% of our basic subscribers are in the top 100 television markets in the United
States, commonly referred to as Nielsen Media Research designated market areas (“DMAs”), with more
than 38% in DMAs that rank between the 60th and 100th largest. Our major service areas include: the
gulf coast region surrounding Pensacola, FL and Mobile, AL; suburban and outlying communities
around Minneapolis, MN; outlying communities around Champaign, Springfield and Decatur, IL;
communities in the western Kentucky and southern Illinois region; communities in northern Indiana;
Dagsboro, DE and the adjoining coastal area in Delaware and Maryland; certain western suburbs of
Chicago, IL; and suburban communities of Huntsville, AL. Each of these clusters is further extended
through use of regional fiber networks to connect additional cities and towns.
Residential Services
Our residential services, consisting of our triple play bundle and other advanced products and
services, are the principal source of our revenues, and are generally provided by fees paid by
residential customers that are billed on a monthly basis. Customers are offered the option of
signing a contract to hold rates constant through the term of the agreement, or paying on a
month-to-month basis, which is subject to rate increases. Customers with contracts who discontinue
service prior to the expiration of the agreement are charged a termination fee.
We market our products and services to residential consumers in bundled packages, offering
customers discounted pricing and the convenience of a single monthly bill. Customers who take our
“VIP Pak” triple play bundle, which includes digital video service, receive faster HSD speeds and other
benefits free of charge. As of December 31, 2010, approximately 56% of our customers subscribed to
two or more of our primary services, including about 22% of our customers who take all three.
Video
We offer our video service to residential customers
in a variety of packages, ranging from our
lower-cost broadcast basic service to premium video services, including digital and other advanced
video products and services as discussed below. Our residential video customers are charged
monthly subscription rates which vary according to the level of service and equipment taken. We
also derive video revenue from the sale of premium VOD content and pay-per-view events, as well as
equipment, installation and other auxiliary charges.
Broadcast Basic Service. Our broadcast basic service includes 12 to 20 channels, including local
over-the-air broadcast network and independent stations, limited satellite-delivered programming,
home-shopping channels, and local public, government and leased access channels.
Family Basic Service. Our expanded basic package of services, marketed as “Family Cable,”
includes, for an additional monthly fee, 40 to 55 additional satellite-delivered channels such as
CNN, Discovery, ESPN, Lifetime, MTV, TNT and the USA Network in addition to those provided with our
broadcast basic service.
Digital Service. Our digital video service offers customers up to 230 channels, depending on the
level of service selected, with an improved picture and sound quality compared to traditional
analog video service. A digital converter or cable card is required to receive our digital and
other advanced video services, and digital customers are charged an additional monthly fee, which varies according to the level of service taken and the number of digital converters
in the home. Digital customers are provided access to our interactive on-screen program guide, and
receive all of the channels provided in our Family Basic Service along with additional programming,
including digital music channels and full access to our VOD library. For additional charges, our
subscribers may purchase premium video services such as Cinemax, HBO, Showtime and Starz! on an
individual or tiered basis.
High-Definition Television. Our HDTV service offers video customers a high-resolution picture
quality, digital sound and a wide-screen, theater-like display when using a high-definition
(“HD”) television. Most major broadcast networks, leading national cable networks and regional
sports networks are offered in HD to our digital customers at no additional charge. Digital
customers who subscribe to premium video services also have access to the premium service’s HDTV
channels without additional fees.
We offer up to 68 HD channels in certain of our markets, and plan to expand up to 100 HD channels
in 2011. Based upon data provided by the Nielsen Company, we believe the HD programming we
currently offer represents about 80% of the most widely-watched programming available.
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Digital Video Recorders. Our DVR service allows digital customers to record and store programming
to watch at their convenience, as well as the ability to pause and rewind “live” television. Our
DVR service requires the use of an advanced digital converter, and customers who take our DVR
service are charged an additional monthly fee. In 2010, we launched a multi-room DVR product that
enables customers who take our DVR service to record in one room and watch the recorded programming
in any other rooms, using up to three set-top boxes in their home.
As of December 31, 2010, 45.4% of our digital customers received DVR and/or HDTV services.
Video-On-Demand. Our VOD service provides on-demand access to almost 7,500 movies, special events
and general interest titles, and includes full two-way functionality, including the ability to
start programs at any time, as well as pause, rewind and fast forward. The majority of our VOD
content is available to our digital customers at no additional charge, with additional content such
as first-run movies and special event programs such as live concerts and sporting events available
on a pay-per-view basis. Digital customers who subscribe to premium video services also have
access to the premium service’s VOD content without additional fees. As of December 31, 2010, our
VOD service was available to about 85% of our digital customers.
Mediacom Online
Mediacom Online, our residential HSD service, is offered to customers at downstream speeds ranging
from 3 Mbps to 105 Mbps. HSD customers are charged monthly subscription rates which vary according
to the level of HSD service taken, and include the use of a cable modem. Our most popular service
delivers speeds of up to 12 Mbps downstream and 1 Mbps upstream, and customers who take our VIP Pak
are automatically upgraded to 15 Mbps downstream speeds at no additional cost.
In late 2009, we launched Mediacom Online Ultra, which is our very high-speed, or “wideband,” HSD
service. Mediacom Online Ultra utilizes DOCSIS 3.0 technology that was developed to accommodate
much higher transmission speeds through the use of channel bonding, allowing us to offer downstream
and upstream speeds of up to 105 Mbps and 10 Mbps, respectively. As of December 31, 2010, Mediacom
Online Ultra was available to approximately half of our service territory, and we plan to continue
our expansion of this service in 2011. In our service areas that we do not offer Mediacom Online
Ultra, we offer maximum downstream speeds of 20 Mbps.
Mediacom Phone
Mediacom Phone, our residential phone service, offers unlimited local, regional and long-distance
calling within the United States, Puerto Rico, the U.S. Virgin Islands and Canada. Our phone customers are charged a monthly fee, which includes
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. Substantially
all of our phone customers take multiple services from us; about 84% take the triple-play and
approximately 15% take either video or HSD service in addition to phone.
Business Services
Commercial Services
We offer our full array of products and services to small and medium sized businesses (“SMB”),
including a multiline business phone service, which we believe has expanded our potential to
attract new SMB customers. During 2011, we will introduce a trunk-based voice service that will
offer SMB customers significantly more capacity for additional lines and a portfolio of
cloud-based, managed communications solutions through partnerships with local technology companies.
These initiatives will enable us to offer SMB customers access to enterprise-class services
without the need for significant infrastructure investment.
Enterprise Networks
Our enterprise networks business provides medium and large businesses in our markets, including
companies in the educational, financial services, healthcare and wireless telecommunications
industries, with tailored network solutions built upon our proprietary all-fiber optic backbone.
Our fiber network provides scalable bandwidths from 5 Mbps to 10 Gbps, which allows us to offer our enterprise networks customers a service that is customized to meet their current bandwidth requirements, while allowing for additional bandwidth
in the future. Our enterprise networks customers are supported by a dedicated technical team and
24/7 monitoring by our Network Operations Center.
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Advertising
We generate revenues from selling advertising time we receive under our programming 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.
Marketing and Sales
We employ a wide range of sales channels to reach current and potential customers, including direct
marketing such as mail and outbound telemarketing, door-to-door and field technician sales. We also
steer people to our inbound call centers or website through television advertising on our own cable
systems and local broadcast television stations, internet advertising on search engines and other
websites and through other mass media outlets, including newspaper, radio and outdoor advertising.
Our primary marketing focus to residential and SMB customers is on our bundled products and
services, which we offer to our customers at discounted pricing, with the convenience of a single
bill. Residential customers who take our VIP Pak triple play bundle receive benefits such as faster HSD speeds, additional free VOD movies and retailer discounts,
which we believe enhances the value of our services and increases our brand recognition.
We have a dedicated sales force to market our business services and established relationships with
third-party agents, which we believe will help attract new SMB and enterprise networks
customers.
Customer Care
We believe that providing a superior customer experience improves customer retention and creates
opportunities for sale of our advanced services. Our efforts to enhance our customers’ satisfaction
include multiple options to resolve questions and access information about their
services, a focus on first time resolution of service calls without the need to go to the
customer’s residence, and continually improving the performance and reliability
of our products and services.
Contact Centers
Our customer care group has multiple contact centers, which are staffed with dedicated customer service,
sales and technical support representatives that are available 24 hours a day, seven days a week, to respond to customer inquiries on all of
our products and services. Our virtual contact center technology ensures that the customer care
group functions 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 is also available to our customers, which allows them to order products
via the Internet, review their billing accounts, make payments, receive general and technical support, and utilize self-help tools to troubleshoot technical difficulties. We also have
established a presence on certain social networking websites, offering our current and potential
customers in our markets another method of contacting us.
Field Operations
Our field operations group is staffed to handle all of our customers’ installation and service
needs. Our field technicians utilize a workflow management system that facilitates on-time arrival for
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 and real time remote technician dispatching. Our field technicians
are equipped with hand-held monitoring tools that determine the real-time quality of service at
each customer’s home, and allow us to effectively install new services and efficiently resolve
customer reported issues.
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Technology
Our cable systems use a hybrid fiber-optic coaxial (“HFC”) design that provides a single platform
distribution system, and has proven to be highly flexible in meeting the increasing requirements of
our business. The HFC designed network is engineered to accommodate bandwidth management
initiatives that provide increased capacity for our advanced products and services without the need
for costly upgrades. Our signals are delivered via laser-fed fiber optical cable from control centers
known as headends and hubs to individual nodes, and coaxial cable is then connected from each node
to the individual homes we serve.
As of December 31, 2010, substantially all our cable distribution network had bandwidth capacity of
at least 750 megahertz or had been converted to all-digital technology, which we believe is
sufficient to deliver our current array of products and services. However, demand for new
services, including additional HDTV channels and DOCSIS 3.0-enabled wideband HSD service will require
us to become more efficient with our existing bandwidth capacity. As part of our transition
towards an “all-digital” platform, we have been moving video channels from analog to digital
transmission, allowing us to deliver the same programming using less bandwidth, which enables us to offer our customers more HDTV channels, faster HSD speeds and other advanced products
and services using the reclaimed bandwidth. We have transitioned certain of our cable systems to
an “all-digital” format, removing all analog programming and only offering digital video. We plan to transition additional systems to an “all-digital” format in 2011 and beyond. To take full
advantage of the efficiencies associated with digital transmission, we expect most of our cable
distribution network will ultimately move to an “all-digital” platform in the future, thereby
eliminating all analog transmissions.
We have constructed fiber networks which connect over 80% of our service territory, upon which we
have overlaid a video transport system which allows these areas to function a single virtual
system. Our fiber networks and video transport system give us greater reach from a central
location, making it more cost efficient and timely to introduce new and advanced services to
customers, helping us reduce equipment and personnel costs, connectivity charges and other
expenditures.
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, under which we provide to about
1,350 schools with free video service and about 60 schools with free HSD service. We also provide
free cable service to over 2,500 government buildings, libraries and not-for-profit hospitals, of
which almost 200 locations receive free HSD service.
We develop and provide exclusive local programming for our communities, a service that cannot be
offered by our primary video competitor, direct broadcast satellite (“DBS”) providers. Several of
our cable systems have production facilities with the ability to create local programming, including 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 brand awareness and customer loyalty in the communities we serve.
Franchises
Cable systems are generally operated under non-exclusive franchises granted by local or state
governmental authorities. Historically, these franchises have 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, as amended (the “Cable Act”).
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As of December 31, 2010, we served 857 communities under a cable franchise. 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.
Many of the states in which we operate have enacted comprehensive state-issued franchising statutes
that cede control over franchises away from local communities and towards state agencies, such as
the various public service commissions that regulate other utilities. As of December 31, 2010,
about 15% 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.
We have never had a franchise revoked or failed to have a franchise renewed. Furthermore, 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 its own merits and not as part of a comparative
process with competing applications. We believe that we have satisfactory relationships with our
franchising communities.
Sources of Supply
Programming
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 customer, subject to contractual
escalations. Although most of our contracts are secured directly with the programmer, 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 local broadcast station owners elect either
“must carry” or retransmission consent every three years. 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, greater cash payments and, to a lesser extent, our purchase of advertising time
from local broadcast station owners were required to secure their consent.
Programming expenses have historically comprised our largest single expense item, and in recent
years such costs have increased substantially more than the inflation rate or the change in the
consumer price index, particularly for sports and local broadcast programming. We believe that
these expenses will continue to grow, principally due to contractual unit rate increases and the
increasing demands of sports programmers and television broadcast station owners for greater
compensation. While such growth in programming expenses can be partially offset by rate increases
to video customers, we expect that our gross video margins will continue to decline as
increases in programming costs outpace growth in video revenues.
Set-Top Boxes, Program Guides, Cable Modems and Network Equipment
We purchase set-top boxes, including DVRs, from a limited number of suppliers, principally Motorola
Inc. and Pace plc, and lease these devices to subscribers on a monthly basis. We purchase cable
modems, routers, switches and other network equipment from a variety of providers, the most
significant being Cisco Systems Inc. If we were unable to obtain such equipment from these
suppliers, our ability to serve our customers in a consistent manner could be affected, and we may
not be able to provide similar equipment in a timely manner.
HSD and Phone Connectivity
We deliver HSD and phone services through fiber networks that are either owned by us or leased from
third parties, and through backbone networks that are operated by third parties. We pay fees for
leased circuits based on the amount of capacity and for Internet connectivity based on the amount
of HSD and phone traffic received from, and sent over, the provider’s network.
Digital Phone
Under a multi-year agreement between us and Sprint Corporation, Sprint has assisted us in providing
phone service by routing voice traffic to and from destinations outside of our network via the
public switched telephone network, delivering E911 service and assisting in local number
portability and long-distance traffic carriage. In 2010, we initiated a project to transition these
services in-
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house, which we expect to complete in the first half of 2011. As a result of this transition, we
will realize lower phone service delivery costs and greater flexibility to develop and provide
advanced phone services to meet our customers’ preferences.
Competition
We operate in a competitive business environment, and are subject to significant developments in
the marketplace, including rapid technological advances and changes in the regulatory and
legislative environment. We have historically faced intense competition from communications and
entertainment providers, primarily DBS and certain local telephone companies, many of whom have
greater resources than we do. In the past several years, many of these competitors have expanded
their service areas and added services and features comparable to ours. We have also faced
increasing competition from wireless telephone providers, as many potential phone customers have
replaced their wireline phone service with a wireless product.
Recent technological advances may result in greater competition for us in the future, particularly
from video services that are delivered over the Internet, also known as “over-the-top” video
(“OTTV”). While the majority of OTTV services do not offer a video product comparable to ours,
certain premium OTTV services are now available which offer a similar
product to our VOD service, for which customers are charged on a monthly subscription or an individual title basis. Our HSD product may face greater competition in the future if a
competitively priced wireless data product is made available that offers similar speeds to our HSD
product. We are unable to predict the effects, if any, of these advancements on our business.
Direct Broadcast Satellite Providers
DBS providers, principally DirecTV, Inc. and DISH Network Corp., are the cable industry’s most
significant video competitors, serving more than 33 million customers nationwide, according to
publicly available information. DirecTV and DISH offers packages that include programming
substantially similar to ours, including local broadcast signals in most of our markets, over 150
channels of HD programming and exclusive arrangements to provide certain programming which is
unavailable to us, including special professional football packages.
DBS providers have operational cost advantages over us, including not being required to pay certain
taxes and fees which we incur, particularly franchise fees, and the establishment of a nation-wide
brand and marketing platform. While DBS customers have historically paid up-front costs that we do
not charge, in recent years such costs have decreased substantially due to aggressive marketing
offers to new customers, which may include discounted or free equipment and installation. For the
past several years, DBS competitors have deployed aggressive marketing campaigns, including deeply
discounted promotional packages, which have resulted in video customer losses in our markets.
Due to technological constraints, DBS service has limited two-way interactivity, which restricts
their providers’ ability to offer interactive video, HSD and phone services. In contrast, our
networks’ full two-way interactivity enables us to deliver true VOD, as well as HSD and phone
services over a single platform. In lieu of offering such advanced services, DBS providers have in
many cases entered into 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 bundled products and
services.
Local Telephone Companies and other Overbuilders
Our HSD and phone services compete primarily with local telephone companies such as
AT&T Inc. Such companies compete with our HSD product by offering digital subscriber line (“DSL”)
services and with our phone product by offering a substantially similar product to that which we
offer. In our markets, widely-available DSL service is typically limited to downstream speeds
ranging from 1.5Mbps to 3Mbps, compared to our downstream speeds ranging from 3Mbps to 105Mbps. We
believe the performance, cost savings and convenience of our bundled packages compare favorably
with the local telephone companies’ products and services.
Historically, local phone companies have
been in a better position to offer data services to businesses, as their networks tend to be more
complete in commercial areas. However, as we continue to extend our distribution network across
business districts in the cities and towns we serve and market our products and services, we expect
to capitalize on the potential of small to medium sized commercial and large enterprise markets.
Certain
local telephone companies, including Verizon Communications Inc. and
AT&T have built, and are continuing to build, fiber networks with fiber-to-the-node or
fiber-to-the-home architecture, enabling them to offer a triple play bundle similar to ours. Such
upgraded networks provide video, HSD and phone services that are comparable, and in some cases,
superior to ours, with entry prices similar to those we offer. Based on internal estimates, these
competitors were actively marketing to approximately 8% of our service territory as of December 31,
2010. Due to the lower home density of our service areas compared to
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the higher home density of larger metropolitan markets, and the per home passed capital investment
associated with constructing fiber networks, we believe that further build-outs into most our
markets will be a lower priority for the telephone companies.
Our video service also competes with cable systems operating 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. However, most of these entities were operating prior to our ownership of the affected
cable systems, and we believe there has been no significant expansion of such entities in our
markets in the past several years.
As of
December 31, 2010, we believe that various entities are currently offering video service, through
wireline distribution networks, to about 31% of our estimated homes passed.
Wireless Communication Companies
In
addition to competition from wireline phone service providers, we have faced, and continue to
face, increasing competition from wireless phone providers, such as AT&T, Verizon and Sprint. As
the usage of wireless phone service has increased, a trend known as “wireless substitution” has
developed where certain consumers have chosen a wireless phone provider in lieu of a traditional
phone service such as we offer. We expect this trend to continue in the future and, given the
recent economic downturn, may accelerate as consumers become more cost conscious.
Many wireless telephone providers also offer a mobile data service for cellular use. With the
increasing penetration of advanced mobile devices, including “smartphones,” the use of mobile data
services for certain applications is expanding, a trend we believe will continue in the near
future. Wireless telephone providers are currently unable to offer a mobile data service that compares with
our HSD service in terms of speed and reliability, and few, if any, potential HSD customers have
chosen a wireless data product in lieu of our HSD service. However, if technological advances were
to lead to a wireless data service comparable to our HSD service, we could experience lower growth
rates, or a decline in HSD customers.
Other Competition
Video
The usage of OTTV has increased dramatically in the last several years, as greater downstream
speeds offered by Internet providers, including our HSD product, and advances in streaming video
technology have enabled content providers a variety of “over the top” distribution outlets. In
general, such OTTV content is supported by advertising, and made available to consumers free of
charge, including certain programming which is the same, or substantially similar, to that which we
offer. Certain OTTV providers, including Netflix Inc., Hulu.com., Amazon.com and Apple Inc., now
offer a premium service similar to our VOD product, for which
consumers are charged a monthly
subscription or an individual title basis.
Recent advances have also allowed consumers to stream OTTV directly to their television through
various electronic devices such as video game consoles and Blu-ray players, resulting in a similar
experience to our VOD service. We may face greater video service competition in the future as the
usage of OTTV, particularly streamed to consumers’ televisions, continues to grow. While we
expect our HSD service to remain the primary provider of Internet service to our video customers,
if certain customers were to choose to downgrade, or fully replace our video service with an OTTV
product, we could experience meaningful declines in our video revenues.
HSD
The American Recovery Act of 2009 is providing specific funding for broadband development as part
of the economic stimulus package. Some of our existing and potential competitors have applied for
funds under this program. In a limited number of cases, some of our existing and potential
competitors have been approved to receive funds from this program which will allow them to build or
expand facilities faster and deploy existing and new services sooner, and to more areas, than they
otherwise would.
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Phone
Our phone service also competes with national providers of IP-based phone services, such as Vonage,
Skype and magicJack, as well as companies that sell phone cards at a cost per minute for both
national and international service. Such providers of IP-based phone services do not have a
traditional facilities-based network, but provide their services through a consumer’s high-speed
Internet connection.
Advertising
We compete for the sale of advertising against a wide variety of media outlets, including local
broadcast stations, national broadcast networks, national and regional programming networks, local
radio broadcast stations, local and regional newspapers, magazines and Internet sites.
During the past several years, many businesses have allocated a greater part of their advertising
spending to Internet based advertising. The recent economic distress has caused lower levels of
overall advertising spending, particularly during 2009. While we experienced a rebound in
advertising revenues in 2010, if companies continue to allocate more of their spending to Internet
based advertising, or overall advertising spending were to further decline, we may face greater
competition for advertising revenues.
Employees
As of December 31, 2010, we employed 1,773 full-time and 55 part-time employees. None of our
employees are organized under, or covered by, a collective bargaining agreement. We consider our
relations with our employees to be satisfactory.
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.
Cable System Operations and Cable Services
Federal Regulation
The Cable Act establishes the principal federal regulatory framework for our operation of cable
systems and for the provision of our video services. The Cable Act allocates primary responsibility
for enforcing the federal policies among the FCC and state and local governmental authorities.
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 the primary signal of 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, and commercial
radio stations.
Through December 31, 2014, Congress bars broadcasters from entering into exclusive retransmission
consent agreements. Congress also requires all parties to negotiate retransmission consent
agreements in good faith.
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On March 3, 2011, the FCC released a Notice of Proposed Rulemaking (“NPRM”) to explore what action
the FCC could take to allow market forces to set retransmission consent fees while still protecting
the interests of consumers, identify per se violations of the duty to bargain in good faith,
strengthen subscriber notice requirements when negotiations fail and eliminate the FCC’s network
non-duplication and syndicated exclusivity rules, which currently restrict the ability of a cable
operator to carry certain signals containing duplicative programming, even if the station claiming
protection is not carried by the cable operator. We cannot predict when, or if, the FCC will
implement any new rules or change existing rules or the impact that any new rules may have on our
business. If the new rules relatively strengthen the negotiating position of broadcasters or
impose greater advance notice requirements of a possible termination of our right to carry a
signal, that could have an adverse effect on our business.
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 with terms extending at least until the end of
the current retransmission consent election cycle, December 31, 2011.
