10-K
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
For the fiscal year ended December 31, 2007
Commission File Number: 0-29227
Mediacom Communications
Corporation
(Exact name of Registrant as
specified in its charter)
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Delaware
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06-1566067
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(State of
incorporation)
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(I.R.S. Employer
Identification Number)
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100
Crystal Run Road
Middletown, New York 10941
(Address of principal executive
offices)
(845) 695-2600
(Registrants
telephone number)
Securities registered pursuant to Section 12(b) of the
Exchange Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Class A Common Stock, $0.01 par value per share
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The NASDAQ Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Exchange
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act Yes o No þ
Indicate by check mark if the Registrant is not required to file
pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has 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 Registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past
90 days. Yes þ 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. o
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):
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Large accelerated filer
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Accelerated
filer þ
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
Company o
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Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of June 29, 2007, the aggregate market value of the
Class A common stock of the Registrant held by
non-affiliates of the Registrant was approximately
$522.1 million.
As of February 29, 2008 there were outstanding
70,655,408 shares of Class A common stock and
27,001,944 shares of Class B common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for the 2008
Annual Meeting of Stockholders are incorporated by reference
into Items 10, 11, 12, 13 and 14 of Part III.
MEDIACOM
COMMUNICATIONS CORPORATION
2007
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
2
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 Securities and Exchange Commission
(the SEC).
In this Annual Report, we state our beliefs of future events and
of our future financial performance. In some cases, you can
identify those so-called forward-looking statements
by words such as may, will,
should, expects, plans,
anticipates, believes,
estimates, predicts,
potential, or continue or the negative
of those words and other comparable words. These forward-looking
statements are subject to risks and uncertainties that could
cause actual results to differ materially from historical
results or those we anticipate. Factors that could cause actual
results to differ from those contained in the forward-looking
statements include, but are not limited to: competition for
video, high-speed Internet access and phone customers; our
ability to achieve anticipated customer and revenue growth and
to successfully introduce new products and services; increasing
programming costs; changes in laws and regulations; our ability
to generate sufficient cash flow to meet our debt service
obligations and access capital to maintain our financial
flexibility; and the other risks and uncertainties discussed in
this Annual Report on
Form 10-K
for the year ended December 31, 2007 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 otherwise required by applicable federal
securities laws.
3
PART
I
Introduction
We are the nations eighth largest cable television company
based on the number of basic video subscribers and among the
leading cable operators focused on serving the smaller cities
and towns in the United States. Over 50% of our basic video
subscribers, or basic subscribers, are located within the top
50 100 television markets in the United States, with
a significant concentration in the midwest and southern regions.
We provide our customers with a wide array of advanced products
and services, including: video services, such as
video-on-demand
(VOD), high-definition television (HD or
HDTV) and digital video recorders (DVR);
high-speed data (HSD), also known as high-speed
Internet access or cable modem service; and phone service.
As of December 31, 2007, we served
approximately 1.32 million basic subscribers, 557,000
digital video customers or digital customers, 658,000 HSD
customers and 185,000 telephone customers, totaling
2.72 million revenue generating units (RGUs).
We provide the triple play bundle of advanced video services,
HSD and phone to nearly 90% of the estimated homes our network
passes. A basic subscriber is a customer who purchases one or
more video services. RGUs represent the sum of basic subscribers
and digital, HSD and phone customers.
We are a publicly-owned company, and our Class A common
stock is listed on The Nasdaq Global Select Market under the
symbol MCCC. We were founded in July 1995 by Rocco
B. Commisso, our Chairman and Chief Executive Officer, who
beneficially owns shares in our company representing the
majority of the aggregate voting power of our common stock.
Our principal executive offices are located at 100 Crystal Run
Road, Middletown, New York 10941 and our telephone number at
that address is
(845) 695-2600.
Our website is located at www.mediacomcc.com. We have made
available free of charge through our website (follow the
About Us link to the Investor Relations tab to
SEC Filings) our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after such material was
electronically filed with, or furnished to, the Securities and
Exchange Commission. We have also made our Code of Ethics
available in the Governance portion of the Investor
Relations tab of our website. The information on our website is
not part of this Annual Report.
Industry
The cable industry operates in an increasingly competitive and
rapidly changing environment. Over the last several years the
industry has invested in interactive fiber optic networks,
boosting network capacity, capability and reliability, and
allowing it to introduce a compelling variety of new and
advanced services to consumers. This has resulted in greater
consumer choice and convenience in advanced video programming,
with services such as VOD, HDTV and DVRs; dramatically higher
speeds that have enhanced the HSD product; and a feature-rich
product in voice over internet protocol (VoIP) phone
service. We provide the triple play of video, HSD and phone over
a single communications platform, a significant advantage over
competitors. As we expect demand for these advanced services to
grow, we believe that we are better positioned than our
competition to widely offer this bundle of advanced services.
Our primary competitors in video programming distribution are
direct broadcast satellite (DBS) providers, but they
have had limited success in providing high speed internet
service and do not provide phone service. Our primary
competitors in HSD and phone services are incumbent telephone
companies. Major telephone companies are building and operating
fiber-to-the-node (FTTN) or fiber-to-the-home
(FTTH) networks in an attempt to offer consumers a
product bundle comparable to those offered today by cable
companies. However, we believe that these advanced service
offerings will not be made broadly available by telephone
companies in our markets for a number of years. They do not
generally provide a widely available video product in our
markets using their own networks, but instead have marketing
agreements with DBS providers under which DBS service is bundled
with their phone and data service. Meanwhile, we expect to
benefit from our bundled offerings of products and services
while continuing to introduce new services.
4
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:
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2007
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2006
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2005
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2004
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2003
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Operating Data:
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Core Video
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Estimated homes
passed(1)
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2,836,000
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2,829,000
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2,807,000
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2,785,000
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2,755,000
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Basic
subscribers(2)
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1,324,000
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1,380,000
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1,423,000
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1,458,000
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1,543,000
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Basic
penetration(3)
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46.7
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%
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48.8
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%
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50.7
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%
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52.4
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%
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56.0
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Digital Cable
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Digital
customers(4)
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557,000
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528,000
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494,000
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396,000
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383,000
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Digital
penetration(5)
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42.1
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%
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38.3
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%
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34.7
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%
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27.2
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%
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24.8
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%
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High Speed Data
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HSD
customers(6)
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658,000
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578,000
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478,000
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367,000
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280,000
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HSD
penetration(7)
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23.2
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%
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20.4
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%
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17.0
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%
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13.2
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%
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10.2
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%
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Phone
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Estimated marketable phone
homes(8)
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2,550,000
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2,300,000
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1,450,000
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Phone
customers(9)
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185,000
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105,000
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22,000
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Phone
penetration(10)
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7.3
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%
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4.6
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%
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1.5
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%
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Revenue Generating
Units(11)
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2,724,000
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2,591,000
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2,417,000
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2,221,000
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2,206,000
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(1) |
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Represents the estimated number of single residence homes,
apartments and condominium units passed by the cable
distribution network. Estimated homes passed is based on the
best available information. |
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(2) |
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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 television
services. Accounts that are billed on a bulk basis, which
typically receive discounted rates, are converted into
full-price equivalent basic subscribers by dividing total bulk
billed basic revenues of a particular system by average cable
rate charged to basic subscribers in that system. This
conversion method is consistent with the methodology used in
determining payments made to programmers. Basic subscribers
include connections to schools, libraries, local government
offices and employee households that may not be charged for
limited and expanded cable services, but may be charged for our
other services. Customers who exclusively purchase high-speed
Internet and/or phone service are not counted as basic
subscribers. Our methodology of calculating the number of basic
subscribers may not be identical to those used by other
companies offering similar services. |
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Represents basic subscribers as a percentage of estimated homes
passed. |
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(4) |
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Represents customers receiving digital video services. |
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(5) |
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Represents digital customers as a percentage of basic
subscribers. |
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Represents residential HSD customers and small to medium-sized
commercial cable modem accounts billed at higher rates than
residential customers. Small to medium-sized commercial accounts
generally represent customers with bandwidth requirements of up
to 15Mbps, and are converted to equivalent residential HSD
customers by dividing their associated revenues by the
applicable residential rate. Our HSD customers exclude large
commercial accounts. Our methodology of calculating HSD
customers may not be identical to those used by other companies
offering similar services. |
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(7) |
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Represents the number of total HSD customers as a percentage of
estimated homes passed. |
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Represents estimated number of homes to which we market phone
service and is based upon the best available information. |
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(9) |
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Represents customers receiving phone service. |
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(10) |
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Represents the number of total phone customers as a percentage
of estimated marketable phone homes. |
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(11) |
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Represents the sum of basic subscribers and digital, HSD and
phone customers. |
5
Designated
Market Areas
Over 50% of our basic subscribers are in the top
50-100
Nielsen Media Research designated market areas
(DMAs) in the United States, and over 65% are in the
top 100 DMAs. We are the leading provider of broadband services
in Iowa. The following table provides the largest DMAs in which
we serve:
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DMA Rank
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Designated Market Area
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3
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Chicago, IL
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15
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Minneapolis St. Paul, MN
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36
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Greenville Spartanburg, SC
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61
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Mobile, AL - Pensacola, FL
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71
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Des Moines Ames, IA
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74
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Springfield, MO
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79
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Paducah, KY Cape Girardeau, MO
Harrisburg Mt. Vernon, IL
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84
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Champaign & Springfield Decatur, IL
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87
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Cedar Rapids Waterloo Iowa
City & Dubuque, IA
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96
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Davenport, IA Rock Island Moline, IL
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Products
and Services
Video
We receive a majority of our revenues from video subscription
services. However, our reliance on video services has been
declining for the past several years, primarily due to
contributions from our HSD and phone services. Basic subscribers
and digital customers are billed on a monthly basis, and
generally may discontinue services at any time. We design our
channel
line-ups for
each system according to demographics, programming preferences,
channel capacity, competition, price sensitivity and local
regulation. Monthly subscription rates and related charges vary
according to the type of service selected and the type of
equipment used by subscribers. Below is selected information
regarding our video services.
Basic Service. Our basic service includes, for
a monthly fee, local broadcast channels, network and independent
stations, limited satellite-delivered programming and local
public, government, home-shopping and leased access channels.
Expanded Basic Service. Our expanded basic
service includes, for an additional monthly fee, various
satellite-delivered channels such as CNN, MTV, USA Network,
ESPN, Lifetime, Nickelodeon and TNT.
As of December 31, 2007, we had 1.32 million basic
subscribers, representing a 46.7% penetration of estimated homes
passed.
Digital Service. We currently offer several
programming packages that include digital basic channels,
multichannel premium services, sports channels, digital music
channels, an interactive on-screen program guide and full access
to our VOD library. Currently, digital customers receive up to
230 digital channels. Customers pay a monthly fee for digital
video service, which varies according to the level of service
and the number of digital converters in the home. A digital
converter or cable card is required to receive our digital video
service. As of December 31, 2007, we had 557,000 digital
customers, representing a 42.1% penetration of our basic
subscribers.
Pay-Per-View
Service. Our
pay-per-view
services allow customers to pay to view a single showing of a
feature film, live sporting event, concert and other special
events on an unedited, commercial-free basis.
Video-On-Demand. Mediacom
On Demand, our VOD service, provides on-demand access to nearly
2,000 hours of movies, special events and general interest
titles. Our customers enjoy full functionality, including the
ability to pause, rewind and fast forward selected programming,
free special interest programming, subscription-based VOD
(SVOD) premium packages, such as Starz!, Showtime
and HBO and movies and other programming that can be ordered on
a
pay-per-view
basis. We currently offer this service to 85% of our digital
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customers. DBS providers are unable to offer a similar product
to customers, which gives us a competitive advantage for these
services.
High-Definition Television. HDTV features
high-resolution picture quality, digital sound quality and a
wide-screen, theater-like display when using an HDTV set. Our
HDTV service offers up to 21 high-definition channels, including
most major broadcast networks, leading national cable networks,
premium channels and regional sports networks. In late 2007, we
began to offer HD movies on-demand to our digital customers, and
plan to continue to expand our HD on-demand library in 2008.
Digital Video Recorders. We provide our
customers with HDTV-capable digital converters that have video
recording capability, allowing them to record and store
programming for later viewing, as well as pause and rewind live
television. HDTV and DVR services require the use of an advanced
digital converter for which we charge a monthly fee.
Mediacom
Online
Our HSD product, which we refer to as Mediacom Online, offers to
consumers packages of cable modem-based services, with varied
speeds and competitive prices, our interactive portal, multiple
e-mail
addresses, personal webspace and local community content.
Mediacom Online offers downstream speeds ranging from 8Mbps to
15Mbps, and we believe our flagship residential data service
offering, at 8Mbps, is currently the fastest broadband product
in substantially all of our markets. As of December 31,
2007, we had 658,000 high-speed data customers, representing a
23.2% penetration of estimated homes passed.
We are supporting industry-wide development of specifications
for technology that will enable us to offer significantly faster
HSD speeds to our customers and are working with our vendors to
commercialize and deploy this technology. We plan to begin this
deployment in 2009.
Mediacom
Phone
Mediacom Phone offers our customers unlimited local, regional
and long-distance calling within the United States, Puerto Rico,
the U.S. Virgin Islands and Canada for a flat monthly rate.
As of December 31, 2007, we marketed phone service to
nearly 90% of our 2.84 million estimated homes passed and
served 185,000 phone customers, representing a 7.3% penetration
of estimated marketable phone homes passed. Approximately 83% of
our phone customers take the ViP triple play and
approximately 16% take either video or HSD service in addition
to phone. ViP is our branding of the triple play, and stands for
Video, Internet and Phone.
Mediacom Phone includes popular calling features, such as:
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Voice mail;
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Caller ID with name and number;
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Call waiting;
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Three-way calling; and
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Enhanced Emergency 911 dialing
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Directory assistance is available for a charge, and
international calling is available at competitive rates. Our
phone customers may keep their existing phone number where local
number portability is supported and use existing phones, jacks,
outlets and in-home wiring.
Mediacom
Business Services
Through our network technology, we provide a range of advanced
data services for the commercial market. For small and
medium-sized businesses, we offer several packages of high-speed
data services that include business
e-mail,
webspace storage and several IP address options. Using our
fiber-rich regional networks, we also offer customized Internet
access and data transport solutions for large businesses,
including the vertical markets of healthcare, financial services
and education. Our services for large business are scalable and
competitively priced,
7
and are designed to create point-to-point and point to
multi-point networks offering dedicated Internet access and
local area networks.
Starting in the second half of 2008, we expect to expand voice
services to the commercial market. Our Mediacom Business
Services group plans to target small and medium-sized businesses
with a bundled package of high-speed data and multiple-line
phone services. Initial marketing will focus on our existing
commercial HSD customers, and then extend to other small and
medium-sized businesses in our markets.
Advertising
We generate revenues from the sale of advertising time that we
receive from programmers as part of our license agreements with
them. 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 with other cable operators to
jointly sell local advertising, simplifying our clients
purchase of local advertising and expanding the reach of
advertising they purchase. In some of these markets, we
represent the advertising sales efforts of other cable
operators; in other markets, other cable operators represent us.
Additionally, national and regional interconnect agreements have
been negotiated with other cable system operators to simplify
the purchase of advertising time by our clients.
In 2007, we expanded our advertising-supported VOD service into
new markets. This service permits interested customers to view
long-form information advertisements and allows advertisers to
anonymously track aggregate viewing data. We expect to launch a
consumer-centric web service to attract online advertising
dollars in 2008, and at that time, we will be able to offer an
advertising triple play combining traditional video
spots, VOD and an online platform for the businesses in our
communities.
Marketing
and Sales
We employ a wide range of sales channels to reach current and
potential customers, including direct marketing tactics such as
direct mail, outbound telemarketing and door-to-door sales. We
also employ mass media, including broadcast television, radio,
newspaper and outdoor advertising, to direct people to our
inbound call centers or web site. We advertise on our own cable
systems to reach our current customers, promoting our full array
of products and services. Direct sales channels have also been
established in local and national retail stores, and with
national
e-tailers
to capture potential customers who shop via the internet.
We market our bundled ViP triple play packages, by offering our
customers the convenience of a single bill with discounted
pricing compared to pricing on an individual product basis. We
have enhanced our ViP offering with ViP Extra, a loyalty program
rewarding ViP customers who subscribe to the ViP triple play
with free VOD movies, faster HSD speeds and retailer discounts.
Technology
Our cable systems are designed as hybrid fiber-optic coaxial
(HFC) networks that have proven to be highly
flexible in meeting the increasing requirements of our business.
This HFC designed network is engineered to accommodate bandwidth
management initiatives that provide increased capacity and
performance for our advanced video and broadband products and
services without costly, extensive upgrades. We deliver our
signals via laser-fed fiber optical cable from control centers
known as headends, and hubs to individual nodes. Coaxial cable
is then connected from each node to the individual homes we
serve. Our network design generally provides for six strands of
fiber optic cable extended to each node, with two strands active
and four strands dark or inactive for future use.
As of December 31, 2007, approximately 87% of our cable
network was greater than 550 megahertz (MHz)
capacity, with the balance at less than or equal to 550MHz
capacity (550MHz systems). MHz is a measure used to
quantify bandwidth or the capacity to carry video and
communication signals.
Demand for new video services, including additional HDTV
channels, requires us to become more efficient with our
bandwidth. To reach this objective, we are moving toward an all
digital solution, allowing us to reclaim a cable systems
bandwidth committed to analog programming channels for HD
programming and other uses. We believe that this can be achieved
without costly upgrades. Because digital signaling is more
efficient, we can deliver
8
the same video programming using less bandwidth. For the digital
video customer, this format provides even better picture and
sound quality than analog TV channels. In 2008, we expect to go
all digital in certain smaller 550MHz systems as well as upgrade
certain other 550MHz systems. We also plan in 2008 to launch
digital simulcast in additional cable systems. Digital simulcast
is a step toward going all digital, wherein all analog video
channels will also be sent digitally to be viewed by our digital
customers. Lastly, we expect to begin deploying switched digital
video in 2008, which will enable us to stream a channel to
subscribers homes only when they request it. Because many
channels are not typically viewed at all times, this frees up
capacity that can be used for other purposes.
As of December 31, 2007, our cable systems were operated
from 117 headend facilities, with 97% of our basic subscribers
served by our 50 largest headend facilities. We have two
regional fiber networks, which connect 39 headends and 83% of
our estimated homes passed, upon which we have overlaid a video
transport system that serves about 70% of our video subscriber
base. The regional networks allow us to reach a greater number
of our markets from a central location. Centralizing these
activities makes it more efficient to introduce new and advanced
services to customers, and helps us reduce equipment, personnel
and other expenditures.
Programming
Supply
We have various fixed-term contracts to obtain programming for
our cable systems from programming suppliers whose compensation
is typically based on a fixed monthly fee per subscriber or
customer. Although most of our contracts are secured directly,
we also negotiate programming contract renewals through a
programming cooperative of which we are a member. 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
commercial broadcast stations, which generally expire in 2008.
In some cases, retransmission consent has been contingent upon
our carriage of satellite delivered cable programming offered by
companies affiliated with the stations owners. In other
cases, retransmission consent has been contingent upon cash
payments
and/or our
purchase of advertising time.
We expect our programming costs to remain our largest single
expense item for the foreseeable future. In recent years, we
have experienced a substantial increase in the cost of our
programming, particularly sports programming, well in excess of
the inflation rate or the change in the consumer price index. We
believe our programming costs will continue to rise in the
future due to increased costs to purchase programming. In
particular, we expect that the cost to secure retransmission
consent in 2009 and beyond will rise significantly as owners of
commercial broadcast stations demand cash payments in exchange
for their consent.
Customer
Care
Providing superior customer care helps us to improve customer
satisfaction, reduce churn and increase the penetration of
advanced services. In an increasingly competitive environment,
the strategic importance of customer service enhancement is
becoming more of a factor in growing our customer base, and we
will continue to invest in new technologies and the hiring and
training of our workforce.
We have several virtual contact centers, staffed with dedicated
customer service and technical support representatives, that are
available to respond to customer inquiries on all of our
products and services, 24 hours a day, seven days a week.
This virtual structure helps our customer care group to function
as a single, unified call center and allows us to effectively
manage and leverage resources, reduce answer times to customer
calls through call-routing and operate in a more cost-efficient
manner.
We benefit from locally-based service technicians who use a
mobile field workforce management tool, whereby their work is
scheduled and routed more efficiently, work status is accounted
for seamlessly and HSD and phone products are provisioned with
hand held units. This management tool gives us the ability to
schedule and manage resources in an optimal fashion for both
customer satisfaction and cost control purposes. In 2008, we
plan to expand the capabilities of our web-based customer
service platform,
e-Care, by
allowing customers to order products via the Internet, in
addition to managing their payments.
9
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 and demonstrates our
commitment to the communities. We support local charities and
community causes, with events and campaigns to raise funds and
supplies for persons in need and in-kind donations that include
production services and free airtime on cable networks. We
participate in industry initiatives such as the Cable in
the Classroom program, which provides more than 2,900
schools with free video service and more than 250 schools with
free high-speed Internet service; and Get Ready for Digital
TV, the industrys cables
18-month
multimedia consumer education initiative designed to inform
cable customers and other consumers about how to manage the
transition to digital broadcast television. We also provide free
cable television service to over 3,500 government buildings,
libraries and not-for-profit hospitals in our franchise areas.
We also develop and provide exclusive local programming for our
communities, a service not offered by direct broadcast satellite
providers. Several of our cable systems have production
facilities to create local programming, which includes local
school sports events, fund-raising telethons by local chapters
of national charitable organizations, local concerts and other
entertainment. In the Iowa communities we serve, the Mediacom
Connections channel airs approximately 70 hours of local
programming per week, including high school and college sporting
events and statewide public affairs programs. We believe
increasing our emphasis on local programming helps build
customer loyalty.
Franchises
Cable systems are generally operated under non-exclusive
franchises granted by local governmental authorities. These
franchises typically contain many conditions, such as: time
limitations on commencement and completion of construction;
conditions of service, including population density
specifications for service, the bandwidth capacity of the
system, the broad categories of programming required, the
provision of free service to schools and other public
institutions, and the provision and funding of public,
educational and governmental access channels (PEG Access
Channels); a provision for franchise fees; and the
maintenance or posting of insurance or indemnity bonds by the
cable operator. Many of the provisions of local franchises are
subject to federal regulation under the Communications Act of
1934, or Communications Act, as amended.
Many of the states in which we operate, including Missouri,
Georgia, Florida, Michigan, North Carolina, Kansas, Illinois,
Indiana, Iowa and California, have recently enacted
comprehensive state-issued franchising statutes that cede
control over our franchises away from local communities and
towards state agencies, such as the various public service
commissions that regulate other utilities. Some of these states
permit us to exchange local franchises for state held franchises
before the expiration date of the local franchise. These state
statutes make the terms and conditions of our franchises more
uniform, and in some cases, eliminate locally imposed
requirements such as PEG Access Channels.
As of December 31, 2007, we held 1,366 cable television
franchises. These franchises provide for the payment of fees to
the issuing authority. In most of our cable systems, such
franchise fees are passed through directly to the customers. The
Cable Communications Policy Act of 1984, or 1984 Cable Act,
prohibits franchising authorities from imposing franchise fees
in excess of 5% of gross revenues from specified cable services
and permits the cable operator to seek renegotiation and
modification of franchise requirements if warranted by changed
circumstances.
We have never had a franchise revoked or failed to have a
franchise renewed. In addition, substantially all of our
franchises eligible for renewal have been renewed or extended
prior to their stated expirations, and no franchise community
has refused to consent to a franchise transfer to us. The 1984
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. In
addition, the 1984 Cable Act established comprehensive renewal
procedures, which require that an incumbent franchisees
renewal application be assessed on our own merits and not as
part of a comparative process with competing applications. We
believe that we have satisfactory relationships with our
franchising communities.
10
Competition
We face intense competition from various communications and
entertainment providers, principally DBS providers and certain
regional and local telephone companies, many of whom have
greater resources than we do. We operate in an industry that is
subject to rapid and significant changes and developments in the
marketplace, in technology and in the regulatory and legislative
environment. In 2007, many of our competitors expanded their
service areas, added features and adopted aggressive pricing and
packaging for services and features that are comparable to the
services and features we offer. We are unable to predict the
effects, if any, of such future changes or developments on our
business.