Availability of Analog Broadcast Signals
Because television broadcasters now deliver signals in digital format only, the FCC mandated that
cable operators must ensure that cable subscribers with analog television sets can continue to view
that broadcast station’s signal. This created a “dual carriage” requirement for must-carry
signals. Cable systems that are not “all-digital” are required until mid-2012 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 only in a digital format. Where we have not yet converted systems to “all
digital,” 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.
For several years, the FCC has had under review 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.
Program Tiering
Federal law requires that certain types of programming, such as the carriage of local broadcast
channels and any public, educational or governmental access (“PEG”) channels, to be part of the
lowest level of video programming service — the basic tier. In many of our systems, the basic tier
is generally comprised of programming in analog format although some programming may be offered in
digital format. Migration of PEG channels from analog to digital format frees up bandwidth over
which we can provide a greater variety of other programming or service options. During 2008, such
migration met opposition from some municipalities, members of Congress and FCC officials. Several
communities and one special interest group have petitioned the FCC to restrict the ability of cable
operators to migrate PEG channels from analog to digital tiers. The FCC opened a public comment
period on these petitions that ended on April 1, 2009, but has not issued any orders resulting from
the petitions. We cannot predict the outcome of this proceeding, if any. 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.
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, 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.
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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 most systems to designate a
significant portion of its 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.
In 2008, the FCC promulgated regulations which could allow certain leased access users lower cost
access to channel capacity on cable systems. Those regulations limit fees to 10 cents per
subscriber per month for tiered channels and in some cases potentially no charge, and impose a
variety of leased access customer service, information and reporting standards. The United States
Office of Management and Budget denied approval of the new rules and a federal court of appeals
stayed implementation of the new rules. In July 2008, the federal appeals court agreed at the
request by 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.
Access to Certain Programming
In January 2011, as part of its order approving Comcast’s acquisition of a controlling interest in
NBC Universal (“Comcast Order”), the FCC specified certain terms and conditions by which Comcast
and NBC Universal will be required to provide programming to both traditional multichannel video
programming distributors (“MVPDs”), and online video distributors (“OVD”), as well as the
availability of commercial arbitration mechanisms. While the net effect of these provisions could
reduce the cost of such programming to us, it also may increase the availability and lower the cost
of such programming to our MVPD competitors. However, the provisions could also make it easier for
us to carry such programming via an Internet-based video service should we choose to offer one in
the future. We cannot, however, predict the net effect of these new program access provisions on
our business.
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 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. In August 2009, the United States Court of Appeals for the Third
Circuit struck down the 30 percent horizontal cable ownership cap. The FCC’s Chairman has stated
his intent for the FCC to take further action on the horizontal cap. We cannot predict what action
the FCC will take or how it may impact our business.
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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 MVPDs, 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 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.
Since 2007, cable operators have been prohibited from issuing to their customers new set-top
terminals that integrate security and basic navigation functions. In 2009, the FCC relaxed this ban
by issuing an industry-wide waiver permitting cable operator use of a particular one-way set top
box that met its definition of a “low-cost, limited capability” device. The particular box did not
support interactive program guides, video-on-demand, or pay-per-view or include high definition or
dual digital tuners or video recording functionality. The FCC established an expedited process to
encourage other equipment manufacturers to obtain industry-wide waivers. In a separate action,
specific to another cable operator, the FCC determined that HD output would no longer be considered
an advanced capability. Such waivers by the FCC can help to lower the cost and facilitate
conversion of cable systems to digital format.
As required by the Child Safe Viewing Act of 2007, the FCC issued a report to Congress in 2009
regarding the existence and availability of advanced technologies that are compatible with various
communications devices or platforms to allow blocking of parent selected content. 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.
Additionally, the FCC commenced another proceeding to gather information about empowering parents
and protecting children in an evolving media landscape. The comment period ended in March 2010. We
cannot predict what, if any, FCC action will result from the information gathered.
In a separate 2009 proceeding, the FCC sought specific comment on how it can encourage innovation
in the market for navigation devices to support convergence of video, television and IP-based
technology. If the FCC were to mandate the use of specific technology for set-top boxes, it could
hinder innovation and could impose further costs and restrictions on us.
In April 2010, the FCC issued a NPRM to address perceived shortcomings in CableCARD technology.
The NPRM asks whether cable systems should be allowed to deploy certain limited functionality
one-way high-definition digital terminal adapters and whether that relief should be available only
to systems with limited activated channel capacity, whether operators should be permitted to use
switched digital tuning adapters to expand the tuning range of one-way retail devices and require
high-definition set-top boxes to deliver video in any industry standard format for use by a wide
variety of retail viewing devices. At the same time, the FCC issued a Notice of Inquiry (“NOI”) as
part of its review pursuant to its National Broadband Plan that seeks to standardize gateway
devices to allow consumer access to all video programming regardless of the MVPD provider. That
NOI discusses an “AllVid” gateway device that would be used by all MVPDs by December 31, 2012. The
AllVid device would translate network delivery technologies into a standardize video output that
could be received by any AllVid retail device. Another adaptor would operate in a similar fashion
but deliver the output to a home router for delivery to networked devices. We cannot predict the
outcome of these proceedings or what effect they may have on our business. If any new requirements
require investment in new gateway devices, which could increase our costs and require capital
investment, and any change to technology that could make it easier for consumers to change MVPDs,
could have an adverse effect on our business.
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 rate formula that became effective in 2001,
which governs the maximum rate
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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 that 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. Moreover, as discussed in “State and Local
Regulation — Network Neutrality” below, the FCC has proposed reclassifying Internet access service
as a Title II telecommunications service which could result in pole owners seeking significantly
higher attachment rates from us. In any event, as we continue our deployment of phone 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 May 2010, the FCC issued an order that, among other things, clarified the right to use certain
types of attachment techniques and held that just and reasonable access to poles pursuant to
Section 224 of the Communications Act includes the right of timely access. At the same time, the
FCC issued a Further Notice of Proposed Rulemaking (“FNPRM”) in conjunction with implementation of
recommendations contained in the FCC’s National Broadband Plan. The FNPRM seeks to lower the
attachment rates for telecommunications providers and establish more uniform rates for all
attachers; establish timelines for pole attachments and permit the use of contractors where
timelines are not met; regulate make-ready charges; create additional rules that could impact
attachment contract negotiations; and increase penalties for unauthorized attachments. In October
2010, the FCC sought comment on various petitions for reconsideration filed with respect to the May
2010 order. While we cannot predict the effect that the outcome of the FNPRM or any
reconsideration of the order, any change in the computation of pole attachment rates that would
increase our pole attachment rate structure could significantly increase our annual pole attachment
costs and any rule changes that would increase the difficulty in obtaining pole attachment
agreements could also increase our costs and adversely affect our business.
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 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. In 2009, the United States Court of Appeals for the District of
Columbia upheld the FCC’s 2007 order. In March 2010, the FCC affirmed the permissibility of bulk
rate agreements and exclusive marketing agreements. 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
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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 the
compulsory satellite license authority for an additional five years, and again in 2010 extending
that authority through 2014. In its 2008 Report to Congress, the Copyright Office recommended
abandonment of the current cable and satellite compulsory licenses. In March 2010, Congress passed
legislation that requires the Copyright Office, in consultation with the FCC, to issue a report to
Congress containing proposed mechanisms, methods, and recommendations on how to implement a
phase-out of both the cable and satellite compulsory licenses. On March 3, 2011, the Copyright
Office released a NOI seeking comment on: (1) marketplace mechanisms to replace the statutory
license, such as sublicensing, private licensing and collective licensing; (2) implementation of
market-based licensing practices; and (3) any legislative and/or regulatory actions that would be
necessary in order to implement the recommended changes. The NOI suggests a number of alternative
licensing mechanisms that would require procuring the licenses directly from broadcast station
owners, each content owner or some type of collective agent. Any of these mechanisms could make
procurement of copyright licenses more costly and/or more difficult to procure. The legislation
also requires the Comptroller General to conduct a study and issue a report to Congress that
considers the impact such a phase-out and related changes to carriage requirements would have on
consumer prices and access to programming. We cannot predict whether Congress will eliminate the
cable compulsory license. Elimination of the cable compulsory license could, however, increase our
costs of obtaining broadcast programming.
In 2010, Congress modified the cable compulsory license reporting and payment obligations with
respect to the carriage of multiple streams of programming from a single broadcast station and
clarified that cable operators need not pay for distant signals carried only in portions of the
cable system as if they were carried everywhere in the system (commonly referred to as “phantom
signals”). The legislation also provides copyright owners with the ability to independently audit
cable operators’ statement of accounts filed in 2010 and later. We cannot predict what impact it
may have, if any, on our business.
The Copyright Office has commenced inquiries soliciting comment on petitions it received seeking
clarification and revisions of certain cable compulsory copyright license reporting requirements.
To date, the Copyright Office has not taken any public action on these petitions. Issues raised in
the petitions that have not been resolved by subsequent legislation include, among other things,
clarification regarding: inclusion in gross revenues of digital converter fees, additional set fees
for digital service and revenue from required “buy throughs” to obtain digital service; and certain
reporting practices, including the definition of “community.” Moreover, the Copyright Office has
not yet acted on a filed petition and may solicit comment on the definition of a “network” station
for purposes of the compulsory license.
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 2009, a federal
appellate court upheld an FCC regulation that requires phone customers 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.
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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 2009, the Federal Trade Commission issued revised self-regulatory principles for
online behavioral advertising.
In March 2010, the FCC released recommendations regarding broadband privacy in its National
Broadband Plan. These recommendations included requiring greater transparency regarding consumer
disclosures of personal data practices and consumer informed consent for such uses as well as
consumer control over uses. The FCC recommended collaboration with the Federal Trade Commission
and Congress to develop these requirements.
In December 2010, the FTC staff issued a preliminary report proposing, but not imposing, a
normative framework for the protection of consumer privacy that departs from the traditional
notice-and-choice model. Among the FTC report’s recommendations includes adoption of “privacy by
design” to build-in data security measures into everyday business practices, allowing customers to
elect “do not track” status prohibiting information collection, greater transparency of data
collection practices through disclosures that would allow comparison of practices across sites,
access to data collected about them and education efforts by stakeholders about commercial data
practices and choices available to them. Moreover, privacy legislation is regularly introduced in
Congress to address these and similar concerns including at least one “do not track” bill in
February 2011. We cannot predict if there will be additional regulatory action or whether Congress
will enact legislation, whether legislation would impact our existing privacy-related obligations
under the Cable Act or any impact on any of the services that we provide. Future federal and/or
state laws may also 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.
Small Cable Operator Provisions
The federal regulatory framework includes limited provisions for certain lessened regulation or
special benefits for qualifying smaller cable operators. Historically, these provisions have been
limited to cable operators with 400,000 or fewer subscribers. In the Comcast Order, the FCC
enacted special bargaining and commercial arbitration provisions for cable operators with 1.5
million or fewer subscribers seeking to acquire Comcast or NBC Universal programming. This
represents the first time that the FCC has recognized the need for special provisions for a cable
operator our size and larger.
State and Local Regulation
Franchise Matters
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. We have non-exclusive
franchises granted by municipal, state or other local government entity for virtually every
community in which we operate that authorize us to construct, operate and maintain our cable
systems. 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 granted by a municipal or local
governmental entity generally contains provisions governing:
| • | franchise fees; |
| • | franchise term; |
| • | system construction and maintenance obligations; |
| • | system channel capacity; |
| • | design and technical performance; |
| • | customer service standards; |
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| • | sale or transfer of the franchise; and |
| • | territory of the franchise. |
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. Many of the states in which we operate, including California,
Florida, Illinois, Indiana, Iowa, Michigan, Missouri, North Carolina and Wisconsin make
state-issued franchises available, which typically contain less restrictive provisions than those
issued by municipal or other local government entities. 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.
HSD Service
Federal Regulation
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.
Moreover, as discussed in “State and Local Regulation — Network Neutrality” below, the FCC has
proposed reclassifying Internet access service as a Title II telecommunications service. 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.
Network Neutrality
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: access the lawful Internet content of their choice; run applications and services of their
choice, subject to the needs of law enforcement; connect their choice of legal devices that do not
harm the network; and enjoy competition among network providers, application and service providers,
and content providers. These principles are generally referred to as “network neutrality.” In 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 by, among other things,
allegedly managing user bandwidth consumption by identifying and restricting the applications being
run and the actual bandwidth consumed. This decision may establish de facto standards that limit
the network management practices that cable operators use to manage bandwidth consumption on their
networks. In April 2010, the United States Court of Appeals for the District of Columbia held that
the FCC exceeded its authority, reversing that decision. In June 2010, the FCC commenced a NOI
regarding its authority to regulate broadband Internet access. The NOI suggested three ways to
assert such regulation, including classifying broadband Internet access as a Title II
telecommunications service and forbearing from enforcing many of the Title II regulations.
In December 2010, the FCC, citing authority under Section 706 of the Telecommunications Act of
1996, adopted comprehensive broadband Internet network neutrality rules, including requiring
transparency of disclosures to consumers of commercial terms, performance and network management
practices; preventing blocking of lawful content, applications and services; and preventing
unreasonable discrimination in the transmission of lawful Internet traffic. Although the
prohibitions on blocking and interference are subject to reasonable network management practices,
the FCC did not provide definitive guidance or safe harbors as to what actions constitute such
practices. Rather, the FCC has opted to trade clarity for flexibility by further developing what
constitutes reasonable network management practices on a complaint-driven case-by-case evaluation
of actual practices. The rules will take effect 60 days after approval by the Office of Management
and Budget. On January 20, 2011, Verizon Communications filed a challenge to the rules in the
United States District Court of Appeals for the District of Columbia claiming, among other things,
that the action exceeded the
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FCC’s authority and that the enactment was arbitrary and capricious. Legislation has been
introduced in Congress to prevent the FCC from using any appropriated funds for the implementation
or enforcement to these new regulations. We cannot predict how the FCC will implement and enforce
these new rules which could have a negative impact on our business. We also cannot predict the
outcome of any pending proceedings or legislation or the impact that such outcomes could have on
our business.
National Broadband Plan
In March 2010, the FCC delivered to Congress the National Broadband Plan (“Plan”) as required by
the American Recovery and Reinvestment Act. The Plan seeks to ensure that all people of the United
States have access to affordable broadband capability; connect 100 million households to affordable
100 Mbps service; provide access to 1 Gbps service to community anchor institutions; increase
mobile innovation by making 500 MHz of spectrum newly available; increase broadband adoption rates
from 65 percent to 90 percent; transition Universal Service Fund (“USF”) support from providing a
legacy high-cost telephone subsidy to instead supporting affordable broadband in rural communities;
enhancing public safety by ensuring first responder access to a nationwide, wireless interoperable
public safety network and ensure that all consumers can track and manage their real-time energy
consumption via broadband connectivity. The Plan includes more than 60 key actions, proceedings,
and initiatives the FCC intends to undertake. The FCC proposes a variety of incentives to spur
private investment in broadband deployment, including the repurposing of certain USF monies. The
Plan calls for closing the gap between the telecommunications and cable pole attachment rates (see
discussion under “Cable System Operations and Cable Services: Pole Attachments”), new rules
affecting set-top boxes (see discussion under “Cable System Operations and Cable Services: Cable
Equipment”), efforts to increase the transparency of privacy practices to consumers and gaining
informed consent from consumers for information collection (see discussion under “Cable System
Operations and Cable Services: Privacy and Data Security”) and standardization of technical
measures of broadband performance (speed) and disclosure requirements to consumers. The Plan also
recommends stronger cybersecurity protections and defenses by HSD providers as well as increased
reporting obligations. In July 2010, the FCC, in conjunction with its implementation of the
National Broadband Plan, issued a Public Notice to seek comment on whether to impose strict
“network outage reporting” requirements for certain outages of 30 minutes or more on broadband
Internet service providers. We cannot predict what, if any, requirements will be placed on our
provision of HSD services or our operation of HSD facilities or what impact the Plan and the
related FCC rulemakings and actions by other regulatory agencies or Congress will ultimately have
on our business or what advantages may be given to services that may compete with ours.
Digital Millennium Copyright Act
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.
Privacy
Federal law may limit the personal information that we collect, use, disclose and retain about
persons who use our services. Please refer to the Privacy and Data Security discussion contained in
the Cable System Operations and Cable Services section, above for discussion of these
considerations.
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International Law
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 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.
State and Local Regulation
Our HSD services provided over our cable systems are not generally subject to regulation by state
or local jurisdictions.
Voice-over-Internet Protocol Telephony Service
Federal Law
The 1996 amendments to the Cable Act created a more favorable regulatory environment for cable
operators to enter the phone business. Most major cable operators now offer voice-over-Internet
protocol (VoIP) telephony as a competitive alternative to traditional circuit-switched telephone
service. Various states, including states where we operate, considered or attempted 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 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.
In 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
or if these issues will be resolved.
Federal regulatory obligations
Over the past several years, the FCC has begun to apply traditional landline telephone provider
regulations to VoIP services. In 2006, the FCC announced that it would require VoIP providers to
contribute to the Universal Service Fund based on their interstate service revenues. 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. Since 2007,
the FCC has required interconnected VoIP providers, such as us, to pay regulatory fees based on
revenues reported on the FCC Form 499A at the same rate as interstate telecommunications service
providers. The FCC also has extended other regulations and reporting requirements to VoIP
providers, including E-911, Customer Proprietary Network Information (“CPNI”), local number
portability, disability access, and Form 477 (subscriber information) reporting obligations. The
FCC has issued a FNPRM with respect to possible changes in the intercarrier compensation model in a
way that could financially disadvantage us and benefit some of our competitors. In April 2010, the
FCC issued a NOI and a NPRM that would transition high-cost program funds from analog telephony to
the provision of broadband services. In July 2010, the FCC, in conjunction with its implementation
of the National Broadband Plan, issued a Public Notice to seek comment on whether to impose strict
“network outage reporting” requirements for certain outages of 30 minutes or more on VoIP service
providers. Simultaneously, the FCC issued a proposed $600,000 forfeiture against a competitive
local exchange provider for untimely filing of outage reports. It is unknown what conclusions or
actions the FCC may take or the effects on our business.
Privacy
In addition to any privacy laws that may apply to our provision of VoIP services (see general
discussion in Privacy and Data Security in the Cable System Operations and Cable Services
discussion, above), we must comply with additional privacy provisions contained
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in the FCC’s CPNI regulations related to certain telephone customer records. In addition to
employee training programs and other operating and disciplinary procedures, the CPNI rules require
establishment of customer authentication and password protections, limit the means that we may use
for such authentication, and provide customer approval prior to certain types of uses or
disclosures of CPNI.
State and Local Regulation
Although our entities that provide VoIP telephony services are certificated as competitive local
exchange carriers in most of the states in which they operate, they generally provide few if any
services in that capacity. Rather, we provide VoIP services that are not generally subject to
regulation by state or local jurisdictions. The FCC has preempted some state commission regulation
of VoIP services, but has stated that its preemption does not extend to state consumer protection
requirements. Some states continue to attempt to impose obligations on VoIP service providers,
including state universal service fund payment obligations.
ITEM 1A. RISK FACTORS
Risks Related to our Operations
Our products and services face increasing competition that could adversely affect our business,
financial condition and results of operations.
We operate in a highly competitive business environment and, in some instances, face competitors
with greater resources and operating capabilities, fewer regulatory burdens, easier access to
financing, more brand name recognition and long-standing relationships with regulatory authorities
and customers. Historically, our principal competitors have been DBS providers and local telephone
companies. Recently, we have also faced meaningful competition for our phone service from wireless
phone providers, and for our video service from advances in OTTV content and delivery options that
may lead to greater video competition going forward.
DBS providers, principally DirecTV and DISH, are our most significant video competitors. We have
lost a significant number of video customers to DBS providers in the past, and expect to continue
to face substantial levels of competition from them. DBS providers generally offer promotional
marketing campaigns in which they offer video service packages at a price point much lower than our
comparable offering. In some cases, DBS providers will enter marketing agreements under which local
telephone companies sell DBS service bundled with their HSD and phone services to replicate a
product similar to our triple play. Certain local telephone companies, including AT&T and Verizon,
have deployed fiber networks in approximately 8% of our service area, giving them the capability to
offer a substantially similar product to our triple play. We believe that further expansions into
most of our markets will be a lower priority for the telephone companies; however, we could face
increased competition for video customers if they were to continue to build into our service areas.
Also, if OTTV content providers were to deliver content that consumers accepted as an adequate, if
not preferable, replacement to our video service, we may face further competition for video
customers.
Our HSD service primarily faces competition from local telephone companies such as AT&T,
who compete with our HSD service by offering DSL services. As widely-available DSL service is
typically limited to downstream speeds ranging from 1.5Mbps to 3Mbps, compared to our downstream
speeds ranging from 3Mbps to 105Mbps, our HSD service is generally superior in these markets.
However, certain local telephone companies have constructed fiber networks to the home or to the
neighborhood, similar to our own, that allow them to offer a product similar in terms of
performance to our HSD service. If further build-outs of such fiber networks were to occur in our
service areas, we could face increased competition for HSD customers. Many wireless phone
providers offer a wireless data service, and technological advances have increased, and we expect
will continue to increase, the speed and reliability of such service. While such wireless data
services are not currently comparable to our HSD service, if wireless phone providers were to offer
a competitively priced wireless data service that offered similar speeds to our HSD service, we
could face further competition for HSD customers.
Our phone service mainly faces competition for phone customers from local telephone companies and
wireless telephone service providers. In recent years, a trend known as “wireless substitution”
has developed where certain customers have chosen to utilize a wireless telephone service as their
sole phone provider. We expect this trend to continue in the future and, given the recent economic
downturn, may accelerate as consumers become more cost conscious.
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We are unable to predict the effects that competition may have on our business. Competition has
caused us to experience lower revenues through the loss of customers or greater than usual levels
of discounted pricing, higher levels of advertising and marketing
expenses and additional capital expenditures as a result of customer churn. A continuation, or
worsening, of such competitive factors as discussed above could adversely affect our business,
financial condition and results of operations.
Weak economic conditions may adversely impact our business, financial condition and results of
operations.
Continuing weakness in employment, as well as lower levels of consumer confidence and demand, has
impacted our business. As a result, many of our customers have faced greater pressure to downgrade
their current level of service, or discontinue some, or all of their services taken. In addition,
poor housing markets have resulted in fewer customers moving and constrained new home construction,
resulting in lower new customer growth. As most of our revenues are provided by residential
customers, if such conditions were to worsen or fail to demonstrate any improvement, we may
experience further customer losses or downgrades in service, 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.
Video programming expenses have historically been our largest single expense item, and in recent
years we have experienced substantial increases 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 that these expenses will continue to grow due to the increasing demands of
sports and other large programmers for contract renewals and television broadcast station owners
for retransmission consent fees, including certain large programmers who also own major market
television broadcast stations. While such growth in programming expenses can be partially offset by
rate increases, our video gross margins may continue to decline if they cannot be fully offset,
which may have an adverse affect on our results of operations.