Video
Direct
Broadcast Satellite Providers
DBS providers, principally DIRECTV, Inc. and DISH Network Corp.,
are the cable industrys most significant video
competitors, having grown their customer base rapidly over the
past several years. They now serve more than 30 million
customers nationwide, according to publicly available
information. In February 2008, Liberty Media Corporation, a
holding company that owns a broad range of communications,
programming and retailing businesses and investments, acquired a
controlling interest in DirecTV, which may alter this DBS
providers competitive position.
Our ability to compete with DBS service depends, in part, on the
programming available to them and us for distribution. DirecTV
and DISH now offer more than 250 and 340 video channels of
programming, respectively, much of it substantially similar to
our video offerings. DirecTV also has exclusive arrangements
with the National Football League (NFL) and Major
League Baseball to offer sports programming unavailable to us.
In late 2005, DBS providers began to offer local HD broadcast
signals of the four primary broadcast networks in certain major
metropolitan markets across the U.S. As of
December 31, 2007, DirecTV offered local HD signals in 70
U.S. cities, representing more than 70% of U.S. TV
households, and plans to offer local HD signals in additional
markets during 2008. DirecTV currently offers local HD signals
in markets covering 15% of our basic subscribers, and more than
90 HD channels of national programming. As of December 31,
2007, DISH offered local HD signals in 35 U.S. cities,
representing almost 50% of U.S. TV households, and plans to
offer local HD signals in additional markets during 2008. DISH
currently offers local HD signals in markets covering 11% of our
basic subscribers, and more than 70 HD channels of national
programming.
DBS service has technological limitations because of its limited
two-way interactivity, restricting DBS providers ability
to compete in interactive video, HSD and voice services. In
contrast, our broadband network has full two-way interactivity,
giving us a single platform that is capable of delivering true
VOD and SVOD services, as well as HSD and phone services.
DBS providers are seeking to expand their services to include
these advanced services, and have marketing agreements under
which major telephone companies sell DBS service bundled with
their phone and high-speed data services. However, we believe
that our delivery of multiple services from a single broadband
platform is, and will continue to be, more cost effective than
the DBS providers, giving us a long-term competitive advantage.
We also believe our customers prefer the cost savings of the
bundled products and services we offer and the convenience of
having a single provider contact for ordering, scheduling,
provisioning, billing and customer care. In addition, we have a
meaningful presence in our customers communities,
including the proprietary local content we produce in several of
our markets. DBS providers are not locally-based, and therefore
do not have the ability to offer locally-produced programming.
Traditional
Overbuilds
Cable television systems are operated under non-exclusive
franchises granted by local authorities. More than one cable
system may legally be built in the same area by another cable
operator, a local utility or another service 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. A number of
cities have constructed their own cable systems in a manner
similar to city-
11
provided utility services. In certain communities in Iowa,
competition from municipally-owned entities may increase because
of local legislation passed in 2005 that allows these
communities to form entities to compete with us. We believe that
various entities are currently offering cable service to 12.4%
of the estimated homes passed in our markets; most of these
entities were operating prior to our ownership of the affected
cable television systems.
Telephone
Companies
Local telephone companies, many of whom have substantial
resources, can offer video and other services to compete with
us, and may increasingly do so in the future. Two major
telephone companies, Verizon Communications Inc. and AT&T
Inc. have underway reconstruction of their networks with FTTN or
FTTH technology. Their upgraded networks are now operating,
capable of carrying two-way video services that are comparable
to ours, high-speed data services that operate at speeds as high
or higher than those we make available to customers in these
areas and digital voice services that are similar to ours. In
addition, these companies continue to offer their traditional
telephone services, as well as bundles that include wireless
voice services provided by affiliated companies. Based on
internal estimates, we believe that AT&Ts and
Verizons upgrades have been completed in systems
representing approximately 1% of our homes passed as of
December 31, 2007. Additional upgrades in markets in which
we operate, principally by AT&T, are expected in the
future. In areas where they have launched video services, these
parties are aggressively marketing video, data and voice bundles
at entry prices similar to those we offer.
Other
We also have other actual or potential video competitors,
including: broadcast television stations; private home dish
earth stations; multichannel multipoint distribution services,
known as MMDS (which deliver programming services over microwave
channels licensed by the FCC); satellite master antenna
television systems (which use technology similar to MMDS and
generally serve condominiums, apartment complexes and other
multiple dwelling units); new services such as wireless local
multipoint distribution service; and potentially new services
such as multichannel video distribution and data service. We
currently have limited competition from these competitors.
High
Speed Data
Our HSD service competes primarily with digital subscriber line
(DSL) services offered by telephone companies. DSL
technology provides Internet access at data transmission speeds
greater than that of standard telephone line or
dial-up
modems, putting DSL service in direct competition with our HSD
service. As discussed above, certain major telephone companies
are currently constructing and operating new fiber networks,
allowing them to offer significantly faster high-speed data
services compared to DSL technology. We expect the
competitiveness of telephone companies to increase in high-speed
data, as they continue to respond to our entry into their phone
business.
DBS providers have attempted to compete with our HSD service,
but their satellite-delivered service has had limited success
given their technical constraints. We expect that DBS providers
will continue to explore other options for the provision of
high-speed data services.
Other potential competitors include companies seeking to provide
high-speed Internet services using wireless technologies.
Certain electric utilities also have announced plans to deliver
broadband services over their electrical distribution networks,
and if they are able to do so, they could become formidable
competitors given their resources.
Phone
Mediacom Phone principally competes with the phone services
offered by incumbent telephone companies. The incumbent
telephone companies have substantial capital and other
resources, longstanding customer relationships and extensive
existing facilities. In addition, Mediacom Phone competes with
services offered by other VoIP providers, such as Vonage, that
do not have a traditional facilities-based network, but provide
their services through a consumers high-speed Internet
connection.
12
Other
Competition
The FCC has adopted regulations and policies for the issuance of
licenses for digital television (DTV) to incumbent
television broadcast licensees. DTV television can deliver HD
television pictures and multiple digital-quality program
streams, as well as CD-quality audio programming and advanced
digital services, such as data transfer or subscription video.
Over-the-air DTV subscription service is now available in a few
cities in the United States.
The quality of streaming video over the Internet and into homes
and businesses continues to improve. These services are becoming
more accessible as the use of high speed Internet access becomes
more widespread. In the future, we expect that streaming video
will increasingly compete with the video services offered by
cable operators and other providers of video services. For
instance, certain programming suppliers are marketing their
content directly to consumers through video streaming over the
Internet, bypassing cable operators or DBS providers as video
distributors, although the cable operators may remain as the
providers of high-speed Internet access service.
Employees
As of December 31, 2007, we employed 4,354 full-time
and 111 part-time employees. None of our employees are
organized under, or are covered by, a collective bargaining
agreement. We consider our relations with our employees to be
satisfactory.
13
Legislation
and Regulation
General
Federal, state and local laws regulate the development and
operation of cable communications systems. In the following
paragraphs, we summarize the federal laws and regulations
materially affecting us and other cable operators. We also
provide a brief description of certain relevant state and local
laws. Currently few laws or regulations apply to Internet
services. Existing federal, state and local laws and regulations
and state and local franchise requirements are currently the
subject of judicial proceedings, legislative hearings and
administrative proceedings that could change, in varying
degrees, the manner in which cable systems operate. Neither the
outcome of these proceedings nor their impact upon the cable
industry or our business, financial condition or results of
operations can be predicted at this time.
Federal
Regulation
The principal federal statutes governing the cable industry, the
Communications Act of 1934, as amended by the Cable
Communications Policy Act of 1984, the Cable Television Consumer
Protection and Competition Act of 1992 and the
Telecommunications Act of 1996 (collectively, the Cable
Act), establish the federal regulatory framework for the
industry. The Cable Act allocates principal responsibility for
enforcing the federal policies among the Federal Communications
Commission (FCC) and state and local governmental
authorities.
The FCC and some state regulatory agencies regularly conduct
administrative proceedings to adopt or amend regulations
implementing the statutory mandate of the Cable Act. At various
times, interested parties to these administrative proceedings
challenge the new or amended regulations and policies in the
courts with varying levels of success. Further court actions and
regulatory proceedings may occur that might affect the rights
and obligations of various parties under the Cable Act. The
results of these judicial and administrative proceedings may
materially affect the cable industry and our business, financial
condition and results of operations.
Subscriber
Rates
The Cable Act and the FCCs regulations and policies limit
the ability of cable systems to raise rates for basic services
and customer equipment. No other rates are subject to
regulation. Federal law exempts cable systems from all rate
regulation in communities that are subject to effective
competition, as defined by federal law and where affirmatively
declared by the FCC. Federal law defines effective competition
as existing in a variety of circumstances that are increasingly
satisfied with the increases in DBS penetration and the
announced plans of some local phone companies to offer
comparable video service. Although the FCC is conducting a
proceeding that may streamline the process for obtaining
effective competition determinations, neither the outcome of
this proceeding nor its impact upon the cable industry or our
business or operations can be predicted at this time.
Where there is no effective competition to the cable
operators services, federal law gives local franchising
authorities the ability to regulate, in accordance with
FCC-mandated procedures, the rates charged by the operator for:
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the lowest level of programming service offered by the cable
operator, typically called basic service, which includes, at a
minimum, the local broadcast channels and any public access or
governmental channels that are required by the operators
franchise;
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the installation of cable service and related service
calls; and
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the installation, sale and lease of equipment used by
subscribers to receive basic service, such as converter boxes
and remote control units.
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We have sought and obtained affirmative determinations from the
FCC of the presence of effective competition in approximately
730 communities serving approximately 800,000 subscribers. In
those communities, under current law, our rates cannot be
subject to regulation and other associated regulations do not
apply.
Reversing the findings of a November 2004 report, the FCC
released a report in February 2006 finding that consumers could
benefit under certain a la carte models for delivery of video
programming. This report did not
14
specifically recommend or propose the adoption of any specific
rules by the FCC and it did not endorse a pure a la carte model
where subscribers could purchase specific channels without
restriction. Instead, it favored tiers plus individual channels
or smaller theme-based tiers. In November 2007, the FCC
announced that it will collect information from cable operators
to determine whether cable systems with at least 36 channels are
available to at least 70 percent of U.S. homes and
whether 70 percent of households passed by those systems
subscribe to a cable service provider. If so, the FCC may have
additional discretion under the Cable Act to promulgate
additional rules necessary to promote diversity of information
sources. The FCC did not specify what rules it would seek to
promulgate. Congress may also consider legislation regarding
programming packaging, bundling or a la carte delivery of
programming. Any such requirements could fundamentally change
the way in which we package and price our services. We cannot
predict the outcome of any current or future FCC proceedings or
legislation in this area, or the impact of such proceedings on
our business at this time.
Content
Requirements
Must
Carry and Retransmission Consent
The FCCs regulations contain broadcast signal carriage
requirements that allow local commercial television broadcast
stations to elect once every three years whether to require a
cable system:
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to carry the station, subject to certain exceptions, commonly
called must-carry; or
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to negotiate the terms by which the cable system may carry the
station on its cable systems, commonly called retransmission
consent.
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The Cable Act and the FCCs 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 FCCs rules also give
certain local non-commercial educational television stations
mandatory carriage rights, but not the option to negotiate
retransmission consent. Additionally, cable systems must obtain
retransmission consent for carriage of:
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all distant commercial television stations, except for certain
commercial satellite-delivered independent superstations such as
WGN;
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commercial radio stations; and
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certain low-power television stations.
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Through 2009, Congress barred broadcasters from entering into
exclusive retransmission consent agreements. Congress also
requires all parties to negotiate retransmission consent
agreements in good faith.
Must-carry obligations may decrease the attractiveness of the
cable operators 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 substantial number of local broadcast
stations carried by our cable television systems have elected to
negotiate for retransmission consent, and we have entered into
retransmission consent agreements with most of them.
In February 2008, the FCC Chairman proposed a requirement that
cable operators carry signals of low-power local television
stations, referred to as Class A television stations. Over
500 such stations exist, mostly in rural areas and they do not
currently have must-carry rights. While we cannot predict the
impact of any such requirement, if ultimately imposed, it could
consume valuable bandwidth and force us to drop or prevent us
from adding other programming that is more highly valued by our
subscribers.
No later than February 18, 2009, all television stations
must broadcast solely in digital format. After February 17,
2009, broadcasters must return their analog spectrum. This
change from analog to digital by broadcast television stations
is commonly referred to as the DTV transition, or the digital
transition. The FCC has issued a decision that effectively
requires mandatory carriage of local television stations that
surrender their analog channel and broadcast only digital
signals. These stations are entitled to request carriage in
their choice of digital or converted analog format. Stations
transmitting in both digital and analog formats (Dual
Format Broadcast Stations), which is permitted during the
transition period, have no carriage rights for the digital
format
15
during the transition unless and until they turn in their analog
channel. The FCC recently mandated that it is the responsibility
of cable operators to ensure that cable subscribers with analog
television sets can continue to view all must-carry stations
following the DTV transition. In doing so, the Commission has
adopted a dual carriage requirement for must-carry
signals post DTV transition. Cable operators that are not
all-digital will be required for at least a three
year period to provide must-carry signals to their subscribers
in the primary digital format in which the operator receives the
signal (i.e. high definition or standard definition), and
downconvert the signal from digital to analog so that it is
viewable to subscribers with analog television sets. Cable
systems that are all digital are not required to
downconvert must-carry signals into analog, and may provide the
must-carry signals in only in a digital format. The FCC has
ordered that the cost of any downconversion is to be borne by
the cable operator. The adoption of the dual
carriage approach by the FCC has the potential of having a
negative impact on us because it will reduce available channel
capacity and thereby could require us to either discontinue
other channels of programming or restrict our ability to carry
new channels of programming or other services that may be more
desirable to our customers.
Tier Buy
Through
The Cable Act and the FCCs regulations require our cable
systems, other than those systems which are subject to effective
competition, to permit subscribers to purchase video programming
we offer on a per channel or a per program basis without the
necessity of subscribing to any tier of service other than the
basic service tier.
The FCC is reviewing a complaint with respect to another cable
operator to determine whether certain charges routinely assessed
by many cable operators, including us, to obtain access to
digital services, violate this anti-buy-through
provision. Any decision that requires us to restructure or
eliminate such charges would have an adverse effect on our
business.
Use of
Our Cable Systems by the Government and Unrelated Third
Parties
The Cable Act allows local franchising authorities and unrelated
third parties to obtain access to a portion of our cable
systems channel capacity for their own use. For example,
the Cable Act:
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permits franchising authorities to require cable operators to
set aside channels for public, educational and governmental
access programming; and
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requires a cable system with 36 or more activated channels to
designate a significant portion that activated channel capacity
for commercial leased access by third parties to provide
programming that may compete with services offered by the cable
operator.
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The FCC regulates various aspects of third party commercial use
of channel capacity on our cable systems, including:
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the maximum reasonable rate a cable operator may charge for
third party commercial use of the designated channel capacity;
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the terms and conditions for commercial use of such
channels; and
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the procedures for the expedited resolution of disputes
concerning rates or commercial use of the designated channel
capacity.
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In February 2008, the FCC released a Report and Order which
could allow certain leased access users lower cost access to
channel capacity on cable systems. The new regulations revise
the formula for computing maximum leased access charges that may
result in very low, and in some cases for channels on certain
tiers, potentially no charge to provide leased access. In all
events, leased access fee may not exceed 10 cents per subscriber
per month for tiered channels The regulations also impose a
variety of access customer service, information and reporting
standards. 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.
16
Franchise
Matters
We have non-exclusive franchises in virtually every community in
which we operate that authorize us to construct, operate and
maintain our cable systems. Although franchising matters have
traditionally been regulated at the local level through a
franchise agreement
and/or a
local ordinance, many states have adopted laws in recent years
that allow cable service providers to bypass the county or
municipal franchising process and obtain franchise agreements or
equivalent authorizations directly from state (State
Issued Franchises). Many of the states in which we
operate, including Missouri, Georgia, Florida, Michigan, North
Carolina, Kansas, Illinois, Indiana, Iowa and California, have
adopted state-issued franchise legislation. State-issued
franchises in many states generally allow local telephone
companies or other competitors to deliver services in
competition with our cable service without obtaining equivalent
local 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.
In connection with its decision in 2002 classifying high-speed
Internet services provided over a cable system as interstate
information services, the FCC stated that revenues derived from
cable operators Internet services should not be included
in the revenue base from which franchise fees are calculated.
Although the United States Supreme Court subsequently 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 to
determine whether to impose regulatory obligations on such
providers, including us. Because of the FCCs decision, we
are no longer collecting and remitting franchise fees on our
high-speed Internet service revenues. We are unable to predict
the ultimate resolution of these matters but do not expect that
any additional franchise fees we may be required to pay will be
material to our business and operations.
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 FCCs decisions implementing these
statutory provisions and remanded the case to the FCC for
further proceedings. In December 2007, the FCC reinstituted a
restriction setting the maximum number of subscribers that a
cable operator may serve at 30 percent nationwide. The FCC
also has commenced a rulemaking to review vertical ownership
limits and cable and broadcasting attribution rules.
Registered utility holding companies and their subsidiaries may
provide telecommunications and cable television services. The
FCC has adopted rules that: (i) affirm the ability of
electric service providers to provide broadband Internet access
services over their distribution systems; and (ii) seek to
avoid interference with existing services. Electric utilities
could be formidable competitors to cable system operators.
Cable
Equipment
The Cable Act and FCC regulations seek to promote competition in
the delivery of cable equipment by giving consumers the right to
purchase set-top converters from third parties as long as the
equipment does not harm the network, does not interfere with
services purchased by other customers and is not used to receive
unauthorized services. Over a multi-year phase-in period, the
rules also require multichannel video programming distributors,
other than direct broadcast satellite operators, to separate
security from non-security functions in set-top converters to
allow third party vendors to provide set-tops with basic
converter functions. To promote compatibility of cable
television 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. The FCC continues to push
the cable television and consumer electronics industries to
develop two-way plug and play specifications.
Since July 1, 2007, cable operators have been prohibited
from issuing to their customers new set-top terminals that
integrate security and basic navigation functions. The FCC has
set forth a number of limited circumstances
17
under which it will grant waivers of this requirement. Although
we remain in full compliance with requirements, we have
determined that a waiver would permit us to transition certain
smaller and limited bandwidth systems to an all digital
platform, allowing us to increase our service offerings without
requiring bandwidth upgrades. Thus we have sought a conditional
waiver from the FCC that would allow us to deploy low-cost,
integrated set-top boxes in certain cable systems serving less
than nine percent of our subscriber base, provided that we would
commit to upgrade to all-digital operations in those systems by
February 17, 2009. We cannot predict whether or not we will
receive any such waivers or receive them with sufficient lead
time to accomplish the digital transition in the affected cable
systems.
Pole
Attachment Regulation
The Cable Act requires certain public utilities, including all
local telephone companies and electric utilities, except those
owned by municipalities and co-operatives, to provide cable
operators and telecommunications carriers with nondiscriminatory
access to poles, ducts, conduit and rights-of-way at just and
reasonable rates. This right to access is beneficial to us.
Federal law also requires the FCC to regulate the rates, terms
and conditions imposed by such public utilities for cable
systems use of utility pole and conduit space unless state
authorities have demonstrated to the FCC that they adequately
regulate pole attachment rates, as is the case in certain states
in which we operate. In the absence of state regulation, the FCC
will regulate pole attachment rates, terms and conditions only
in response to a formal complaint. The FCC adopted a new rate
formula that became effective in 2001, which governs the maximum
rate certain utilities may charge for attachments to their poles
and conduit by companies providing telecommunications services,
including cable operators.
This telecommunications services formula which produces higher
maximum permitted attachment rates applies only to cable
television systems which elect to offer telecommunications
services. The FCC ruled that the provision of Internet services
would not, in and of itself, trigger use of this new formula.
The Supreme Court affirmed this decision and held that the
FCCs 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
Courts decision upholding the FCCs classification of
cable modem service as an information service should strengthen
our ability to resist rate increases based solely on the
delivery of cable modem services over our cable systems. As we
continue our deployment of cable telephony and certain other
advanced services, utilities may continue to seek to invoke the
higher rates.
As a result of the Supreme Court case upholding the FCCs
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 Circuits 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. After this determination, Gulf Power
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
those circumstances were met. Gulf Power has appealed this
decision to the full Commission and the appeal is pending.
Failing to receive a favorable ruling there, Gulf Power could
pursue its claims in the federal court.
In November 2007, the FCC released a Notice of Proposed
Rulemaking (NPRM) addressing pole attachment rental rates,
certain terms and conditions of pole access and other issues.
The NPRM calls for a review of long-standing FCC rules and
regulations, including the long-standing cable rate
formula and considers effectively eliminating cables lower
pole attachment fees by imposing a higher unified rate for
entities providing broadband Internet service. While we cannot
predict the effect that the outcome of the NPRM will ultimately
have on our business, changes to our pole attachment rate
structure could significantly increase our annual pole
attachment costs.
Other
Regulatory Requirements of the Cable Act and the
FCC
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
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the building owner to terminate its cable services in a building
with multiple dwelling units. In November 2007, the FCC issued
rules voiding existing and prohibiting future exclusive service
contracts for services to multiple dwelling unit or other
residential developments. The loss of exclusive service rights
in existing contracts coupled with our inability to secure such
express rights in the future may adversely affect our business
to subscribers residing in multiple dwelling unit buildings and
certain other residential developments.
Copyright
Our cable systems typically include in their channel
line-ups
local and distant television and radio broadcast signals, which
are protected by the copyright laws. We generally do not obtain
a license to use this programming directly from the owners of
the copyrights associated with this programming, but instead
comply with an alternative federal compulsory copyright
licensing process. In exchange for filing certain reports and
contributing a percentage of our revenues to a federal copyright
royalty pool, we obtain blanket permission to retransmit the
copyrighted material carried on these broadcast signals. The
nature and amount of future copyright payments for broadcast
signal carriage cannot be predicted at this time.
In 1999, Congress modified the satellite compulsory license in a
manner that permits DBS providers to become more competitive
with cable operators. In 2004, Congress adopted legislation
extending this authority through 2009. The 2004 legislation also
directed the United States Copyright Office to submit a report
to Congress by June 2008 recommending any changes to the cable
and satellite licenses that the Office deems necessary. The
elimination or substantial modification of the cable compulsory
license could adversely affect our ability to obtain suitable
programming and could substantially increase the cost of
programming that remains available for distribution to our
subscribers. We are unable to predict the outcome of any
legislative or agency activity related to either the cable
compulsory license or the right of direct broadcast satellite
providers to deliver local or distant broadcast signals.
The Copyright Office has commenced inquiries soliciting comment
on petitions it received seeking clarification and revisions of
certain cable compulsory copyright license reporting
requirements and clarification of certain issues relating to the
application of the compulsory license to the carriage of digital
broadcast stations. The petitions seek, among other things:
(i) clarification of the 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 (ii) reporting of dual
carriage and multicast signals. In December 2007, the
Copyright Office issued a Notice of Inquiry to review whether
cable operators must include in their compulsory license royalty
calculation a distant signal carried anywhere in the cable
system as if it were carried everywhere in the system, thus
resulting in payments on phantom signals. Moreover,
the Copyright Office has not yet acted on a filed petition and
may solicit comment on the definition of the definition of a
network station for purposes of the compulsory
license. Furthermore, the Copyright Office is reviewing an
approach by which all copyright payments would be computed
electronically by a system administered by the Copyright Office
that may not reflect the unique circumstances of each of our
systems
and/or
groupings of systems. We cannot predict the outcome of any such
inquiries, rulemakings or proceedings; 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.
Privacy
The Cable Act imposes a number of restrictions on the manner in
which cable television 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 customers enforcement
rights. In the event that a cable television 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
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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. Moreover, we are
subject to a variety of federal requirements governing certain
privacy practices and programs.
HSD
Service
There are currently few laws or regulations that specifically
regulate communications or commerce over the Internet.
Section 230 of the Communications Act declares it to be the
policy of the United States to promote the continued development
of the Internet and other interactive computer services and
interactive media, and to preserve the vibrant and competitive
free market that presently exists for the Internet and other
interactive computer services, unfettered by federal or state
regulation.
In 2002, the FCC announced that it was classifying Internet
access service provided through cable modems as an interstate
information service. 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.