Greater levels of OTTV usage may have an adverse affect on our results of operations.
OTTV usage rates have dramatically increased, and may continue to grow at a meaningful pace. If
our customers were to choose an OTTV service to partially or fully replace our video service, we
may experience lower video revenues as a result. We may also incur additional marketing costs to
compete for and retain consumers in our markets as a result of greater competition for video
customers. We may also recognize additional HSD service costs or capital expenditures, as greater
levels of OTTV streaming will cause additional bandwidth charges and network requirements. If the
usage of OTTV were to continue to grow at a significant rate, we may experience lower revenues and
greater expenses in the future, which may have an adverse affect on our results of operations.
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 technological environment and our success depends, in part, on our
ability to enhance existing or adopt new technologies to maintain or improve our competitive
positioning. If we are unsuccessful in keeping pace with future technological developments, or if
we fail to choose technologies that allow us to offer products and services that are sought by our
customers, and which are cost efficient for us, we may experience customer losses and our results
of operations may be adversely affected.
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 components used in delivering our products and services,
including digital set-top converter boxes, DVRs and VOD equipment; routers and other switching
equipment; provisioning and other software; network connections for our phone services; fiber optic
cable and construction services for expansion and upgrades of our networks and cable systems; and
our customer billing platform. Some of these companies may have leverage over us, considering that
they are the sole supplier of certain products and services, or there may be a long lead time
and/or significant expense required to transition to another provider. As a result, our operations
depend on a successful relationship with 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, and therefore any delays in our ability to obtain equipment could impact
our operations. 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, could also negatively affect our ability to
effectively provision and service our customers. We currently have outsourcing arrangements with
certain telephony providers in connection with our provision of HSD and telephony
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services and are in the process of transitioning our telephony services to an in-house platform.
Unexpected delays or disruptions in the transition process may adversely affect our customers and
our business.
We depend on network and information systems and other technologies to operate our businesses. A
disruption or failure in such systems and technologies, or in our ability to transition from one
system to another, 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 could 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; and natural disasters, power outages and man-made disasters.
Such occurrences may cause service disruptions, loss of customers and revenues and negative
publicity, which 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 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-party firms 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; and 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.
Some of our cable systems operate in the Gulf Coast region, which historically has experienced
severe hurricanes and tropical storms.
Cable systems serving approximately 18% 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. If
the Gulf Coast region were to 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 key personnel could have a material adverse effect on our business.
Our success is substantially dependent upon the retention of, and the continued performance by,
Mediacom’s key personnel, including Rocco B. Commisso, Mediacom’s Chairman and Chief Executive
Officer. Our debt arrangements provide that a default may result if Mr. Commisso ceases to be
Mediacom’s Chairman and Chief Executive Officer, or if he and his designees do not constitute a
majority of our Executive Committee.
We do not currently maintain key man life insurance on Mr. Commisso
or other key personnel.
If any of Mediacom’s key personnel ceases to participate in
our business and operations, it could have an adverse effect on our business, financial condition
and results of operations.
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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 the credit markets for bank credit
arrangements, to meet our financial commitments and liquidity needs. Recently, the U.S. economy
fell into a deep recession, with major downturns in financial markets. While the capital and credit
markets have recovered, future disruptions in such markets could limit our ability to access new
debt financings or refinancings, and cause our counterparty banks to be unable to fulfill their
commitments to us, potentially reducing amounts available to us under our revolving credit
commitments, or subjecting us to greater credit risk with respect to our interest rate exchange
agreements. We are unable to predict future movements in the capital and credit markets or the
underlying effects on our results of operations.
We have substantial debt, we are highly leveraged and we have significant interest payments and
debt repayments, which could limit our operational flexibility and have an adverse affect on our
financial condition and results of operations.
As of December 31, 2010, our total debt was approximately $1.519 billion. Giving pro forma effect
to the Going Private Transaction, as of the same date, our total debt would have been approximately
$1.619 billion. Because of our substantial indebtedness, we are highly leveraged and will continue
to be so. Our overall leverage could:
| • | limit our ability to obtain additional financing in the future for working capital, capital expenditures or acquisitions; |
| • | limit our ability to refinance our indebtedness on terms acceptable to us or at all; |
| • | require us to dedicate a significant portion of our cash flow from operations to paying the principal of and interest on our indebtedness; |
| • | limit our flexibility in planning for, or reacting to, changes in our business and the communications industry generally; |
| • | place us at a competitive disadvantage compared with competitors that have a less significant debt burden; and |
| • | make us more vulnerable to economic downturns and limit our ability to withstand competitive pressures. |
Our debt service obligations require us to use a large portion of our revenues and cash flows to
pay principal and interest, reducing our ability to finance our operations, capital expenditures
and other activities. Outstanding debt under our bank credit facility has a variable rate of
interest determined by either the London Interbank Offered Rate (“LIBOR”), or the Prime rate,
chosen at our discretion, plus a margin, which varies depending on certain financial ratios as
defined in the credit agreement governing our bank credit facility (the “credit agreement”). If
such variable rates were to increase, or if we were to incur additional indebtedness, we may be
required to pay additional interest expense, which would have an adverse affect on our results of
operations.
We believe that cash generated by us or available to us will meet our anticipated capital and
liquidity needs for the foreseeable future, including scheduled term loan maturities during each of
the years ending December 31, 2011 through December 31, 2014 of $12.0 million. However, in the
longer term, specifically 2015 and beyond, we will not generate enough cash to satisfy our maturing
term loans and senior notes. Accordingly, we will have to refinance existing obligations to extend
maturities, or raise additional capital through debt or equity issuances or both. There can be no
assurance that we will be able to refinance our existing obligations or raise any required
additional capital or to do so on favorable terms. If we do not successfully accomplish these
tasks, then we may have to cancel or scale back future capital spending programs, or sell assets.
Failure to make capital investments in our business could materially and adversely affect our
ability to compete effectively.
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 our 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 our advances to, our operating subsidiaries. These operating subsidiaries
conduct all of our consolidated operations and own substantially all of our consolidated assets.
Our operating subsidiaries are separate and distinct legal entities and have no obligation,
contingent or otherwise, to make funds available to us.
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The only source of cash that we have to fund our senior notes (including, without limitation, the
payment of interest on, and the repayment of, principal) is the cash that our operating
subsidiaries generate from operations and from borrowing under their bank credit facility. 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 the covenants set forth in the credit
agreement governing our bank credit facility. If our operating subsidiaries were unable to make
funds available to us, then we may not be able to make payments of principal or interest due under
our senior notes. If such an event occurred, we may be required to adopt one or more alternatives,
such as refinancing our senior notes or the outstanding debt of our operating subsidiaries at or
before maturity, or raise additional capital through debt or equity issuance, or both. If we were
not able to successfully accomplish those tasks, then we may have to cancel or scale back future
capital spending programs, or sell assets. There can be no assurance that any of the foregoing
actions would be successful. Any inability to meet our debt service obligations or refinance our
indebtedness would materially adversely affect our business, financial condition, results of
operations and liquidity.
A default under our bank credit facility or senior notes could result in an acceleration of our
indebtedness and other material adverse effects.
The credit agreement contains various covenants that, among other things, impose certain
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. As of December 31, 2010, the principal financial covenants of the credit agreement
required compliance with a senior leverage ratio (as defined) of no more than 6.0 to 1.0 at any
time and an interest coverage ratio (as defined) of no less than 2.0 to 1.0 at the end of a
quarterly period. The indenture governing our senior notes contains various covenants, though they
are generally less restrictive than those found in our credit facility. As of such date, the
principal financial covenant of these senior notes had a limitation on the incurrence of additional
indebtedness based upon a maximum total leverage ratio (as defined) of 8.5 to 1.0. See Note 5 in
our Notes to Consolidated Financial Statements.
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 our credit facility. A default under our 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, results of operations,
and liquidity.
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 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 direct or indirect subsidiaries, are 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 lowering of the ratings assigned to our debt securities by ratings agencies may increase our
future borrowing costs and reduce our access to capital.
Our future access to the debt markets and the terms and conditions we receive are influenced by our
debt ratings. Our corporate credit ratings are B1, with a stable outlook, by Moody’s, and B+, with
a stable outlook, by Standard and Poor’s. Any future downgrade to our credit ratings could result
in higher interest rates on future debt issuance than we currently experience, or adversely impact
our ability to raise additional funds.
We have a history of net losses and we may continue to generate net losses in the future.
Although we reported net income for the years ended December 31, 2010, 2009, and 2008, we have a
history of net losses, and we may report net losses in the future. In general, our net losses have
principally resulted from depreciation and amortization expenses associated with our acquisitions
and capital expenditures related to expanding and upgrading of our cable systems, interest expense
and other financing charges related to our indebtedness, and net losses on derivatives.
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If we were
to report net losses in the future, these losses may limit our ability to attract needed financing, and to do so on favorable terms, as
such losses may prevent some investors from investing in our securities.
Impairment of our goodwill and other intangible assets could cause significant losses.
As of December 31, 2010, we had approximately $641.3 million of unamortized intangible assets,
including goodwill of $24.0 million and franchise rights of $616.8 million on our consolidated
balance sheets. These intangible assets represented approximately 41% of our total assets.
Accounting Standards Codification No. 350 — Intangibles — Goodwill and Other (“ASC 350”) requires
that goodwill and other intangible assets deemed to have indefinite useful lives, such as cable
franchise rights, cease to be amortized. ASC 350 also 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.
We follow the provisions of ASC 350 to test our goodwill and franchise rights for impairment. We
assess the fair values of each cable system cluster using discounted cash flow (“DCF”) methodology,
under which the fair value of cable franchise rights are determined in a direct manner. We employ
the In-use Excess Earnings DCF methodology to calculate the fair values of our cable franchise
rights, using unobservable inputs (Level 3). 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, estimated growth
rates, terminal growth rates, comparable company data, revenues per customer, market penetration as
a percentage of homes passed and operating margin. We also consider market transactions, market
valuations, research analyst estimates and other valuations using multiples of operating income
before depreciation and amortization to confirm the reasonableness of fair values determined by the
DCF methodology. We also employ the Greenfield model to corroborate the fair values of our cable
franchise rights determined under the In-use Excess Earnings DCF 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. Such impairments, if recognized, could
potentially be material.
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. However, 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. Such
impairment could be significant and could have an adverse effect on our business, financial
condition and results of operations. Any such impairment would result in our recognizing a
corresponding write-off, which could cause us to report a significant noncash operating loss. Our
annual impairment analysis was performed as of October 1, 2010 and resulted in no impairment. We
may be required to conduct an impairment analysis prior to our anniversary date to the extent
certain economic or business factors are present.
Risks Related to Legislative and Regulatory Matters
Changes in government regulation 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. Additionally, our HSD and phone services are
also subject to regulation, and additional regulation is under consideration. 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 FCC’s comprehensive implementation of changes under
its National Broadband Plan, in addition to increasing our costs, may provide advantages to our
competitors by subsidizing their costs, providing them with regulatory advantages and/or lowering
barriers to entry. 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.”
Restrictions on how we tier or package video programming selections could adversely impact our
business.
Congress may 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
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current or future FCC proceedings or legislation in this area, or the impact of such proceedings on
our business at this time. See “Business — Legislation and Regulation — Content Regulations —
Program Tiering.”
The new program access mandates of the FCC’s Comcast Order may help our competitors more than it
may benefit us.
Although the program access provisions related to Comcast and NBC Universal programming may provide
benefits to us in the form of lower programming costs and access to online distribution rights
should we decide to provide distribution of video services over the Internet, those provisions may
provide our competitors greater advantages. Not only do the new provisions benefit traditional
competing MVPDs, but they may vastly expand the quantity of mainstream programming available to
OVDs. More robust OVD offerings may have greater appeal to our current or prospective video
subscribers. We cannot predict the impact such provisions may have on our business, but the
lowering of costs to our competitors and the increased availability of online delivery of content
could adversely affect our business. See “Business — Legislation and Regulation — Content
Regulations — Access to Certain Programming.”
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, 2010, we believe
that various entities are currently offering video service, through wireline distribution networks,
to about 31% of our estimated homes passed. 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 — Cable System Operations and Cable Services
— State and Local 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 costs 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
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 — Cable System Operations and Cable Services — 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. Should the FCC
reclassification of Internet access service as a regulated Title II telecommunications service
could impose significant new regulatory burdens and costs. Moreover, the FCC’s actions to impose
network neutrality obligations on our HSD service could add regulatory burdens, further restrict
the methods we may employ to manage the operation of our network, increase our costs and may
require us to make additional capital expenditures, thus adversely affecting our business.
Moreover, if the FCC’s jurisdiction to regulate broadband Internet access is upheld by the court,
the type of jurisdiction found to exist may permit even more expansive and invasive regulation of
our HSD service. See “Business — Legislation and Regulation — HSD Service — Federal Regulation.”
Our phone service may become subject to additional regulation.
The regulatory treatment of phone services that we and other providers 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 either 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
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our telephony business. See “Business — Legislation and Regulation — Voice-over-Internet-Protocol
Telephony Service — Federal Law.”
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 could
increase our pole attachment costs. Any increase in the cable rate formula or changes that would
make it more difficult for us to obtain pole attachment agreements could increase our pole
attachment costs and slow our ability to expand or upgrade our systems. Moreover, should the FCC
reclassify our Internet access service as a Title II telecommunications service, pole owners may
seek to impose higher telecommunications rates on our attachments, thereby potentially
significantly increasing our 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 — Cable System Operations and Cable Services
— Federal Regulation — Pole Attachment Regulation.”
Changes in compulsory copyright regulations could significantly increase our license fees.
If Congress either eliminates the current cable compulsory license or enacts the proposed revisions
to the Copyright Act, the elimination could impose increased costs and transactional burdens or the
revisions could impose oversight and conditions that could adversely affect our business.
Additionally, the Copyright Office’s implementation of any such legislative changes could impose
requirements on us or permit overly intrusive access to financial and operational records. Any
future decision by Congress to eliminate the cable compulsory license, which would require us to
obtain copyright licensing of all broadcast material at the source, would impose significant
administrative burdens and additional costs that could adversely affect our business. See “Business
— Legislation and Regulation — Cable System Operations and Cable Services — Federal Regulation
— Copyright.”
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.
As a result of the Going Private Transaction, Mediacom is wholly-owned by Rocco B. Commisso,
Mediacom’s founder, Chairman and Chief Executive Officer. Our debt arrangements provide that a
default may result if Mr. Commisso ceases to be Mediacom’s Chairman and Chief Executive Officer, or
if he and his designees do not constitute a majority of our Executive Committee. A change in
control could result in a default under our debt arrangements, could require us to offer to
repurchase our senior notes at 101% of their principal amount, could trigger a variety of federal,
state and local regulatory consent requirements and potentially limit Mediacom’s further
utilization of net operating losses for income tax purposes. Any of the foregoing results could
adversely affect our results of operations and financial condition.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
Our principal physical assets consist of fiber optic networks, including signal receiving, encoding
and decoding devices, headend facilities and distribution systems and equipment at, or near,
customers’ homes. 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, cable modems and related equipment. Our distribution systems 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
performance and capacity. In addition, we maintain a network operations center with equipment
necessary to monitor and manage the status of our network.
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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. Before trial, the plaintiffs 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 did 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 18, 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. The Court
did not enter a final judgment on this verdict and therefore the amount of the verdict cannot at
this time be judicially collected. 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 plus the possibility of an award of attorneys’ fees, prejudgment
interest, and punitive damages. We are vigorously defending against the claims made by the other
members of the class, including filing and responding to post trial motions, which include filing a
motion to decertify the class and responding to the plaintiffs’ summary judgment motion, and
preparing for subsequent trials, and an 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 18,
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.
A purported class action in the United States District Court for the Southern District of New York
entitled Jim Knight v. Mediacom Communications Corp., in which MCC is named as the defendant, was
filed on March 4, 2010. The complaint asserts that the potential class is comprised of all persons
who purchased premium cable services from MCC and rented a cable box distributed by MCC. The
plaintiff alleges that MCC improperly “ties” the rental of cable boxes to the provision of premium
cable services in violation of Section 1 of the Sherman Antitrust Act. The plaintiff also alleges a
claim for unjust enrichment and seeks injunctive relief and unspecified damages. MCC was served
with the complaint on April 16, 2010. MCC believes they have substantial defenses to the claims
asserted in the complaint, and they intend to defend the action vigorously. If MCC is not
successful in this litigation, we may have to distribute cash to MCC in order for MCC to pay any
damages in regard to this litigation.
Between June 3, 2010 and June 10, 2010, three purported class actions lawsuits were filed against
Mediacom and its individual directors, including Mr. Commisso, all in the Court of Chancery of the
State of Delaware (which we refer to as the “Delaware Court”), under the captions Colleen Witmer v.
Mediacom Communications Corporation, et al., J. Malcolm Gray v. Mediacom Communications
Corporation, et al. and Haverhill Retirement System v. Mediacom Communications Corporation, et al.
The lawsuits were subsequently consolidated for all purposes in the Delaware Court of Chancery
under the caption In Re Mediacom Communications Corporation Shareholders Litigation. On January 4,
2011, a Second Verified Consolidated Amended Class Action Complaint was filed that alleges, among
other things, that the defendant directors breached their fiduciary duties to the stockholders of
Mediacom in connection with Mr. Commisso’s proposal to take Mediacom private, including among other
things their fiduciary duty of disclosure, and that Mediacom, Mr. Commisso and JMC Communications
LLC aided and abetted such breaches. The plaintiffs seek injunctive relief, rescission of the
transaction or rescissory damages, and an accounting of all damages.
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On November 18, 2010, another purported class action lawsuit was filed against Mediacom and
its individual directors, including Mr. Commisso, in the Supreme Court of the State of New York,
Orange County, under the caption Wendy Kwait v. Mediacom
Communications
Corporation, et al. The lawsuit alleges, among other things, that the director
defendants breached their fiduciary duties to the stockholders of Mediacom in connection with Mr.
Commisso’s proposal to take Mediacom private and that Mediacom and Mr. Commisso aided and abetted
such breaches. The plaintiffs seek injunctive relief, rescission of the transaction or rescissory
damages.
On November 29, 2010, another purported class action lawsuit was filed against Mediacom and
its individual directors, including Mr. Commisso, in the United States District Court for the
Southern District of New York, under the caption Thomas Turberg v. Mediacom Communications
Corporation, et al. The lawsuit alleges, among other things, that the director defendants breached
their fiduciary duties to the stockholders of Mediacom in connection with Mr. Commisso’s proposal
to take Mediacom private and that Mediacom and JMC Communications LLC aided and abetted such
breaches. The plaintiffs seek injunctive relief and damages.
On December 10, 2010, another purported class action lawsuit was filed against Mediacom and
its individual directors, including Mr. Commisso, in the United States District Court for the
Southern District of New York, under the caption Ella Mae Pease v.
Rocco Commisso, et al. The
lawsuit alleges, among other things, that the director defendants breached their fiduciary duties
to the stockholders of Mediacom in connection with Mr. Commisso’s proposal to take Mediacom
private; that Mediacom, Mr. Commisso and JMC Communications LLC aided and abetted such breaches;
and that the defendants violated Section 14(a) of the Exchange Act and Rule 14a-9 promulgated
thereunder. The plaintiffs seek declaratory and injunctive relief, rescission of the transaction or
rescissory damages, and an accounting of all damages, profits and special benefits.
The director defendants, Mediacom, JMC Communications LLC and Mr. Commisso, as defendants in the
foregoing actions, have reached an agreement in principle with the plaintiffs in all of the
foregoing actions providing for the settlement of the actions on the terms and subject to the
conditions set forth in a memorandum of understanding (the “MOU”), which terms include, but are not
limited to, a settlement payment made by Mediacom on behalf of and for the benefit of the parties
to the actions in the amount of $0.25 per share for each share of Mediacom common stock held by the
plaintiff class as of March 4, 2011. If the settlement becomes effective, the settlement payment to
the plaintiff class will be reduced by any attorneys’ fees and expenses awarded to plaintiffs’
counsel. The settlement is subject to, among other things, the execution of definitive settlement
documentation and the approval of the Delaware Court.
We may have to distribute cash to MCC to partially fund the
settlement.
Upon effectiveness of the settlement, the
actions will be dismissed with prejudice and all claims under federal and state law that were or
could have been asserted in the actions or which arise out of or relate to the Going Private
Transaction will be released.
The defendants have denied and continue to deny any wrongdoing or liability with respect to all
claims, events and transactions complained of in the aforementioned actions or that they have
engaged in any wrongdoing. The defendants have entered into the MOU to eliminate the uncertainty,
burden, risk, expense and distraction of further litigation.
We 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.
ITEM
4. RESERVED
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 selected historical consolidated statement of operations data and
cash flow data for the years ended December 31, 2006 through 2010 and balance sheet data as of
December 31, 2006 through 2010, which are derived from our audited consolidated financial
statements (except other data and operating data).