Congress and the FCC have been urged to adopt certain rights for
users of Internet access services, and to regulate or restrict
certain types of commercial agreements between service providers
and providers of Internet content. These proposals are generally
referred to as network neutrality. In 2005, the FCC
issued a non-binding policy statement providing four principles
to guide its policymaking regarding such services. According to
the policy statement, consumers are entitled to: (i) access
the lawful Internet content of their choice; (ii) run
applications and services of their choice, subject to the needs
of law enforcement; (iii) connect their choice of legal
devices that do not harm the network; and (iv) enjoy
competition among network providers, application and service
providers, and content providers. In January 2008, the FCC
opened an investigation against another cable operator for
violating its 2005 policy statement by, among other things,
allegedly managing user bandwidth consumption by identifying and
restricting the applications being run, and the actual bandwidth
consumed. We cannot predict the outcome of this proceeding or
any impact it may have on the FCCs net neutrality
requirements as they apply to other Internet access providers.
Voice-over-Internet
Protocol Telephony
The 1996 amendments to the Cable Act created a more favorable
regulatory environment for cable operators to enter the phone
business. Currently, numerous cable operators have commenced
offering VoIP telephony as a competitive alternative to
traditional circuit-switched telephone service. Various states,
including states where we operate, have adopted or are
considering differing regulatory treatment, ranging from minimal
or no regulation to full-blown common carrier status. As part of
the proceeding to determine any appropriate regulatory
obligations for VoIP telephony, the FCC recently decided that
alternative voice technologies, like certain types of VoIP
telephony, should be regulated only at the federal level, rather
than by individual states. Many implementation details remain
unresolved, and there are substantial regulatory changes being
considered that could either benefit or harm VoIP telephony as a
business operation. While the final outcome of the FCC
proceedings cannot be predicted, it is generally believed that
the FCC favors a light touch regulatory approach for
VoIP telephony, which might include preemption of certain state
or local regulation. In 2006, the FCC announced that it would
require VoIP providers to contribute to the Universal Service
Fund based on their interstate service revenues. Recently, the
FCC issued a Further Notice of Proposed Rulemaking with respect
to possible changes in the intercarrier compensation model in a
way that could financially disadvantage us and benefit some of
our competitors. Beginning in 2007,
facilities-based
broadband Internet access and interconnected VoIP service
providers were required to comply with Communications Assistance
for Law Enforcement Act requirements. It is unknown what
conclusions or actions the FCC may take or the effects on our
business.
Despite the FCCs interpretations to date, the Missouri
Public Service Commission has held that cable operators
providing VoIP services must obtain state certification. The
decision is being appealed by that cable provider.
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State
and Local Regulation
Our cable systems use local streets and rights-of-way.
Consequently, we must comply with state and local regulation,
which is typically imposed through the franchising process. Our
cable systems generally are operated in accordance with
non-exclusive franchises, permits or licenses granted by a
municipality or other state or local government entity. Our
franchises generally are granted for fixed terms and in many
cases are terminable if we fail to comply with material
provisions. The terms and conditions of our franchises vary
materially from jurisdiction to jurisdiction. Each franchise
generally contains provisions governing:
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franchise fees;
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franchise term;
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system construction and maintenance obligations;
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system channel capacity;
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design and technical performance;
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customer service standards;
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sale or transfer of the franchise; and
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territory of the franchise.
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Risks
Related to our Business
We
have a history of net losses and we may continue to generate net
losses in the future.
We have a history of net losses, and may continue to report net
losses in the future. Although we reported net income of
$13.6 million for the year ended December 31, 2004, we
reported net losses of $62.5 million, $222.2 million,
$124.9 and $95.1 million for the years ended
December 31, 2003, 2005, 2006 and 2007 respectively. The
principal reasons for our net losses were the depreciation and
amortization expenses associated with our acquisitions, the
capital expenditures related to expanding and upgrading our
cable systems and interest costs on borrowed money. However, for
the years ended December 31, 2005, 2006 and 2007, in
addition to these factors, the increase in our valuation
allowance for deferred tax assets (discussed below) increased
our provision for income taxes and our net loss by a
corresponding amount.
Changes
to our valuation account for deferred tax assets or impairment
of our goodwill and other intangible assets can cause our net
income or net loss to fluctuate significantly.
As of December 31, 2007, we had pre-tax net operating loss
carryforwards for federal purposes of approximately
$2.2 billion; if not utilized, they will expire in the
years 2020 through 2027. Mostly due to these net operating loss
carryforwards, as of December 31, 2007, we had deferred tax
assets of $922.3 million. These assets have been reduced by
a valuation allowance of $631.0 million to reflect our
assessment of the likelihood of their recovery in future periods.
We periodically assess the likelihood of realization of our
deferred tax assets, considering all available evidence, both
positive and negative, including our most recent performance,
the scheduled reversal of deferred tax liabilities, our forecast
of taxable income in future periods and the availability of
prudent tax planning strategies. As a result of these
assessments, in prior years we have established valuation
allowances on a portion of our deferred tax assets due to the
uncertainty surrounding the realization of these assets.
We expect to add to our valuation allowance for any increase in
the deferred tax liabilities relating to indefinite-lived
intangible assets. We will also adjust our valuation allowance
if we assess that there is sufficient change in our ability to
recover our deferred tax assets. Our income tax expense in
future periods will be reduced or increased to the extent of
offsetting decreases or increases, respectively, in our
valuation allowance. These changes could have a significant
impact on our future earnings.
As of December 31, 2007, we had approximately
$2.0 billion of unamortized intangible assets, including
goodwill of $220.7 million and franchise rights of
$1.8 billion on our consolidated balance sheets. These
intangible assets represented approximately 56% of our total
assets.
FASB Statement No. 142, Goodwill and Other
Intangible Assets, requires that goodwill and other
intangible assets deemed to have indefinite useful lives, such
as cable franchise rights, cease to be amortized.
SFAS No. 142 requires that goodwill and certain
intangible assets be tested at least annually for impairment. If
we find that the carrying value of goodwill or cable franchise
rights exceeds its fair value, we will reduce the carrying value
of the goodwill or intangible asset to the fair value, and will
recognize an impairment loss in our results of operations.
The impairment tests require us to make an estimate of the fair
value of intangible assets, which is determined using a
discounted cash flow methodology. Since a number of factors may
influence determinations of fair value of intangible assets, we
are unable to predict whether impairments of goodwill or other
indefinite-lived intangibles will occur in the future. Any such
impairment would result in our recognizing a corresponding
write-off, which could cause us to report a significant loss.
Such impairment could have an adverse effect on our business,
financial condition and results of operations.
We may
be unsuccessful in implementing our growth
strategy.
We currently expect that a substantial portion of our future
growth in revenues will come from the expansion of relatively
new services, the introduction of additional new services and,
possibly, acquisitions. Relatively new services include HSD,
VOD, DVRs, HDTV and phone service. We may not be able to
successfully expand existing
22
services due to unpredictable technical, operational or
regulatory challenges. It is also possible that these services
will not generate significant revenue growth.
The
adverse effects on our business caused by increases in
programming costs could continue or worsen.
Historically, programming costs, our largest single expense
category, have grown primarily because of annual increases in
the fees we pay for the non-broadcast networks we carry and the
costs of new non-broadcast networks that we add either to remain
competitive or as a condition for obtaining better terms for the
networks we already carry. In recent years, we have experienced
a rapid rise in the cost of programming, particularly sports
programming. Increases in programming costs are expected to
continue, and any such cost increases that are not passed on
fully to our subscribers have had, and will continue to have, an
adverse impact on profit margins. We may lose existing or
potential additional subscribers because of increases in the
subscriber rates we institute to fully or partially offset
growth in programming and other costs.
We also face increasing financial and other demands by local
broadcast stations to obtain the required consents for the
transmission of their programming to our subscribers. This may
accelerate the increase in programming costs. Federal law allows
commercial television broadcast station owners to elect to
prohibit cable operators as well as DBS providers from
delivering their signal to subscribers without their permission,
which is referred to as retransmission consent.
In the past, we generally have obtained retransmission consent
for stations in our markets without being required to provide
consideration that did not result in some offsetting value to
us. Most owners of multiple broadcast stations have become much
more aggressive in demanding significant cash payments from us
and other cable operators, DBS providers and local telephone
companies. Consequently, we believe that the cost to secure
retransmission consent in 2009 and beyond will rise
significantly.
In some cases, refusal to meet the demands of broadcast station
owners could result in the loss of our ability to retransmit
those stations to our subscribers. That could cause some of our
existing or potential new subscribers to switch to, or choose,
competitors which offer the stations. Similarly, if our
contracts with non-broadcast networks expire and we are unable
to negotiate prices that we think are reasonable, we may be
denied the right to continue to deliver those networks and may
suffer losses of subscribers to competitors which make them
available.
Our carriage of new non-broadcast networks, whether we add them
to remain competitive or as a condition for obtaining better
terms for the networks we already carry, has diminished the
amount of capacity we have available to introduce new services.
A continuation of these trends could have an adverse effect on
our business, financial condition and results of operations.
We
operate in a highly competitive business environment, which
affects our ability to attract and retain customers and can
adversely affect our business and operations. We have lost a
significant number of video subscribers to direct broadcast
satellite competition and this trend may continue.
The industry in which we operate is highly competitive and is
often subject to rapid and significant changes and developments
in the marketplace and in the regulatory and legislative
environment. In some instances, we compete against companies
with fewer regulatory burdens, easier access to financing,
greater resources and operating capabilities, greater brand name
recognition and long-standing relationships with regulatory
authorities and customers.
Our video business faces competition primarily from DBS
providers. The two largest DBS companies, DirecTV and DISH, are
each the second and fourth largest providers of multichannel
video programming services based on reported customers. In
February 2008, Liberty acquired a controlling stake in DirecTV
from News Corporation, which may alter this DBS providers
competitive position. We have lost a significant number of video
subscribers to DBS providers, and will continue to face
significant challenges from them. DBS providers have a video
offering that is, in some respects, similar to our video
services, including DVR and some interactive capabilities. They
also hold exclusive rights to programming such as the NFL that
is not available to cable and other video providers. Both
DirecTV and DISH have aggressively launched HD channel offerings
with each currently
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offering about 90 and 70 such channels, respectively. DirecTV
has announced plans to have at least 100 HD channels by the end
of 2008. Such extensive offerings of HD channels likely make
these services even more competitive.
Local telephone companies are capable of offering video and
other services to compete with us and they may increasingly do
so in the future. Certain telephone companies are actively
deploying fiber more extensively in their networks and, in some
cases, avoiding the regulatory burdens imposed on us. These
deployments enable them to provide enhanced video, Internet
access and telephone services to consumers. In 2006, the FCC
issued an order that limits the ability of local franchising
authorities to impose certain unreasonable
requirements and effectively gives incumbent telephone
providers, among others, the right to begin operation of a cable
system no later than 90 days after filing a franchise
application. Moreover, many of the states in which we operate
offer state-issued video franchises that facilitate rapid entry
into our markets without having comparable financial and service
obligations.
Certain telephone companies, together with DBS providers, have
launched bundled offerings of satellite delivered video service
with phone, Internet and wireless service delivered by the
telephone companies.
We face competition from municipal entities that provide video,
internet and phone services. In Iowa, our largest market, ballot
referenda were passed in 2005 in several municipalities to
authorize the formation of a communications utility, a
prerequisite to the funding and construction of facilities that
may compete with ours. We are not aware that any of these
communities has taken necessary action to authorize construction
or funding of a competitive system. Some municipal entities are
also exploring building wireless networks to deliver these
services.
In addition, we face competition on individual services from a
range of providers. For instance, our video service faces
competition from providers of paid television services (such as
satellite master antenna services) and from video delivered over
the Internet. Our high-speed data service faces competition
from, among others, incumbent local telephone companies
utilizing their
newly-upgraded
fiber networks
and/or DSL
lines, Wi-Fi, Wi-Max and 3G wireless broadband services provided
by mobile carriers such as Verizon Wireless, broadband over
power line providers, and from providers of traditional
dial-up
Internet access. Our voice service faces competition for voice
customers from incumbent local telephone companies, cellular
telephone service providers, Internet phone providers, such as
Vonage, and others.
As we face increase competition from any of these service
providers, our business, financial condition, and results of
operations could be adversely affected.
We
face many risks inherent to our phone business, which is a
relatively new service for us.
We have been rapidly scaling our phone business over the past
two years. Our customers expect the same quality from our phone
product as delivered by our video and data services. In order to
provide high quality service, we may need to increase spending
on technology, equipment, technicians, and customer service
representatives. If phone service is not sufficiently reliable
or we otherwise fail to meet customer expectations, our phone
business could be adversely affected. We face increasing
competition from wireline and wireless service providers. We
also depend on third parties for interconnection, call
switching, and other related services to operate Mediacom Phone.
As a result, the quality of our service may suffer if these
third parties are not capable of handling their contractual
obligations. We also expect to see changes in technology,
competition, and the regulatory and legislative environment that
may affect our phone business. We may experience difficulties as
we introduce this service to new marketing areas or seek to
increase the scale of the service in areas where it is already
offered. Consequently, we are unable to predict the effect that
current or future developments in these areas might have on our
business, financial condition and results of operations.
We may
be found to infringe on intellectual property rights of
others.
Third parties have in the past, and may in the future, assert
claims or initiate litigation related to exclusive patent,
copyright, trademark, and other intellectual property rights to
technologies and related standards that are relevant to us.
These assertions have increased over time as a result of our
growth and the general increase in the pace of patent claims
assertions, particularly in the United States. Because of the
existence of a large number of
24
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. The asserted claims
and/or
initiated litigation can include claims against us or our
manufacturers, suppliers, or customers, alleging infringement of
their proprietary rights with respect to our existing or future
products
and/or
services or components of those products
and/or
services. Regardless of the merit of these claims, they can be
time-consuming, result in costly litigation and diversion of
technical and management personnel, or require us to develop a
non-infringing technology or enter into license agreements.
There can be no assurance that licenses will be available on
acceptable terms and conditions, if at all, or that our
indemnification by our suppliers will be adequate to cover our
costs if a claim were brought directly against us or our
customers. Furthermore, because of the potential for high court
awards that are not necessarily predictable, it is not unusual
to find even arguably unmeritorious claims settled for
significant amounts. If any infringement or other intellectual
property claim made against us by any third party is successful,
if we are required to indemnify a customer with respect to a
claim against the customer, or if we fail to develop
non-infringing technology or license the proprietary rights on
commercially reasonable terms and conditions, our business,
operating results, and financial condition could be adversely
affected.
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, our key personnel, including
Rocco B. Commisso, our Chairman and Chief Executive Officer. Our
debt arrangements provide that a default may result if
Mr. Commisso ceases to be our Chairman and Chief Executive
Officer, or if he and his designees do not constitute a majority
of the Executive Committee of each of Mediacom LLC and Mediacom
Broadband LLC. We have not entered into a long-term employment
agreement with Mr. Commisso. We do not currently maintain
key man life insurance on Mr. Commisso or other key
personnel. If any of our 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.
Some
of our cable systems operate in the Gulf Coast region, which
historically has experienced severe hurricanes and tropical
storms.
Cable systems serving approximately 8% of our subscribers are
located on or near the Gulf Coast in Alabama, Florida and
Mississippi. In 2004 and 2005, three hurricanes impacted these
cable systems, to varying degrees, causing property damage,
service interruption and loss of customers. The Gulf Coast could
experience severe hurricanes in the future. This could adversely
impact our 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.
Inability
to secure favorable relationships and trade terms with third
party providers of products and services on which we depend may
impair our ability to provision and service our
customers.
Third party firms provide some of the inputs used in delivering
our products and services, including digital set-top converter
boxes, digital video recorders and VOD equipment; routers,
provisioning and other software; the telecommunications network
and e-mail platform for our HSD and phone data services; fiber
optic cable and construction services for expansion and upgrades
of our cable systems; and our customer billing platform. Some of
these companies may hold leverage over us, considering that they
are the sole supplier of certain products and services. As a
result, our operation depends on the successful operation of
these companies. Any delays or disruptions in the relationship
as a result of contractual disagreements, operational or
financial failures on the part of the suppliers, or other
adverse events, could negatively affect our ability to
effectively provision and service our customers. Demand for some
of these items has increased with the general growth in demand
for Internet and telecommunications services. We typically do
not carry significant inventories of equipment. Moreover, if
there are no suppliers that are able to provide set-top
converter boxes that comply with evolving Internet and
telecommunications standards, or that are compatible with other
equipment and software that we use, our business, financial
condition and results of operations could be adversely affected.
25
We may
be unable to keep pace with technological change.
Our industry is characterized by rapid technological change and
the introduction of new products and services, some of which are
bandwidth-intensive. We cannot be certain that we will be able
to fund the capital expenditures necessary to keep pace with
future technological developments or successfully anticipate the
demand of our customers for products and services requiring new
technology. This type of rapid technological change could
adversely affect our ability to maintain, expand or upgrade our
systems and respond to competitive pressures. With the use of
high-bandwidth internet applications on the rise, we may have to
spend capital to increase our bandwidth capabilities. Otherwise,
our customers may experience less-than-optimal speeds and
performance when using their broadband service. Extensive
increases in bandwidth usage would significantly increase our
costs. Inability to keep pace with technological change and
provide advanced services in a timely manner, or to anticipate
the demands of the market place, could adversely affect our
business, financial condition and results of operations.
We
depend on computer and network technologies, and may face
disruptions in such systems.
Because of the importance of computer networks and data transfer
technologies to our business, any events affecting these systems
could have devastating impact on our business. These events
include computer viruses, damage to infrastructure by natural
disasters, power loss and man-made disasters. Some adverse
results of such occurrences are service disruptions, excessive
service and repair requirements, loss of customers and revenues
and negative publicity. We may also be negatively affected by
illegal acquisition and dissemination of data and information.
Risks
Related to our Indebtedness and the Indebtedness of our
Operating Subsidiaries
Mediacom
Communications Corporation, Mediacom Broadband LLC and Mediacom
LLC are holding companies with no operations and if Mediacom
Broadband LLC, Mediacom LLC and/or their operating subsidiaries
are unable to make funds available to their respective parent
companies, such parent companies may not be able to fund their
indebtedness and other obligations.
Mediacom Communications Corporation is a holding company and
does not have any operations or hold any assets other than its
investments in, and its advances to, its direct, wholly-owned
subsidiaries, Mediacom Broadband LLC and Mediacom LLC. The
various operating subsidiaries of Mediacom Broadband LLC and
Mediacom LLC own our cable systems. Consequently, such operating
subsidiaries conduct all of our consolidated operations and own
substantially all of our consolidated assets. The only source of
cash that Mediacom Communications Corporation, Mediacom
Broadband LLC and Mediacom LLC have to fund their obligations
(including, without limitation, the payment of interest on, and
the repayment of principal of, their outstanding indebtedness)
is the cash that the operating subsidiaries generate from their
operations and from borrowing under the subsidiary credit
facilities. The operating subsidiaries are separate and distinct
legal entities and have no obligation, contingent or otherwise,
to make funds available to Mediacom Communications Corporation,
Mediacom Broadband LLC or Mediacom LLC. The ability of our
operating subsidiaries to make funds available to their
respective parent companies, in the form of dividends, loans,
advances or other payments, will depend upon the operating
results of such subsidiaries and is subject to applicable laws
and contractual restrictions, including covenants under the
subsidiary credit facilities and the indentures governing our
senior notes that restrict the ability of the obligors
thereunder to make funds available to their respective parent
companies.
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 Mediacom Communications
Corporation, or any of its direct or indirect subsidiaries, is a
creditor of another of our subsidiaries, the claims of such
creditor could be subordinated to any security interest in the
assets of such subsidiary and/or any indebtedness of such
subsidiary senior to that held by such creditor.
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We
have substantial existing debt and have significant interest
payment requirements, which could adversely affect our ability
to obtain financing in the future, and require our operating
subsidiaries to apply a substantial portion of their cash flow
to debt service.
As of December 31, 2007, our total debt was approximately
$3.215 billion. Our gross interest expense for the year
ended December 31, 2007, was $243.2 million.
This high level of debt and our debt service obligations could
have material consequences, including that:
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our ability to access new sources of financing for working
capital, capital expenditures, acquisitions or other purposes
may be limited;
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we may need to use a large portion of our revenues to pay
interest on borrowings under our subsidiary credit facilities
and our senior notes, which will reduce the amount of money
available to finance our operations, capital expenditures and
other activities;
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some of our debt has a variable rate of interest, which may
expose us to the risk of increased interest rates;
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we may be more vulnerable to economic downturns and adverse
developments in our business;
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we may be less flexible in responding to changing business and
economic conditions, including increased competition and demand
for new products and services;
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we may be at a disadvantage when compared to those of our
competitors that have less debt leverage; and
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we may not be able to fully implement our business strategy.
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We cannot assure you that our business will generate sufficient
cash flows to permit us, or our subsidiaries, to repay
indebtedness or that refinancing of that indebtedness will be
possible on commercially reasonable terms, or at all. Interest
rates on our future borrowings may be much higher than our
current interest rates, and we may not be able to raise
additional debt financing on reasonable terms, or at all, if
turmoil in the capital markets persist.
A
default under our indentures or our subsidiary credit facilities
could result in an acceleration of our indebtedness and other
material adverse effects.
The agreements and instruments governing our subsidiaries
indebtedness contain financial and operating covenants. The
breach of any of these covenants could cause a default, which
could 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 respective
subsidiary credit facilities. A default under one of our
subsidiary credit facilities could result in a foreclosure by
the lenders on the membership interests pledged under that
facility. Because we are dependent upon our operating
subsidiaries for all of our cash flows, a foreclosure would have
a material adverse effect on our business, financial condition
and results of operations.
The
terms of our indebtedness could materially limit our financial
and operating flexibility.
Several of the covenants contained in the agreements and
instruments governing our indebtedness could materially limit
our financial and operating flexibility by restricting, among
other things, our ability and the ability of our operating
subsidiaries to:
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incur additional indebtedness;
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create liens and other encumbrances;
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pay dividends and make other payments, investments, loans and
guarantees;
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enter into transactions with related parties;
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sell or otherwise dispose of assets and merge or consolidate
with another entity;
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repurchase or redeem capital stock, other equity interests or
debt;
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pledge assets; and
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issue capital stock or other equity interests.
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Complying with these covenants could cause us to take actions
that we otherwise would not take or cause us not to take actions
that we otherwise would take.
We may
not be able to obtain additional capital to fund future capital
expenditures and continue the development of our
business.
Our business is capital intensive. Capital spending for our
business was $227.4 million, $210.2 million and
$228.2 million for the years ended December 31, 2007,
2006 and 2005, respectively, including payments for customer
premise equipment and related installation costs and network and
infrastructure investments. We expect these capital expenditures
to be significant over the next several years, as we continue to
grow our video, HSD and phone customers. We may not be able to
obtain the funds necessary to finance additional capital
requirements through internally generated funds, additional
borrowings or other sources. If we are unable to obtain these
funds, we would not be able to implement our business strategy
and our results of operations would be adversely affected.
A
lowering of the ratings assigned to our debt securities by
ratings agencies may further increase our future borrowing costs
and reduce our access to capital.
Our debt ratings are below the investment grade category, which
results in higher borrowing costs. There can be no assurance
that our debt ratings will not be lowered in the future by a
rating agency. A lowering in our debt ratings may further
increase our future borrowing costs and reduce our access to
capital.
Risks
Related to Legislative and Regulatory Matters
Changes
in cable television regulations could adversely impact our
business.
The cable television industry is subject to extensive
legislation and regulation at the federal and local levels, and,
in some instances, at the state level. Many aspects of such
regulation are currently the subject of judicial and
administrative proceedings and legislative and administrative
proposals, and lobbying efforts by us and our competitors. We
expect that court actions and regulatory proceedings will
continue to refine our rights and obligations under applicable
federal, state and local laws. The results of these judicial and
administrative proceedings and legislative activities may
materially affect our business operations.
Local authorities grant us non-exclusive franchises that permit
us to operate our cable systems which we renew or renegotiate
from time to time. Local franchising authorities may demand
concessions, or other commitments, as a condition to renewal,
and these concessions or other commitments could be costly. The
Cable Communications Policy Act of 1984 (Communications
Act) contains renewal procedures and criteria designed to
protect incumbent franchisees against arbitrary denials of
renewal, and although such Act requires the local franchising
authorities to take into account the costs of meeting such
concessions or commitments, there is no assurance that we will
not be compelled to meet their demands in order to obtain
renewals. We cannot predict whether any of the markets in which
we operate will expand the regulation of our cable systems in
the future or the impact that any such expanded regulation may
have upon our business.