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See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
| Year Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006(11) | ||||||||||||||||
| (Amounts in thousands, except per share data and operating data) | ||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||
Revenues |
$ | 651,326 | $ | 637,375 | $ | 615,859 | $ | 565,913 | $ | 529,156 | ||||||||||
Costs and expenses: |
||||||||||||||||||||
Service costs |
291,946 | 283,167 | 267,321 | 245,968 | 222,334 | |||||||||||||||
Selling, general and administrative expenses |
109,752 | 109,829 | 110,605 | 104,694 | 101,149 | |||||||||||||||
Management fee expense — parent |
12,123 | 11,808 | 11,805 | 10,358 | 9,747 | |||||||||||||||
Depreciation and amortization |
108,303 | 112,084 | 109,883 | 113,597 | 104,678 | |||||||||||||||
Operating income |
129,202 | 120,487 | 116,245 | 91,296 | 91,248 | |||||||||||||||
Interest expense, net |
(91,824 | ) | (89,829 | ) | (99,639 | ) | (118,386 | ) | (112,895 | ) | ||||||||||
Loss on early extinguishment of debt |
(1,234 | ) | (5,790 | ) | — | — | (4,624 | ) | ||||||||||||
(Loss) gain on derivatives, net |
(18,214 | ) | 13,121 | (23,321 | ) | (9,951 | ) | (7,080 | ) | |||||||||||
(Loss) gain on sale of cable systems, net |
— | (377 | ) | (170 | ) | 8,826 | — | |||||||||||||
Investment from affiliate(1) |
18,000 | 18,000 | 18,000 | 18,000 | 18,000 | |||||||||||||||
Other expense, net |
(2,777 | ) | (3,794 | ) | (3,726 | ) | (4,411 | ) | (4,068 | ) | ||||||||||
Net income (loss) |
$ | 33,153 | $ | 51,818 | $ | 7,389 | $ | (14,626 | ) | $ | (19,419 | ) | ||||||||
Balance Sheet Data (end of period): |
||||||||||||||||||||
Total assets |
$ | 1,584,108 | $ | 1,568,220 | $ | 1,499,125 | $ | 1,467,146 | $ | 1,486,383 | ||||||||||
Total debt |
$ | 1,519,000 | $ | 1,510,000 | $ | 1,520,000 | $ | 1,505,500 | $ | 1,548,356 | ||||||||||
Total members’ deficit |
$ | (134,830 | ) | $ | (190,987 | ) | $ | (304,261 | ) | $ | (267,650 | ) | $ | (251,020 | ) | |||||
Cash Flow Data: |
||||||||||||||||||||
Net cash flows provided by (used in): |
||||||||||||||||||||
Operating activities |
$ | 94,428 | $ | 134,409 | $ | 186,383 | $ | 103,927 | $ | 133,394 | ||||||||||
Investing activities |
$ | (103,182 | ) | $ | (98,213 | ) | $ | (141,695 | ) | $ | (83,469 | ) | $ | (99,911 | ) | |||||
Financing activities |
$ | 21,900 | $ | (37,388 | ) | $ | (44,213 | ) | $ | (22,374 | ) | $ | (28,448 | ) | ||||||
Other Data: |
||||||||||||||||||||
Adjusted OIBDA(2) |
$ | 238,118 | $ | 233,136 | $ | 226,557 | $ | 205,346 | $ | 196,337 | ||||||||||
Adjusted OIBDA margin(3) |
36.6 | % | 36.6 | % | 36.8 | % | 36.3 | % | 37.1 | % | ||||||||||
Ratio of earnings to fixed charges(4) |
1.33 | 1.52 | 1.07 | — | — | |||||||||||||||
Operating Data: (end of period) |
||||||||||||||||||||
Estimated homes passed(5) |
1,292,000 | 1,286,000 | 1,370,000 | 1,360,000 | 1,355,000 | |||||||||||||||
Basic subscribers(6) |
530,000 | 548,000 | 601,000 | 604,000 | 629,000 | |||||||||||||||
Digital customers(7) |
322,000 | 300,000 | 288,000 | 240,000 | 224,000 | |||||||||||||||
HSD customers(8) |
379,000 | 350,000 | 337,000 | 299,000 | 258,000 | |||||||||||||||
Phone customers(9) |
157,000 | 135,000 | 114,000 | 79,000 | 34,000 | |||||||||||||||
RGUs(10) |
1,388,000 | 1,333,000 | 1,340,000 | 1,222,000 | 1,145,000 | |||||||||||||||
| (1) | Investment income from affiliate represents the investment income on our $150.0 million preferred equity investment in Mediacom Broadband. See Note 11 in our Notes to Consolidated Financial Statements. | |
| (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. | ||
| 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. |
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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, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Adjusted OIBDA |
$ | 238,118 | $ | 233,136 | $ | 226,557 | $ | 205,346 | $ | 196,337 | ||||||||||
Non-cash, share-based compensation charges(a) |
(613 | ) | (565 | ) | (429 | ) | (453 | ) | (411 | ) | ||||||||||
Depreciation and amortization |
(108,303 | ) | (112,084 | ) | (109,883 | ) | (113,597 | ) | (104,678 | ) | ||||||||||
Operating income |
$ | 129,202 | $ | 120,487 | $ | 116,245 | $ | 91,296 | $ | 91,248 | ||||||||||
| (a) | Included approximately $28, $9, $9, $10 and $28 for the years ended December 31, 2010, 2009, 2008, 2007 and 2006, respectively, related to the issuance of other share-based awards. |
| (3) | Represents Adjusted OIBDA as a percentage of revenues. See note 2 above. | |
| (4) | The ratio of earnings to fixed charges was 1.33, 1.52 and 1.07 for the year ended December 31, 2010, 2009 and 2008 respectively. Earnings were insufficient to cover fixed charges by $14.4 million and $19.6 million for the years ended December 31, 2007, and 2006, respectively. Refer to Exhibit 12.1 to this Annual Report for additional information. | |
| (5) | Represents the estimated number of single residence homes, apartments and condominium units passed by our cable distribution network. Estimated homes passed are based on the best information currently available. | |
| (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 generally 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. 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 receiving 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 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. | |
| (9) | Represents customers receiving phone service. Small to medium-sized commercial accounts are converted to equivalent residential phone customers by dividing their associated revenues by the applicable residential rate. Our methodology of calculating phone customers may not be identical to those used by other companies offering similar services. | |
| (10) | Represents the sum of basic subscribers and digital, HSD and phone customers. | |
| (11) | Effective January 1, 2006, we adopted ASC 718 — Compensation — Stock Compensation (“ASC 718”) (formerly SFAS No. 123(R) — Share-Based Payment). See Note 9 in our Notes to 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, 2010, 2009 and 2008.
Overview
We are a wholly-owned subsidiary of Mediacom Communications Corporation (“MCC”). MCC is the
nation’s eighth largest cable company based on the number of customers who purchase one or more
video services, also known as basic subscribers. Through our interactive broadband network, we
provide our customers with a wide variety of advanced products and services, including video
services, such as video-on-demand, high-definition television (“HDTV”) and digital video recorders
(“DVRs”), high-speed data (“HSD”) and phone service. We offer our primary services of video, HSD
and phone, which we refer to as our “triple-play” bundle, over a single communications platform, a
significant advantage over most competitors in our service areas.
As of December 31, 2010, we offered our triple-play bundle to approximately 92% of our estimated
1.29 million homes passed in twenty states. As of the same date, we served approximately 530,000
basic subscribers, 322,000 digital video customers, 379,000 HSD customers and 157,000 phone
customers, aggregating 1.39 million revenue generating units (“RGUs”).
Our basic and digital video services compete principally with direct broadcast satellite (“DBS”)
companies, and we continue to face significant levels of price competition from these providers,
who offer video programming substantially similar to ours. We compete with these providers by
offering our triple-play bundle and interactive video services that are generally unavailable to
DBS customers due to the limited two-way interactivity of DBS service. Our HSD service competes
primarily with digital subscriber line (“DSL”) services offered by local telephone companies; based
upon the speeds we offer, we believe our HSD product is superior to comparable DSL offerings in our
service areas. Our phone service mainly competes with substantially comparable phone services
offered by local telephone companies and with cellular phone services offered by national wireless
providers. We believe our customers prefer the cost savings of the bundled products and services we
offer, as well as the convenience of having a single provider contact for ordering, provisioning,
billing and customer care.
Our ability to continue to grow our customer base and revenues is dependent on a number of factors,
including the competition we face and general economic conditions. As a result of weak economic
conditions and significant price competition from DBS providers, we have seen lower demand for our
video, HSD and phone services, resulting in a reduction in basic subscribers and slower growth
rates of digital, HSD and phone customers. A continuation or broadening of such effects may
adversely impact our results of operations, cash flows and financial position.
2010 Developments
New Financings
On April 23, 2010, we completed financing transactions (the “new financings”) that provided for a
new term loan in the principal amount of $250 million and amendments to our existing bank credit
facility (the “credit facility”) which, among other things, extended the termination date on
certain of our total revolving credit commitments, and reduced the commitments thereunder. The net
proceeds from the new term loan were used to repay an existing term loan and the full balance of
outstanding revolving credit loans under our credit facility. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources —
Capital Structure — New Financings” and Note 5 in our Notes to Consolidated Financial Statements
for more information.
Going Private Transaction
On November 12, 2010, Mediacom entered into an Agreement and Plan of Merger (the “Merger
Agreement”), by and among Mediacom, JMC Communications LLC (“JMC”) and Rocco B. Commisso,
Mediacom’s founder, Chairman and Chief Executive Officer, who was also the sole member and manager
of JMC (the “Going Private Transaction”). Pursuant to the Merger Agreement, among other things,
each share of Mediacom common stock (other than shares held by Mr. Commisso, JMC, or any of their
respective
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affiliates, shares held in treasury by Mediacom and shares held by stockholders who have perfected
their appraisal rights under Delaware law) would be converted into the right to receive $8.75 in
cash upon stockholder approval of the Merger Agreement.
At a special meeting of stockholders on March 4, 2011, Mediacom’s stockholders voted to adopt the
Merger Agreement and, on the same date, the Going Private Transaction was closed. As a result, JMC
was merged with and into Mediacom, with Mediacom continuing as the surviving corporation, a private
company that is wholly-owned by Mr. Commisso. The Going Private Transaction consideration was
approximately $367 million, and was funded, in part, by distributions to Mediacom by us, consisting
of $100 million of drawdowns under our revolving credit facility and cash on hand, with the balance
funded by Mediacom Broadband.
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, franchise 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 large-sized businesses for our scalable, fiber-based enterprise network products
and services. Phone revenues primarily represent monthly fees charged to customers (including small
to medium sized commercial establishments) for our phone service. Advertising revenues represent
the sale of advertising placed on our video services.
If we continue to lose video customers as a result of competition and weak economic conditions, our
video revenues could continue to decline for the foreseeable future. However, we believe this will
be mostly offset through increased gains in penetration of our advanced video services as well as
rate increases. We expect further growth in HSD and phone revenues, as we believe we will continue
to expand our penetration of our HSD and phone services. However, future growth in HSD and phone
customers may be adversely affected by intensifying competition, weakened economic conditions and,
specific to phone, wireless substitution. We expect advertising revenues to continue to stabilize
during 2011, given potentially improving economic conditions.
Service costs consist primarily of video programming costs and other direct costs related to
providing and maintaining services to our customers. Significant service costs include: programming
expenses; 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 and costs related to our enterprise networks
business and our network operations center; phone service costs, including delivery and other
expenses; and field operating costs, including outside contractors, vehicle, utilities and pole
rental expenses. These costs generally rise because of customer growth, contractual increases in
video programming rates and inflationary cost increases for personnel, outside vendors and other
expenses. Costs relating to personnel and their support may increase as the percentage of our
expenses that we can capitalize declines due to lower levels of new service installations. Service
delivery related costs may also fluctuate with the level of investment we make, and corresponding
operational efficiencies achieved by such investments. We anticipate that our service costs will
continue to grow, but should remain fairly consistent as a percentage of our revenues, with the
exception of programming costs, which we discuss below.
Video programming expenses, which are generally paid on a per subscriber basis, have historically
been our largest single expense item, and in recent years we have experienced substantial increases
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 that these expenses
will continue to grow due to the increasing demands of sports and other large programmers for
contract renewals and television broadcast station owners for retransmission consent fees,
including certain large programmers who also own major market television broadcast stations. While
such growth in programming expenses can be partially offset by rate increases, it is expected that
our video gross margins will continue to decline, as increases in programming costs outpace any
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. These costs typically rise because of customer growth and inflationary cost
increases for employees and other expenses, but we expect such costs should remain fairly
consistent as a percentage of revenues.
Management
fee expenses reflect compensation paid to Mediacom for the performance
of services it provides our operating subsidiaries in accordance
with management agreements between
Mediacom and our operating subsidiaries.
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Use of Non-GAAP Financial Measures
“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
has inherent limitations as discussed below.
Adjusted OIBDA is one of the primary measures used by management to evaluate our performance and to
forecast future results. 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. 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 uses a separate process to budget, measure and
evaluate capital expenditures. In addition, Adjusted OIBDA also has the limitation of not
reflecting the effect of our non-cash, share-based compensation charges. We believe that excluding
share-based compensation allows investors to better understand our performance without the effects
of these obligations that are not expected to be settled in cash. Adjusted OIBDA may not be
comparable to similarly titled measures used by other companies, which may have different
depreciation and amortization policies, as well as different share-based compensation programs.
Adjusted OIBDA should not be regarded as an alternative to operating income or net income (loss) as
indicators of operating performance, or to the statement of cash flows as measures of liquidity,
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
On February 11, 2009 (the “transfer date”), certain of our operating subsidiaries executed an Asset
Transfer Agreement (the “Transfer Agreement”) with MCC and the operating subsidiaries of Mediacom
Broadband LLC (“Mediacom Broadband”). As part of the Transfer Agreement, we contributed to MCC
cable systems located in Western North Carolina (the “WNC Systems”), and exchanged certain of our
cable systems for certain of Mediacom Broadband’s cable systems (the “Asset Transfer”). During the
year ended December 31, 2009, the WNC Systems recorded for us revenues of $2.7 million, service costs of
$1.3 million, selling, general and administrative expenses of $0.5 million and $0.9 million of
operating income. During the year ended December 31, 2008, the WNC Systems recognized $22.5
million of total revenues, $11.4 million of service costs, $4.2 million of selling, general and
administrative expenses and $4.6 million of depreciation and amortization, or $2.2 million of
operating income. For each of the years ended December 31, 2009 and 2008, the results of operations
of the exchanged cable systems between us and Mediacom Broadband were substantially similar. The
net effects of the Transfer Agreement were the reduction of 28,700 basic subscribers, 9,000 digital
customers, 12,000 HSD customers and 2,400 phone customers. Such effects on discussions of
subscriber and customer gains and losses are referred to as the “effect of the Transfer Agreement.”
In accordance with ASC 805, the cable systems we received from Mediacom Broadband under the
Transfer Agreement were recorded as a business under common control, and therefore we recorded the
results of operations of such systems as if the transfer date was January 1, 2009. We recognized an
additional $5.5 million in revenues and $1.7 million of net income, for the period January 1, 2009
through the transfer date, because we recorded the results of operations for the cable systems we
received as part of the Asset Transfer, as if the transfer date was January 1, 2009. Instances
where the inclusion of such results of operations of these transferred cable systems may affect
comparisons to the prior year’s results are referred to as “related to the Asset Transfer.”
For more information, see Note 6 in our Notes to Consolidated Financial Statements.
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Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
The tables below set forth our consolidated statements of operations for the years ended December
31, 2010 and 2009 (dollars in thousands and percentage changes that are not meaningful are marked
NM).
| Year Ended | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2010 | 2009 | $ Change | % Change | |||||||||||||
Revenues |
$ | 651,326 | $ | 637,375 | $ | 13,951 | 2.2 | % | ||||||||
Costs and expenses: |
||||||||||||||||
Service costs (exclusive of depreciation and amortization) |
291,946 | 283,167 | 8,779 | 3.1 | % | |||||||||||
Selling, general and administrative expenses |
109,752 | 109,829 | (77 | ) | (0.1 | %) | ||||||||||
Management fee expense |
12,123 | 11,808 | 315 | 2.7 | % | |||||||||||
Depreciation and amortization |
108,303 | 112,084 | (3,781 | ) | (3.4 | %) | ||||||||||
Operating income |
129,202 | 120,487 | 8,715 | 7.2 | % | |||||||||||
Interest expense, net |
(91,824 | ) | (89,829 | ) | (1,995 | ) | 2.2 | % | ||||||||
Loss on early extinguishment of debt |
(1,234 | ) | (5,790 | ) | 4,556 | (78.7 | %) | |||||||||
(Loss) gain on derivatives, net |
(18,214 | ) | 13,121 | (31,335 | ) | NM | ||||||||||
Loss on sale of cable systems, net |
— | (377 | ) | 377 | NM | |||||||||||
Investment income from affiliate |
18,000 | 18,000 | — | NM | ||||||||||||
Other expense, net |
(2,777 | ) | (3,794 | ) | 1,017 | (26.8 | %) | |||||||||
Net income |
$ | 33,153 | $ | 51,818 | $ | (18,665 | ) | (36.0 | %) | |||||||
Adjusted OIBDA |
$ | 238,118 | $ | 233,136 | $ | 4,982 | 2.1 | % | ||||||||
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, | ||||||||||||||||
| 2010 | 2009 | $ Change | % Change | |||||||||||||
Adjusted OIBDA |
$ | 238,118 | $ | 233,136 | $ | 4,982 | 2.1 | % | ||||||||
Non-cash, share-based compensation charges(1) |
(613 | ) | (565 | ) | (48 | ) | 8.5 | % | ||||||||
Depreciation and amortization |
(108,303 | ) | (112,084 | ) | 3,781 | (3.4 | %) | |||||||||
Operating income |
$ | 129,202 | $ | 120,487 | $ | 8,715 | 7.2 | % | ||||||||
| (1) | Included approximately $28 and $9 for the years ended December 31, 2010 and 2009, respectively, related to the issuance of other share-based awards. |
39
Table of Contents
Revenues
The tables below set forth revenue and selected subscriber, customer and average monthly revenue
statistics for the years ended December 31, 2010 and 2009 (dollars in thousands, except per
subscriber data).
| Year Ended | ||||||||||||||||||||
| December 31, | ||||||||||||||||||||
| 2010 | 2009 | $ Change | % Change | |||||||||||||||||
Video |
$ | 399,905 | $ | 407,150 | $ | (7,245 | ) | (1.8 | %) | |||||||||||
HSD |
176,134 | 161,940 | 14,194 | 8.8 | % | |||||||||||||||
Phone |
58,320 | 52,556 | 5,764 | 11.0 | % | |||||||||||||||
Advertising |
16,967 | 15,729 | 1,238 | 7.9 | % | |||||||||||||||
Total |
$ | 651,326 | $ | 637,375 | $ | 13,951 | 2.2 | % | ||||||||||||
| Year Ended December 31, | Increase | |||||||||||||||||||
| 2010 | 2009 | (Decrease) | % Change | |||||||||||||||||
Basic subscribers |
530,000 | 548,000 | (18,000 | ) | (3.3 | %) | ||||||||||||||
Digital customers |
322,000 | 300,000 | 22,000 | 7.3 | % | |||||||||||||||
HSD customers |
379,000 | 350,000 | 29,000 | 8.3 | % | |||||||||||||||
Phone customers |
157,000 | 135,000 | 22,000 | 16.3 | % | |||||||||||||||
RGUs(1) |
1,388,000 | 1,333,000 | 55,000 | 4.1 | % | |||||||||||||||
Average total monthly revenue per basic subscriber (2) |
$ | 100.70 | $ | 92.45 | $ | 8.25 | 8.9 | % | ||||||||||||
| (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 increased $14.0 million, or 2.2%, primarily due to higher HSD and, to a much lesser
extent, phone revenues, offset in part by lower video revenues and an unfavorable comparison to the
prior year, during which we recognized $5.5 million of revenues related to the Asset Transfer.
Average total monthly revenue per basic subscriber rose $8.25, or 8.9%, to $100.70. About $0.80 of
the increase in average total monthly revenue per basic subscriber was related to the Asset
Transfer.
Video revenues fell $7.2 million, or 1.8%, largely as a result of a lower number of basic
subscribers and, to a lesser extent, an unfavorable comparison to the prior year, during which we
recognized $3.6 million of video revenues related to the Asset Transfer, offset in part by higher
revenues from our digital, DVR and HDTV services. During the year ended December 31, 2010, we lost
18,000 basic subscribers and gained 22,000 digital customers, as compared to a loss of 24,300 basic
subscribers and a gain of 21,000 digital customers in the prior year, excluding the effect of the
Transfer Agreement. As of December 31, 2010, we served 530,000 basic subscribers, representing a
penetration of 41.0% of our estimated homes passed, and 322,000 digital customers, representing a
penetration of 60.8% of our basic subscribers. As of December 31, 2010, 45.4% of our digital
customers received DVR and/or HDTV services, as compared to 37.4% as of the same date in the prior
year.
HSD revenues rose $14.2 million, or 8.8%, primarily due to a 8.3% increase in HSD customers and, to
a much lesser extent, greater revenues from our enterprise networks business. During the year
ended December 31, 2010, we gained 29,000 HSD customers, as compared to a gain of 25,000 in the
prior year, excluding the impact of the Transfer Agreement. As of December 31, 2010, we served
379,000 HSD customers, representing a penetration of 29.3% of our estimated homes passed.
Phone revenues grew $5.8 million, or 11.0%, mainly due to a 16.3% increase in phone customers,
offset in part by higher levels of discounted pricing. During the year ended December 31, 2010, we
gained 22,000 phone customers, as compared to a gain of 23,400 in the prior year, excluding the
effect of the Transfer Agreement. As of December 31, 2010, we served 157,000 phone customers,
representing a penetration of 13.2% of our estimated marketable phone homes.
Advertising revenues increased $1.2 million, or 7.9%, primarily due to increased national and,
to a lesser extent, local sales, with significant contributions from the political and automotive
categories.
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Costs and Expenses
Service costs increased $8.8 million, or 3.1%, primarily due to higher programming and, to a lesser
extent, phone service and field operations costs, offset in part by lower HSD delivery expenses and
a favorable comparison to the prior year, during which we recognized $2.5 million of service costs
related to the Asset Transfer, The following analysis of service cost components excludes the
effects of the Asset Transfer. Programming expenses increased 6.4%, principally due to higher
contractual rates charged by our programming vendors, offset in part by a lower number of video
customers. Phone service costs rose 10.0%, mainly due to unit growth. Field operation costs were
5.3% higher, largely as a result of higher vehicle fuel, fiber lease and electricity costs, as well
as a greater use of outside contractors, partly offset by lower pole rental costs. HSD delivery
expenses fell 28.2%, principally due to the transition to an internally managed e-mail system for
our customers. Service costs as a percentage of revenues were 44.8% and 44.4% for the years ended
December 31, 2010 and 2009, respectively.
Selling, general and administrative expenses were essentially unchanged, as greater bad debt and
marketing expenses were offset by lower employee costs and a favorable comparison to the prior
year, during which we recognized $0.8 million of selling, general and administrative expenses
related to the Asset Transfer. The following analysis of selling, general and administrative
expenses excludes the effects of the Asset Transfer. Bad debt expense grew 9.3%, primarily due to a
higher average balance of written-off accounts and greater collection costs. Marketing costs were
3.9% higher, largely as a result of a greater use of print advertising, offset in part by a decline
in third party direct sales. Employee costs fell by 5.7%, primarily due to a favorable shift in
employee benefit expenses and greater efficiencies in our call centers, offset in part by lower
capitalization of overhead costs. Selling, general and administrative expenses as a percentage of
revenues were 16.9% and 17.2% for the years ended December 31, 2010 and 2009, respectively.
Management fee expense increased $0.3 million, or 2.7%, reflecting slightly higher overhead charges
at MCC. Management fee expenses as a percentage of revenues were 1.9% for each of the years ended
December 31, 2010 and 2009.
Depreciation and amortization fell $3.8 million, or 3.4%, largely as a result of a favorable
comparison to the prior year, during which we experienced write-offs related to ice storms, and, to
a lesser extent, the run-off of certain fully depreciated assets, offset in part by greater
investments in shorter-lived customer premise equipment.
Adjusted OIBDA
Adjusted OIBDA increased $5.0 million, or 2.1%, largely as a result of greater revenues, offset in
part by higher service costs and, to a lesser extent, an unfavorable comparison to the prior year,
during which we recognized $2.2 million of Adjusted OIBDA related to the Asset Transfer.
Operating Income
Operating income grew $8.7 million, or 7.2%, mainly due to the growth in Adjusted OIBDA and the
decline in depreciation and amortization.