Similarly, due to the increasing popularity and use of
commercial online services and the Internet, certain aspects
have become subject to regulation at the federal and state
level, such as the collection of information online from
children, disclosure of certain subscriber information to
governmental agencies, commercial emails or spam,
privacy, security and distribution of material in violation of
copyrights. In addition to the possibility that additional
federal laws and regulations may be adopted with respect to
commercial online services and the Internet, several individual
states have imposed such restrictions and others may also impose
similar restrictions, potentially creating an intricate
patchwork of laws and regulations. Future federal
and/or state
laws may cover such issues as privacy, access to some types of
content by minors, pricing, encryption standards, consumer
protection, electronic commerce, taxation of
e-commerce,
copyright infringement and other intellectual property matters.
The adoption
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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 cable modem service, increase our
costs of providing such service or have other adverse effects on
our business, financial condition and results of operations. The
effects of such laws or regulations may also require disclosure
of failures of our procedures or breaches to our system by third
parties, which can increase the likelihood of claims against us
by affected subscribers.
Increased
exposure from loss of personal information could impose
significant additional costs on us.
Many states in which we operate have enacted laws requiring us
to notify customers in the event that certain customer
information is accessed, or believed to have been accessed,
without authorization. Such notifications can result in private
causes of action being filed against us. Additionally, we are
increasingly required to provide protection of personal
information to prevent identity theft and increasingly,
financial institutions are seeking recovery of fraud losses from
entities from which personal information was illicitly obtained.
The effects of such laws and legal theories, should we have a
loss of protected data, could increase our costs.
Changes
in channel carriage regulations could impose significant
additional costs on us.
Cable operators face significant regulation of their channel
carriage. Currently, they can be required to devote substantial
capacity to the carriage of programming that they might not
carry voluntarily, including certain local broadcast signals,
local public, educational and government access programming, and
unaffiliated commercial leased access programming. The
FCCs Report and Order released in February 2008
significantly limits the amount that we can charge for
commercial leased access, especially with respect to channels
offered on one of our tiers, may cause a significant increase in
demand for leased commercial access on our cable systems.
Moreover, if the FCC ultimately adopts a requirement currently
under consideration that we must carry the signals of certain
low-power Class A television stations, or if
the FCC or Congress were to require cable systems to carry
multiple program streams included within a single digital
broadcast transmission of a local television station, these
carriage burdens would increase substantially. A substantial
increase in demand for leased access programming
and/or
changes in carriage requirements could cause us to have to
delete carriage of existing programming or forego carriage of
additional programming that might be more desirable to our
subscribers.
Reversing the findings of a 2004 report, the FCC released a
report in 2006 finding that consumers could benefit under
certain a la carte models for delivery of video programming. The
report did not specifically recommend or propose the adoption of
any specific rules by the FCC, and it did not endorse a pure a
la carte model where subscribers could purchase specific
channels without restriction. Instead, it favored tiers plus
individual channels or smaller theme-based tiers. Shortly after
release of the report, the FCC voted to seek additional
information as to whether cable systems with at least 36
channels are available to at least 70 percent of
U.S. homes and whether 70 percent of households served
by those systems subscribe. In November 2007, the FCC Chairman
indicated that the FCC would seek additional information to
determine whether those thresholds had been met. If so, the FCC
may have discretion under the Cable Act to promulgate additional
rules necessary to promote diversity of information sources.
Congress may also consider legislation regarding programming
packaging, bundling or a la carte delivery of programming. Any
such requirements could fundamentally change the way in which we
package and price our services. We cannot predict the outcome of
any current or future FCC proceedings or legislation in this
area, or the impact of such proceedings on our business,
financial condition and results of operations at this time.
Our
franchises are non-exclusive and local franchising authorities
may grant competing franchises in our markets.
Our cable systems are operated under non-exclusive franchises
granted by local franchising authorities. As a result, competing
operators of cable systems and other potential competitors, such
as municipal utility providers, may be granted franchises and
may build cable systems in markets where we hold franchises.
Some may not require local franchises at all, such as certain
municipal utility providers. Any such competition could
adversely affect our business. The existence of multiple cable
systems in the same geographic area is generally referred to as
an overbuild. As of December 31, 2007,
approximately 12.4% of the estimated homes passed by our cable
systems were overbuilt by other cable operators. We cannot
assure you that competition from overbuilders will not develop
in other markets that we now serve or will serve after any
future acquisitions.
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Legislation was recently passed in many states in which we
operate cable systems and similar legislation is pending, or has
been proposed in certain other states and in Congress, to allow
local telephone companies to deliver services in competition
with our cable service without obtaining equivalent local
franchises. Such a legislatively granted advantage to our
competitors could adversely affect our business. The effect of
such initiatives, if any, on our obligation to obtain local
franchises in the future or on any of our existing franchises,
many of which have years remaining in their terms, cannot be
predicted.
In 2006, the FCC adopted an order that limits the ability of
local franchising authorities to impose certain
unreasonable requirements, such as public,
governmental and educational access, institutional networks and
build-out requirements, when issuing competitive franchises. The
Order effectively permits competitors with existing rights to
use the rights-of-ways to begin operation of cable systems no
later than 90 days and all others 180 days after
filing a franchise application and preempts conflicting existing
local laws, regulations and requirements including level-playing
field provisions. Although the Commission considered similar
limitations on local franchising authorities with respect to
incumbent franchise renewal proceedings, little relief was
ultimately provided. Easing of barriers to entry or allowing
competitors to operate under more favorable or less burdensome
franchise requirements may adversely affect our business.
Pending
FCC and court proceedings could adversely affect our HSD
service.
The legal and regulatory status of providing HSD service by
cable television companies is uncertain. Although the United
States Supreme Court has held that HSD 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 issued a declaratory ruling that
HSD service, as it is currently offered, is properly classified
as an interstate information service that is not subject to
common carrier regulation. However, the FCC is still considering
the following: whether to require cable companies to provide
capacity on their systems to other entities to deliver
high-speed Internet directly to customers, also known as open
access; whether certain other regulatory requirements do or
should apply to cable modem service; and whether and to what
extent cable modem service should be subject to local franchise
authorities regulatory requirements or franchise fees. The
adoption of new rules by the FCC could place additional costs
and regulatory burdens on us, reduce our anticipated revenues or
increase our anticipated costs for this service, complicate the
franchise renewal process, result in greater competition or
otherwise adversely affect our business. While we cannot predict
the outcome of this proceeding, we do note that the FCC recently
removed the requirement that telecommunications carriers provide
access to competitors to resell their DSL Internet access
service citing the need for competitive parity with cable modem
service that has no similar access requirement.
We may
be subject to legal liability because of the acts of our HSD
customers or because of our own negligence.
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 cable modem service customers, such as
defamation, negligence, copyright or trademark infringement,
fraud or other theories based on the nature and content of
information that our customers use our service to post, download
or distribute. We also could be subject to similar claims based
on the content of other websites to which we provide links or
third-party products, services or content that we may offer
through our Internet service. Due to the global nature of the
Web, it is possible that the governments of other states and
foreign countries might attempt to regulate its transmissions or
prosecute us for violations of their laws.
It is also possible that information provided directly by us
will contain errors or otherwise be negligently provided to
users, resulting in third parties making claims against us. For
example, we offer Web-based email services, which expose us to
potential risks such as liabilities or claims resulting from
unsolicited email, lost or misdirected messages, illegal or
fraudulent use of email, or interruptions or delays in email
service. Additionally, we host website portal pages
designed for use as a home page by, but not limited to, our HSD
customers. These
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portal pages offer a wide variety of content from us and third
parties that could contain errors or other material that could
give rise to liability.
To date, we have not been served notice that such a claim has
been filed against us. However, in the future someone may serve
such a claim on us in either a domestic or international
jurisdiction and may succeed in imposing liability on us. Our
defense of any such actions could be costly and involve
significant distraction of our management and other resources.
If we are held or threatened with significant liability, we may
decide to take actions to reduce our exposure to this type of
liability. This may require us to spend significant amounts of
money for new equipment and may also require us to discontinue
offering some features or our cable modem service.
From time to time, we receive notices of claimed infringements
by our cable modem 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
customers 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 persons 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.
We may
become subject to additional regulatory burdens because we offer
phone service.
The regulatory treatment of VoIP services like those we and
others offer remains uncertain. The FCC, Congress, the courts
and the states continue to look at issues surrounding the
provision of VoIP, including whether this service is properly
classified as a telecommunications service or an information
service. The FCCs decision to classify VoIP as an
information service should eliminate much if not all local
regulation of the service and should limit federal regulation to
consumer protection, as opposed to economic issues. For example,
on the federal level, the FCC recently required providers of
interconnected VoIP services, such as ours, to file
a letter with the FCC certifying compliance with certain
E-911
functionality. Disputes have also arisen with respect to the
rights of VoIP providers and their telecommunications provider
partners to obtain interconnection and other rights under the
Act from incumbent telephone companies. We cannot predict how
these issues will be resolved, but uncertainties in the existing
law as it applies to VoIP or any determination that results in
greater or different regulatory obligations than competing
services would result in increased costs, reduce anticipated
revenues and impede our ability to effectively compete or
otherwise adversely affect our ability to successfully roll-out
and conduct our telephony business.
Actions
by pole owners might subject us to significantly increased pole
attachment costs.
Our cable facilities are often attached to or use public utility
poles, ducts or conduits. Historically, cable system attachments
to public utility poles have been regulated at the federal or
state level. Generally this regulation resulted in favorable
pole attachment rates for cable operators. The FCC clarified
that the provision of Internet access does not endanger a cable
operators favorable pole rates; this approach ultimately
was upheld by the Supreme Court of the United States. That
ruling, coupled with the recent Supreme Court decision upholding
the FCCs classification of HSD service as an information
service should strengthen our ability to resist such rate
increases based solely on the delivery of cable modem services
over our cable systems. In November 2007, the FCC commenced a
proceeding to determine whether it will effectively eliminate
cables lower pole attachment fees by imposing a higher
unified rate for entities providing broadband Internet service
which could significantly increase our annual pole attachment
costs. As we continue our deployment of cable telephony and
certain other advanced services, utilities may continue to
invoke higher rates. The series of cases that upheld the FCC
rate formula as just compensation left one potential caveat
allowing for a higher rate where an owner of a pole could show
that an individual pole was full and where it could
show lost opportunities to rent space presently occupied by an
attacher at rates higher than provided under the rate formula.
Gulf Power, a utility company from whom we rent pole space,
invoked a formal hearing before the FCC in which Gulf Power
attempted to demonstrate such a scenario so that it could impose
higher pole attachment
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rates than could be approved under the FCCs rate formula.
The Administrative Law Judge appointed by the FCC ultimately
found for various reasons that the poles were not full and that
Gulf Power had already set conditions in its contracts with
operators that precluded a finding that it did not receive just
compensation from the FCC rate formula. Gulf Power has appealed
this decision to the full Commission and a potential adverse
ruling could occur.
In November 2007, the FCC released a Notice of Proposed
Rulemaking (NPRM) addressing pole attachment rental rates,
certain terms and conditions of pole access and other issues.
The NPRM calls for a review of long-standing FCC rules and
regulations, including the long-standing cable rate
formula and considers effectively eliminating cables lower
pole attachment fees by imposing a higher unified rate for
entities providing broadband Internet service. While we cannot
predict the outcome of the NPRM will ultimately have on our
business, changes to our pole attachment rate structure could
significantly increase our annual pole attachment costs.
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.
Changes
in compulsory copyright regulations might significantly increase
our license fees.
Filed petitions for rulemaking with the United States Copyright
Office propose revisions to certain compulsory copyright license
reporting requirements and seek clarification of certain issues
relating to the application of the compulsory license to the
carriage of digital broadcast stations. The petitions seek,
among other things: (i) clarification of the 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
(ii) reporting of dual carriage and multicast
signals. In December 2007, the Copyright Office issued a Notice
of Inquiry to review whether cable operators must include in
their compulsory license royalty calculation a distant signal
carried anywhere in the cable system as if it were carried
everywhere in the system, thus resulting in payments on
phantom signals. Moreover, the Copyright Office has
not yet acted on a filed petition and may solicit comment on the
definition of definition of a network station for
purposes of the compulsory license. The Copyright Office
may open one or more rulemakings in response to these petitions.
We cannot predict the outcome of any such rulemakings; however,
it is possible that certain changes in the rules or copyright
compulsory license fee computations could have an adverse affect
on our business, financial condition and results of operations
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.
Risks
Related to our Chairman and Chief Executive Officers
Controlling Position
Our
Chairman and Chief Executive Officer has the ability to control
all major corporate decisions, and a sale of his stock could
result in a change of control that would have unpredictable
effects.
Rocco B. Commisso, our Chairman and Chief Executive Officer,
beneficially owned shares of our common stock representing
approximately 79.8% of the aggregate voting power as of
December 31, 2007. As a result, Mr. Commisso generally
has the ability to control the outcome of all matters requiring
stockholder approval, including the election of our entire board
of directors, the approval of any merger or consolidation and
the sale of all or substantially all of our assets. In addition,
Mr. Commissos voting power may have the effect of
discouraging offers to acquire us because any such acquisition
would require his consent.
We cannot assure you that Mr. Commisso will maintain all or
any portion of his ownership, or that he would continue as an
officer or director if he sold a significant part of his stock.
The disposition by Mr. Commisso of a sufficient number of
shares could result in a change in control of our company, and
no assurance can be given that a change of control would not
adversely affect our business, financial condition or results of
operations. A change in control could also result in a default
under our debt arrangements, could require us to offer to
repurchase our senior notes at 101% of their principal amount,
could trigger a variety of federal, state and local regulatory
consent requirements and potentially limit our utilization of
net operating losses for income tax purposes.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
Our principal physical assets consist of cable television
operating plant and equipment, including signal receiving,
encoding and decoding devices, headend facilities and
distribution systems and equipment at or near customers
homes for each of the systems. The signal receiving apparatus
typically includes a tower, antenna, ancillary electronic
equipment and earth stations for reception of satellite signals.
Headend facilities are located near the receiving devices. Our
distribution system consists primarily of coaxial and fiber
optic cables and related electronic equipment. Customer premise
equipment consists of set-top devices and cable modems.
Our cable television plant and related equipment generally are
attached to utility poles under pole rental agreements with
local public utilities; although in some areas the distribution
cable is buried in underground ducts or trenches. The physical
components of the cable systems require maintenance and periodic
upgrading to improve system performance and capacity. In
addition, we maintain a network operations center with equipment
necessary to monitor and manage the status of our HSD network.
We own and lease the real property housing our regional call
centers, business offices and warehouses throughout our
operating regions. Our headend facilities, signal reception
sites and microwave facilities are located on owned and leased
parcels of land, and we generally own the towers on which
certain of our equipment is located. We own most of our service
vehicles. We believe that our properties, both owned and leased,
are in good condition and are suitable and adequate for our
operations.
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ITEM 3.
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LEGAL
PROCEEDINGS
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Mediacom LLC, one of our wholly owned subsidiaries, is 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, by which the plaintiffs are
seeking
class-wide
damages for alleged trespasses on land owned by private parties.
The lawsuit was originally filed in April 2001. Pursuant to
various agreements with the relevant state, county or other
local authorities and with utility companies, Mediacom LLC
placed interconnect fiber optic cable within state and county
highway rights-of-way and on utility poles in areas of Missouri
not presently encompassed by a cable franchise. The lawsuit
alleges that Mediacom LLC placed cable in unauthorized locations
and, therefore, was required but failed to obtain permission
from the landowners to place the cable. The lawsuit had not made
a claim for specified damages in the original complaint. An
order declaring that this action is appropriate for class relief
was entered in April 2006. Mediacom LLCs petition for an
interlocutory appeal or in the alternative a writ of mandamus
was denied by order of the Supreme Court of Missouri in October
2006. Mediacom LLC continues to vigorously defend against any
claims made by the plaintiffs, including at trial, and on
appeal, if necessary. Mediacom LLC has tendered the lawsuit to
our insurance carrier for defense and indemnification. The
carrier has agreed to defend Mediacom LLC under a reservation of
rights, and a declaratory judgment action is pending regarding
the carriers defense and coverage responsibilities. 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 expert, the plaintiffs claim compensatory damages of
approximately $14.5 million. Legal fees, prejudgment
interest, potential punitive damages and other costs could
increase this estimate to approximately $26.0 million. We
are unable to reasonably determine the amount of our final
liability in this lawsuit, as our experts have estimated our
liability to be within the range of approximately
$0.1 million to approximately $1.2 million, depending
on the courts determination of the proper measure of
damages. We believe, however, that the amount of such liability,
as stated by any of the parties, would not have a material
effect on our consolidated financial position, results of
operations, cash flows or business. There can be no assurance
that the actual liability would not exceed this estimated range.
A trial date of November 2008 has been set for the claim by the
class representative.
We are involved in various other legal actions arising in the
ordinary course of business. In the opinion of management, the
ultimate disposition of these other matters will not have a
material adverse effect on our consolidated financial position,
results of operations, cash flows or business.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of security holders during
the fourth quarter of the fiscal year ended December 31,
2007.
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ITEM 4A.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Title
|
|
Rocco B. Commisso
|
|
|
58
|
|
|
Chairman and Chief Executive Officer
|
Mark E. Stephan
|
|
|
51
|
|
|
Executive Vice President and Chief Financial Officer
|
John G. Pascarelli
|
|
|
46
|
|
|
Executive Vice President, Operations
|
Italia Commisso Weinand
|
|
|
54
|
|
|
Senior Vice President, Programming & Human Resources
|
Joseph E. Young
|
|
|
59
|
|
|
Senior Vice President, General Counsel & Secretary
|
Charles J. Bartolotta
|
|
|
53
|
|
|
Senior Vice President, Customer Operations
|
Calvin G. Craib
|
|
|
53
|
|
|
Senior Vice President, Business Development
|
Brian M. Walsh
|
|
|
42
|
|
|
Senior Vice President & Corporate Controller
|
Craig S. Mitchell
|
|
|
49
|
|
|
Director
|
William S. Morris III
|
|
|
73
|
|
|
Director
|
Thomas V. Reifenheiser
|
|
|
72
|
|
|
Director
|
Natale S. Ricciardi
|
|
|
59
|
|
|
Director
|
Robert L. Winikoff
|
|
|
61
|
|
|
Director
|
Rocco B. Commisso has 29 years of experience with
the cable television industry and has served as our Chairman and
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 Canadas
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 banks lending activities to communications
firms including the cable industry. He serves on the board of
directors and executive committees of the National Cable
Television Association and Cable Television Laboratories, Inc.,
and on the board of directors of C-SPAN and the National Italian
American Foundation. Mr. Commisso holds a Bachelor of
Science in Industrial Engineering and a Master of Business
Administration from Columbia University.
Mark E. Stephan has 21 years of experience with the
cable television industry and has served as our Executive Vice
President and Chief Financial Officer since July 2005. Prior to
that he was Executive Vice President, Chief Financial Officer
and Treasurer since November 2003 and our Senior Vice President,
Chief Financial Officer and Treasurer since the commencement of
our operations in March 1996. Before joining us,
Mr. Stephan served as Vice President, Finance for
Cablevision Industries from July 1993. Prior to that time,
Mr. Stephan served as Manager of the telecommunications and
media lending group of Royal Bank of Canada.
John G. Pascarelli has 27 years of experience in the
cable television industry and has served as our Executive Vice
President, Operations since November 2003. Prior to that he was
our Senior Vice President, Marketing and Consumer Services from
June 2000 and our Vice President of Marketing from March 1998.
Before joining us 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 31 years of experience
in the cable television industry. Before joining us in April
1996, Ms. Weinand served as Regional Manager for Comcast
Corporation from July 1985. Prior to that time,
34
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 23 years of experience with the
cable television industry. Before joining us 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 25 years of experience in
the cable television industry. Before joining us 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 26 years of experience in the
cable television industry and has served as our Senior Vice
President, Business Development since August 2001. Prior to that
he was our Vice President, Business Development since April
1999. Before joining us in April 1999, Mr. Craib 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 20 years of experience in the
cable television industry and has served as our Senior Vice
President and Corporate Controller since February 2005. Prior to
that he was our Senior Vice President, Financial Operations from
November 2003, our Vice President, Finance and Assistant to the
Chairman from November 2001, our Vice President and Corporate
Controller from February 1998 and our Director of Accounting
from November 1996. Before joining us in April 1996,
Mr. Walsh held various management positions with
Cablevision Industries from 1988 to 1995.
Craig S. Mitchell has held various management positions
with Morris Communications Company LLC for more than the past
six years. He currently serves as its Senior Vice President of
Finance, Treasurer and Secretary and is also a member of our
board of directors.
William S. Morris III has served as the Chairman and
Chief Executive Officer of Morris Communications for more than
the past six years. He was the Chairman of the board of
directors of the Newspapers Association of America for
1999-2000.
Thomas V. Reifenheiser served for more than six years as
a Managing Director and Group Executive of the Global Media and
Telecom Group of Chase Securities Inc. until his retirement in
September 2000. He joined Chase in 1963 and had been the Global
Media and Telecom Group Executive since 1977. He also had been a
member of the Management Committee of The Chase Manhattan Bank.
Mr. Reifenheiser is also a member of the board of directors
of Cablevision Systems Corporation, Lamar Advertising Company
and Citadel Broadcasting Corporation.
Natale S. Ricciardi has held various management positions
with Pfizer Inc. for more than the past six years.
Mr. Ricciardi joined Pfizer in 1972 and currently serves as
Senior Vice President, Pfizer Inc. and President, Pfizer Global
Manufacturing, with responsibility for all of Pfizers
manufacturing and supply activities. He is a member of the
Pfizer Executive Leadership Team.
Robert L. Winikoff has been a partner of the law firm of
Sonnenschein Nath & Rosenthal, LLP since August 2000.
Prior thereto, he was a partner of the law firm of Cooperman
Levitt Winikoff Lester & Newman, P.C. for more
than five years. Sonnenschein Nath & Rosenthal, LLP
currently serves as our outside general counsel, and prior to
such representation, Cooperman Levitt Winikoff
Lester & Newman, P.C. served as our outside
general counsel from 1995.
35
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our Class A common stock is traded on The Nasdaq Global
Select Market under the symbol MCCC. The following
table sets forth, for the periods indicated, the high and low
closing sales prices for our Class A common stock as
reported by The Nasdaq Global Select Market:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
Low
|
|
High
|
|
Low
|
|
High
|
|
First Quarter
|
|
$
|
7.54
|
|
|
$
|
8.25
|
|
|
$
|
5.36
|
|
|
$
|
6.01
|
|
Second Quarter
|
|
$
|
8.20
|
|
|
$
|
10.03
|
|
|
$
|
5.85
|
|
|
$
|
6.98
|
|
Third Quarter
|
|
$
|
7.05
|
|
|
$
|
10.30
|
|
|
$
|
5.97
|
|
|
$
|
7.25
|
|
Fourth Quarter
|
|
$
|
3.93
|
|
|
$
|
7.36
|
|
|
$
|
7.00
|
|
|
$
|
8.41
|
|
As of February 29, 2008, there were approximately
2,138 holders of record of our Class A common stock
and 2 holders of record of our Class B common stock.
The number of Class A stockholders does not include
beneficial owners holding shares through nominee names.
We have never declared or paid any dividends on our common
stock. We currently anticipate that we will retain all of our
future earnings for use in the expansion and operation of our
business. Thus, we do not anticipate paying any cash dividends
on our common stock in the foreseeable future. Our future
dividend policy will be determined by our board of directors and
will depend on various factors, including our results of
operations, financial condition, capital requirements and
investment opportunities.
During the year ended December 31, 2007, we repurchased
11.2 million shares of our Class A common stock for an
aggregate cost of $69.0 million. As of December 31,
2007, approximately $20.0 million remained available under
our stock repurchase program.
The following is a summary of our share repurchases of
Class A common stock during the fourth quarter of 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Total
|
|
|
Value of Shares that
|
|
|
|
Total Number
|
|
|
|
|
|
Shares Purchased
|
|
|
Dollars Purchased
|
|
|
May Yet Be
|
|
|
|
of Shares
|
|
|
Average Price
|
|
|
as Part of Publicly
|
|
|
Under the
|
|
|
Purchased Under
|
|
Period
|
|
Purchased
|
|
|
per Share
|
|
|
Announced Program
|
|
|
Program
|
|
|
the Program
|
|
|
October 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
906
|
|
November 2007
|
|
|
2,716,220
|
|
|
|
4.44
|
|
|
|
2,716,220
|
|
|
|
12,050,396
|
|
|
|
37,950,510
|
(1)
|
December 2007
|
|
|
3,751,172
|
|
|
|
4.79
|
|
|
|
3,751,172
|
|
|
|
17,949,601
|
|
|
|
20,000,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter 2007
|
|
|
6,467,392
|
|
|
$
|
4.64
|
|
|
|
6,467,392
|
|
|
|
29,999,997
|
|
|
$
|
20,000,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On November 1, 2007, our Board of Directors authorized a
new $50.0 million Class A common stock repurchase
program. |
36
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
In the table below, we provide you with selected historical
consolidated statement of operations data and cash flow data for
the years ended December 31, 2003 through 2007 and balance
sheet data as of December 31, 2003 through 2007, which are
derived from our audited consolidated financial statements
(except other data and operating data).