Interest Expense, Net
Interest expense, net, increased $2.0 million, or 2.2%, principally due to greater amortization of
deferred financing costs, offset in part by a lower average cost of debt.
(Loss) Gain on Derivatives, Net
As of December 31, 2010, we had interest rate exchange agreements, or interest rate swaps, with an
aggregate notional amount of $1.2 billion, of which $300 million are forward-starting interest rate
swaps. 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 based upon information provided by our counterparties, we recorded a net loss on
derivatives of $18.2 million and a net gain on derivatives of $13.1 million for the years ended
December 31, 2010 and 2009, respectively. Our net loss on derivatives was due to lower expectations
of future market interest rates, leading to a decline in the valuation of our interest rate swaps,
mainly those that become effective at future dates.
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Loss on Sale of Cable Systems, Net
For the year ended December 31, 2009, we recognized a loss on sale of cable systems, net, of
approximately $0.4 million related to minor transactions.
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt totaled $1.2 million for the year ended December 31, 2010,
representing the write-off of certain deferred financing costs associated with prior financings
that were repaid during the period. For more information on the new financings, see “Liquidity and
Capital Resources — Capital Structure — New Financings.” Loss on early extinguishment of debt
totaled $5.8 million for the year ended December 31, 2009 representing the write-off of deferred
financing costs associated with certain of our redeemed senior notes and, to a lesser extent, fees
related to such redemption.
Other Expense, Net
Other expense, net, was $2.8 million and $3.8 million for the years ended December 31, 2010 and
2009, respectively. During the year ended December 31 2010, other expense, net, consisted of $2.2
million of revolving credit facility commitment fees and $0.6 million of other fees. During the
year ended December 31, 2009, other expense, net, consisted of $2.4 million of commitment fees and
$1.4 million of deferred financing costs and other fees.
Investment Income from Affiliate
Investment income from affiliate was $18.0 million for each of the years ended December 31, 2010
and 2009. This amount represents the investment income on our $150.0 million preferred equity
investment in Mediacom Broadband.
Net Income
As a result of the factors described above, we recognized net income of $33.2 million for the year
ended December 31, 2010, as compared to net income of $51.8 million for the year ended December 31,
2009.
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Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
The tables below set forth the unaudited consolidated statements of operations for the years ended
December 31, 2009 and 2008 (dollars in thousands and percentage changes that are not meaningful are
marked NM).
| Year Ended | ||||||||||||||||||||
| December 31, | ||||||||||||||||||||
| 2009 | 2008 | $ Change | % Change | |||||||||||||||||
Revenues |
$ | 637,375 | $ | 615,859 | $ | 21,516 | 3.5 | % | ||||||||||||
Costs and expenses: |
||||||||||||||||||||
Service costs (exclusive of depreciation and amortization) |
283,167 | 267,321 | 15,846 | 5.9 | % | |||||||||||||||
Selling, general and administrative expenses |
109,829 | 110,605 | (776 | ) | (0.7 | %) | ||||||||||||||
Management fee expense |
11,808 | 11,805 | 3 | NM | ||||||||||||||||
Depreciation and amortization |
112,084 | 109,883 | 2,201 | 2.0 | % | |||||||||||||||
Operating income |
120,487 | 116,245 | 4,242 | 3.6 | % | |||||||||||||||
Interest expense, net |
(89,829 | ) | (99,639 | ) | 9,810 | (9.8 | %) | |||||||||||||
Loss on early extinguishment of debt |
(5,790 | ) | — | (5,790 | ) | NM | ||||||||||||||
Gain (loss) on derivatives, net |
13,121 | (23,321 | ) | 36,442 | NM | |||||||||||||||
Loss on sale of cable systems, net |
(377 | ) | (170 | ) | (207 | ) | NM | |||||||||||||
Investment income from affiliate |
18,000 | 18,000 | — | NM | ||||||||||||||||
Other expense, net |
(3,794 | ) | (3,726 | ) | (68 | ) | 1.8 | % | ||||||||||||
Net income |
$ | 51,818 | $ | 7,389 | $ | 44,429 | NM | |||||||||||||
Adjusted OIBDA |
$ | 233,136 | $ | 226,557 | $ | 6,579 | 2.9 | % | ||||||||||||
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, | ||||||||||||||||||||
| 2009 | 2008 | $ Change | % Change | |||||||||||||||||
Adjusted OIBDA |
$ | 233,136 | $ | 226,557 | $ | 6,579 | 2.9 | % | ||||||||||||
Non-cash, share-based compensation charges(1) |
(565 | ) | (429 | ) | (136 | ) | 31.7 | % | ||||||||||||
Depreciation and amortization |
(112,084 | ) | (109,883 | ) | (2,201 | ) | 2.0 | % | ||||||||||||
Operating income |
$ | 120,487 | $ | 116,245 | $ | 4,242 | 3.6 | % | ||||||||||||
| (1) | Included approximately $9 for each of the years ended December 31, 2009 and 2008, respectively, related to the issuance of other share-based awards. |
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Revenues
The tables below set forth revenue and selected subscriber, customer and average monthly revenue
statistics for the years ended December 31, 2009 and 2008 (dollars in thousands, except per
subscriber data).
| Year Ended | ||||||||||||||||||||
| December 31, | ||||||||||||||||||||
| 2009 | 2008 | $ Change | % Change | |||||||||||||||||
Video |
$ | 407,150 | $ | 408,536 | $ | (1,386 | ) | (0.3 | %) | |||||||||||
HSD |
161,940 | 146,970 | 14,970 | 10.2 | % | |||||||||||||||
Phone |
52,556 | 40,359 | 12,197 | 30.2 | % | |||||||||||||||
Advertising |
15,729 | 19,994 | (4,265 | ) | (21.3 | %) | ||||||||||||||
Total |
$ | 637,375 | $ | 615,859 | $ | 21,516 | 3.5 | % | ||||||||||||
| Year Ended December 31, | Increase | |||||||||||||||||||
| 2009 | 2008 | (Decrease) | % Change | |||||||||||||||||
Basic subscribers |
548,000 | 601,000 | (53,000 | ) | (8.8 | %) | ||||||||||||||
Digital customers |
300,000 | 288,000 | 12,000 | 4.2 | % | |||||||||||||||
HSD customers |
350,000 | 337,000 | 13,000 | 3.9 | % | |||||||||||||||
Phone customers |
135,000 | 114,000 | 21,000 | 18.4 | % | |||||||||||||||
RGUs |
1,333,000 | 1,340,000 | (7,000 | ) | (0.5 | %) | ||||||||||||||
Average total monthly revenue per basic subscriber |
$ | 92.45 | $ | 85.18 | $ | 7.27 | 8.5 | % | ||||||||||||
Revenues increased $21.5 million, or 3.5%, of which $16.0 million was primarily due to growth
in our HSD, phone and digital customers, offset in part by the impact of the WNC Systems Transfer
and, to a much lesser extent, lower advertising revenues, with the remaining $5.5 million increase
related to the Asset Transfer. Average total monthly revenue per basic subscriber increased $7.27,
or 8.5%, primarily as a result of higher penetration levels of our advanced video, HSD and phone
services, offset by a lower number of basic subscribers. About $0.80 of the increase in average
total monthly revenue per basic subscriber was related to the Asset Transfer.
Video revenues fell $1.4 million, or 0.3%, principally due to a lower number of basic
subscribers, including the impact of the WNC Systems Transfer, mostly offset by continued growth in
digital customers and customers taking our DVR and HDTV services and rate increases and, to a
lesser extent, $3.6 million of video revenues related to the Asset Transfer. During the year ended
December 31, 2009, we lost 24,300 basic subscribers and gained 21,000 digital customers, excluding
the effect of the Transfer Agreement, as compared to a loss of 3,800 basic subscribers and a gain
of 46,200 digital customers in the prior year. Excluding the effects of the Transfer Agreement,
basic subscriber losses mainly represented video-only customers, which were largely caused by
aggressive video price discounts by direct broadcast satellite providers. As of December 31, 2009,
we served 548,000 basic subscribers, representing a penetration of 42.6% of our estimated homes
passed, and 300,000 digital customers, representing a penetration of 54.7% of our basic
subscribers. As of December 31, 2009, 37.4% of our digital customers received DVR and/or HDTV
services, as compared to 31.9% as of the same date in the prior year.
HSD revenues rose $15.0 million, or 10.2%, of which $13.5 million was primarily due to a 3.9%
increase in HSD customers and higher unit pricing, offset in part by the impact of the WNC Systems
Transfer. The remaining increase of $1.5 million was related to the Asset Transfer. During the year
ended December 31, 2009, we gained 25,000 HSD customers, excluding the effect of the Transfer
Agreement, as compared to a gain of 36,100 in the prior year. As of December 31, 2009, we served
350,000 HSD customers, representing a penetration of 27.2% of our estimated homes passed.
Phone revenues grew $12.2 million, or 30.2%, mainly due to a 18.4% increase in phone customers
and, to a lesser extent, higher unit pricing. During the year ended December 31, 2009, we gained
23,400 phone customers, excluding the effect of the Transfer Agreement, as compared to a gain of
32,900 in the prior year. As of December 31, 2009, we served 135,000 phone customers, representing
a penetration of 11.4% of our estimated marketable phone homes.
Advertising revenues fell $4.3 million, or 21.3%, principally due to sharp declines in
advertising revenues in local markets, particularly in the automotive segment.
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Costs and Expenses
Service costs rose $15.8 million, or 5.9%, principally due to higher programming expenses and,
to a lesser extent, increased employee and phone service costs, as well $2.5 million of service
costs related to the Asset Transfer, offset in part by the impact of the WNC Systems Transfer. The
following analysis of service cost components excludes the effects of the Asset Transfer.
Programming expenses increased 5.2%, largely as a result of higher contractual rates charged by our
programming vendors and, to a lesser extent, greater retransmission consent fees, offset in part by
a lower number of basic subscribers, including the effect of the Transfer Agreement. Employee
expenses grew 13.0%, principally due to reduced customer installation activity resulting in lower
labor capitalization, offset in part by the impact of the WNC Systems Transfer. Phone service costs
were 10.0% higher, mostly due to the increase in phone customers, offset in part by the impact of
the WNC Systems Transfer. Service costs as a percentage of revenues were 44.4% and 43.4% for the
years ended December 31, 2009 and 2008, respectively.
Selling, general and administrative expenses decreased $0.8 million, or 0.7%, primarily due to
the impact of the WNC Systems Transfer and, to a lesser extent, reduced customer service employee
costs and lower advertising and office expenses, offset in part by higher bad debt expenses and
$0.8 million of selling, general and administrative expenses related to the Asset Transfer. The
following analysis of selling, general and administrative expenses excludes the effects of the
Asset Transfer. Customer service employee costs fell 6.2%, largely due to greater productivity in
our call centers and the impact of the WNC Systems Transfer. Advertising expenses fell 19.6%,
largely as a result of lower employee costs directly related to sales activity. Office expenses
dropped 8.4%, principally due to lower telecommunications costs as a result of more efficient call
routing and internal network use and the impact of the WNC Systems Transfer. Bad debt expense rose
18.8%, principally due to higher average balances of uncollectable accounts, offset in part by an
adjustment made to our accrual allowance for uncollectable accounts. Selling, general and
administrative expenses as a percentage of revenues were 17.2% and 18.0% for the years ended
December 31, 2009 and 2008, respectively.
Management fee expense paid to MCC was virtually unchanged from the prior year, reflecting
substantially similar overhead charges at MCC. Management fee expense as a percentage of revenues
were 1.9% for each of the years ended December 31, 2009 and 2008.
Depreciation and amortization increased $2.2 million, or 2.0%, largely as a result of greater
deployment of shorter-lived customer premise equipment and, to a lesser extent, write-offs related
to ice storms in certain of our service areas and $0.5 million of depreciation and amortization
related to the Asset Transfer, offset in part by an increase in the useful lives of certain fixed
assets and the impact of the WNC Systems Transfer.
Adjusted OIBDA
Adjusted OIBDA increased $6.6 million, or 2.9%, mainly due to growth in HSD and phone revenues
and, to a much lesser extent, $2.2 million of Adjusted OIBDA related to the Asset Transfer, offset
in part by higher service costs and, to a lesser extent, the impact of the WNC Systems Transfer.
Operating Income
Operating income grew $4.2 million, or 3.6%, principally due to the increase in Adjusted
OIBDA, offset in part by the increase in depreciation and amortization.
Interest Expense, Net
Interest expense, net, decreased $9.8 million, or 9.8%, primarily due to lower market interest
rates on variable rate debt, offset in part by higher average indebtedness.
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt totaled $5.8 million for the year ended December 31,
2009. This amount included fees and premium paid relating to the tender offers of the
77/8% Notes and
91/2% Notes, as well as the write-off of deferred
financing costs associated with such notes.
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Gain (Loss) on Derivatives, Net
As a result of changes to the mark-to-market valuation of our interest rate exchange
agreements, we recorded a net gain on derivatives of $13.1 million and a net loss on derivatives of
$23.3 million, based in part upon information provided by our counterparties, for the years ended
December 31, 2009 and 2008, respectively.
Loss on Sale of Cable Systems, Net
For the year ended December 31, 2009, we recognized a loss on sale of cable systems, net, of
approximately $0.4 million related to minor transactions. During the year ended December 31, 2008,
we recognized a loss on sale of cable systems, net, of approximately $0.2 million, which reflects
adjustments made to a prior transaction.
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Other Expense, Net
Other expense, net, was $3.8 million and $3.7 million for the year ended December 31, 2009 and
2008, respectively. During the year ended December 31, 2009, other expense, net, consisted of $2.4
million of commitment fees, which included $0.4 million of commitment fees related to the delayed
funding of the new term loan and $1.4 million of deferred financing costs and other fees. During
the year ended December 31, 2008, other expense, net, consisted of $2.5 million of commitment fees
and $1.9 million of deferred financing costs and other fees.
Investment Income from Affiliate
Investment income from affiliate was $18.0 million for each of the years ended December 31,
2009 and 2008. This amount represents the investment income on our $150.0 million preferred equity
investment in Mediacom Broadband.
Net Income
As a result of the factors described above, we recognized net income of $51.8 million for the
year ended December 31, 2009, as compared to net income of $7.4 million for the year ended December
31, 2008.
Liquidity and Capital Resources
Overview
Our net cash flows provided by operating and financing activities are used primarily to fund
network investments to accommodate customer growth and the further deployment of our advanced
products and services, as well as scheduled repayments of our external financing and contributions
to MCC. We expect that cash generated by us or available to us will meet our anticipated
capital and liquidity needs for the foreseeable future, including scheduled term loan maturities of
$12.0 million in each of the years ending December 31, 2011 through December 31, 2014. As of
December 31, 2010, our sources of liquidity included $22.0 million of cash and cash equivalents,
$8.9 million of restricted cash and cash equivalents and $303.8 million of unused and available
lines under our revolving credit facility.
In the longer term, specifically 2015 and beyond, we will not generate sufficient net cash flows
from operations to fund our maturing term loans and senior notes. If we are unable to obtain
sufficient future financing or, if we not able to do so on similar terms as we currently
experience, we may need to take other actions to conserve or raise capital that we would not take
otherwise. However, we have accessed the debt markets for significant amounts of capital in the
past, and expect to continue to be able to access these markets in the future as necessary.
Net Cash Flows Provided by Operating Activities
Net cash flows provided by operating activities were $94.4 million for the year ended December 31,
2010, primarily due to Adjusted OIBDA of $238.1 million and, to a much lesser extent, investment
income from affiliate of $18.0 million, offset in part by interest expense of $91.8 million and the
net change in operating assets and liabilities of $70.5 million. The net change in operating assets
and liabilities was substantially due to a decrease in accounts payable, accrued expenses and other
current liabilities of $71.0 million, which includes a $66.2 million decline in accounts payable to
affiliate.
Net cash flows provided by operating activities were $134.4 million for the year ended December 31,
2009, primarily due to Adjusted OIBDA of $233.1 million, offset in part by interest expense of
$89.8 million and, to a much lesser extent, the $23.0 million net change in our operating assets
and liabilities. The net change in our operating assets and liabilities was principally as a result
of a decrease in accounts payable and accrued expenses of $23.2 million.
Net Cash Flows Used in Investing Activities
Capital expenditures continue to be our primary use of capital resources and the majority of our
net cash flows used in investing activities. Net cash flows used in investing activities were
$103.2 million for the year ended December 31, 2010, as compared to $98.2 million for the prior
year. The $5.0 million increase in net cash flows used in investing activities was due to an $8.9
million investment in restricted cash and cash equivalents, offset in part by a $3.9 million
decrease in capital spending.
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The
increase in capital spending was principally due to greater investments in our internal phone platform, offset in part
by reduced outlays for network improvements and vehicles.
Net Cash Flows Provided By (Used in) Financing Activities
Net cash flows provided by financing activities were $21.9 million for the year ended December 31,
2010, primarily due to capital contributions from parent of $60.0 million and, to a much lesser
extent, net borrowings of $9.0 million under our bank credit facility (see “New Financings” below),
offset in part by capital distributions to parent of $37.0 million and, to a much lesser extent,
financing costs of $6.9 million and other financing activities, principally book overdrafts, of
$3.2 million.
Net cash flows used in financing activities were $37.4 million for the year ended December 31,
2009, principally due to cash distributions to parent of $191.7 million and, to a lesser extent,
$23.9 million of financing costs and net borrowings of $10.0 million, largely funded by capital
contributions from parent of $189.9 million. At the same time, we received an $82.2 million capital
contribution from parent under the Transfer Agreement, comprising an $8.2 million payment related
to the Transfer Agreement, and a $74.0 million payment for our contribution of the WNC Systems to
MCC. See Note 7 in our Notes to Consolidated Financial Statements.
Capital Structure
As of December 31, 2010, our outstanding total indebtedness was $1.519 billion, of which
approximately 82% was at fixed interest rates or subject to interest rate protection. During the
year ended December 31, 2010, we paid cash interest of $91.4 million, net of capitalized interest.
Bank Credit Facility
As of December 31, 2010, we had a $1.473 billion bank credit facility (the “credit facility”), of
which $1.169 billion was outstanding. The credit agreement governing the credit facility contains
various covenants that, among other things, impose certain 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. See Note 5 in our Notes to
Consolidated Financial Statements for information regarding material financial covenants.
As of December 31, 2010, we had no outstanding balance under our $304.2 million revolving credit
facility, with $303.8 million of unused lines after taking into account $0.4 million of letters of
credit issued under the credit facility. As of the same date, based on the terms and conditions of
our debt arrangements, all of our unused revolving credit lines were available to be borrowed and
used for general corporate purposes. Our revolving credit commitments are scheduled to expire in
the amounts of $79.0 million and $225.2 million on September 30, 2011 and December 31, 2014,
respectively. See “Going Private Transaction” below for information regarding drawdowns under our
revolving credit facility to fund, in part, the Going Private Transaction.
New Financings
On April 23, 2010, we completed new financings that provided for a new term loan under our existing
credit facility in the aggregate principal amount of $250 million. The new term loan matures in
October 2017, and since September 30, 2010, has been subject to quarterly reductions of 0.25%, with
a final payment at maturity representing 92.75% of the original principal amount. The net proceeds
of the new term loan were largely used to repay an existing term loan and the full balance of
outstanding revolving credit loans under our credit facility. On the same date, we also reduced the
total revolving credit commitments under our revolving credit facility from $400.0 million to
$304.2 million, while extending the termination date with respect to $225.2 million of such
commitments to December 31, 2014. As a result of these transactions, we believe our overall
liquidity position has strengthened. See Note 5 in our Notes to Consolidated Financial Statements
for further information on the new financings.
Going Private Transaction
The Going Private Transaction was funded, in part, by $100 million of drawdowns under our existing
revolving credit facility. As of December 31, 2010, after giving effect to the Going Private
Transaction, our outstanding total indebtedness would have been $1.619 billion. As of the same
date, we would have had $194.8 million of unused and available lines under our revolving credit
facility, all available to be borrowed and used for general corporate purpose, after taking into
account $9.4 million of letters of credit.
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Interest Rate Exchange Agreements
We use interest rate exchange agreements, or interest rate swaps, in order to fix the rate of the
applicable Eurodollar portion of debt under the credit facility to reduce the potential volatility
in our interest expense that would otherwise result from changes in market interest rates. As of
December 31, 2010, we had interest rate swaps with various banks pursuant to which the interest
rate on $900 million of floating rate debt was fixed at a weighted average rate of 3.0%. We also
had $300 million of forward starting interest rate swaps with a weighted average fixed rate of
3.2%, of which $100 million and $200 million will commence
during the years ending
December 31, 2011 and 2012, respectively. Including the effects of such interest rate swaps, the
average interest rates on outstanding debt under our bank credit facility as of December 31, 2010
and 2009 were 5.5% and 4.7%, respectively.
Senior Notes
As of December 31, 2010, we had $350.0 million of senior notes outstanding. The indenture governing
our senior notes also contain various covenants, though they are generally less restrictive than
those found in our credit facility. Such covenants restrict our ability, among other things, make
certain distributions, investments and other restricted payments, sell certain assets, to make
restricted payments, create certain liens, merge, consolidate or sell substantially all of our
assets and enter into certain transactions with affiliates. See Note 5 in our Notes to Consolidated
Financial Statements for information regarding material financial covenants.
Covenant Compliance and Debt Ratings
For all periods through December 31, 2010, we were in compliance with all of the covenants under
the credit facility and senior note arrangements. There are no covenants, events of default,
borrowing conditions or other terms in the credit facility or senior note arrangements that are
based on changes in our credit rating assigned by any rating agency. We do not believe that we will
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
debt ratings. Our corporate credit ratings are B1, with a stable outlook, by Moody’s, and B+, with
a stable outlook, by Standard and Poor’s. Any future downgrade to our credit ratings could result
in higher interest rates on future debt issuance than we currently experience, or adversely impact
our ability to raise additional funds.
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, 2010 and thereafter (dollars in thousands)*:
| Operating | Interest | Purchase | ||||||||||||||||||
| Debt | Leases | Expense(1) | Obligations(2) | Total | ||||||||||||||||
2011 |
$ | 12,000 | $ | 2,370 | $ | 90,680 | $ | 13,534 | $ | 118,584 | ||||||||||
2012-2013 |
24,000 | 3,126 | 170,709 | 14,951 | 212,786 | |||||||||||||||
2014-2015 |
615,500 | 1,553 | 127,932 | — | 744,985 | |||||||||||||||
Thereafter |
867,500 | 3,192 | 133,770 | — | 1,004,462 | |||||||||||||||
Total cash obligations |
$ | 1,519,000 | $ | 10,241 | $ | 523,091 | $ | 28,485 | $ | 2,080,817 | ||||||||||
| * | 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, 2010 and the average interest rates applicable under such debt obligations. Interest expense amounts are net of amounts capitalized. | |
| (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: $8.1 million for 2011, $5.5 million for 2012-2013 and $0 for 2014-2014 and thereafter. |
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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 in our Notes to 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 ASC No. 922 —
Entertainment — Cable Television (formerly 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 included
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.