See Managements Discussion and Analysis of Financial
Condition and Results of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006(11)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Amounts in thousands, except per share data and operating
data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,293,375
|
|
|
$
|
1,210,400
|
|
|
$
|
1,098,822
|
|
|
$
|
1,057,226
|
|
|
$
|
1,004,889
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service costs
|
|
|
544,072
|
|
|
|
492,729
|
|
|
|
438,768
|
|
|
|
407,875
|
|
|
|
383,012
|
|
Selling, general and administrative expenses
|
|
|
264,006
|
|
|
|
252,688
|
|
|
|
232,514
|
|
|
|
216,394
|
|
|
|
198,943
|
|
Corporate expenses
|
|
|
27,637
|
|
|
|
25,445
|
|
|
|
22,287
|
|
|
|
19,276
|
|
|
|
17,237
|
|
Depreciation and amortization
|
|
|
235,331
|
|
|
|
215,918
|
|
|
|
220,567
|
|
|
|
217,262
|
|
|
|
273,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
222,329
|
|
|
|
223,620
|
|
|
|
184,686
|
|
|
|
196,419
|
|
|
|
132,390
|
|
Interest expense, net
|
|
|
(239,015
|
)
|
|
|
(227,206
|
)
|
|
|
(208,264
|
)
|
|
|
(192,740
|
)
|
|
|
(190,199
|
)
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
(35,831
|
)
|
|
|
(4,742
|
)
|
|
|
|
|
|
|
|
|
(Loss) gain on derivative instruments, net
|
|
|
(22,902
|
)
|
|
|
(15,798
|
)
|
|
|
12,555
|
|
|
|
16,125
|
|
|
|
9,057
|
|
Gain (loss) on sale of assets and investments, net
|
|
|
11,079
|
|
|
|
|
|
|
|
2,628
|
|
|
|
5,885
|
|
|
|
(1,839
|
)
|
Other expense, net
|
|
|
(9,054
|
)
|
|
|
(9,973
|
)
|
|
|
(11,829
|
)
|
|
|
(12,061
|
)
|
|
|
(11,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(37,563
|
)
|
|
|
(65,188
|
)
|
|
|
(24,966
|
)
|
|
|
13,628
|
|
|
|
(62,051
|
)
|
Provision for income taxes
|
|
|
(57,566
|
)
|
|
|
(59,734
|
)
|
|
|
(197,262
|
)
|
|
|
(76
|
)
|
|
|
(424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(95,129
|
)
|
|
$
|
(124,922
|
)
|
|
$
|
(222,228
|
)
|
|
|
13,552
|
|
|
|
(62,475
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) earnings per
share:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) earnings per share
|
|
$
|
(0.88
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(1.90
|
)
|
|
$
|
0.11
|
|
|
$
|
(0.53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
107,828
|
|
|
|
110,971
|
|
|
|
117,194
|
|
|
|
118,534
|
|
|
|
118,627
|
|
Diluted weighted average share outstanding
|
|
|
107,828
|
|
|
|
110,971
|
|
|
|
117,194
|
|
|
|
118,543
|
|
|
|
118,627
|
|
Balance Sheet Data (end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,615,210
|
|
|
$
|
3,652,350
|
|
|
$
|
3,649,498
|
|
|
$
|
3,635,655
|
|
|
$
|
3,662,763
|
|
Total debt
|
|
$
|
3,215,033
|
|
|
$
|
3,144,599
|
|
|
$
|
3,059,651
|
|
|
$
|
3,009,632
|
|
|
$
|
3,051,493
|
|
Total stockholders (deficit) equity
|
|
$
|
(253,089
|
)
|
|
$
|
(94,814
|
)
|
|
$
|
59,107
|
|
|
$
|
293,512
|
|
|
$
|
285,114
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006(11)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Amounts in thousands, except per share data and operating
data)
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
188,792
|
|
|
$
|
176,905
|
|
|
$
|
179,095
|
|
|
$
|
224,611
|
|
|
$
|
206,900
|
|
Investing activities
|
|
$
|
(202,335
|
)
|
|
$
|
(210,235
|
)
|
|
$
|
(223,600
|
)
|
|
$
|
(177,424
|
)
|
|
$
|
(221,444
|
)
|
Financing activities
|
|
$
|
(3,454
|
)
|
|
$
|
52,434
|
|
|
$
|
37,911
|
|
|
$
|
(49,127
|
)
|
|
$
|
9,135
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
OIBDA(2)
|
|
$
|
462,979
|
|
|
$
|
444,255
|
|
|
$
|
406,610
|
|
|
$
|
413,729
|
|
|
$
|
405,752
|
|
Adjusted OIBDA
margin(3)
|
|
|
35.8
|
%
|
|
|
36.7
|
%
|
|
|
37.0
|
%
|
|
|
39.1
|
%
|
|
|
40.4
|
%
|
Ratio of earnings to fixed
charges(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.06
|
|
|
|
|
|
Operating Data: (end of period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated homes
passed(5)
|
|
|
2,836,000
|
|
|
|
2,829,000
|
|
|
|
2,807,000
|
|
|
|
2,785,000
|
|
|
|
2,755,000
|
|
Basic
subscribers(6)
|
|
|
1,324,000
|
|
|
|
1,380,000
|
|
|
|
1,423,000
|
|
|
|
1,458,000
|
|
|
|
1,543,000
|
|
Digital
customers(7)
|
|
|
557,000
|
|
|
|
528,000
|
|
|
|
494,000
|
|
|
|
396,000
|
|
|
|
383,000
|
|
Data
customers(8)
|
|
|
658,000
|
|
|
|
578,000
|
|
|
|
478,000
|
|
|
|
367,000
|
|
|
|
280,000
|
|
Phone
customers(9)
|
|
|
185,000
|
|
|
|
105,000
|
|
|
|
22,000
|
|
|
|
|
|
|
|
|
|
RGUs(10)
|
|
|
2,724,000
|
|
|
|
2,591,000
|
|
|
|
2,417,000
|
|
|
|
2,221,000
|
|
|
|
2,206,000
|
|
|
|
|
(1) |
|
Basic and diluted (loss) earnings per share is calculated based
on the basic and diluted weighted average shares outstanding,
respectively. |
|
(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 television
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. |
38
|
|
|
|
|
The following represents a reconciliation of Adjusted OIBDA to
operating income, which is the most directly comparable GAAP
measure (dollars in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Adjusted OIBDA
|
|
$
|
462,979
|
|
|
$
|
444,255
|
|
|
$
|
406,610
|
|
|
$
|
413,729
|
|
|
$
|
405,752
|
|
Non-cash share-based compensation and other share-based
awards(A)
|
|
|
(5,319
|
)
|
|
|
(4,717
|
)
|
|
|
(1,357
|
)
|
|
|
(48
|
)
|
|
|
(55
|
)
|
Depreciation and amortization
|
|
|
(235,331
|
)
|
|
|
(215,918
|
)
|
|
|
(220,567
|
)
|
|
|
(217,262
|
)
|
|
|
(273,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
222,329
|
|
|
$
|
223,620
|
|
|
$
|
184,686
|
|
|
$
|
196,419
|
|
|
$
|
132,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A)
|
Includes approximately $20, $239, $24, $48, and $55 for the
years ended December 31, 2007, 2006, 2005, 2004 and 2003,
respectively, related to the issuance of other share-based
awards.
|
|
|
|
(3) |
|
Represents Adjusted OIBDA as a percentage of revenues. See
note 2 above. |
|
(4) |
|
Earnings were insufficient to cover fixed charges by
$95.9 million, $66.1 million, $26.4 million and
$66.9 million for the years ended December 31, 2007,
2006, 2005 and 2003, respectively. Refer to Exhibit 12.1. |
|
(5) |
|
Represents an estimate of the number of single residence homes,
apartments and condominium units passed by the cable
distribution network. Estimated homes passed is based on the
best available information. |
|
(6) |
|
Represents a dwelling with one or more television sets that
receives a package of
over-the-air
broadcast stations, local access channels or certain
satellite-delivered cable television services. Accounts that are
billed on a bulk basis, which typically receive discounted
rates, are converted into full-price equivalent basic
subscribers by dividing total bulk billed basic revenues of a
particular system by the average cable rate charged to basic
subscribers in that system. This conversion method is consistent
with the methodology used in determining payments to
programmers. Basic subscribers include connections to schools,
libraries, local government offices and employee households that
may not be charged for limited and expanded cable services, but
may be charged for digital cable, VOD, HDTV, DVR or high-speed
Internet service. Customers who exclusively purchase high-speed
Internet or phone service are not counted as basic subscribers.
Our methodology of calculating the number of basic subscribers
may not be identical to those used by other companies offering
similar services. |
|
(7) |
|
Represents customers that receive digital video services. |
|
(8) |
|
Represents residential HSD customers and small to medium-sized
commercial cable modem accounts billed at higher rates than
residential customers. Small to medium-sized commercial accounts
generally represent customers with bandwidth requirements of up
to 15Mbps, and are converted to equivalent residential HSD
customers by dividing their associated revenues by the
applicable residential rate. Our HSD customers exclude large
commercial accounts. Our methodology of calculating HSD
customers may not be identical to those used by other companies
offering similar services. |
|
(9) |
|
Represents estimated number of homes to which we market phone
service, and is based upon the best available information. |
|
(10) |
|
Represents the sum of basic subscribers and digital, HSD and
phone customers. |
|
(11) |
|
Effective January 1, 2006, the Company adopted
SFAS No. 123(R) (See Note 8 in the Notes to
Consolidated Financial Statements). |
39
|
|
ITEM 7.
|
MANAGEMENTS
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, 2007, 2006 and 2005.
Overview
Mediacom Communications Corporation is the nations eighth
largest cable television company based on the number of basic
video subscribers, and among the leading cable operators focused
on serving the smaller cities and towns in the United States.
Through our interactive broadband network, we provide our
customers with a wide array of advanced products and services,
including video services such as VOD, HDTV and DVRs, HSD and
phone service. We offer triple-play bundles of video, HSD and
voice to almost 90% of our estimated homes passed. Bundled
products and services offer our customers a single provider
contact for ordering, provisioning, billing and customer care.
As of December 31, 2007, our cable systems passed an
estimated 2.84 million homes and served 1.32 million
basic subscribers in 23 states. We provide digital video
services to 557,000 customers, representing a digital
penetration of 42.1% of our basic subscribers; HSD service to
658,000 customers, representing a data penetration of 23.2% of
our estimated homes passed; and phone service to 185,000
customers, representing a penetration of 7.3% of our estimated
marketable phone homes.
We evaluate our performance, in part, by measuring the number of
RGUs we serve. As of December 31, 2007, we served
2.72 million RGUs, representing an increase of 5.1% over
the prior year.
We have faced increasing levels of competition for our video
programming services over the past several years, primarily from
DBS providers. Since they have been permitted to deliver local
television broadcast signals beginning in 1999, DirecTV and DISH
now have essentially ubiquitous coverage in our markets with
local television broadcast signals. Their ability to deliver
local television broadcast signals has been a significant cause
of our loss of basic subscribers in recent years.
Hurricane
Losses in 2005
In July and August 2005, as a result of Hurricanes Dennis and
Katrina, our cable systems in areas of Alabama, Florida, and
Mississippi experienced, to varying degrees, damage to their
cable plant and other property and equipment, service
interruption and loss of customers. We estimate that the
hurricanes initially caused losses of approximately 9,000 basic
subscribers, 2,000 digital customers and 1,000 data customers.
As of December 31, 2007, we have not recovered a
significant number of these subscribers.
Adjusted
OIBDA
We define Adjusted OIBDA as operating income before depreciation
and amortization and non-cash, share-based compensation charges.
Adjusted OIBDA is one of the primary measures used by management
to evaluate our performance and to forecast future results, but
is not a financial measure calculated in accordance with
generally accepted accounting principles (GAAP) in the United
States. It is also a significant performance measure in our
annual incentive compensation programs. We believe Adjusted
OIBDA is useful for investors because it enables them to assess
our performance in a manner similar to the methods used by
management, and provides a measure that can be used to analyze,
value and compare the companies in the cable television
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,
40
Adjusted OIBDA has the limitation of not reflecting the effect
of the 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 as a substitute for financial measures prepared in accordance
with GAAP. We believe that operating income is the most directly
comparable GAAP financial measure to Adjusted OIBDA.
Actual
Results of Operations
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
The following table sets forth the unaudited consolidated
statements of operations for the years ended December 31,
2007 and 2006 (dollars in thousands and percentage changes that
are not meaningful are marked NM):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
Revenues
|
|
$
|
1,293,375
|
|
|
$
|
1,210,400
|
|
|
$
|
82,975
|
|
|
|
6.9
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service costs
|
|
|
544,072
|
|
|
|
492,729
|
|
|
|
51,343
|
|
|
|
10.4
|
%
|
Selling, general and administrative expenses
|
|
|
264,006
|
|
|
|
252,688
|
|
|
|
11,318
|
|
|
|
4.5
|
%
|
Corporate expenses
|
|
|
27,637
|
|
|
|
25,445
|
|
|
|
2,192
|
|
|
|
8.6
|
%
|
Depreciation and amortization
|
|
|
235,331
|
|
|
|
215,918
|
|
|
|
19,413
|
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
222,329
|
|
|
|
223,620
|
|
|
|
(1,291
|
)
|
|
|
(0.6
|
)%
|
Interest expense, net
|
|
|
(239,015
|
)
|
|
|
(227,206
|
)
|
|
|
(11,809
|
)
|
|
|
5.2
|
%
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
(35,831
|
)
|
|
|
35,831
|
|
|
|
NM
|
|
Loss on derivatives, net
|
|
|
(22,902
|
)
|
|
|
(15,798
|
)
|
|
|
(7,104
|
)
|
|
|
45.0
|
%
|
Gain on sale of cable systems, net
|
|
|
11,079
|
|
|
|
|
|
|
|
11,079
|
|
|
|
NM
|
|
Other expense, net
|
|
|
(9,054
|
)
|
|
|
(9,973
|
)
|
|
|
919
|
|
|
|
(9.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(37,563
|
)
|
|
|
(65,188
|
)
|
|
|
27,625
|
|
|
|
(42.4
|
)%
|
Provision for income taxes
|
|
|
(57,566
|
)
|
|
|
(59,734
|
)
|
|
|
2,168
|
|
|
|
(3.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(95,129
|
)
|
|
$
|
(124,922
|
)
|
|
$
|
29,793
|
|
|
|
(23.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
$
|
462,979
|
|
|
$
|
444,255
|
|
|
$
|
18,724
|
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following represents a reconciliation of Adjusted OIBDA to
operating income, which is the most directly comparable GAAP
measure (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
Adjusted OIBDA
|
|
$
|
462,979
|
|
|
$
|
444,255
|
|
|
$
|
18,724
|
|
|
|
4.2
|
%
|
Non-cash, share-based compensation and other share-based
awards(1)
|
|
|
(5,319
|
)
|
|
|
(4,717
|
)
|
|
|
(602
|
)
|
|
|
12.8
|
%
|
Depreciation and amortization
|
|
|
(235,331
|
)
|
|
|
(215,918
|
)
|
|
|
(19,413
|
)
|
|
|
9.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
222,329
|
|
|
$
|
223,620
|
|
|
$
|
(1,291
|
)
|
|
|
(0.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes approximately $20 and $239 for the years ended
December 31, 2007 and 2006, respectively, related to the
issuance of other share-based awards. |
41
Revenues
The following table sets forth revenue and selected subscriber,
customer and average monthly revenue statistics for the years
ended December 31, 2007 and 2006 (dollars in thousands,
except per subscriber and customer data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Increase/
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
% Change
|
|
|
Video
|
|
$
|
891,594
|
|
|
$
|
881,530
|
|
|
$
|
10,064
|
|
|
|
1.1
|
%
|
Data
|
|
|
278,853
|
|
|
|
237,542
|
|
|
$
|
41,311
|
|
|
|
17.4
|
%
|
Phone
|
|
|
55,892
|
|
|
|
26,996
|
|
|
$
|
28,896
|
|
|
|
107.0
|
%
|
Advertising
|
|
|
67,036
|
|
|
|
64,332
|
|
|
$
|
2,704
|
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,293,375
|
|
|
$
|
1,210,400
|
|
|
$
|
82,965
|
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Increase/
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
(Decrease)
|
|
|
% Change
|
|
|
Basic subscribers
|
|
|
1,324,000
|
|
|
|
1,380,000
|
|
|
|
(56,000
|
)
|
|
|
(4.1
|
)%
|
Digital customers
|
|
|
557,000
|
|
|
|
528,000
|
|
|
|
29,000
|
|
|
|
5.5
|
%
|
Data customers
|
|
|
658,000
|
|
|
|
578,000
|
|
|
|
80,000
|
|
|
|
13.8
|
%
|
Phone customers
|
|
|
185,000
|
|
|
|
105,000
|
|
|
|
80,000
|
|
|
|
76.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RGUs
|
|
|
2,724,000
|
|
|
|
2,591,000
|
|
|
|
133,000
|
|
|
|
5.1
|
%
|
Average monthly revenue per
RGU(1)
|
|
$
|
40.75
|
|
|
$
|
40.40
|
|
|
$
|
0.35
|
|
|
|
0.9
|
%
|
|
|
|
(1)
|
|
Average monthly revenue per RGU is
calculated based on monthly revenue divided by the average
number of RGUs for each of the twelve months.
|
Note: Certain
reclassifications have been made to the prior years
amounts to conform to the current years presentation.
Revenues rose 6.9%
year-over-year,
largely attributable to the growth in our data and phone
customers. RGUs grew 5.1%
year-over-year,
and average total monthly revenue per RGU was 0.9% higher than
the prior year.
Video revenues represent monthly subscription fees charged to
customers for our core cable television products and services
(including basic and digital cable programming services, wire
maintenance, equipment rental and services to commercial
establishments),
pay-per-view
charges, installation, reconnection and late payment fees and
other ancillary revenues. Data revenues primarily represent
monthly fees charged to customers, including commercial
establishments, for our data products and services and equipment
rental fees. Phone revenues primarily represent monthly fees
charged to customers. Advertising revenues represent the sale of
advertising time on various channels.
Video revenues increased 1.1%, due to higher service fees from
our advanced video products and services such as DVRs and HDTV,
offset by a lower number of basic subscribers. During the year
ended December 31, 2007, we lost 56,000 basic subscribers,
including a significant number of basic subscribers lost in
connection with the retransmission consent dispute with an owner
of a major television broadcast group, and the sale of the
period of cable systems serving on a net basis 6,300 basic
subscribers, as compared to a loss of 43,000 basic subscribers
in the prior year. Digital customers grew by 29,000, as compared
to an increase of 34,000 in the prior year. We ended the year
with 557,000 digital customers, representing a 42.1% penetration
of basic subscribers. As of December 31, 2007, 29.1% of
digital customers received DVR
and/or HDTV
services, as compared to 20.0% in the prior year.
Data revenues rose 17.4%, primarily due to a 13.8%
year-over-year
increase in data customers. Data customers grew by 80,000, as
compared to a gain of 100,000 in the prior year, ending the year
with 658,000 customers, or a 23.2% penetration of estimated
homes passed.
Phone revenues grew 107.0%, primarily due to a 76.2%
year-over-year
increase in phone customers. Phone customers grew by 80,000, as
compared to a gain of 83,000 in the prior year, ending the year
with 185,000
42
customers, or a 7.3% penetration of estimated marketable phone
homes. As of December 31, 2007, Mediacom Phone was marketed
to nearly 90% of our 2.84 million estimated homes passed.
Advertising revenues increased by 4.2%, as a result of stronger
national advertising sales, despite a meaningful decline in
political advertising from the prior year.
Costs
and Expenses
Significant service costs include: programming expenses;
employee expenses related to wages and salaries of technical
personnel who maintain our cable network, perform customer
installation activities and provide customer support; data
costs, including costs of bandwidth connectivity and customer
provisioning; and field operating costs, including outside
contractors, vehicle, utilities and pole rental expenses. Video
programming costs, which are generally paid on a per subscriber
basis, represent our largest single expense and have
historically increased due to both increases in the rates
charged for existing programming services and the introduction
of new programming services to our customers. These costs are
expected to continue to grow principally because of contractual
unit rate increases and the increasing demands of television
broadcast station owners for retransmission consent fees. As a
consequence, it is expected that our video gross margins will
decline as increases in programming costs outpace growth in
video revenues.
Service costs rose 10.4%, primarily due to customer growth in
our phone and HSD services and increases in programming and
field operating expenses. Recurring expenses related to our
phone and HSD services grew 43.0%, commensurate with the
significant increase of our phone and data customers.
Programming expense rose 5.6%, principally as a result of higher
unit costs charged by our programming vendors, offset in part by
a lower number of basic subscribers. Field operating costs rose
14.0%, primarily as a result of higher outside contractor usage,
increases in utility, fuel and vehicle maintenance costs, costs
associated with our mobile workforce management system and the
purchase of antennas for distribution to our customers during
the aforementioned retransmission consent dispute. Service costs
as a percentage of revenues were 42.1% and 40.7% for the years
ended December 31, 2007 and 2006, respectively.
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.
Selling, general and administrative expenses rose 4.5%,
principally due to higher marketing, bad debt and billing
expenses, offset in part by reductions in telecommunication and
employee benefit costs. Marketing costs rose by 14.5%, largely
due to increases in direct mailing campaigns, higher salaries,
sales commissions and recruiting costs and a greater use of
outside contracted sales personnel. Bad debt expenses grew by
17.5%, primarily due to higher average write-offs per delinquent
account, unusually low write-offs of uncollectable accounts in
the prior year and increased collection expense. Billing
expenses rose by 5.1%, largely due to increased processing, bank
and credit card fees. Selling, general and administrative
expenses as a percentage of revenues were 20.4% and 20.9% for
the years ended December 31, 2007 and 2006, respectively.
Corporate expenses reflect compensation of corporate employees
and other corporate overhead. Corporate expenses rose 8.6%,
principally due to increases in non-cash, share-based
compensation, and legal fees. Corporate expenses as a percentage
of revenues were 2.1% for each of the years ended
December 31, 2007 and 2006.
Depreciation and amortization increased 9.0%, primarily due to
increased deployment of customer premise equipment and related
installation activities.
Adjusted
OIBDA
Adjusted OIBDA rose 4.2%, due to revenue growth, especially in
data and phone, offset in part by increases in service costs and
selling, general and administrative expenses.
43
Operating
Income
Operating income decreased 0.6%
year-over-year,
largely due to higher depreciation and amortization and service
costs, substantially offset by the growth in Adjusted OBIDA.
Interest
Expense, Net
Interest expense, net, increased by 5.2%, primarily due to
higher average indebtedness, the expiration of certain interest
rate hedging agreements with favorable rates and higher market
interest rates on variable rate debt.
Loss
on Derivatives, Net
We enter into interest rate exchange agreements, or
interest rate swaps, with counterparties to fix the
interest rate on a portion of our variable rate debt to reduce
the potential volatility in our interest expense that would
otherwise result from changes in variable market interest rates.
As of December 31, 2007, we had interest rate swaps with an
aggregate notional amount of $1.0 billion. The changes in
their
mark-to-market
values are derived primarily from changes in market interest
rates, the decrease in their time to maturity and the
creditworthiness of the counterparties. These swaps have not
been designated as hedges for accounting purposes. As a result
of the quarterly
mark-to-market
valuation of these interest rate swaps, we recorded losses on
derivatives amounting to $22.9 million and
$15.8 million, based upon information provided by our
counterparties, for the years ended December 31, 2007 and
2006, respectively.
Loss
on Early Extinguishment of Debt
We incurred a loss of $35.8 million for the year ended
December 31, 2006, as a result of our redemption of our 11%
senior notes due 2013.