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, 2010, we had approximately $641.3 million of unamortized intangible assets,
including goodwill of $24.0 million and franchise rights of $616.8 million on our consolidated
balance sheets. These intangible assets represented approximately 41% 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 digital video, 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 ASC No. 350 — Intangibles — Goodwill and Other (“ASC 350”)
(formerly 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 ASC 350 to test our goodwill and franchise rights for impairment. We
assess the fair values of each cable system cluster using discounted cash flow (“DCF”) methodology,
under which the fair value of cable franchise rights are determined in a direct manner. We employ
the In-use Excess Earnings DCF methodology to calculate the fair values of our cable franchise
rights. Our DCF analysis uses significant (Level 3) unobservable inputs. 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, estimated growth rates, terminal growth rates, comparable company data, revenues
per customer, market penetration as a percentage of homes passed and operating margin. We also
consider market transactions, market valuations, research analyst estimates and other valuations
using multiples of operating income before depreciation and amortization to confirm the
reasonableness of fair values determined by the DCF methodology. We also employ the Greenfield
model to corroborate the fair values of our cable franchise rights determined under the In-use
Excess Earnings DCF 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. Such impairments, if recognized, could potentially be material.
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Based on the guidance outlined in ASC 350 (formerly 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 ASC 350, Mediacom LLC.
In accordance with ASC 350, 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 ASC 350 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, 2010, which
reflected no impairment of our franchise rights, goodwill or other intangible assets.
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 may have a negative impact on the fair values of the assets in our reporting unit.
For illustrative purposes, if there were a hypothetical decline of 20% in the fair values
determined for cable franchise rights at our Mediacom LLC reporting unit, an impairment loss of
$3.3 million would result as of our impairment testing date of October 1, 2010. In addition, a
hypothetical decline of up to 20% in the fair values determined for goodwill and other finite-lived
intangible assets at the same reporting unit, would result in an impairment loss of $24.0 million
and $0 as of October 1, 2010.
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
FASB Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 168, The
“FASB Accounting Standards Codificationtm” and the Hierarchy of Generally
Accepted Accounting Principles — a replacement of FASB Statement No. 162. Statement 168
establishes the FASB Accounting Standards Codificationtm (“Codification” or
“ASC”) as the single source of authoritative U.S. generally accepted accounting principles (“GAAP”)
recognized by the FASB to be applied by nongovernmental entities for interim or annual periods
ending after September 30, 2009. Rules and interpretive releases of the Securities and Exchange
Commission (“SEC”) under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting
standards. All other non-grandfathered, non-SEC accounting literature not included in the
Codification will be considered non-authoritative.
Following the Codification, FASB will not issue new standards in the form of Statements, FASB Staff
Positions or Emerging Issues Task Force Abstracts. Instead, FASB will issue Accounting Standards
Updates, which will serve to update the Codification, provide background information about the
guidance and provide the basis for conclusions on the changes to the Codification.
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GAAP is not intended to be changed as a result of FASB’s Codification project. However, it will
change the way in which accounting guidance is organized and presented. As a result, we will change
the way we reference GAAP in our financial statements. We have begun the process of implementing
the Codification by providing references to the Codification topics alongside references to the
previously existing accounting standards.
Other Pronouncements
In April 2009, the FASB issued ASC 820-10-65-4 — Fair Value Measurements and Disclosures (“ASC
820”) (formerly FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity
for the Asset or the Liability Have Significantly Decreased and Identifying Transactions That Are
Not Orderly”). ASC 820-10-65-4 provides additional guidance on (i) estimating fair value when the
volume and level of activity for an asset or liability have significantly decreased in relation to
normal market activity for the asset or liability, and (ii) circumstances that may indicate that a
transaction is not orderly. ASC 820-10-65-4 also requires additional disclosures about fair value
measurements in interim and annual reporting periods. ASC 820-10-65-4 is effective for interim and
annual reporting periods ending after June 15, 2009, and shall be applied prospectively. We have
completed our evaluation of ASC 820-10-65-4 and determined that the adoption did not have a
material effect on our consolidated financial condition or results of operations.
The following sets forth our financial assets and liabilities measured at fair value on a recurring
basis at December 31, 2010. These assets and liabilities have been categorized according to the
three-level fair value hierarchy established by ASC 820, 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, 2010, our interest rate exchange agreement liabilities, net, were valued at
$37.9 million using Level 2 inputs, as follows:
| Fair Value as of December 31, 2010 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Interest rate exchange agreements |
$ | — | $ | 2,180 | $ | — | $ | 2,180 | ||||||||
Liabilities |
||||||||||||||||
Interest rate exchange agreements |
$ | — | $ | 40,099 | $ | — | $ | 40,099 | ||||||||
Interest rate exchange agreements — liabilities, net |
$ | — | $ | 37,919 | $ | — | $ | 37,919 | ||||||||
As of December 31, 2009, our interest rate exchange agreement liabilities, net, were valued at
$19.7 million using Level 2 inputs, as follows:
| Fair Value as of December 31, 2009 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Interest rate exchange agreements |
$ | — | $ | 3,053 | $ | — | $ | 3,053 | ||||||||
Liabilities |
||||||||||||||||
Interest rate exchange agreements |
$ | — | $ | 22,758 | $ | — | $ | 22,758 | ||||||||
Interest rate exchange agreements — liabilities, net |
$ | — | $ | 19,705 | $ | — | $ | 19,705 | ||||||||
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In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, Improving
Disclosures about Fair Value Measurements, which amends Accounting Standards Codification (“ASC”)
No. 820 — Fair Value Measurements and Disclosures (“ASC 820”) to add new requirements for
disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about
purchases, sales, issuances, and settlements relating to Level 3 measurements. The ASU also
clarifies existing fair value disclosures about the level of disaggregation and about inputs and
valuation techniques used to measure fair value. The ASU is effective for the first reporting
period (including interim periods) beginning after December 15, 2009, except for the requirement to
provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis,
which will be effective for fiscal years beginning after December 15, 2010, and for interim periods
within those fiscal years. Early adoption is permitted. This ASU did not have a significant impact
on our consolidated financial statements or related disclosures.
In December 2010, the FASB issued ASU No. 2010-28, Intangibles — Goodwill and Other: When to
Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts (a consensus of the EITF) (“ASU No. 2010-28”). ASU No. 2010-28 modifies Step 1 of
the goodwill impairment test for reporting units who have recognized goodwill and whose reporting
unit carrying amount is either zero or negative. For those reporting units, an entity is required
to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill
impairment exists. In determining whether it is more likely than not that a goodwill impairment
exists, an entity should consider whether there are any adverse qualitative factors indicating that
an impairment may exist. ASU No. 2010-28 will be effective for the Company on January 1, 2011.
Early adoption is not permitted. The adoption of ASU No. 2010-28 is not expected to have a material
impact on our financial statements.
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 exchange agreements with counterparty banks
to fix the interest rate on a portion of our variable interest rate debt. As of December 31, 2010,
we had current interest rate swaps with various banks pursuant to which the interest rate on $900
million of floating rate debt was fixed at a weighted average rate of 3.0%. We also had $300
million of forward starting interest rate swaps with a weighted average fixed rate of approximately
3.2%, all of which commence during the year ending December 31, 2010. The fixed rates of the
interest rate swaps are offset against the applicable London Interbank Offered 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 such nonperformance. As of December 31, 2010, based on the mark-to-market valuation, we would
have paid approximately $37.9 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 million,
$400 million and $200 million during the years ending December 31, 2011, 2012 and 2014 respectively.
See Notes 2 and 5 in our Notes to 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, 2010 (all dollars in thousands).
| Bank Credit | ||||||||||||
| Senior Notes | Facilities | Total | ||||||||||
Expected Maturity: |
||||||||||||
January 1, 2011 to December 31, 2011 |
$ | — | $ | 12,000 | $ | 12,000 | ||||||
January 1, 2012 to December 31, 2012 |
— | 12,000 | 12,000 | |||||||||
January 1, 2013 to December 31, 2013 |
— | 12,000 | 12,000 | |||||||||
January 1, 2014 to December 31, 2014 |
— | 12,000 | 12,000 | |||||||||
January 1, 2015 to December 31, 2015 |
— | 603,500 | 603,500 | |||||||||
Thereafter |
350,000 | 517,500 | 867,500 | |||||||||
Total |
$ | 350,000 | $ | 1,169,000 | $ | 1,519,000 | ||||||
Fair Value |
$ | 357,000 | $ | 1,139,588 | $ | 1,496,588 | ||||||
Weighted Average Interest Rate |
9.1 | % | 5.5 | % | 6.3 | % | ||||||
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MEDIACOM LLC AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Contents
| Page | ||||
| 56 | ||||
| 57 | ||||
| 58 | ||||
| 59 | ||||
| 60 | ||||
| 61 | ||||
| 80 | ||||
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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, 2010 and December 31, 2009, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2010 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 17, 2011
PricewaterhouseCoopers LLP
New York, New York
March 17, 2011
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MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
| (Amounts in thousands) | ||||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash |
$ | 22,014 | $ | 8,868 | ||||
Restricted cash and cash equivalents |
8,853 | — | ||||||
Accounts receivable, net of allowance for doubtful accounts of $1,228 and $927 |
35,318 | 37,405 | ||||||
Prepaid expenses and other current assets |
8,079 | 7,272 | ||||||
Total current assets |
74,264 | 53,545 | ||||||
Preferred equity investment in affiliated company |
150,000 | 150,000 | ||||||
Property, plant and equipment, net of accumulated depreciation of $1,211,315
and $1,098,785 |
688,883 | 694,216 | ||||||
Franchise rights |
616,807 | 616,807 | ||||||
Goodwill |
24,046 | 24,046 | ||||||
Subscriber lists, net of accumulated amortization of $117,781 and $117,351 |
495 | 927 | ||||||
Other assets, net of accumulated amortization of $4,240 and $2,920 |
29,613 | 28,679 | ||||||
Total assets |
$ | 1,584,108 | $ | 1,568,220 | ||||
LIABILITIES AND MEMBERS’ DEFICIT |
||||||||
CURRENT LIABILITIES |
||||||||
Accounts payable, accrued expenses and other current liabilities |
$ | 150,648 | $ | 213,974 | ||||
Deferred revenue |
25,674 | 25,327 | ||||||
Current portion of long-term debt |
12,000 | 59,500 | ||||||
Total current liabilities |
188,322 | 298,801 | ||||||
Long-term debt, less current portion |
1,507,000 | 1,450,500 | ||||||
Other non-current liabilities |
23,616 | 9,906 | ||||||
Total liabilities |
1,718,938 | 1,759,207 | ||||||
Commitments and contingencies (Note 10) |
||||||||
MEMBERS’ DEFICIT |
||||||||
Capital contributions |
478,973 | 455,973 | ||||||
Accumulated deficit |
(613,803 | ) | (646,960 | ) | ||||
Total members’ deficit |
(134,830 | ) | (190,987 | ) | ||||
Total liabilities and members’ deficit |
$ | 1,584,108 | $ | 1,568,220 | ||||
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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Amounts in thousands) | ||||||||||||
Revenues |
$ | 651,326 | $ | 637,375 | $ | 615,859 | ||||||
Costs and expenses: |
||||||||||||
Service costs (exclusive of depreciation and amortization) |
291,946 | 283,167 | 267,321 | |||||||||
Selling, general and administrative expenses |
109,752 | 109,829 | 110,605 | |||||||||
Management fee expense |
12,123 | 11,808 | 11,805 | |||||||||
Depreciation and amortization |
108,303 | 112,084 | 109,883 | |||||||||
Operating income |
129,202 | 120,487 | 116,245 | |||||||||
Interest expense, net |
(91,824 | ) | (89,829 | ) | (99,639 | ) | ||||||
Loss on early extinguishment of debt |
(1,234 | ) | (5,790 | ) | — | |||||||
(Loss) gain on derivatives, net |
(18,214 | ) | 13,121 | (23,321 | ) | |||||||
Loss on sale of cable systems, net |
— | (377 | ) | (170 | ) | |||||||
Investment income from affiliate |
18,000 | 18,000 | 18,000 | |||||||||
Other expense, net |
(2,777 | ) | (3,794 | ) | (3,726 | ) | ||||||
Net income |
$ | 33,153 | $ | 51,818 | $ | 7,389 | ||||||
The accompanying notes are an integral part of these statements.
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MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ DEFICIT
| Capital | Accumulated | |||||||||||
| Contributions | Deficit | Total | ||||||||||
| (Amounts in thousands) | ||||||||||||
Balance, December 31, 2007 |
$ | 438,517 | $ | (706,167 | ) | $ | (267,650 | ) | ||||
Net loss |
— | 7,389 | 7,389 | |||||||||
Capital distributions to parent |
(104,000 | ) | — | (104,000 | ) | |||||||
Capital contributions from parent |
60,000 | — | 60,000 | |||||||||
Balance, December 31, 2008 |
$ | 394,517 | $ | (698,778 | ) | $ | (304,261 | ) | ||||
Net income |
— | 51,818 | 51,818 | |||||||||
Capital distributions to parent |
(221,993 | ) | — | (221,993 | ) | |||||||
Capital contributions from parent |
283,449 | — | 283,449 | |||||||||
Balance, December 31, 2009 |
$ | 455,973 | $ | (646,960 | ) | $ | (190,987 | ) | ||||
Net income |
— | 33,153 | 33,153 | |||||||||
Capital distributions to parent |
(37,000 | ) | — | (37,000 | ) | |||||||
Capital contributions from parent |
60,000 | — | 60,000 | |||||||||
Other |
— | 4 | 4 | |||||||||
Balance, December 31, 2010 |
$ | 478,973 | $ | (613,803 | ) | $ | (134,830 | ) | ||||
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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Amounts in thousands) | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income |
$ | 33,153 | $ | 51,818 | $ | 7,389 | ||||||
Adjustments to reconcile net income to net cash provided
by operating activities: |
||||||||||||
Depreciation and amortization |
108,303 | 112,084 | 109,883 | |||||||||
Loss (gain) on derivatives, net |
18,214 | (13,121 | ) | 23,321 | ||||||||
Loss on sale of cable systems, net |
— | 377 | 170 | |||||||||
Loss on early extinguishment of debt |
1,234 | 3,707 | — | |||||||||
Amortization of deferred financing costs |
3,392 | 1,961 | 2,039 | |||||||||
Share-based compensation |
585 | 556 | 420 | |||||||||
Changes in assets and liabilities, net of effects from acquisitions: |
||||||||||||
Accounts receivable, net |
2,087 | (1,749 | ) | (1,788 | ) | |||||||
Prepaid expenses and other assets |
(902 | ) | 2,341 | (532 | ) | |||||||
Accounts payable, accrued expenses and other current liabilities |
(70,981 | ) | (23,152 | ) | 45,466 | |||||||
Deferred revenue |
347 | 499 | 1,949 | |||||||||
Other non-current liabilities |
(1,004 | ) | (912 | ) | (1,934 | ) | ||||||
Net cash flows provided by operating activities |
$ | 94,428 | $ | 134,409 | $ | 186,383 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Capital expenditures |
(94,329 | ) | (98,213 | ) | (141,695 | ) | ||||||
Investment in restricted cash and cash equivalents (Note 2) |
(8,853 | ) | — | — | ||||||||
Net cash flows used in investing activities |
$ | (103,182 | ) | $ | (98,213 | ) | $ | (141,695 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
New borrowings |
498,875 | 1,149,125 | 300,000 | |||||||||
Repayment of debt |
(489,875 | ) | (884,125 | ) | (285,500 | ) | ||||||
Issuance of bank debt |
— | 350,000 | — | |||||||||
Redemption of senior notes |
— | (625,000 | ) | — | ||||||||
Capital distributions to parent (Note 6) |
(37,000 | ) | (191,702 | ) | (104,000 | ) | ||||||
Capital contributions from parent (Note 6) |
60,000 | 189,918 | 60,000 | |||||||||
Financing costs |
(6,918 | ) | (23,896 | ) | — | |||||||
Other financing activities — book overdrafts |
(3,182 | ) | (1,708 | ) | (14,713 | ) | ||||||
Net cash flows provided by (used in) financing activities |
$ | 21,900 | $ | (37,388 | ) | $ | (44,213 | ) | ||||
Net increase (decrease) in cash |
13,146 | (1,192 | ) | 475 | ||||||||
CASH, beginning of period |
8,868 | 10,060 | 9,585 | |||||||||
CASH, end of period |
$ | 22,014 | $ | 8,868 | $ | 10,060 | ||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||||||
Cash paid during the period for interest, net of amounts capitalized |
$ | 91,405 | $ | 104,278 | $ | 99,911 | ||||||
NON-CASH TRANSACTIONS — FINANCING: |
||||||||||||
Exchange of cable systems with related party (Note 7) |
$ | — | $ | 63,240 | $ | — | ||||||
The accompanying notes are an integral part of these statements.
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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 in the United States. As a limited liability company, we are not subject to income taxes.
We rely on our parent, MCC, for various services such as corporate and administrative support. Our
financial position, results of operations and cash flows 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.
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, $12.6 million and
$11.7 million for the years ended December 31, 2010, 2009 and 2008, respectively.
Cash and Cash Equivalents
We consider all highly liquid investments with original maturities of three months or less to be
cash equivalents.
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Restricted cash and cash equivalents
Restricted cash and cash equivalents represent funds pledged to insurance carriers as security
under a master pledge and security agreement. Pledged funds are invested in short-term, highly
liquid investments. We retain ownership of the pledged funds, and under the terms of the pledge and
security agreement, we can withdraw any of the funds, with the restrictions removed from such
funds, provided comparable substitute collateral is pledged to the insurance carriers.
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, 2008, 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 in our consolidated statement of
operations for the year ended December 31, 2008.
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 ASC
350-40-Intangibles-Goodwill and Other: Internal-Use Software (formerly 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, 2010 and 2009, we capitalized approximately $4.8 million and
$0.1 million, respectively of software development costs. Capitalized software had a net book value
of $8.1 million and $3.8 million as of December 31, 2010 and 2009, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Marketing and Promotional Costs
Marketing and promotional costs are expensed as incurred and were $13.7 million, $12.3 million and
$11.7 million for the years ended December 31, 2010, 2009 and 2008, 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, 2010, we held 857 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 digital video, HSD and phone services, 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 ASC No. 350 — Intangibles — Goodwill and Other (“ASC 350”) (formerly 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 ASC 350 to test our goodwill and franchise rights for impairment. We
assess the fair values of each cable system cluster using discounted cash flow (“DCF”) methodology,
under which the fair value of cable franchise rights are determined in a direct manner. We employ
the In-use Excess Earnings DCF methodology to calculate the fair values of our cable franchise
rights, using unobservable inputs (Level 3). 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, estimated growth
rates, terminal growth rates, comparable company data, revenues per customer, market penetration as
a percentage of homes passed and operating margin. We also consider market transactions, market
valuations, research analyst estimates and other valuations using multiples of operating income
before depreciation and amortization to confirm the reasonableness of fair values determined by the
DCF methodology. We also employ the Greenfield model to corroborate the fair values of our cable
franchise rights determined under the In-use Excess Earnings DCF 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. Such impairments, if recognized, could
potentially be material.
Based on the guidance outlined in ASC 350 (formerly 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 ASC 350, Mediacom LLC.
In accordance with ASC 350, 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 ASC 350 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, 2010, which
reflected no impairment of our franchise rights, goodwill or other intangible assets.
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 may have a negative impact on the fair values of the assets
in our reporting unit.
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Other finite-lived intangible assets, which consist primarily of subscriber lists 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, 2010, 2009 and 2008 was approximately $0.4 million, $0.4 million
and $0.2 million, respectively. Our estimated aggregate amortization expense for 2011 and
thereafter are $.0.4 million, $0.1 million, respectively.
The following table details changes in the carrying value of goodwill for the years ended December
31, 2010 and 2009, respectively (dollars in thousands):
Balance — December 31, 2008 |
$ | 16,642 | ||
Acquisitions |
7,404 | |||
Dispositions |
— | |||
Balance — December 31, 2009 |
$ | 24,046 | ||
Acquisitions |
— | |||
Dispositions |
— | |||
Balance — December 31, 2010 |
$ | 24,046 | ||
During the fourth quarter of 2009, we determined that goodwill and members’ equity were overstated
by $13.0 million during each of the interim periods due to an error in the accounting for the Asset
Transfer (see Note 7), which occurred in the first quarter of 2009. We concluded that such amounts
were not material to our interim financial statements for 2009, based on our consideration of
quantitative and qualitative factors. We corrected this error in the fourth quarter of 2009.
Other Assets
Other assets, net, primarily include financing costs and original issue discount incurred to raise
debt. Financing costs and original issue discounts are deferred and amortized as interest expense
over the expected term of such financings.
Segment Reporting
ASC 280 — Segment Reporting (“ASC 280”) (formerly 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 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,
operates within a similar regulatory environment and has similar economic characteristics.
Management evaluated the criteria for aggregation of the operating segments under ASC 280 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 ASC 815 — Derivatives and Hedging (“ASC
815”) (formerly 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 ASC 410 — Asset Retirement Obligations (“ASC 410”) (formerly SFAS No. 143, “Accounting
for Asset Retirement Obligations”), on January 1, 2003. ASC 410 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 ASC 410, we determined that in certain instances, we are 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, 2010 and 2009, the
corresponding asset, net of accumulated amortization, was $0.4 million and $1.0 million,
respectively.
Accounting for Long-Lived Assets
In accordance with ASC 360 — Property, Plant and Equipment (“ASC 360”) (formerly 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.
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 estimate the fair value of stock options granted using the Black-Scholes option-pricing model
using ASC 718 — Compensation — Stock Compensation (“ASC 718”) (formerly SFAS No. 123(R) —
Share-Based Payment). 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Recent Accounting Pronouncements
FASB Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 168, The
“FASB Accounting Standards Codificationtm” and the Hierarchy of Generally
Accepted Accounting Principles — a replacement of FASB Statement No. 162. Statement 168
establishes the FASB Accounting Standards Codificationtm (“Codification” or
“ASC”) as the single source of authoritative U.S. generally accepted accounting principles (“GAAP”)
recognized by the FASB to be applied by nongovernmental entities for interim or annual periods
ending after September 30, 2009. Rules and interpretive releases of the Securities and Exchange
Commission (“SEC”) under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting
standards. All other non-grandfathered, non-SEC accounting literature not included in the
Codification will be considered non-authoritative.
Following the Codification, FASB will not issue new standards in the form of Statements, FASB Staff
Positions or Emerging Issues Task Force Abstracts. Instead, FASB will issue Accounting Standards
Updates, which will serve to update the Codification, provide background information about the
guidance and provide the basis for conclusions on the changes to the Codification.