Provision
for Income Taxes
The provision for income taxes was approximately
$57.6 million for the year ended December 31, 2007, as
compared to a provision for income taxes of $59.7 million
for the year ended December 31, 2006. During the year ended
December 31, 2007, based on our assessment of the facts and
circumstances, we determined that an additional portion of our
deferred tax assets from net operating loss carryforwards will
not be realized under the more-likely-than-not standard required
by SFAS No. 109, Accounting for Income
Taxes. As a result, we increased our valuation
allowance and recognized a $57.3 million corresponding
non-cash charge to income tax expense for the year ended
December 31, 2007.
We periodically assess the likelihood of realization of our
deferred tax assets considering all available evidence, both
positive and negative, including our most recent performance,
the scheduled reversal of deferred tax liabilities, our forecast
of taxable income in future periods and the availability of
prudent tax planning strategies. As a result of these
assessments in prior periods and the current period, we have
established valuation allowances on a portion of our deferred
tax assets due to the uncertainty surrounding the realization of
these assets.
Net
Loss
As a result of the factors described above, primarily interest
expense, depreciation and amortization and loss on derivatives,
net, partially offset by Adjusted OIBDA, we incurred a net loss
for the year ended December 31, 2007 of $95.1 million,
as compared to a net loss of $124.9 million for the year
ended December 31, 2006.
44
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
The following table sets forth the unaudited consolidated
statements of operations for the years ended December 31,
2006 and 2005 (dollars in thousands and percentage changes that
are not meaningful are marked NM):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
Revenues
|
|
$
|
1,210,400
|
|
|
$
|
1,098,822
|
|
|
$
|
111,578
|
|
|
|
10.2
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service costs
|
|
|
492,729
|
|
|
|
438,768
|
|
|
|
53,961
|
|
|
|
12.3
|
%
|
Selling, general and administrative expenses
|
|
|
252,688
|
|
|
|
232,514
|
|
|
|
20,174
|
|
|
|
8.7
|
%
|
Corporate expenses
|
|
|
25,445
|
|
|
|
22,287
|
|
|
|
3,158
|
|
|
|
14.2
|
%
|
Depreciation and amortization
|
|
|
215,918
|
|
|
|
220,567
|
|
|
|
(4,649
|
)
|
|
|
(2.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
223,620
|
|
|
|
184,686
|
|
|
|
38,934
|
|
|
|
21.1
|
%
|
Interest expense, net
|
|
|
(227,206
|
)
|
|
|
(208,264
|
)
|
|
|
(18,942
|
)
|
|
|
9.1
|
%
|
Loss on early extinguishment of debt
|
|
|
(35,831
|
)
|
|
|
(4,742
|
)
|
|
|
(31,089
|
)
|
|
|
NM
|
|
(Loss) gain on derivatives, net
|
|
|
(15,798
|
)
|
|
|
12,555
|
|
|
|
(28,353
|
)
|
|
|
NM
|
|
Gain on sale of assets and investments, net
|
|
|
|
|
|
|
2,628
|
|
|
|
(2,628
|
)
|
|
|
NM
|
|
Other expense, net
|
|
|
(9,973
|
)
|
|
|
(11,829
|
)
|
|
|
1,856
|
|
|
|
(15.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(65,188
|
)
|
|
|
(24,966
|
)
|
|
|
(40,222
|
)
|
|
|
NM
|
|
Provision for income taxes
|
|
|
(59,734
|
)
|
|
|
(197,262
|
)
|
|
|
137,528
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(124,922
|
)
|
|
$
|
(222,228
|
)
|
|
$
|
97,306
|
|
|
|
(43.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
$
|
444,255
|
|
|
$
|
406,610
|
|
|
$
|
37,645
|
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following represents a reconciliation of Adjusted OIBDA to
operating income (dollars in thousands and percentage changes
that are not meaningful are marked NM):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
Adjusted OIBDA
|
|
$
|
444,255
|
|
|
$
|
406,610
|
|
|
$
|
37,645
|
|
|
|
9.3
|
%
|
Non-cash, share-based compensation and other share-based
awards(1)
|
|
|
(4,717
|
)
|
|
|
(1,357
|
)
|
|
|
(3,360
|
)
|
|
|
NM
|
|
Depreciation and amortization
|
|
|
(215,918
|
)
|
|
|
(220,567
|
)
|
|
|
4,649
|
|
|
|
(2.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
223,620
|
|
|
$
|
184,686
|
|
|
$
|
38,934
|
|
|
|
21.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes approximately $239 and $24 for the years ended
December 31, 2006 and 2005, respectively, related to the
issuance of other share-based awards. |
45
Revenues
The following table sets forth revenue, and selected subscriber,
customer and average monthly revenue statistics for the years
ended December 31, 2006 and 2005 (dollars in thousands,
except per subscriber and customer data and percentage changes
that are not meaningful are marked NM):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
Video
|
|
$
|
881,530
|
|
|
$
|
849,474
|
|
|
$
|
32,056
|
|
|
|
3.8
|
%
|
Data
|
|
|
237,542
|
|
|
|
195,144
|
|
|
|
42,398
|
|
|
|
21.7
|
%
|
Phone
|
|
|
26,996
|
|
|
|
1,086
|
|
|
|
25,910
|
|
|
|
NM
|
|
Advertising
|
|
|
64,332
|
|
|
|
53,118
|
|
|
|
11,214
|
|
|
|
21.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,210,400
|
|
|
$
|
1,098,822
|
|
|
$
|
111,578
|
|
|
|
10.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Increase/
|
|
|
|
|
2006
|
|
2005
|
|
(Decrease)
|
|
% Change
|
|
Basic subscribers
|
|
|
1,380,000
|
|
|
|
1,423,000
|
|
|
|
(43,000
|
)
|
|
|
(3.0
|
)%
|
Data customers
|
|
|
578,000
|
|
|
|
478,000
|
|
|
|
100,000
|
|
|
|
20.9
|
%
|
Phone customers
|
|
|
105,000
|
|
|
|
22,000
|
|
|
|
83,000
|
|
|
|
NM
|
|
Note: Certain reclassifications have been made to the
prior years amounts to conform to the current years
presentation.
Revenues rose 10.2%, largely attributable to growth in our data
and phone customers and higher video rates and service fees.
Video revenues increased 3.8%, as a result of the impact of
basic rate increases applied on our subscribers and higher
service fees from our advanced video products and services,
offset in part by the loss of basic subscribers. During the year
ended December 31, 2006, we lost 43,000 basic subscribers
as compared to a loss of 35,000 basic subscribers in the prior
year.
Data revenues rose 21.7%, primarily due to a 20.9%
year-over-year
increase in data customers and, to a lesser extent, the growth
of our commercial and enterprise network services.
Phone revenues were $27.0 million for the year ended
December 31, 2006. Phone customers grew by 83,000 during
2006, as compared to 22,000 in 2005. As of December 31,
2006, Mediacom Phone was marketed to 2.3 million homes.
Advertising revenues increased 21.1%, largely as a result of
stronger local advertising sales and political advertising.
Political advertising, which was negligible in 2005, contributed
approximately 41% of overall advertising revenue growth in 2006.
Costs
and Expenses
Service costs rose 12.3%, primarily due to increases in
programming and employee expenses and customer growth in our
phone and HSD services. Video programming expense increased
8.2%, principally as a result of higher unit costs charged by
our programming vendors, offset in part by a lower number of
basic subscribers. Recurring expenses related to our phone and
HSD services grew 46.8% because of the significant increase of
our phone and data customers. Employee operating costs rose by
12.0% due to higher levels of headcount and compensation, and
lower capitalized activity by our technicians. Service costs as
a percentage of revenues were 40.7% and 39.9% for the years
ended December 31, 2006 and 2005, respectively.
Selling, general and administrative expenses rose 8.7%,
principally due to higher taxes and fees and office, advertising
sales and administrative and customer service employee expenses,
offset in part by lower sales commissions paid to our employees.
Taxes and fees increased by 11.9% due principally to higher
property taxes and franchise fees. Office expenses rose 20.6%
due to higher call center telecommunications charges.
Advertising sales expense grew 12.9% commensurate with the
increase in our advertising sales revenue. Employee costs grew
by
46
7.9% due primarily to higher levels of salary and non-cash,
share-based compensation in our administrative and customer
service workforce. Selling, general and administrative expenses
as a percentage of revenues were 20.9% and 21.2% for the years
ended December 31, 2006 and 2005, respectively.
Corporate expenses reflect compensation of corporate employees
and other corporate overhead. Corporate expenses rose 14.2%,
principally due to increases in employee compensation, mostly
non-cash, share-based compensation, offset in part by a decrease
in legal fees. Corporate expenses as a percentage of revenues
were 2.1% and 2.0% for the years ended December 31, 2006
and 2005, respectively.
Depreciation and amortization decreased 2.1% primarily due an
overall decrease in capital spending.
Adjusted
OIBDA
Adjusted OIBDA rose 9.3%, due to revenue growth, partially
offset by higher service costs and selling, general and
administrative expenses.
Operating
Income
Operating income grew 21.1%, largely due to growth in Adjusted
OIBDA and, to a lesser extent, a reduction of depreciation and
amortization expense.
Interest
Expense, Net
Interest expense, net, increased by 9.1%, primarily due to
higher market interest rates on variable rate debt.
(Loss)
gain on Derivatives, Net
As of December 31, 2006, we had interest rate swaps with an
aggregate notional amount of $1.1 billion. The changes in
their
mark-to-market
values are primarily derived from changes in market interest
rates, the decrease in their time to maturity and the
creditworthiness of the counterparties. As a result of the
quarterly
mark-to-market
valuation of these interest rate swaps, we recorded a loss on
derivatives amounting to $15.8 million for the year ended
December 31, 2006 and a gain of $12.6 million for the
year ended December 31, 2005.
Loss
on Early Extinguishment of Debt
Loss on early extinguishment of debt totaled $35.8 million
and $4.7 million for the years ended December 31, 2006
and 2005, respectively. This includes a premium paid on the
redemption of the 11% Notes and the write-off of deferred
financing costs associated with various refinancing transactions
occurring in both 2006 and 2005.
Provision
for Income Taxes
Provision for income taxes was approximately $59.7 million
for the year ended December 31, 2006, as compared to a
provision for income taxes of $197.3 million for the year
ended December 31, 2005. During the year ended
December 31, 2006, based on our assessment of the facts and
circumstances, we determined that an additional portion of our
deferred tax assets from net operating loss carryforwards will
not be realized under the more-likely-than-not standard required
by SFAS No. 109. As a result, we increased our
valuation allowance and recognized a $59.5 million
corresponding non-cash charge to income tax expense for the year
ended December 31, 2006.
Net
Loss
As a result of the factors described above, primarily the
provision for income taxes, the loss on early extinguishment of
debt and the loss on derivatives, net, partially offset by
Adjusted OIBDA, we incurred a net loss for the year ended
December 31, 2006 of $124.9 million, as compared to
net loss of $222.2 million for the year ended
December 31, 2005.
47
Liquidity
and Capital Resources
We have invested, and will continue to invest, in our network to
enhance our reliability and capacity and the further deployment
of advanced broadband services. Our capital spending has
recently shifted from mainly network upgrade investments to the
deployment of advanced services, and we also may continue to
make strategic acquisitions of cable systems. We have a high
level of indebtedness and incur significant amounts of interest
expense each year. We believe that we will meet interest expense
and principal payments (also referred to as debt service),
capital spending and other requirements through a combination of
our net cash flows from operating activities, borrowing
availability under our bank credit facilities and our ability to
secure future external financing. However, there is no assurance
that we will be able to obtain sufficient future financing, or,
if we were able to do so, that the terms would be favorable to
us.
As of December 31, 2007, our total debt was
$3.215 billion. Of this amount, $94.5 million matures
during the year ending December 31, 2008. During the year
ended December 31, 2007, we paid cash interest of
$245.1 million, net of capitalized interest. As of
December 31, 2007, about 66% of our outstanding
indebtedness was at fixed interest rates or subject to interest
rate protection.
Bank
Credit Facilities
We own our cable systems through two principal subsidiaries,
Mediacom LLC and Mediacom Broadband LLC. The operating
subsidiaries of Mediacom LLC (LLC Group) have a
$1.244 billion bank credit facility (the LLC Credit
Facility) expiring in 2015, of which $880.5 million
was outstanding as of December 31, 2007. The LLC Credit
Facility consists of a $400.0 million revolving credit
commitment, a $200.0 million term loan and a
$643.5 million term loan. The operating subsidiaries of
Mediacom Broadband LLC (Broadband Group) have a
$1.524 billion bank credit facility (the Broadband
Credit Facility) expiring in 2015, of which
$1.210 billion was outstanding as of December 31,
2007. The Broadband Credit Facility consists of a
$565.4 million revolving credit commitment, a
$166.5 million term loan, and a $792.0 million term
loan. Continued access to our credit facilities is subject to
our remaining in compliance with the covenants of these credit
facilities, including covenants tied to our operating
performance, principally the requirement that we maintain a
maximum ratio of total senior debt to cash flow, as defined in
our credit agreements, of 6.0 to 1.0. As of December 31,
2007, we had, in total, unused revolving credit commitments of
approximately $645.4 million, all of which could be
borrowed and used for general corporate purposes based on the
terms and conditions of our debt arrangements. As of the same
date, the weighted average interest rate for borrowings under
our credit facilities was 6.7%.
The LLC Credit Facility is collateralized by LLC Groups
pledge of all its ownership interests in the operating
subsidiaries owned by LLC Group and is guaranteed by LLC Group
on a limited recourse basis to the extent of such ownership
interests. The Broadband Credit Facility is collateralized by
Broadband Groups pledge of all its ownership interests in
the operating subsidiaries owned by Broadband Group and is
guaranteed by Broadband Group on a limited recourse basis to the
extent of such ownership interests.
As of December 31, 2007, approximately $32.0 million
of letters of credit were issued under our bank credit
facilities to various parties as collateral for our performance
relating to insurance and franchise requirements.
Interest
Rate Exchange Agreements
As of December 31, 2007, we have entered into interest rate
swaps with counterparties to hedge $1.0 billion of floating
rate debt at weighted average fixed rate of 5.1%. These swaps
are scheduled to expire in the amounts of $800.0 million
and $200.0 million during the years ended December 31,
2009 and 2010, respectively, and have been accounted for on a
mark-to-market basis as of, and for the year ended
December 31, 2007. Under the terms of all of our interest
rate swaps, we are exposed to credit loss in the event of
nonperformance by the other parties. However, due to the high
creditworthiness of our counterparties, which are major banking
firms with investment grade ratings, we do not anticipate their
nonperformance.
48
Senior
Notes
We have issued senior notes through Mediacom LLC and Mediacom
Broadband LLC totaling $1.125 billion as of
December 31, 2007. The indentures governing our senior
notes also contain financial and other covenants, though they
are generally less restrictive than those found in our bank
credit facilities and do not require us to maintain any
financial ratios. Principal covenants include a limitation on
the incurrence of additional indebtedness based upon a maximum
ratio of total indebtedness to cash flow, as defined in these
debt agreements, of 7.0 to 1.0 in the case of Mediacom
LLCs senior notes, and 8.5 to 1.0 in the case of Mediacom
Broadband LLCs senior notes. These agreements also contain
limitations on dividends, investments and distributions.
Covenant
Compliance and Debt Ratings
For all periods through December 31, 2007, we were in
compliance with all of the covenants under our bank credit
facilities and other debt arrangements. We believe that we will
not have any difficulty complying with any of the applicable
covenants in the foreseeable future.
Our future access to the debt markets and the terms and
conditions we receive are influenced by our debt ratings. Our
corporate credit ratings are B1, with a stable outlook, by
Moodys, and B+, with a stable outlook, by Standard and Poors.
There are no covenants, events of default, borrowing conditions
or other terms in our credit facilities or our other debt
arrangements that are based on changes in our credit ratings
assigned by any rating agency. Any future downgrade to our
credit ratings could increase the interest rate on future debt
issuance and adversely impact our ability to raise additional
funds.
Operating
Activities
Net cash flows provided by operating activities were
$188.8 million for the year ended December 31, 2007,
compared to $176.9 million for the prior year. The change
of $11.9 million is primarily due to an $18.7 million
increase in Adjusted OIBDA and $22.0 million cash payment
made in 2006 relating to early extinguishment of debt, partially
offset by a $19.6 million reduction in the changes in
operating assets and liabilities and an $11.8 million
increase in interest expense.
During the year ended December 31, 2007, the net change in
our operating assets and liabilities was $30.8 million, due
to a decrease in accounts payable and accrued expenses of
$21.8 million, an increase in accounts receivable, net, of
$6.3 million, an increase in prepaid expenses and other
assets of $5.3 million and a decrease in non-current
liabilities of $2.1 million, offset in part by an increase
in deferred revenue of $4.7 million.
Investing
Activities
Net cash flows used in investing activities, which consisted
primarily of capital expenditures, were $202.3 million for
the year ended December 31, 2007, compared to
$210.2 million for the prior year. Capital expenditures
increased $17.2 million from 2006, primarily due to greater
customer installations and equipment and network enhancements.
We received proceeds of $32.4 million from the sale of
cable systems and purchased a cable system for $7.3 million.
Financing
Activities
Net cash flows used in financing activities were
$3.5 million for the year ended December 31, 2007, as
compared to net cash flows provided by financing activities of
$52.4 million for the prior year. Pursuant to our Board
authorized share repurchase program, we repurchased
approximately 11.2 million shares of our Class A
common stock for approximately $69.0 million during the
year ended December 31, 2007. We paid for such share
repurchases using borrowings under the revolving credit portion
of our subsidiary credit facilities. For the year ended
December 31, 2007 new borrowings exceeded repayment of debt
by $70.4 million.
49
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, 2007 and thereafter (dollars in
thousands)*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
Interest
|
|
|
Purchase
|
|
|
|
|
|
|
Debt
|
|
|
Leases
|
|
|
Leases
|
|
|
Expense(1)
|
|
|
Obligations
|
|
|
Total
|
|
|
2008
|
|
$
|
94,500
|
|
|
$
|
33
|
|
|
$
|
5,138
|
|
|
$
|
241,301
|
|
|
$
|
27,291
|
|
|
$
|
368,263
|
|
2009-2010
|
|
|
209,500
|
|
|
|
|
|
|
|
7,861
|
|
|
|
461,396
|
|
|
|
28,239
|
|
|
|
706,996
|
|
2011-2012
|
|
|
548,000
|
|
|
|
|
|
|
|
4,315
|
|
|
|
425,323
|
|
|
|
|
|
|
|
977,638
|
|
Thereafter
|
|
|
2,363,000
|
|
|
|
|
|
|
|
5,222
|
|
|
|
463,454
|
|
|
|
|
|
|
|
2,831,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash obligations
|
|
$
|
3,215,000
|
|
|
$
|
33
|
|
|
$
|
22,536
|
|
|
$
|
1,591,474
|
|
|
$
|
55,530
|
|
|
$
|
4,884,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Refer to Note 7 to our consolidated financial statements
for a discussion of our long-term debt, and to Note 12 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,
2007 and the average interest rates applicable under such debt
obligations. |
|
(2) |
|
We have contracts with programmers who provide video programming
services to our subscribers. Programming is our largest expense;
however, 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: $16.4 million for
2008 and $18.7 million for
2009-2010. |
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 3 of our consolidated
financial statements.
Property,
Plant and Equipment
We capitalize the costs of new construction and replacement of
our cable transmission and distribution facilities and new
service installation in accordance with
SFAS No. 51-Financial Reporting by Cable
Television Companies. Costs associated with subsequent
installations of additional services not previously installed at
a customers dwelling are capitalized to the extent such
costs are incremental and directly attributable to the
installation of such additional services. Capitalized costs
include all direct labor and materials as well as certain
indirect costs. Capitalized costs are recorded as additions to
property, plant and equipment and depreciated over the average
life of the related assets. We use standard costing models,
developed from actual historical costs and relevant operational
data, to determine our capitalized amounts. These models include
labor rates, overhead rates and standard time inputs to perform
various installation and construction activities. The
development of these standards involves significant judgment by
management, especially in the development of standards for our
newer, advanced products and services in which historical data
is limited. Changes to the estimates or assumptions used in
establishing these standards could be material. We perform
periodic evaluations of the estimates used to determine the
amount of costs that are capitalized. Any changes to these
estimates, which may be significant, are applied in the period
in which the evaluations were completed.
50
Indefinite-lived
Intangibles
Our cable systems operate under non-exclusive franchises granted
by state and local governmental authorities for varying lengths
of time. We acquired these cable franchises through acquisitions
of cable systems and they 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, advanced products and services.
We have concluded that our cable 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 cable franchise
rights contribute to our revenues. Accordingly, with our
adoption of SFAS No. 142, Goodwill and Other
Intangible Assets, we no longer amortize the cable
franchise rights and goodwill. Instead, such assets are tested
annually for impairment or more frequently if impairment
indicators arise.
Based on the guidance outlined in EITF
No. 02-7,
Unit of Accounting for Testing Impairment of
Indefinite-Lived Intangible Assets, we determined that
the unit of accounting for testing franchise value 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 unit reporting level reflects the level at
which the purchase method of accounting for our acquisitions was
originally recorded. We have two borrowing groups, or reporting
units, for the purpose of applying SFAS No. 142.
We follow the provisions of SFAS No. 142 to test our
goodwill and cable franchise rights for impairment. We assess
the fair values of each cable system cluster using discounted
cash flow methodology, under which the fair value of cable
franchise rights are determined in a direct manner. This
involves significant judgment, as well as certain assumptions
and estimates, including 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.
Significant impairment in value resulting in impairment charges
may result if these estimates and assumptions used in the fair
value determination change in the future. Such impairments could
potentially be material.
Goodwill impairment is determined using a two-step process. The
first step compares the fair value of a reporting unit with its
carrying amount, including goodwill. If the fair value of a
reporting unit exceeds its 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
its 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 units 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 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.
We completed our most recent impairment test as of
October 1, 2007, which reflected no impairment of our
franchise rights and goodwill.
Income
Taxes
We account for income taxes using the liability method as
stipulated by SFAS No. 109. This method generally
provides that deferred tax assets and liabilities be recognized
for temporary differences between the financial reporting basis
and the tax basis of our assets and liabilities and anticipated
benefit of utilizing net operating loss carryforwards.
In evaluating our ability to recover our deferred tax assets and
net operating loss carryforwards, we assess all available
positive and negative evidence including our most recent
performance, the scheduled reversal of deferred tax liabilities,
our forecast of taxable income in future periods and available
prudent tax planning strategies. In forecasting future taxable
income we use assumptions that require significant judgment and
are consistent with the estimates we use to manage our business.
During 2007, we increased our valuation allowance against
deferred tax assets by $57.3 million and recognized a
corresponding non-cash charge to the provision for income taxes.
At December 31, 2007, the valuation allowance had a balance
of approximately $631.0 million. We will continue to
monitor the need for
51
the deferred tax asset valuation allowance in accordance with
SFAS No. 109. We expect to add to our valuation
allowance any increase in deferred tax liabilities relating to
indefinite-lived intangible assets. We will also adjust our
valuation allowance if we assess that there is sufficient change
in our ability to recover our deferred tax assets. Our income
tax expense in future periods will be reduced or increased to
the extent of offsetting decreases or increases, respectively,
in our valuation allowance. These changes could have a
significant impact on our future earnings.
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 options expected
life and the price volatility of the underlying stock. The
estimation of stock awards that will ultimately vest requires
judgment, and to the extent actual results or updated estimates
differ from our current estimates, such amounts will be recorded
as a cumulative adjustment in the periods the estimates are
revised. Actual results, and future changes in estimates, may
differ substantially from our current estimates.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, SFAS No. 157
establishes a single authoritative definition of fair value,
sets out a framework for measuring fair value, and expands on
required disclosures about fair value measurement.
SFAS No. 157 will be effective as of January 1,
2008 and will be applied prospectively. We do not expect that
this Statement will have a material impact on our consolidated
financial condition or results of operations.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB
Statement No. 115. SFAS No. 159 permits
entities to choose to measure many financial instruments and
certain other items at fair value. This Statement is effective
as of the beginning of an entitys first fiscal year that
begins after November 15, 2008. We do not expect that this
Statement will have a material impact on our consolidated
financial condition or results of operations.
In December 2007, the FASB issued
SFAS No. 141 (R), Business
Combinations, which continues to require the treatment
that all business combinations be accounted for by applying the
acquisition method. Under the acquisition method, the acquirer
recognizes and measures the identifiable assets acquired, the
liabilities assumed, and any contingent consideration and
contractual contingencies, as a whole, at their fair value as of
the acquisition date. Under SFAS No. 141 (R), all
transaction costs are expensed as incurred.
SFAS No. 141 (R) replaces SFAS No. 141.
The guidance in SFAS No. 141 (R) will be applied
prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning after December 15, 2008.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB
No. 51. SFAS No. 160 requires that a
noncontrolling interest (previously referred to as a minority
interest) be separately reported in the equity section of the
consolidated entitys balance sheet. SFAS No. 160
also established accounting and reporting standards for:
(i) ownership interests in subsidiaries held by parties
other than the parent, (ii) the amount of consolidated net
income attributable to the parent and to the noncontrolling
interest, (iii) changes in a parents ownership
interest, (iv) the valuation of retained noncontrolling
equity investments when a subsidiary is deconsolidated and
(v) sufficient disclosures to identify the interest of the
parent and the noncontrolling owners. SFAS No. 160 is
effective for fiscal years beginning on or after
December 15, 2008. We are currently assessing the potential
impact that the adoption of SFAS No. 160 will have on
our consolidated financial statements.
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
FCCs existing cable rate regulations we may increase rates
for cable television 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.
52
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
In the normal course of business, we use interest rate swaps
with counterparties to fix the interest rate on a portion of our
variable interest rate debt. As of December 31, 2007, we
had $1.0 billion of interest rate swaps with various banks
with a weighted average fixed rate of approximately 5.12%. The
fixed rates of the interest rate swaps are offset against the
applicable three-month London Interbank Offering Rate to
determine the related interest expense. Under the terms of the
interest rate swaps, we are exposed to credit loss in the event
of nonperformance by the other parties. However, due to the high
creditworthiness of our counterparties, which are major banking
firms with investment grade ratings, we do not anticipate their
nonperformance. At December 31, 2007, based on the
mark-to-market valuation, we would have paid approximately
$25.8 million, including accrued interest, if we terminated
these interest rate swaps. Our interest rate swaps are scheduled
to expire in the amounts of $800.0 million and
$200.0 million during the years ended December 31,
2009 and 2010, respectively. See Notes 3 and 7 to our
consolidated financial statements.
Our interest rate swaps and financial contracts do not contain
credit rating triggers that could affect our liquidity.
The table below provides the expected maturity and estimated
fair value of our debt as of December 31, 2007 (all dollars
in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Credit
|
|
|
Capital Lease
|
|
|
|
|
|
|
Senior Notes
|
|
|
Facilities
|
|
|
Obligations
|
|
|
Total
|
|
|
Expected Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2008 to December 31, 2008
|
|
|
|
|
|
$
|
94,500
|
|
|
$
|
33
|
|
|
$
|
94,533
|
|
January 1, 2009 to December 31, 2009
|
|
|
|
|
|
|
121,000
|
|
|
|
|
|
|
|
121,000
|
|
January 1, 2010 to December 31, 2010
|
|
|
|
|
|
|
88,500
|
|
|
|
|
|
|
|
88,500
|
|
January 1, 2011 to December 31, 2011
|
|
|
125,000
|
|
|
|
103,500
|
|
|
|
|
|
|
|
228,500
|
|
January 1, 2012 to December 31, 2012
|
|
|
|
|
|
|
319,500
|
|
|
|
|
|
|
|
319,500
|
|
Thereafter
|
|
|
1,000,000
|
|
|
|
1,363,000
|
|
|
|
|
|
|
|
2,363,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,125,000
|
|
|
$
|
2,090,000
|
|
|
$
|
33
|
|
|
$
|
3,215,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
$
|
1,014,085
|
|
|
$
|
2,090,000
|
|
|
$
|
33
|
|
|
$
|
3,215,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Interest Rate
|
|
|
8.9
|
%
|
|
|
6.7
|
%
|
|
|
3.1
|
%
|
|
|
7.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
Contents
|
|
|
|
|
|
|
Page
|
|
|
|
|
55
|
|
|
|
|
56
|
|
|
|
|
57
|
|
|
|
|
58
|
|
|
|
|
59
|
|
|
|
|
60
|
|
|
|
|
83
|
|
54
Report of
Independent Registered Public Accounting Firm
To the Shareholders of Mediacom Communications Corporation:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Mediacom Communications Corporation
and its subsidiaries (the Company) at
December 31, 2007 and December 31, 2006, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2007 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. Also in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying
Managements Report on Internal Control over Financial
Reporting, appearing under Item 9A. Our responsibility is
to express opinions on these financial statements, on the
financial statement schedule, and on the Companys internal
control over financial reporting based on our integrated audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
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. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
As discussed in Note 8 to the consolidated financial statements,
during the year ended December 31, 2006, the Company
changed the manner in which it accounts for share-based
compensation.
A companys internal control over financial reporting is a
process designed 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. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) 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 the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its 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 risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
New York, New York
March 14, 2008
55
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(All dollar amounts in thousands)
|
|
|
ASSETS
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
19,388
|
|
|
$
|
36,385
|
|
Accounts receivable, net of allowance for doubtful accounts of
$2,107 and $2,173, respectively
|
|
|
82,096
|
|
|
|
75,722
|
|
Prepaid expenses and other current assets
|
|
|
20,692
|
|
|
|
17,248
|
|
Deferred tax assets, net
|
|
|
2,424
|
|
|
|
2,467
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
124,600
|
|
|
|
131,822
|
|
Investment in cable television systems:
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net of accumulated depreciation
of $1,624,811 and $1,423,911, respectively
|
|
|
1,436,427
|
|
|
|
1,451,134
|
|
Franchise rights, net of accumulated amortization of $139,926
and $140,947
|
|
|
1,798,188
|
|
|
|
1,803,898
|
|
Goodwill
|
|
|
220,646
|
|
|
|
221,382
|
|
Subscriber lists and other intangible assets, net of accumulated
amortization of $161,248 and $159,848, respectively
|
|
|
10,532
|
|
|
|
11,827
|
|
|
|
|
|
|
|
|
|
|
Total investment in cable television systems
|
|
|
3,465,793
|
|
|
|
3,488,241
|
|
Other assets, net of accumulated amortization of $27,172 and
$22,288, respectively
|
|
|
24,817
|
|
|
|
32,287
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,615,210
|
|
|
$
|
3,652,350
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
247,485
|
|
|
$
|
275,611
|
|
Deferred revenue
|
|
|
51,015
|
|
|
|
46,293
|
|
Current portion of long-term debt
|
|
|
94,533
|
|
|
|
75,563
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
393,033
|
|
|
|
397,467
|
|
Long-term debt, less current portion
|
|
|
3,120,500
|
|
|
|
3,069,036
|
|
Deferred tax liabilities, net
|
|
|
316,602
|
|
|
|
259,300
|
|
Other non-current liabilities
|
|
|
38,164
|
|
|
|
21,361
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,868,299
|
|
|
|
3,747,164
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
STOCKHOLDERS DEFICIT
|
|
|
|
|
|
|
|
|
Class A common stock, $.01 par value;
300,000,000 shares authorized; 94,293,185 shares
issued and 72,011,963 shares outstanding as of
December 31, 2007 and 93,825,218 shares issued and
82,761,606 shares outstanding as of December 31, 2006
|
|
|
943
|
|
|
|
938
|
|
Class B common stock, $.01 par value;
100,000,000 shares authorized; 27,001,944 and
27,061,237 shares issued and outstanding as of
December 31, 2007 and December 31, 2006, respectively
|
|
|
270
|
|
|
|
271
|
|
Additional paid-in capital
|
|
|
997,404
|
|
|
|
991,113
|
|
Accumulated deficit
|
|
|
(1,121,242
|
)
|
|
|
(1,026,113
|
)
|
Treasury stock, at cost, 22,281,222 and 11,063,612 shares
of Class A common stock, as of December 31, 2007 and
December 31, 2006, respectively
|
|
|
(130,464
|
)
|
|
|
(61,023
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(253,089
|
)
|
|
|
(94,814
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
3,615,210
|
|
|
$
|
3,652,350
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
56
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands, except per share amounts)
|
|
|
Revenues
|
|
$
|
1,293,375
|
|
|
$
|
1,210,400
|
|
|
$
|
1,098,822
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service costs (exclusive of depreciation and amortization of
$235,331, $215,918, $220,567, respectively, shown separately
below)
|
|
|
544,072
|
|
|
|
492,729
|
|
|
|
438,768
|
|
Selling, general and administrative expenses
|
|
|
264,006
|
|
|
|
252,688
|
|
|
|
232,514
|
|
Corporate expenses
|
|
|
27,637
|
|
|
|
25,445
|
|
|
|
22,287
|
|
Depreciation and amortization
|
|
|
235,331
|
|
|
|
215,918
|
|
|
|
220,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
222,329
|
|
|
|
223,620
|
|
|
|
184,686
|
|
Interest expense, net
|
|
|
(239,015
|
)
|
|
|
(227,206
|
)
|
|
|
(208,264
|
)
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
(35,831
|
)
|
|
|
(4,742
|
)
|
(Loss) gain on derivatives, net
|
|
|
(22,902
|
)
|
|
|
(15,798
|
)
|
|
|
12,555
|
|
Gain on sale of cable systems, net
|
|
|
11,079
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets and investments, net
|
|
|
|
|
|
|
|
|
|
|
2,628
|
|
Other expense, net
|
|
|
(9,054
|
)
|
|
|
(9,973
|
)
|
|
|
(11,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(37,563
|
)
|
|
|
(65,188
|
)
|
|
|
(24,966
|
)
|
Provision for income taxes
|
|
|
(57,566
|
)
|
|
|
(59,734
|
)
|
|
|
(197,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(95,129
|
)
|
|
$
|
(124,922
|
)
|
|
$
|
(222,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding
|
|
|
107,828
|
|
|
|
110,971
|
|
|
|
117,194
|
|
Basic and diluted loss per share
|
|
$
|
(0.88
|
)
|
|
$
|
(1.13
|
)
|
|
$
|
(1.90
|
)
|
The accompanying notes are an integral part of these statements.
57
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
Deferred
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Stock
|
|
|
Compensation
|
|
|
Total
|
|
|
|
(All dollar amounts in thousands)
|
|
|
Balance, December 31, 2004
|
|
$
|
930
|
|
|
$
|
274
|
|
|
$
|
983,417
|
|
|
$
|
(678,963
|
)
|
|
$
|
(12,146
|
)
|
|
$
|
|
|
|
$
|
293,512
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(222,228
|
)
|
|
|
|
|
|
|
|
|
|
|
(222,228
|
)
|
Issuance of common stock in employee stock purchase plan
|
|
|
3
|
|
|
|
|
|
|
|
977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
980
|
|
Issuance of restricted stock units, net of forfeitures
|
|
|
|
|
|
|
|
|
|
|
6,190
|
|
|
|
|
|
|
|
|
|
|
|
(6,190
|
)
|
|
|
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,333
|
|
|
|
1,333
|
|
Treasury stock, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,490
|
)
|
|
|
|
|
|
|
(14,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
$
|
933
|
|
|
$
|
274
|
|
|
$
|
990,584
|
|
|
$
|
(901,191
|
)
|
|
$
|
(26,636
|
)
|
|
$
|
(4,857
|
)
|
|
$
|
59,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(124,922
|
)
|
|
|
|
|
|
|
|
|
|
|
(124,922
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
4,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,478
|
|
Issuance of common stock in employee stock purchase plan
|
|
|
2
|
|
|
|
|
|
|
|
908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
910
|
|
Issuance of restricted stock units, net of forfeitures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60
|
)
|
|
|
|
|
|
|
(60
|
)
|
Deferred compensation
|
|
|
3
|
|
|
|
|
|
|
|
(4,860
|
)
|
|
|
|
|
|
|
|
|
|
|
4,857
|
|
|
|
|
|
Treasury stock, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,327
|
)
|
|
|
|
|
|
|
(34,327
|
)
|
Transfer of stock
|
|
|
|
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
938
|
|
|
$
|
271
|
|
|
$
|
991,113
|
|
|
$
|
(1,026,113
|
)
|
|
$
|
(61,023
|
)
|
|
$
|
|
|
|
$
|
(94,814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(95,129
|
)
|
|
|
|
|
|
|
|
|
|
|
(95,129
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
5,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,299
|
|
Issuance of common stock in employee stock purchase plan
|
|
|
2
|
|
|
|
|
|
|
|
962
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
961
|
|
Issuance of restricted stock units, net of forfeitures
|
|
|
2
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(402
|
)
|
|
|
|
|
|
|
(402
|
)
|
Exercise of stock options, net
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
Treasury stock, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69,036
|
)
|
|
|
|
|
|
|
(69,036
|
)
|
Transfer of stock
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
943
|
|
|
$
|
270
|
|
|
$
|
997,404
|
|
|
$
|
(1,121,242
|
)
|
|
$
|
(130,464
|
)
|
|
$
|
|
|
|
$
|
(253,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
58
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(All dollar amounts in thousands)
|
|
|
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(95,129
|
)
|
|
$
|
(124,922
|
)
|
|
$
|
(222,228
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
235,331
|
|
|
|
215,918
|
|
|
|
220,567
|
|
Loss (gain) on derivatives, net
|
|
|
22,902
|
|
|
|
15,798
|
|
|
|
(12,555
|
)
|
Gain on sale of cable systems, net
|
|
|
(11,079
|
)
|
|
|
|
|
|
|
|
|
Gain on sale of assets and investments, net
|
|
|
|
|
|
|
|
|
|
|
(2,628
|
)
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
11,206
|
|
|
|
4,742
|
|
Amortization of deferred financing costs
|
|
|
4,884
|
|
|
|
5,998
|
|
|
|
8,613
|
|
Share-based compensation
|
|
|
5,299
|
|
|
|
4,478
|
|
|
|
1,333
|
|
Deferred income taxes
|
|
|
57,345
|
|
|
|
59,527
|
|
|
|
197,306
|
|
Changes in assets and liabilities, net of effects from
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(6,342
|
)
|
|
|
(11,877
|
)
|
|
|
(5,592
|
)
|
Prepaid expenses and other current assets
|
|
|
(5,360
|
)
|
|
|
118
|
|
|
|
(3,053
|
)
|
Accounts payable and accrued expenses
|
|
|
(21,767
|
)
|
|
|
400
|
|
|
|
(6,722
|
)
|
Deferred revenue
|
|
|
4,722
|
|
|
|
5,220
|
|
|
|
2,366
|
|
Other non-current liabilities
|
|
|
(2,014
|
)
|
|
|
(4,959
|
)
|
|
|
(3,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by operating activities
|
|
$
|
188,792
|
|
|
$
|
176,905
|
|
|
$
|
179,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS USED IN INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
(227,409
|
)
|
|
$
|
(210,235
|
)
|
|
$
|
(228,216
|
)
|
Acquisition of cable television systems
|
|
|
(7,274
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sale of cable television systems
|
|
|
32,348
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of assets and investments
|
|
|
|
|
|
|
|
|
|
|
4,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in investing activities
|
|
$
|
(202,335
|
)
|
|
$
|
(210,235
|
)
|
|
$
|
(223,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
New borrowings
|
|
$
|
412,525
|
|
|
$
|
2,181,000
|
|
|
$
|
849,750
|
|
Repayment of debt
|
|
|
(342,091
|
)
|
|
|
(1,823,552
|
)
|
|
|
(799,731
|
)
|
Redemption of senior notes
|
|
|
|
|
|
|
(572,500
|
)
|
|
|
(202,834
|
)
|
Issuance of senior notes
|
|
|
|
|
|
|
300,000
|
|
|
|
200,000
|
|
Repurchases of Class A common stock
|
|
|
(69,036
|
)
|
|
|
(34,386
|
)
|
|
|
(14,490
|
)
|
Proceeds from issuance of common stock in employee stock
purchase plan
|
|
|
962
|
|
|
|
909
|
|
|
|
954
|
|
Financing costs
|
|
|
|
|
|
|
(2,953
|
)
|
|
|
(11,845
|
)
|
Other financing activities bank overdrafts
|
|
|
(5,814
|
)
|
|
|
3,916
|
|
|
|
16,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows (used in) provided by financing activities
|
|
$
|
(3,454
|
)
|
|
$
|
52,434
|
|
|
$
|
37,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(16,997
|
)
|
|
|
19,104
|
|
|
|
(6,594
|
)
|
CASH, beginning of period
|
|
|
36,385
|
|
|
|
17,281
|
|
|
|
23,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH, end of period
|
|
$
|
19,388
|
|
|
$
|
36,385
|
|
|
$
|
17,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest, net of amounts
capitalized
|
|
$
|
245,143
|
|
|
$
|
247,507
|
|
|
$
|
205,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
59
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Mediacom Communications Corporation (MCC, and
collectively with our direct and indirect subsidiaries, the
Company) was organized in November 1999, and is
involved in the development of cable systems serving smaller
cities and towns in the United States. Through these cable
systems, we provide entertainment, information and
telecommunications services to our subscribers and customers. As
of December 31, 2007, we were operating cable systems in
23 states, principally Alabama, California, Delaware,
Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Minnesota,
Missouri, North Carolina and South Dakota.
|
|
2.
|
LIQUIDITY
AND CAPITAL RESOURCES
|
As of December 31, 2007, we had unused revolving credit
commitments of $645.4 million, all of which could be
borrowed and used for general corporate purposes based on the
terms and conditions of our debt arrangements.
|
|
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Preparation of Consolidated Financial
Statements
The consolidated financial statements include the accounts of
MCC 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 managements most difficult and
subjective judgments include: assessment and valuation of
intangibles, accounts receivable allowance, useful lives of
property, plant and equipment, share-based compensation, and the
recognition and measurement of income tax assets and
liabilities. Actual results could differ from those and other
estimates. Effective January 1, 2006, we adopted
SFAS No. 123(R), Share-Based
Payment. See Note 8.
Revenue
Recognition
Revenues from video, data 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
$36.6 million, $36.7 million and $34.0 million
for the years ended December 31, 2007, 2006 and 2005,
respectively.
Allowance
for Doubtful Accounts
The allowance for doubtful accounts represents our best estimate
of probable losses in the accounts receivable balance. The
allowance is based on the number of days outstanding, customer
balances, historical experience and other currently available
information. During the years ended December 31, 2006 and
2005, we revised our estimate of probable losses in the accounts
receivable of our advertising business to better reflect
historical collection experience. The change in estimate
resulted in a benefit to the consolidated statement of
operations of $0.4 million and $0.9 million for the
years ended December 31, 2006 and 2005, respectively.
60
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the year ended December 31, 2006, we revised our
estimate of probable losses in the accounts receivable of its
video, data and phone business to better reflect historical
collection experience. The change in estimate resulted in a
benefit to the consolidated statement of operations of
$1.0 million for the year ended December 31, 2006.
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 customers 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 customers dwelling are capitalized to the extent such
costs are incremental and directly attributable to the
installation of such additional services.
Capitalized
Software Costs
We account for internal-use software development and related
costs in accordance with AICPA Statement of Position
No. 98-1,
Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use. Software development and
other related costs consist of external and internal costs
incurred in the application development stage to purchase and
implement the software that will be used in our telephony
business. Costs incurred in the development of application and
infrastructure of the software is capitalized and will be
amortized over our respective estimated useful life of
5 years. During the years ended December 31, 2007 and
2006, we capitalized approximately $1.2 million and
$6.5 million, respectively of software development costs.
Capitalized software had a net book value of $16.5 million
and $15.6 million as of December 31, 2007 and 2006,
respectively.
61
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Marketing
and Promotional Costs
Marketing and promotional costs are expensed as incurred and
were $30.1 million, $28.9 million and
$26.9 million for the years ended December 31, 2007,
2006 and 2005, respectively.
Intangible
Assets
In accordance with SFAS No. 142, Goodwill and
Other Intangible Assets, the amortization of goodwill
and indefinite-lived intangible assets is prohibited and
requires such assets to be tested annually for impairment, or
more frequently if impairment indicators arise. We have
determined that our cable franchise rights and goodwill are
indefinite-lived assets and therefore not amortizable.
Other finite-lived intangible assets, which consist primarily of
subscriber lists and covenants not to compete, continue to be
amortized over their useful lives of 5 to 10 years and
5 years, respectively. Amortization expense for the years
ended December 31, 2007, 2006 and 2005 was approximately
$2.5 million, $2.1 million and $2.8 million,
respectively. Our estimated aggregate amortization expense for
2008 through 2011 and beyond are $2.5 million,
$2.5 million, $2.5 million, $2.5 million, and
$0.5 million, respectively.
We operate our cable systems under non-exclusive cable
franchises that are granted by state or local government
authorities for varying lengths of time. As of December 31,
2007, we held 1,366 franchises in areas located throughout the
United States. We acquired these cable franchises through
acquisitions of cable systems and were accounted for using the
purchase method of accounting.
We have directly assessed the value of cable franchise rights
for impairment under SFAS No. 142 by utilizing a
discounted cash flow methodology. In performing an impairment
test in accordance with SFAS No. 142, we make
assumptions, such as future cash flow expectations and other
future benefits related to cable franchise rights, which are
consistent with the expectations of buyers and sellers of cable
systems in determining fair value. If the determined fair value
of our cable franchise rights is less than the carrying amount
on the financial statements, an impairment charge would be
recognized for the difference between the fair value and the
carrying value of such assets.
Goodwill impairment is determined 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 a
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 units 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. We completed our annual impairment test as of
October 1, 2007, which reflected no impairment of franchise
rights and goodwill.
The following table details changes in the carrying valve of
goodwill for the year ended December 31, 2007 (dollars in
thousands):
|
|
|
|
|
Balance December 31, 2006
|
|
$
|
221,382
|
|
Acquisitions
|
|
|
|
|
Dispositions
|
|
|
(736
|
)
|
|
|
|
|
|
Balance December 31, 2007
|
|
$
|
220,646
|
|
|
|
|
|
|
Other
Assets
Other assets, net, primarily include financing costs and
original issue discount incurred to raise debt. Financing costs
are deferred and amortized as other expense and original issue
discounts are deferred and amortized as interest expense over
the expected term of such financings.
62
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Segment
Reporting
SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information, requires the
disclosure of factors used to identify an enterprises
reportable segments. Our operations are organized and managed on
the basis of cable system clusters that represent operating
segments responsible for certain geographical regions. Each
operating segment derives our revenues from the delivery of
similar products and services to a customer base that is also
similar. Each operating segment deploys similar technology to
deliver our products and services and operates within a similar
regulatory environment. In addition, each operating segment has
similar economic characteristics. Management evaluated the
criteria for aggregation of the geographic operating segments
under SFAS No. 131 and believes that we meet each of
the respective criteria set forth. Accordingly, management has
identified broadband services as our one reportable segment.
Accounting
for Derivative Instruments
We account for derivative instruments in accordance with
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities,
SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities-an
amendment of FASB Statement No. 133, and
SFAS No. 149 Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. These
pronouncements require that all derivative instruments be
recognized on the balance sheet at fair value. We enter into
interest rate exchange agreements 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 instruments effectiveness, risk reduction and,
in most cases, a
one-to-one
matching of the derivative instrument to our underlying
transaction. Gains and losses from changes in fair values of
derivatives that are not designated as hedges for accounting
purposes are recognized in the consolidated statement of
operations. We have no derivative financial instruments
designated as hedges. Therefore, changes in fair value for the
respective periods were recognized in the consolidated statement
of operations.
Accounting
for Asset Retirement
We adopted SFAS No. 143, Accounting for Asset
Retirement Obligations, on January 1, 2003.
SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. We reviewed our asset retirement obligations to determine
the fair value of such liabilities and if a reasonable estimate
of fair value could be made. This entailed the review of leases
covering tangible long-lived assets as well as the
Companys
rights-of-way
under franchise agreements. Certain of our franchise agreements
and leases contain provisions that require restoration or
removal of equipment if the franchises or leases are not
renewed. Based on historical experience, we expect to renew our
franchise or lease agreements. In the unlikely event that any
franchise or lease agreement is not expected to be renewed, we
would record an estimated liability. However, in determining the
fair value of our asset retirement obligation under our
franchise agreements, consideration will be given to the Cable
Communications Policy Act of 1984, which generally entitles the
cable operator to the fair market value for the
cable system covered by a franchise, if renewal is denied and
the franchising authority acquires ownership of the cable system
or effects a transfer of the cable system to another person.
Changes in these assumptions based on future information could
result in adjustments to estimated liabilities.