GAAP is not intended to be changed as a result of FASB’s Codification project. However, it will
change the way in which accounting guidance is organized and presented. As a result, we will change
the way we reference GAAP in our financial statements. We have begun the process of implementing
the Codification by providing references to the Codification topics alongside references to the
previously existing accounting standards.
Other Pronouncements
In April 2009, the FASB issued ASC 820-10-65-4 — Fair Value Measurements and Disclosures (“ASC
820”) (formerly FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity
for the Asset or the Liability Have Significantly Decreased and Identifying Transactions That Are
Not Orderly”). ASC 820-10-65-4 provides additional guidance on (i) estimating fair value when the
volume and level of activity for an asset or liability have significantly decreased in relation to
normal market activity for the asset or liability, and (ii) circumstances that may indicate that a
transaction is not orderly. ASC 820-10-65-4 also requires additional disclosures about fair value
measurements in interim and annual reporting periods. ASC 820-10-65-4 is effective for interim and
annual reporting periods ending after June 15, 2009, and shall be applied prospectively. We have
completed our evaluation of ASC 820-10-65-4 and determined that the adoption did not have a
material effect on our consolidated financial condition or results of operations.
The following sets forth our financial assets and liabilities measured at fair value on a recurring
basis at December 31, 2010 and 2009, respectively. These assets and liabilities have been
categorized according to the three-level fair value hierarchy established by ASC 820, 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, 2010, our interest rate exchange agreement liabilities, net, were valued at
$37.9 million using Level 2 inputs, as follows:
| Fair Value as of December 31, 2010 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Interest rate exchange agreements |
$ | — | $ | 2,180 | $ | — | $ | 2,180 | ||||||||
Liabilities |
||||||||||||||||
Interest rate exchange agreements |
$ | — | $ | 40,099 | $ | — | $ | 40,099 | ||||||||
Interest rate exchange agreements — liabilities, net |
$ | — | $ | 37,919 | $ | — | $ | 37,919 | ||||||||
As of December 31, 2009, our interest rate exchange agreement liabilities, net, were valued at
$19.7 million using Level 2 inputs, as follows:
| Fair Value as of December 31, 2009 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Interest rate exchange agreements |
$ | — | $ | 3,053 | $ | — | $ | 3,053 | ||||||||
Liabilities |
||||||||||||||||
Interest rate exchange agreements |
$ | — | $ | 22,758 | $ | — | $ | 22,758 | ||||||||
Interest rate exchange agreements — liabilities, net |
$ | — | $ | 19,705 | $ | — | $ | 19,705 | ||||||||
In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, Improving
Disclosures about Fair Value Measurements, which amends Accounting Standards Codification (“ASC”)
No. 820 — Fair Value Measurements and Disclosures (“ASC 820”) to add new requirements for
disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about
purchases, sales, issuances, and settlements relating to Level 3 measurements. The ASU also
clarifies existing fair value disclosures about the level of disaggregation and about inputs and
valuation techniques used to measure fair value. The ASU is effective for the first reporting
period (including interim periods) beginning after December 15, 2009, except for the requirement to
provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis,
which will be effective for fiscal years beginning after December 15, 2010, and for interim periods
within those fiscal years. Early adoption is permitted. This ASU did not have a significant impact
on our consolidated financial statements or related disclosures.
In December 2010, the FASB issued ASU No. 2010-28, Intangibles — Goodwill and Other: When to
Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts (a consensus of the EITF) (“ASU No. 2010-28”). ASU No. 2010-28 modifies Step 1 of
the goodwill impairment test for reporting units who have recognized goodwill and whose reporting
unit carrying amount is either zero or negative. For those reporting units, an entity is required
to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill
impairment exists. In determining whether it is more likely than not that a goodwill impairment
exists, an entity should consider whether there are any adverse qualitative factors indicating that
an impairment may exist. ASU No. 2010-28 will be effective for the Company on January 1, 2011.
Early adoption is not permitted. The adoption of ASU No. 2010-28 is not expected to have a material
impact on our financial statements.
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3. PROPERTY, PLANT AND EQUIPMENT
As of December 31, 2010 and 2009, property, plant and equipment consisted of (dollars in
thousands):
| December 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
Cable systems, equipment and subscriber devices |
$ | 1,817,314 | $ | 1,717,512 | ||||
Vehicles |
35,098 | 36,507 | ||||||
Furniture, fixtures and office equipment |
30,374 | 21,692 | ||||||
Buildings and leasehold improvements |
15,877 | 15,755 | ||||||
Land and land improvements |
1,535 | 1,535 | ||||||
| 1,900,198 | 1,793,001 | |||||||
Accumulated depreciation |
(1,211,315 | ) | (1,098,785 | ) | ||||
Property, plant and equipment, net |
$ | 688,883 | $ | 694,216 | ||||
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.
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
for the year ended December 31, 2008.
These changes resulted in a reduction of depreciation expense and a corresponding increase in net
income of approximately $11.2 million for the year ended December 31, 2009.
Depreciation expense for the years ended December 31, 2010, 2009 and 2008 was approximately $107.9
million, $111.7 million, and $109.6 million, respectively. During the years ended December 31, 2010
and 2009, we incurred gross interest costs of $93.5 million and $91.4 million, respectively, of
which $1.6 million was capitalized for each of the years ended December 31, 2010 and December 31,
2009, respectively. See Note 2.
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4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following as of December 31, 2010 and
December 31, 2009 (dollars in thousands):
| December 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
Accounts payable — affiliates |
$ | 35,154 | $ | 101,340 | ||||
Liabilities under interest rate exchange agreements |
20,481 | 17,854 | ||||||
Accrued programming costs |
17,699 | 16,056 | ||||||
Accrued taxes and fees |
15,329 | 12,910 | ||||||
Accrued interest |
13,737 | 13,853 | ||||||
Accrued payroll and benefits |
10,753 | 10,999 | ||||||
Accrued service costs |
8,232 | 10,303 | ||||||
Subscriber advance payments |
6,105 | 5,875 | ||||||
Accounts payable |
5,986 | 4,864 | ||||||
Accrued property, plant and equipment |
5,158 | 4,231 | ||||||
Book overdrafts (1) |
2,885 | 6,067 | ||||||
Accrued telecommunications costs |
1,486 | 2,542 | ||||||
Other accrued expenses |
7,643 | 7,080 | ||||||
Accounts payable, accrued expenses and other
current liabilities |
$ | 150,648 | $ | 213,974 | ||||
| (1) | Book overdrafts represented 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, 2010 and 2009, debt consisted of (dollars in thousands):
| December 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
Bank credit facility |
$ | 1,169,000 | $ | 1,160,000 | ||||
9⅛% senior notes due 2019 |
350,000 | 350,000 | ||||||
| 1,519,000 | 1,510,000 | |||||||
Less: Current portion |
12,000 | 59,500 | ||||||
Total long-term debt |
$ | 1,507,000 | $ | 1,450,500 | ||||
Bank Credit Facility
As of December 31, 2010, we maintained a $1.473 billion credit facility (the “credit facility”),
comprised of $1.169 billion of outstanding term loans and $304.2 million of revolving credit
commitments which had no outstanding balance. As of December 31, 2010, the average interest rate
on such outstanding debt, including the effect of the interest rate exchange agreements discussed
below, was 5.5%, as compared to 4.7% as of the same date last year.
Revolving Credit Commitments
As of December 31, 2009, we had $400.0 million of revolving credit commitments, which were
scheduled to expire on September 30, 2011. In April 2010, the credit agreement governing the
credit facility (the “credit agreement”) was amended to extend the termination date with respect to
$225.2 million of our revolving credit commitments (the “extended revolver”) to December 31, 2014 (or June
30, 2014 if Term Loan C under the credit facility has not been repaid or refinanced prior to June
30, 2014).
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The original termination date of September 30, 2011 was maintained with respect to
$79.0 million of the revolving credit commitments (the
“legacy revolver”). As a result of such
amendments, we reduced the aggregate of our revolving credit commitments from $400.0 million to
$304.2 million.
Borrowings under our revolving credit commitments are allocated between the legacy revolver and the
extended revolver on a pro rata basis based upon the percentage of overall revolving credit
commitments. Interest on the legacy revolver and the extended revolver is payable
based upon either the London Interbank Offered Rate (“LIBOR”) or the Prime rate, chosen at our
discretion, plus a margin which is based on certain financial ratios, pursuant to the credit
agreement. Interest on outstanding legacy revolver balances is payable at a floating rate equal to
either LIBOR plus a margin ranging from 1.00% to 2.00%, or the Prime Rate plus a margin ranging
from 0% to 1.00%. Interest on outstanding extended revolver balances is payable at a floating
rate equal to either LIBOR plus a margin ranging from 2.25% to 3.00%, or the Prime Rate plus a
margin ranging from 1.25% to 2.00%. Commitment fees on the unused portion of the available
revolving credit commitments are payable at a rate ranging from 0.50% to 0.63%, based upon certain
financial ratios pursuant to the credit agreement. Effective October 1, 2011, such commitment
fees will be payable at 0.75%.
As of December 31, 2010, we had, in aggregate, $303.8 million of unused lines after taking into
account $0.4 million of letters of credit issued under the credit facility to various parties as
collateral for our performance relating to franchise requirements. Based on the terms and
conditions of our debt arrangements, as of December 31, 2010, all of our unused lines under the
extended revolver and legacy revolver were available to be borrowed and used for general corporate
purposes.
Term Loan C
In May 2006, we entered into an incremental facility agreement that provided for a new term loan
(the “Term Loan C”) in the original principal amount of $650.0 million. The Term Loan C matures on
January 31, 2015 and, since March 31, 2007, has been subject to quarterly reductions of 0.25% of
the original principal amount, with a final payment at maturity representing 92.00% of the original
principal amount. As of December 31, 2010, the outstanding balance under the Term Loan C was
$624.0 million.
Interest on the Term Loan C is payable based upon LIBOR or the Prime Rate, at our discretion, plus
a margin which is based on certain financial ratios, pursuant to the credit agreement. Interest on
the Term Loan C is payable at a floating rate equal to either LIBOR plus a margin of 1.50% or
1.75%, or the Prime Rate plus a margin of 0.50% or 0.75%.
Term Loan D
In August 2009, we entered into an incremental facility agreement that provided for a new term loan
(the “Term Loan D”) in the original principal amount of $300.0 million. The Term Loan D matures on
March 31, 2017 and, since December 31, 2009, has been subject to quarterly reductions of 0.25% of
the original principal amount, with a final payment at maturity representing 92.75% of the original
principal amount. As of December 31, 2010, the outstanding balance under the Term Loan D was
$296.3 million.
Interest on the Term Loan D is payable at a floating rate equal to either LIBOR plus a margin of
3.50%, or the Prime Rate plus a margin of 2.50%. Through August 2013, Term Loan D is subject to a
minimum LIBOR of 2.00%.
Term Loan E
In April 2010, we entered into an incremental facility agreement that provided for a new term loan
(the “Term Loan E”) in the original principal amount of $250.0 million. Proceeds from the Term
Loan E were used to repay certain existing borrowings under the credit facility. The Term Loan E
matures on October 23, 2017 and, since September 30, 2010, has been subject to quarterly reductions
of 0.25% of the original principal amount, with a final payment at maturity representing 92.75% of
the original principal amount. As of December 31, 2010, the outstanding balance under the Term
Loan E was $248.8 million.
Interest on the Term Loan E is payable at a floating rate equal to either LIBOR plus a margin of
3.00%, or the Prime Rate plus a margin of 2.00%. Through April 2014, Term Loan E is subject to a
minimum LIBOR of 1.50%, and a minimum Prime Rate of 2.50%.
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Interest Rate Exchange Agreements
We use interest rate exchange agreements, or interest rate swaps, in order to fix the rate of the
applicable Eurodollar portion of debt under our credit facilities to reduce the potential
volatility in our interest expense that would otherwise result from changes in market interest
rates. Our interest rate swaps have not been designated as hedges for accounting purposes, and have
been accounted for on a mark-to-market basis as of, and for, the years ended December 31, 2010,
2009 and 2008.
As of December 31, 2010, we had current interest rate swaps with various banks pursuant to which
the interest rate on $900 million was fixed at a weighted average rate of 3.0%. Our current
interest rate swaps are scheduled to expire in the amounts of $300 million, $400 million and $200
million during the years ending December 31, 2011, 2012 and 2014, respectively.
We have also entered into forward-starting interest rate swaps that will fix rates for: (i) a
three-year period at a rate of 3.5% on $100 million of floating rate debt, which will commence in
December 2011; (ii) a two-year period at a rate of 3.8% on $100 million of floating rate debt,
which will commence in December 2012; and (iii) a three-year period at a rate of 2.3% on $100
million of floating rate debt, which will commence in December 2012.
The fair value of our 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, 2010, based upon mark-to-market valuation, we recorded on our
consolidated balance sheet, a long-term asset of $2.2 million, an accumulated current liability of
$20.5 million and an accumulated long-term liability of $19.6 million. As of December 31, 2009,
based upon mark-to-market valuation, we recorded on our consolidated balance sheet a long term
asset of $3.1 million, an accumulated current liability of $17.9 million and an accumulated
long-term liability of $4.9 million. As a result of the mark-to-market valuations on these interest
rate swaps, we recorded net losses on derivatives of $18.2 million and $23.3 million for the years
ended December 31, 2010 and 2008, respectively. We recorded a net gain on derivatives of $13.1
million for the year ended December 31, 2009.
Covenant Compliance
The credit agreement contains various covenants that, among other things, impose certain
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. As of December 31, 2010, the principal financial covenants of the credit facility
required compliance with a ratio of indebtedness to system cash flow (the “senior leverage ratio”)
of no more than 6.0 to 1.0 at any time, and a ratio of operating cash flow to interest expense (the
“interest coverage ratio”) of no less than 2.0 to 1.0 at the end of a quarterly period. The terms
“indebtedness,” “system cash flow,” “operating cash flow” and “interest expense” are defined in the
credit agreement. The credit facility is collateralized by 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 maximum senior leverage ratio will be reduced to 5.5 to 1.0 commencing with the quarter ending
December 31, 2011, and to 5.0 to 1.0 commencing with the quarter ending December 31, 2012 and
thereafter, so long as any revolving credit commitments remain outstanding. After the termination
of all revolving credit commitments, the maximum senior leverage ratio will increase to 6.0 to 1.0
and the interest coverage ratio covenant will no longer be applicable.
As of December 31, 2010, the credit facility’s senior leverage ratio and interest coverage ratio
were 4.3 to 1.0 and 2.8 to 1.0, respectively. For all periods through December 31, 2010, we were
in compliance with all of the covenants under the credit agreement.
Senior Notes
In August 2009, we issued $350 million aggregate principal amount of 9 1/8%
Senior Notes due August 2019 (the “9 1/8% Notes”). Net proceeds from the 9
1/8% Notes were used to partially fund the redemption of certain of our
previously outstanding senior notes.
As of December 31, 2010, we had in aggregate $350 million of senior notes outstanding, all of which
consisted of the 9 1/8% Notes. Our 9 1/8% Notes are
unsecured obligations and the indenture governing these Notes stipulates, among other
things, restrictions on the incurrence of indebtedness, distributions, mergers and asset sales and
has cross-default provisions related to us and our subsidiaries.
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Covenant Compliance
The indenture governing our senior notes also contains various covenants, though they are generally
less restrictive than those found in the credit agreement. As of December 31, 2010, the principal
financial covenant of our senior notes had a limitation on the incurrence of additional
indebtedness based upon a maximum ratio of total indebtedness to operating cash flow (the “total
leverage ratio”) of 8.5 to 1.0. These covenants also restrict our ability, among other things, to
make certain distributions, investments and other restricted payments, sell certain assets, create
certain liens, merge, consolidate or sell substantially all of our assets and enter into certain
transactions with affiliates.
As of December 31, 2010, our total leverage ratio was 5.9 to 1.0. For all periods through December
31, 2010, we were in compliance with all of the covenants under the indenture to our senior notes.
Loss on Early Extinguishment of Debt
Loss on early extinguishment of debt totaled $1.2 million for the year ended December 31, 2010,
representing the write-off of certain deferred financing costs associated with prior financings
that were repaid during the period. Loss on early extinguishment of debt totaled $5.8 million for
the year ended December 31, 2009 representing the write-off of deferred financing costs associated
with certain of our redeemed senior notes and, to a lesser extent, fees related to such redemption.
Debt Ratings
Our future access to the debt markets and the terms and conditions we receive are influenced by our
debt ratings. Our corporate credit ratings are B1, with a stable outlook, by Moody’s, and B+, with
a stable outlook, by Standard and Poor’s. Any future downgrade to our credit ratings could result
in higher interest rates on future debt issuance than we currently experience, or adversely impact
our ability to raise additional funds.
There are no covenants, events of default, borrowing conditions or other terms in our credit
agreement or senior note indenture that are based on changes in our credit rating assigned by any
rating agency.
Fair Value and Debt Maturities
As of December 31, 2010, the fair values of our Senior Notes and the credit facility are as follows
(dollars in thousands):
9⅛% senior notes due 2019 |
$ | 357,000 | ||
Bank credit facilities |
$ | 1,139,588 | ||
The stated maturities of all debt outstanding as of December 31, 2010 are as follows (dollars in
thousands):
2011 |
$ | 12,000 | ||
2012 |
12,000 | |||
2013 |
12,000 | |||
2014 |
12,000 | |||
2015 |
603,500 | |||
Thereafter |
867,500 | |||
Total |
$ | 1,519,000 | ||
6. MEMBERS’ EQUITY
As a wholly-owned subsidiary of MCC, our business affairs, including our financing decisions, are
directed by MCC. For the year ended December 31, 2010 we made capital distributions to parent of
$37.0 million. For the year ended December 31, 2009, we made
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
capital distributions to parent of
$222.0 million, comprising $191.7 million cash, and $30.3 million non-cash. Substantially all of
the non-cash distributions represented the book value of the cable systems located in Western North
Carolina distributed to parent (see Note 7). For the same period, we received capital contributions
from parent of $283.4 million, comprising $189.9 million in cash and $93.5 million, net non-cash.
Substantially all of the non-cash contributions from parent represented the excess book value of
the assets exchanged in the Asset Transfer Agreement (see Note 7). As presented in our Consolidated
Statement of Cash Flows, non-cash transactions — financing were $63.2 million, net, comprising
non-cash contributions from parent of $93.5 million, net and non-cash distributions to parent of
$30.3 million, net, as described above.
For the year ended December 31, 2008 we made capital distributions to parent in cash of
approximately $104.0 million. For the year ended December 31, 2008, we received capital
contribution from parent in cash of approximately $60.0 million.
Capital contributions from parent and capital distributions to parent are reported on a gross basis
in the Consolidated Statements of Changes in Members’ Deficit and the Consolidated Statements of
Cash Flows. Non-cash transactions are reported on a net basis in the supplemental disclosures of
cash flow information in the Consolidated Statements of Cash Flows.
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, 2010, 2009 and 2008 amounted to approximately $12.1 million,
$11.8 million, and $11.8 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.
We are a preferred equity investor in Mediacom Broadband LLC, a wholly-owned subsidiary of MCC. See
Note 11.
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 MCC 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 better aligned 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.
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.
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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 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.
The net assets of the cable systems we received as part of the Asset Transfer were accounted for as
a transfer of businesses under common control in accordance with ASC 805. Under this method of
accounting: (i) the net assets we received have been recorded at Mediacom Broadband’s carrying
amounts; (ii) the net assets of the cable systems we transferred to Mediacom Broadband through MCC
were removed from our consolidated balance sheet at net book value on the transfer date; (iii) for
the cable systems we received, we recorded their results of operations as if the transfer date was
January 1, 2009; and (iv) for the cable systems we transferred to Mediacom Broadband through MCC,
we ceased recording those results of operations as of the transfer date.
We recognized an additional $5.5 million in revenues and $1.7 million of net income, for the period
January 1, 2009 through the transfer date, because we recorded the results of operations for the
cable systems we received as part of the Asset Transfer, as if the transfer date was January 1,
2009. This $1.7 million of cash flows was recorded under the caption capital distributions from
parent on our consolidated statements of cash flows for the year ended December 31, 2009.
The financial statements for the periods prior to January 1, 2009 were not adjusted for the receipt
of net assets because the net assets did not meet the definition of a business under generally
accepted accounting principles in effect prior to the adoption of ASC 805.
Going Private transaction
On March 4, 2011, MCC completed a going private transaction with its founder, chairman and chief
executive officer, Rocco B. Commisso. See Note 12 for more information.
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 $0.8 million, $0.8 million and $0.9 million for the years
ended December 31, 2010, 2009 and 2008, respectively.
9. SHARE-BASED COMPENSATION
Share-based Compensation
MCC grants stock options to certain employees which convey to recipients the right to purchase
shares of MCC’s Class A common stock at a specified strike price, upon vesting of the stock option
award, but prior to the expiration date of that award. The awards are subject to annual vesting
periods generally 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 stock option
forfeitures and recognized compensation costs for equity awards expected to vest. We regularly
adjust our forfeiture rate to reflect compensation costs based actual
forfeiture experience. See also Note 12.
In April 2003, MCC adopted its 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.
ASC 718 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, ASC 718
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.
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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 ASC 718 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 ASC 718. We have applied the
provisions of SAB No. 107 in our adoption.
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, | ||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Share-based compensation expense by type of award: |
||||||||||||
Employee stock options |
$ | 26 | $ | 29 | $ | 37 | ||||||
Employee stock purchase plan |
82 | 94 | 51 | |||||||||
Restricted stock units |
477 | 433 | 332 | |||||||||
Total share-based compensation expense |
$ | 585 | $ | 556 | $ | 420 | ||||||
As
required by ASC 718, 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 $0.7 million as of
December 31, 2010, which will be recognized over a weighted average period of 0.5 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 ASC 718, 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 Option Plans |
Employee Stock Purchase Plans |
|||||||||||||||||||||||
| Year Ended | Year Ended | |||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
Dividend yield |
0 | % | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||||||
Expected volatility |
60.0 | % | 59.0 | % | 48.0 | % | 61.4 | % | 43.0 | % | 33.0 | % | ||||||||||||
Risk free interest rate |
2.8 | % | 2.7 | % | 2.3 | % | 2.4 | % | 4.0 | % | 3.0 | % | ||||||||||||
Expected option life (in years) |
6.0 | 5.5 | 6.9 | 0.5 | 0.5 | 0.5 | ||||||||||||||||||
MCC does not expect to declare dividends in the near future. 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, 2010, 2009, and 2008, we elected the simplified method in accordance with SAB 107 and
SAB 110 to estimate the option life of share-based awards. The simplified method is used for
valuing stock option grants by eligible public companies that do not have sufficient historical
exercise patterns of stock options. We have concluded that sufficient historical exercise data is
not available. 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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The following table summarizes our activity under MCC’s option plans for the year ended December
31, 2010:
| Weighted Average | ||||||||||||||||
| Remaining | Aggregate Intrinsic | |||||||||||||||
| Weighted Average | Contractual | Value | ||||||||||||||
| Shares | Exercise Price | Term (In years) | (in thousands) | |||||||||||||
Outstanding at January 1, 2010 |
821,533 | $ | 17.04 | |||||||||||||
Granted |
— | — | ||||||||||||||
Exercised |
— | — | ||||||||||||||
Forfeited |
(538,577 | ) | 18.97 | |||||||||||||
Expired |
— | — | ||||||||||||||
Outstanding at December 31, 2010 |
282,956 | $ | 13.37 | 2.0 | $ | 309 | ||||||||||
Vested or expected to vest at December 31, 2010 |
275,449 | $ | 13.62 | 1.9 | $ | 275 | ||||||||||
Exercisable at December 31, 2010 |
229,331 | $ | 15.56 | 0.7 | 67 | |||||||||||
The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value,
based on MCC’s stock price of $8.47 per share as of December 31, 2010, which would have been
received by the option holders had all option holders exercised their options as of that date.
During the years ended December 31, 2010 and 2009 there were no stock options granted. During the
years ended December 31, 2010, 2009 and 2008, approximately 1,125, 15,375 and 1,125 stock options
vested with a weighted average exercise price of $8.00, $4.29 and $4.37, respectively. There were
no stock options exercised during the year ended December 31, 2010. The proceeds we received, the
intrinsic value of options exercised, and the related tax benefits realized resulting from the
exercise of stock options during 2009 and 2008 were immaterial. The weighted average grant date
fair value for options granted during the year ended December 31, 2008 was $1.94.
The following table summarizes information concerning stock options outstanding as of December 31,
2010:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||||||||
| Weighted | Weighted | |||||||||||||||||||||||||||||||||||
| Average | Weighted | Average | Weighted | |||||||||||||||||||||||||||||||||
| Number of | Remaining | Average | Aggregate | Number of | Remaining | Average | Aggregate | |||||||||||||||||||||||||||||
| Range of | Shares | Contractual | Exercise | Intrinsic Value | Shares | Contractual | Exercise | Intrinsic Value | ||||||||||||||||||||||||||||
| Exercise Prices | Outstanding | Life | Price | (In thousands) | Outstanding | Life | Price | (in thousands) | ||||||||||||||||||||||||||||
| $ | 3.00 — $12.00 | 103,061 | 5.2 | $ | 5.73 | $ | 309 | 49,436 | 2.4 | $ | 7.63 | $ | 67 | |||||||||||||||||||||||
| $ | 12.01 — $18.00 | 173,645 | 0.2 | 17.66 | — | 173,645 | 0.2 | 17.66 | — | |||||||||||||||||||||||||||
| $ | 18.01 — $22.00 | 6,250 | 0.4 | 19.90 | — | 6,250 | 0.4 | 19.90 | — | |||||||||||||||||||||||||||
| 282,956 | 2.0 | $ | 13.37 | $ | 309 | 229,331 | 0.7 | $ | 15.56 | $ | 67 | |||||||||||||||||||||||||
Restricted Stock Units
We grant restricted stock units (“RSUs”) to certain employees (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 generally 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 $1.9 million based on the closing stock price of $8.47 per share of MCC’s Class A common
stock at December
31, 2010. The total value of RSUs vesting during the years ended December 31, 2010, 2009 and 2008
was $0.5 million, $0.2 million and $0.4 million respectively. These values were based upon the
closing prices if $8.47, $4.47 and $4.30 respectively.
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MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the activity of our restricted stock unit awards for the year ended
December 31, 2010:
| Weighted | ||||||||
| Number of Non-Vested | Average Grant | |||||||
| Share Unit Awards | Date Fair Value | |||||||
Unvested Awards at December 31, 2009 |
217,425 | $ | 5.15 | |||||
Granted |
67,900 | 4.25 | ||||||
Awards Vested |
(63,475 | ) | 5.79 | |||||
Forfeited |
(1,775 | ) | 5.47 | |||||
Unvested Awards at December 31, 2010 |
220,075 | $ | 4.68 | |||||
Employee Stock Purchase Plan
MCC maintains an employee stock purchase plan (“ESPP”). Under the ESPP, 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 45,165, 64,647
and 48,080 for the years ended December 31, 2010, 2009 and 2008, respectively. The net proceeds to
us were approximately $0.2 million for each of the years ended December 31, 2010, 2009 and 2008.
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 $3.3 million, $3.1 million and $3.2 million for the years ended
December 31, 2010, 2009 and 2008, respectively. Future minimum annual rental payments are as
follows (dollars in thousands):
2011 |
$ | 2,370 | ||
2012 |
1,776 | |||
2013 |
1,350 | |||
2014 |
911 | |||
2015 |
642 | |||
Thereafter |
3,192 | |||
Total |
$ | 10,241 | ||
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
$5.2 million, $6.0 million and $6.2 million for the years ended December 31, 2010, 2009 and 2008,
respectively.
Letters of Credit
As of December 31, 2010, approximately $0.4 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. Before trial, the plaintiffs proposed an
alternative damage theory of $42.0 million in compensatory
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MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 did 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 18, 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. The Court
did not enter a final judgment on this verdict and therefore the amount of the verdict cannot at
this time be judicially collected. 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 plus the possibility of an award of attorneys’ fees, prejudgment
interest, and punitive damages. We are vigorously defending against the claims made by the other
members of the class, including filing and responding to post trial motions, which include filing a
motion to decertify the class and responding to the plaintiffs’ summary judgment motion, and
preparing for subsequent trials, and an 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 18,
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.
A purported class action in the United States District Court for the Southern District of New York
entitled Jim Knight v. Mediacom Communications Corp., in which MCC is named as the defendant, was
filed on March 4, 2010. The complaint asserts that the potential class is comprised of all persons
who purchased premium cable services from MCC and rented a cable box distributed by MCC. The
plaintiff alleges that MCC improperly “ties” the rental of cable boxes to the provision of premium
cable services in violation of Section 1 of the Sherman Antitrust Act. The plaintiff also alleges a
claim for unjust enrichment and seeks injunctive relief and unspecified damages. MCC was served
with the complaint on April 16, 2010. MCC believes they have substantial defenses to the claims
asserted in the complaint, and they intend to defend the action vigorously. If MCC is not
successful in this litigation, we may have to distribute cash to MCC in order for MCC to pay any
damages in regard to this litigation.
Between June 3, 2010 and June 10, 2010, three purported class actions lawsuits were filed against
Mediacom and its individual directors, including Mr. Commisso, all in the Court of Chancery of the
State of Delaware (which we refer to as the “Delaware
Court”), under the captions Colleen Witmer v.
Mediacom Communications Corporation, et al., J. Malcolm Gray v. Mediacom Communications
Corporation, et al. and Haverhill Retirement System v.
Mediacom Communications Corporation, et al.
The lawsuits were subsequently consolidated for all purposes in the Delaware Court of Chancery
under the caption In Re Mediacom Communications Corporation
Shareholders Litigation. On January 4,
2011, a Second Verified Consolidated Amended Class Action Complaint was filed that alleges, among
other things, that the defendant directors breached their fiduciary duties to the stockholders of
Mediacom in connection with Mr. Commisso’s proposal to take Mediacom private, including among other
things their fiduciary duty of disclosure, and that Mediacom, Mr. Commisso and JMC Communications
LLC aided and abetted such breaches. The plaintiffs seek injunctive relief, rescission of the
transaction or rescissory damages, and an accounting of all damages.
On November 18, 2010, another purported class action lawsuit was filed against Mediacom and its
individual directors, including Mr. Commisso, in the Supreme Court of the State of New York, Orange
County, under the caption Wendy Kwait v. Mediacom Communications
Corporation, et al. The lawsuit
alleges, among other things, that the director defendants breached their fiduciary duties to the
stockholders of Mediacom in connection with Mr. Commisso’s proposal to take Mediacom private and
that Mediacom and Mr. Commisso aided and abetted such breaches. The plaintiffs seek injunctive
relief, rescission of the transaction or rescissory damages.
On November 29, 2010, another purported class action lawsuit was filed against Mediacom and its
individual directors, including Mr. Commisso, in the United States District Court for the Southern
District of New York, under the caption Thomas Turberg v. Mediacom Communications Corporation, et
al. The lawsuit alleges, among other things, that the director defendants breached their fiduciary
duties to the stockholders of Mediacom in connection with Mr. Commisso’s proposal to take Mediacom
private and that Mediacom and JMC Communications LLC aided and abetted such breaches. The
plaintiffs seek injunctive relief and damages.
On December 10, 2010, another purported class action lawsuit was filed against Mediacom and its
individual directors, including Mr. Commisso, in the United States District Court for the Southern
District of New York, under the caption Ella Mae Pease v. Rocco
Commisso, et al. The lawsuit
alleges, among other things, that the director defendants breached their fiduciary duties to the
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MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
stockholders of Mediacom in connection with Mr. Commisso’s proposal to take Mediacom private; that
Mediacom, Mr. Commisso and JMC Communications LLC aided and abetted such breaches; and that the
defendants violated Section 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. The
plaintiffs seek declaratory and injunctive relief, rescission of the transaction or rescissory
damages, and an accounting of all damages, profits and special benefits.
The director defendants, Mediacom, JMC Communications LLC and Mr. Commisso, as defendants in the
foregoing actions, have reached an agreement in principle with the plaintiffs in all of the
foregoing actions providing for the settlement of the actions on the terms and subject to the
conditions set forth in a memorandum of understanding (the “MOU”), which terms include, but are not
limited to, a settlement payment made by Mediacom on behalf of and for the benefit of the parties
to the actions in the amount of $0.25 per share for each share of Mediacom common stock held by the
plaintiff class as of March 4, 2011. If the settlement becomes effective, the settlement payment to
the plaintiff class will be reduced by any attorneys’ fees and expenses awarded to plaintiffs’
counsel. The settlement is subject to, among other things, the execution of definitive settlement
documentation and the approval of the Delaware Court. We may have to distribute cash to MCC to partially fund this settlement.
Upon effectiveness of the settlement, the
actions will be dismissed with prejudice and all claims under federal and state law that were or
could have been asserted in the actions or which arise out of or relate to the Going Private
Transaction will be released.
The defendants have denied and continue to deny any wrongdoing or liability with respect to all
claims, events and transactions complained of in the aforementioned actions or that they have
engaged in any wrongdoing. The defendants have entered into the MOU to eliminate the uncertainty,
burden, risk, expense and distraction of further litigation.
We 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
credit facility. The preferred equity investment has a 12% annual cash dividend, payable quarterly
in cash. For each of the years ended December 31, 2010, 2009 and 2008, we received in aggregate
$18.0 million in cash dividends on the preferred equity.
12. SUBSEQUENT EVENTS
Going Private Transaction
On November 12, 2010, Mediacom entered into an Agreement and Plan of Merger (the “Merger
Agreement”), by and among Mediacom, JMC Communications LLC (“JMC”) and Rocco B. Commisso,
Mediacom’s founder, Chairman and Chief Executive Officer, who was also the sole member and manager
of JMC (the “Going Private Transaction”). Pursuant to the Merger Agreement, among other things,
each share of Mediacom common stock (other than shares held by Mr. Commisso, JMC, or any of their
respective affiliates, shares held in treasury by Mediacom and shares held by stockholders who have
perfected their appraisal rights under Delaware law) would be converted into the right to receive
$8.75 in cash upon stockholder approval of the Merger Agreement.
At a special meeting of stockholders on March 4, 2011, Mediacom’s stockholders voted to adopt the
Merger Agreement and, on the same date, the Going Private Transaction was closed. As a result, JMC
was merged with and into Mediacom, with Mediacom continuing as the surviving corporation, a private
company that is wholly-owned by Mr. Commisso. The Going Private Transaction consideration was
approximately $367 million, and was funded, in part, by distributions to Mediacom by us, consisting
of $100 million of drawdowns under our revolving credit facility and cash on hand, with the balance
funded by Mediacom Broadband.
As a result of the Going Private Transaction, MCC terminated all of its share-based compensation
plans including its employee stock purchase plan and other plans which granted stock options and
RSUs. The settlement of these various plans was paid in cash based upon the terms of the Merger
Agreement.
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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, 2008 |
||||||||||||||||||||||||
Allowance for doubtful accounts: |
||||||||||||||||||||||||
Current receivables |
$ | 900 | $ | 1,069 | $ | — | $ | 842 | $ | — | $ | 1,127 | ||||||||||||
December 31, 2009 |
||||||||||||||||||||||||
Allowance for doubtful accounts: |
||||||||||||||||||||||||
Current receivables |
$ | 1,127 | $ | 1,745 | $ | — | $ | 1,945 | $ | — | $ | 927 | ||||||||||||
December 31, 2010 |
||||||||||||||||||||||||
Allowance for doubtful accounts: |
||||||||||||||||||||||||
Current receivables |
$ | 927 | $ | 1,325 | $ | — | $ | 1,024 | $ | — | $ | 1,228 | ||||||||||||
| 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, 2010.
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, 2010 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, 2010. 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, 2010, 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 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, 2010.
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, 2010 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.
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Management assessed the effectiveness of Mediacom Capital’s internal control over financial
reporting as of December 31, 2010. 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, 2010, Mediacom Capital’s internal control over financial reporting was effective.
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 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 as of March 17, 2011 are:
| Name | Age | Position | ||||
Rocco B. Commisso |
61 | 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 |
54 | Executive Vice President and Chief Financial Officer 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 |
49 | Executive Vice President, Operations of MCC | ||||
Italia Commisso Weinand
|
57 | Senior Vice President, Programming and Human Resources of MCC | ||||
Joseph E. Young
|
62 | Senior Vice President, General Counsel and Secretary of MCC | ||||
Charles J. Bartolotta |
56 | Senior Vice President, Customer Operations of MCC | ||||
Calvin G. Craib |
56 | Senior Vice President, Corporate Finance of MCC | ||||
Brian M. Walsh |
45 | Senior Vice President and Corporate Controller of MCC | ||||
The
following individuals were members of MCC’s board of directors
during the year ended December 31, 2010 and during the period from
January 1, 2011 to March 4, 2011 at which time their service on the
board of directors ceased in accordance with the terms of the Merger
Agreement: Mark E. Stephan,
Thomas V. Reifenheiser, Natale S. Ricciardi, Robert L. Winikoff and Scott W. Seaton.
Rocco B. Commisso has 32 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.
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Mark E. Stephan has 24 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 MCC’s 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 30 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 MCC’s Vice President of Marketing from
March 1998. Before joining MCC 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.
Italia Commisso Weinand has 34 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 26 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 28 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 29 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 23 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, MCC’s Vice President, Finance and
Assistant to the Chairman from November 2001, MCC’s Vice President and Corporate Controller
from February 1998 and MCC’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.
Our manager 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 manager of our operating subsidiaries and in
return receives management fees from each of such subsidiaries.
| 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 |
Going Private Transaction
On November 12, 2010, Mediacom entered into an Agreement and Plan of Merger (the “Merger
Agreement”), by and among Mediacom, JMC Communications LLC (“JMC”) and Rocco B. Commisso,
who was also the sole member and manager of JMC (the “Going
Private Transaction”). Pursuant to the Merger Agreement, among other things, each share of
Mediacom common stock (other than shares held by Mr. Commisso, JMC, or any of their respective
affiliates, shares held in treasury by Mediacom and shares held by stockholders who have perfected
their appraisal rights under Delaware law) would be converted into the right to receive $8.75 in
cash upon stockholder approval of the Merger Agreement.
At a special meeting of stockholders on March 4, 2011, Mediacom’s stockholders voted to adopt the
Merger Agreement and, on the same date, the Going Private Transaction was closed. As a result, JMC was
merged with and into Mediacom, with Mediacom continuing as the surviving corporation, a private
company that is wholly-owned by Mr. Commisso. The Going Private Transaction consideration was approximately $367 million, and was funded, in part, by distributions to
Mediacom by us, consisting of $100 million of drawdowns under our revolving credit facility and
cash on hand, with the balance funded by Mediacom Broadband.
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 gross operating revenues, and shall
be responsible for, among other things, the compensation (including benefits) of MCC’s executive
management. For the year ended December 31, 2010, MCC received $12.1 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 better
aligned 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 the credit facility. The preferred equity investment has a 12% annual
cash dividend, payable quarterly in cash. For the year ended December 31, 2010, we received in
aggregate $18.0 million in cash dividends on the preferred equity.
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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):
| 2010 | 2009 | |||||||
Audit fees |
$ | 460 | $ | 544 | ||||
Audit-related fees |
24 | 19 | ||||||
Tax fees |
38 | — | ||||||
All other fees |
— | — | ||||||
Total |
$ | 522 | $ | 563 | ||||
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.
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.
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 91\8% senior notes due 2019 of Mediacom LLC and Mediacom Capital Corporation(4) | |||
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(5) | ||
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(6) | ||
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| Exhibit | ||||
| Number | Exhibit Description | |||
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(7) | ||
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(7) | ||
10.1
|
(e) | Amendment No. 4, dated as of April 23, 2010, 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) | ||
10.2
|
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(6) | |||
10.3
|
Incremental Facility Agreement, dated as of August 25,2009, between the operating subsidiaries of Mediacom
LLC, the lenders signatory thereto and JPMorgan Chase Bank, N.A., as administrative agent(4) |
|||
10.4
|
Incremental Facility Agreement, dated as of April 23, 2010, between the operating subsidiaries of Mediacom LLC, the lenders signatory thereto and JPMorgan Chase Bank, N.A., as administrative agent(8) | |||
12.1
|
Schedule of Computation of Ratio of Earnings to Fixed Charges | |||
14.1
|
Code of Ethics(9) | |||
21.1
|
Subsidiaries of Mediacom LLC | |||
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 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 Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009 of Mediacom Communications Corporation and incorporated herein by reference. | |
| (5) | Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004 of MCC and |
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| incorporated herein by reference. | ||
| (6) | 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. | |
| (7) | 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. | |
| (8) | Filed as an exhibit to the Current Report on Form 8-K, dated April 23, 2010, of Mediacom LLC 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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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 17, 2011 | ||||
| By: | /s/ Mark E. Stephan | |||
| Mark E. Stephan | ||||
| Executive Vice President and Chief Financial 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
|
Chief Executive Officer (principal executive officer) |
March 17, 2011 | ||
/s/ Mark E. Stephan
|
Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer) |
March 17, 2011 |
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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 17, 2011 | ||||
| By: | /s/ Mark E. Stephan | |||
| Mark E. Stephan | ||||
| Executive Vice President and Chief Financial 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
|
Chief Executive Officer and Director (principal executive officer) |
March 17, 2011 | ||
/s/ Mark E. Stephan
|
Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer) |
March 17, 2011 |
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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.
90
Exhibit 12.1
Mediacom LLC
Schedule of Computation of Ratio of Earnings to Fixed Charges
| For the Years ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Earnings: |
||||||||||||||||||||
Income (loss) before income taxes |
$ | 33,153 | $ | 51,818 | $ | 7,389 | $ | (14,626 | ) | $ | (19,419 | ) | ||||||||
Interest expense, net |
91,824 | 89,829 | 99,639 | 118,386 | 112,895 | |||||||||||||||
Amortization of capitalized interest |
1,828 | 255 | 1,706 | 1,939 | 1,702 | |||||||||||||||
Amortization of debt issuance costs |
3,392 | 1,961 | 2,039 | 2,225 | 2,427 | |||||||||||||||
Interest component of rent expense(1) |
2,831 | 3,041 | 3,133 | 2,617 | 2,716 | |||||||||||||||
Earnings available for fixed charges |
$ | 133,028 | $ | 146,904 | $ | 113,906 | $ | 110,541 | $ | 100,321 | ||||||||||
Fixed Charges: |
||||||||||||||||||||
Interest expense, net |
$ | 91,824 | $ | 89,829 | $ | 99,639 | $ | 118,386 | $ | 112,895 | ||||||||||
Capitalized interest |
1,632 | 1,564 | 2,131 | 1,729 | 1,893 | |||||||||||||||
Amortization of debt issuance cost |
3,392 | 1,961 | 2,039 | 2,225 | 2,427 | |||||||||||||||
Interest component of rent expense(1) |
2,831 | 3,041 | 3,133 | 2,617 | 2,716 | |||||||||||||||
Total fixed charges |
$ | 99,679 | $ | 96,395 | $ | 106,942 | $ | 124,957 | $ | 119,931 | ||||||||||
Raito of earnings to fixed charges |
1.33 | 1.52 | 1.07 | — | — | |||||||||||||||
Deficiency of earnings over fixed charges |
$ | — | $ | — | $ | — | $ | (14,416 | ) | $ | (19,610 | ) | ||||||||
| (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 California LLC
|
Delaware | Mediacom California LLC | ||
Mediacom Capital Corporation
|
New York | Mediacom Capital Corporation | ||
Mediacom Delaware LLC
|
Delaware | Mediacom Delaware LLC Maryland Mediacom Delaware LLC |
||
Mediacom Illinois LLC
|
Delaware | Mediacom Illinois LLC | ||
Mediacom Indiana Partnerco LLC
|
Delaware | Mediacom Indiana Partnerco | ||
Mediacom Indiana Holdings, L.P.
|
Delaware | Mediacom Indiana Holdings, L.P. | ||
Mediacom Indiana LLC
|
Delaware | Mediacom Indiana LLC | ||
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 |
Subsidiaries of Mediacom California LLC
| State of Incorporation | Names Under Which | |||
| Subsidiary | or Organization | Subsidiary does Business | ||
Mediacom Arizona LLC
|
Delaware | Mediacom Arizona LLC Mediacom Cable TV I LLC Mediacom Arizona Cable Network LLC |
Subsidiaries of Mediacom Illinois LLC
| State of Incorporation | Names Under Which | |||
| Subsidiary | or Organization | Subsidiary does Business | ||
Illini Cable Holding, Inc.
|
Illinois | Illini Cable Holding, Inc. |
Subsidiaries of Illini Cable Holding, Inc.
| State of Incorporation | Names Under Which | |||
| Subsidiary | or Organization | Subsidiary does Business | ||
Illini Cablevision of Illinois, Inc
|
Illinois | Illini Cablevision of Illinois, Inc. |
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 17, 2011
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 17, 2011
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 17, 2011
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 17, 2011
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
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, 2010 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 17, 2011
| By: | /s/ Mark E. Stephan | |||
| Mark E. Stephan | ||||
| Chief Financial Officer | ||||
March 17, 2011
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
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, 2010 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 17, 2011
| By: | /s/ Mark E. Stephan | |||
| Mark E. Stephan | ||||
| Chief Financial Officer | ||||
March 17, 2011