Upon adoption of SFAS No. 143, we determined that in
certain instances, it is obligated by contractual terms or
regulatory requirements to remove facilities or perform other
remediation activities upon the retirement of our assets. We
initially recorded a $7.8 million asset in property, plant
and equipment and a corresponding liability of
$7.8 million. As of December 31, 2007 and 2006, the
corresponding asset, net of accumulated amortization, was
$2.9 million and $3.7 million, respectively.
63
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accounting
for Long-Lived Assets
In accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets,
we periodically evaluate the recoverability and estimated
lives of our long-lived assets, including property and equipment
and intangible assets subject to amortization, whenever events
or changes in circumstances indicate that the carrying amount
may not be recoverable or the useful life has changed. The
measurement for such impairment loss is based on the fair value
of the asset, typically based upon the future cash flows
discounted at a rate commensurate with the risk involved. Unless
presented separately, the loss is included as a component of
either depreciation expense or amortization expense, as
appropriate.
Programming
Costs
We have various fixed-term carriage contracts to obtain
programming for our cable systems from content suppliers whose
compensation is generally based on a fixed monthly fee per
customer. These programming contracts are subject to negotiated
renewal. Programming costs are recognized when we distribute the
related programming. These programming costs are usually payable
each month based on calculations performed by us and are subject
to adjustments based on the results of periodic audits by the
content suppliers. Historically, such audit adjustments have
been immaterial to our total programming costs. Some content
suppliers offer financial incentives to support the launch of a
channel and ongoing marketing support. When such financial
incentives are received, we defer them within non-current
liabilities in our consolidated balance sheets and recognizes
such amounts as a reduction of programming costs (which are a
component of service costs in the consolidated statement of
operations) over the carriage term of the programming contract.
Share-based
Compensation
We adopted SFAS No. 123(R) on January 1, 2006
(see Note 8). 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 options
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.
Income
Taxes
We account for income taxes using the liability method as
stipulated by SFAS No. 109, Accounting for
Income Taxes. This method generally provides that
deferred tax assets and liabilities be recognized for temporary
differences between the financial reporting basis and the tax
basis of our assets and liabilities and anticipated benefit of
utilizing net operating loss carryforwards.
In evaluating our ability to recover our deferred tax assets and
net operating loss carryforwards, we assess all available
positive and negative evidence including recent performance, the
scheduled reversal of deferred tax liabilities, forecasts of
taxable income in future periods and available prudent tax
planning strategies. In forecasting future taxable income, we
use assumptions that require significant judgment and are
consistent with the estimates used to manage the business. At
December 31, 2007, we recorded a net deferred tax asset
valuation allowance of approximately $631.0 million. We
will continue to monitor the need for the deferred tax asset
valuation allowance in accordance with SFAS No. 109.
Should there be a sufficient change in our assessment of our
ability to recover our deferred tax assets, we will adjust our
valuation allowance accordingly.
64
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Comprehensive
Income
SFAS No. 130, Reporting Comprehensive
Income, requires companies to classify items of other
comprehensive income by their nature in the financial statements
and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial
position. We have had no other comprehensive income items to
report.
Reclassifications
Certain reclassifications have been made to prior year amounts
to conform to the current year presentation.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements.
SFAS No. 157 establishes a single authoritative
definition of fair value, sets out a framework for measuring
fair value, and expands on required disclosures about fair value
measurement. SFAS No. 157 will be effective as of
January 1, 2008 and will be applied prospectively. We do
not expect that this Statement will have a material impact on
our consolidated financial condition or results of operations.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB
Statement No. 115. SFAS No. 159 permits
entities to choose to measure many financial instruments and
certain other items at fair value. This Statement is effective
as of the beginning of an entitys first fiscal year that
begins after November 15, 2007. We do not expect that this
Statement will have a material impact on our consolidated
financial condition or results of operations.
In December 2007, the FASB issued
SFAS No. 141 (R), Business
Combinations, which continues to require the treatment
that all business combinations be accounted for by applying the
acquisition method. Under the acquisition method, the acquirer
recognizes and measures the identifiable assets acquired, the
liabilities assumed, and any contingent consideration and
contractual contingencies, as a whole, at their fair value as of
the acquisition date. Under SFAS No. 141 (R), all
transaction costs are expensed as incurred.
SFAS No. 141 (R) replaces SFAS No. 141.
The guidance in SFAS No. 141 (R) will be applied
prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting
period beginning after December 15, 2008.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51.
SFAS No. 160 requires that a noncontrolling
interest (previously referred to as a minority interest) be
separately reported in the equity section of the consolidated
entitys balance sheet. SFAS No. 160 also
established accounting and reporting standards for:
(i) ownership interests in subsidiaries held by parties
other than the parent; (ii) the amount of consolidated net
income attributable to the parent and to the noncontrolling
interest; (iii) changes in a parents ownership
interest; (iv) the valuation of retained noncontrolling
equity investments when a subsidiary is deconsolidated; and
(v) sufficient disclosures to identify the interest of the
parent and the noncontrolling owners. SFAS No. 160 is
effective for fiscal years beginning on or after
December 15, 2008. We are currently assessing the potential
impact that the adoption of SFAS No. 160 will have on
our consolidated financial statements.
We calculate earnings per share in accordance with
SFAS No. 128, Earnings per Share.
SFAS No. 128 computes basic earnings (loss) per share
by dividing the net income (loss) by the weighted average number
of shares of common stock outstanding during the period. Diluted
earnings per share is computed by dividing the net income (loss)
by the weighted average number of shares of common stock
outstanding during the period plus the effects of any dilutive
securities. Diluted earnings per share considers the impact of
potentially dilutive securities except in periods in which there
is a loss because the inclusion of the potential common shares
would have an anti-dilutive
65
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
effect. Our potentially dilutive securities include common
shares which may be issued upon exercise of our stock options,
conversion of convertible senior notes or vesting of restricted
stock units. Diluted earnings per share excludes the impact of
potential common shares related to our stock options in periods
in which the option exercise price is greater than the average
market price of our Class A common stock during the period.
For the year ended December 31, 2007, we generated net
losses, and so the inclusion of the potential common shares
would have been anti-dilutive. Accordingly, diluted loss per
share equaled basic loss per share. For the year ended
December 31, 2007, the calculation of diluted loss per
share excludes 2.1 million potential common shares related
to our stock options and restricted stock units.
For the year ended December 31, 2006, we generated net
losses, and so the inclusion of the potential common shares
would have been anti-dilutive. Accordingly, diluted loss per
share equaled basic loss per share. For the year ended
December 31, 2006, the calculation of diluted loss per
share excludes 1.5 million potential common shares related
to our stock options and restricted stock units, and
9.2 million potential common shares related to our
convertible senior notes.
For the year ended December 31, 2005, we generated net
losses, and so the inclusion of the potential common shares
would have been anti-dilutive. Accordingly, diluted loss per
share equaled basic loss per share. For the year ended
December 31, 2005, the calculation of diluted loss per
share excludes 1.2 million potential common shares related
to our stock options and restricted stock units and
9.2 million potential common shares related to our
convertible senior notes.
The following table reconciles the numerator and denominator of
the computations of diluted loss per share for the years ended
December 31, 2007, 2006 and 2005 (amounts in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Net
|
|
|
|
|
|
Loss
|
|
|
Net
|
|
|
|
|
|
Loss
|
|
|
Net
|
|
|
|
|
|
Loss
|
|
|
|
Loss
|
|
|
Shares
|
|
|
per Share
|
|
|
Loss
|
|
|
Shares
|
|
|
per Share
|
|
|
Income
|
|
|
Shares
|
|
|
per Share
|
|
|
Basic loss earnings per share
|
|
$
|
(95,129
|
)
|
|
|
107,828
|
|
|
$
|
(0.88
|
)
|
|
$
|
(124,922
|
)
|
|
|
110,971
|
|
|
$
|
(1.13
|
)
|
|
$
|
(222,228
|
)
|
|
|
117,194
|
|
|
$
|
(1.90
|
)
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible senior notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share
|
|
$
|
(95,129
|
)
|
|
|
107,828
|
|
|
$
|
(0.88
|
)
|
|
$
|
(124,922
|
)
|
|
|
110,971
|
|
|
$
|
(1.13
|
)
|
|
$
|
(222,228
|
)
|
|
|
117,194
|
|
|
$
|
(1.90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
PROPERTY,
PLANT AND EQUIPMENT
|
As of December 31, 2007 and 2006, property, plant and
equipment consisted of (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Cable systems, equipment and subscriber devices
|
|
$
|
2,889,287
|
|
|
$
|
2,711,273
|
|
Vehicles
|
|
|
68,998
|
|
|
|
65,554
|
|
Furniture, fixtures and office equipment
|
|
|
53,814
|
|
|
|
49,716
|
|
Buildings and leasehold improvements
|
|
|
41,893
|
|
|
|
41,140
|
|
Land and land improvements
|
|
|
7,246
|
|
|
|
7,362
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,061,238
|
|
|
|
2,875,045
|
|
Accumulated depreciation
|
|
|
(1,624,811
|
)
|
|
|
(1,423,911
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
1,436,427
|
|
|
$
|
1,451,134
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2007,
2006 and 2005 was $232.8 million, $213.8 million and
$217.7 million, respectively. As of December 31, 2007
and 2006, we had property under capitalized leases of
$10.1 million and $10.1 million, respectively, before
accumulated depreciation, and $1.9 million and
$3.3 million, respectively, net of accumulated
depreciation. During the years ended December 31, 2007 and
2006, we incurred gross interest costs of $243.2 million
and $231.3 million, respectively, of which
$3.8 million and $3.6 million was capitalized. See
Note 2 to our consolidated financial statements.
|
|
6.
|
ACCOUNTS
PAYABLE AND ACCRUED EXPENSES
|
Accounts payable and accrued expenses consist of the following
as of December 31, 2007 and December 31, 2006 (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Accrued programming costs
|
|
$
|
43,596
|
|
|
$
|
49,537
|
|
Accrued interest
|
|
|
39,588
|
|
|
|
44,741
|
|
Accrued taxes and fees
|
|
|
27,678
|
|
|
|
30,502
|
|
Accrued payroll and benefits
|
|
|
25,165
|
|
|
|
27,220
|
|
Accounts payable
|
|
|
18,611
|
|
|
|
32,146
|
|
Accrued service costs
|
|
|
18,114
|
|
|
|
16,062
|
|
Book
overdrafts(1)
|
|
|
16,971
|
|
|
|
22,414
|
|
Accrued telecommunications costs
|
|
|
15,687
|
|
|
|
6,816
|
|
Subscriber advance payments
|
|
|
11,750
|
|
|
|
10,611
|
|
Accrued property, plant and equipment
|
|
|
11,421
|
|
|
|
18,542
|
|
Other accrued expenses
|
|
|
18,904
|
|
|
|
17,020
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
247,485
|
|
|
$
|
275,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Book overdrafts represent checks in excess of funds on deposit
in our disbursement accounts.
|
67
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Debt consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Bank credit facilities
|
|
$
|
2,090,000
|
|
|
$
|
2,018,500
|
|
77/8% senior
notes due 2011
|
|
|
125,000
|
|
|
|
125,000
|
|
91/2% senior
notes due 2013
|
|
|
500,000
|
|
|
|
500,000
|
|
81/2% senior
notes due 2015
|
|
|
500,000
|
|
|
|
500,000
|
|
Capital lease obligations
|
|
|
33
|
|
|
|
1,099
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,215,033
|
|
|
$
|
3,144,599
|
|
Less: Current portion
|
|
|
94,533
|
|
|
|
75,563
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
3,120,500
|
|
|
$
|
3,069,036
|
|
|
|
|
|
|
|
|
|
|
Bank
Credit Facilities
The operating subsidiaries of Mediacom LLC, one of our two
principal subsidiaries, maintain a $1.244 billion senior
secured credit facility (the LLC credit facility).
The LLC credit facility originally consisted of a revolving
credit facility (the LLC revolver) with a
$400.0 million revolving credit commitment, a
$200.0 million term loan (the LLC term loan A)
and a $550.0 million term loan (the LLC term loan
B). In May 2006, we refinanced the LLC term loan B with a
new term loan (the LLC term loan C) in the amount of
$650.0 million. Borrowings under the LLC term loan C bear
interest at a rate that is 0.50% less than the interest rate of
the LLC term loan B that it replaced. The LLC revolver expires
on September 30, 2011 and its commitment amount is not
subject to scheduled reductions prior to maturity. The LLC term
loan A matures on September 30, 2012, and beginning on
March 31, 2008, will be subject to quarterly reductions
ranging from 2.50% to 9.00% of the original amount. The LLC term
loan C matures on January 31, 2015, and is subject to
quarterly reductions of 0.25% that began on March 31, 2007
and extend through December 31, 2014, with a final payment
at maturity representing 92% of the original principal amount.
As of December 31, 2007, the maximum commitment available
under the LLC revolver was $400.0 million and the revolver
had an outstanding balance of $37.0 million. As of the same
date, the LLC term loans A and C had outstanding balances of
$200.0 million and $643.5 million, respectively.
The credit agreement of the LLC credit facility (the LLC
credit agreement) provides for interest at varying rates
based upon various borrowing options and certain financial
ratios, and for commitment fees of 1/2% to 5/8% per annum on the
unused portion of the available revolving credit commitment.
Interest on outstanding LLC revolver and LLC term loan A
balances is payable at either the Eurodollar rate plus a
floating percentage ranging from 1.00% to 2.00% or the base rate
plus a floating percentage ranging from 0% to 1.00%. Interest on
the LLC term loan C is payable at either the Eurodollar rate
plus a floating percentage ranging from 1.50% to 1.75% or the
base rate plus a floating percentage ranging from 0.50% to 0.75%.
For the year ended December 31, 2007, the outstanding debt
under the LLC term loan C was reduced by $6.5 million, or
1.00% of the original principal amount.
For the year ending December 31, 2008, the outstanding debt
under the LLC term loan A will be reduced by $20.0 million,
or 10.00% of the original principal amount, and the outstanding
debt under the LLC term loan C will be reduced by
$6.5 million, or 1.00% of the original principal amount.
The operating subsidiaries of Mediacom Broadband LLC, our other
principal subsidiary, maintain a $1.524 billion senior
secured credit facility (the Broadband credit
facility). The Broadband credit facility originally
consisted of a revolving credit facility (the Broadband
revolver), a $300.0 million term loan A (the
68
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Broadband term loan A) and a $500.0 million
term loan B (the Broadband term loan B). In October
2005, we amended the Broadband revolver: (i) to increase
the revolving credit commitment from approximately
$543.0 million to approximately $650.5 million, of
which approximately $430.3 million is not subject to
scheduled reductions prior to the termination date; and
(ii) to extend the termination date of the commitments not
subject to reductions from March 31, 2010 to
December 31, 2012. In May 2005, we refinanced the Broadband
term loan B with a new term loan (the Broadband term loan
C) in the amount of $500.0 million. In May 2006, we
refinanced the Broadband term loan C with a new term loan (the
Broadband term loan D) in the amount of
$800.0 million. Borrowings under the new term loan bear
interest at a rate that is 0.25% less than the interest rate of
the term loan that it replaced. The Broadband term loan A
matures on February 1, 2014 and, beginning on
September 30, 2004, has been subject to quarterly
reductions ranging from 1.00% to 8.00% of the original principal
amount. The Broadband term loan D matures on January 31,
2015, and is subject to quarterly reductions of 0.25% that began
on March 31, 2007 and extend through December 31,
2014, with a final payment at maturity representing 92.00% of
the original principal amount.
As of December 31, 2007, the maximum commitment available
under the Broadband revolver was $565.4 million and the
revolver had an outstanding balance of $251.0 million. As
of the same date, the Broadband term loans A and D had
outstanding balances of $166.5 million and
$792.0 million, respectively.
The credit agreement of the Broadband credit facility (the
Broadband credit agreement) provides for interest at
varying rates based upon various borrowing options and certain
financial ratios, and for commitment fees of 3/8% to 5/8% per
annum on the unused portion of the available revolving credit
commitment. Interest on outstanding Broadband revolver and
Broadband term loan A balances is payable at either the
Eurodollar rate plus a floating percentage ranging from 1.00% to
2.50% or the base rate plus a floating percentage ranging from
0.25% to 1.50%. Interest on the Broadband term loan B is payable
at either the Eurodollar rate plus a floating percentage ranging
from 1.50% to 1.75% or the base rate plus a floating percentage
ranging from 0.50% to 0.75%.
For the year ended December 31, 2007, the maximum
commitment amount under the portion of the Broadband revolver
subject to reduction was reduced by $48.7 million. The
outstanding debt under the Broadband term loan A was reduced by
$60.0 million, or 20.00% of the original principal amount,
and the outstanding debt under the Broadband term loan C was
reduced by $8.0 million, or 1.00% of the original principal
amount.
For the year ended December 31, 2008, the maximum
commitment amount under the portion of the Broadband revolver
subject to reduction will be reduced by $48.7 million, the
outstanding debt under the Broadband term loan A will be reduced
by $60.0 million, or 20.00% of the original principal
amount, and the outstanding debt under the Broadband term loan D
will be reduced by $8.0 million, or 1.00% of the original
principal amount.
The LLC and Broadband credit agreements require compliance with
certain financial covenants, including the requirement that we
maintain a ratio of senior indebtedness (as defined) to
annualized system cash flow (as defined) of no more than 6.0 to
1.0. The credit agreements also require compliance with other
covenants including, but not limited to, limitations on mergers
and acquisitions, consolidations and sales of certain assets,
liens, the incurrence of additional indebtedness, certain
restricted payments and certain transactions with affiliates.
The LLC credit agreement is collateralized by Mediacom
LLCs pledge of all our ownership interests in our
operating subsidiaries, and is guaranteed by Mediacom LLC on a
limited recourse basis to the extent of such ownership
interests. The Broadband credit agreement is collateralized by
Mediacom Broadband LLCs pledge of all out ownership
interests in our operating subsidiaries, and is guaranteed by
Mediacom Broadband LLC on a limited recourse basis to the extent
of such ownership interests.
The average interest rates on outstanding debt under the bank
credit facilities as of December 31, 2007 and 2006, were
6.7% and 7.2%, respectively. As of December 31,
2007, we had unused credit commitments of approximately
$645.4 million under our bank credit facilities, all of
which could be borrowed and used for general corporate purposes
based on the terms and conditions of our debt arrangements.
69
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2007, approximately $32.0 million
of letters of credit were issued to various parties as
collateral for our performance relating primarily to insurance
and franchise requirements. The amount paid to obtain these
letters of credit was immaterial.
Interest
Rate Exchange Agreements
We use interest rate exchange agreements in order to fix the
interest rate on our floating rate debt. As of December 31,
2007, we had interest rate exchange agreements with various
banks pursuant to which the interest rate on $1.0 billion
is fixed at a weighted average rate of approximately 5.1%. As of
the same date, about 66% of our outstanding indebtedness was at
fixed interest rates or subject to interest rate protection.
These agreements have been accounted for on a
mark-to-market
basis as of, and for the year ended December 31, 2007. Our
interest rate exchange agreements are scheduled to expire in the
amounts of, $800 million and $200 million during the
years ended December 31, 2009 and 2010, respectively.
The fair value of the interest rate exchange agreements is the
estimated amount that we would receive or pay to terminate such
agreements, taking into account market interest rates, the
remaining time to maturities and the creditworthiness of our
counterparties. As of December 31, 2007, based on the
mark-to-market
valuation, we recorded on our consolidated balance sheet a net
accumulated liability for derivatives of $25.8 million. As
a result of the
mark-to-market
valuations on these interest rate swaps, we recorded a loss on
derivatives of $22.9 million and $15.8 million for the
years ended December 31, 2007 and 2006, respectively.
Senior
Notes
On February 26, 1999, Mediacom LLC and its affiliate,
Mediacom Capital Corporation, a Delaware corporation, jointly
issued $125.0 million aggregate principal amount of
77/8% senior
notes due February 2011 (the
77/8% Senior
Notes). The
77/8% Senior
Notes are unsecured obligations of Mediacom LLC, and the
indenture for the
77/8% Senior
Notes stipulates, among other things, restrictions on incurrence
of indebtedness, distributions, mergers and asset sales and has
cross-default provisions related to other debt of Mediacom LLC.
On January 24, 2001, Mediacom LLC and Mediacom Capital
Corporation jointly issued $500.0 million aggregate
principal amount of
91/2% senior
notes due January 2013 (the
91/2% Senior
Notes). The
91/2% Senior
Notes are unsecured obligations of Mediacom LLC, and the
indenture for the
91/2% Senior
Notes stipulates, among other things, restrictions on incurrence
of indebtedness, distributions, mergers, and asset sales and has
cross-default provisions related to other debt of Mediacom LLC.
On June 29, 2001, Mediacom Broadband LLC and its affiliate,
Mediacom Broadband Corporation, a Delaware corporation, jointly
issued $400.0 million aggregate principal amount of
11% notes due July 2013 (the 11% Senior
Notes). The 11% Senior Notes are unsecured
obligations of Mediacom Broadband LLC and the indenture for the
11% Senior Notes stipulates, among other things,
restrictions on incurrence of indebtedness, distributions,
mergers, and asset sales and has cross-default provisions
related to other debt of Mediacom Broadband LLC.
On August 30, 2005, Mediacom Broadband LLC and Mediacom
Broadband Corporation jointly issued $200.0 million
aggregate principal amount of
81/2% senior
notes due October 2015 (the
81/2% Senior
Notes). The
81/2% Senior
Notes are unsecured obligations of Mediacom Broadband LLC, and
the indenture for the
81/2% Senior
Notes stipulates, among other things, restrictions on incurrence
of indebtedness, distributions, mergers and asset sales and has
cross-default provisions related to other debt of Mediacom
Broadband LLC. The proceeds were used to reduce amounts
outstanding under the revolving credit portion of our credit
facilities.
On July 17, 2006, we redeemed all of the outstanding
11% Senior Notes. We funded the redemption with drawdowns
on the revolving credit portions of our subsidiary credit
facilities.
70
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On October 5, 2006, Mediacom Broadband LLC and Mediacom
Broadband Corporation jointly issued an additional
$300.0 million aggregate principal amount of
81/2% Senior
Notes. The proceeds were used to reduce amounts outstanding
under the revolving credit portion of our credit facilities.
Our senior notes contain financial and other covenants, though
they are generally less restrictive than those found in our bank
credit facilities. Principal covenants include a limitation on
the incurrence of additional indebtedness based upon a maximum
ratio of total indebtedness to cash flow, as defined in these
debt agreements, of 7.0 to 1.0 in the case of Mediacom
LLCs senior notes, and 8.5 to 1.0 in the case of Mediacom
Broadband LLCs senior notes. These agreements also contain
limitations on dividends, investments and distributions.
For all periods through December 31, 2007, we were in
compliance with all of the covenants under our bank credit and
senior note agreements. There are no covenants, events of
default, borrowing conditions or other terms in our credit
facilities or our other debt arrangements that are based on
changes in our credit ratings assigned by any rating agency.
Convertible
Senior Notes
On June 29, 2001, we issued $172.5 million aggregate
principal amount of
51/4%
convertible senior notes due July 2008 (the Convertible
Senior Notes). On June 29, 2006, we paid the entire
outstanding principal amount of our Convertible Senior Notes,
plus accrued and unpaid interest, with borrowings under the
Broadband term loan D
Loss
on Early Extinguishment of Debt
For the year ended December 31, 2006, we recorded in our
consolidated statement of operations a loss on early
extinguishment of debt of $35.8 million as a result of our
redemption of our 11% senior notes. This change reflected
representing $22.0 million of call premium,
$2.6 million of bank fees and the write-off of
$11.2 million of unamortized deferred financing costs.
There was no loss on early extinguishment of debt in the year
ended December 31, 2007.
Fair
Value and Debt Maturities
The fair values of our bank credit facilities approximated their
carrying values at December 31, 2007. As of
December 31, 2007, the fair values of our Senior Notes are
as follows (dollars in thousands):
|
|
|
|
|
77/8% senior
notes due 2011
|
|
$
|
115,625
|
|
91/2% senior
notes due 2013
|
|
|
459,660
|
|
81/2% senior
notes due 2015
|
|
|
438,800
|
|
|
|
|
|
|
|
|
$
|
1,014,085
|
|
|
|
|
|
|
The stated maturities of all debt outstanding as of
December 31, 2007 are as follows (dollars in thousands):
|
|
|
|
|
2008
|
|
$
|
94,533
|
|
2009
|
|
|
121,000
|
|
2010
|
|
|
88,500
|
|
2011
|
|
|
228,500
|
|
2012
|
|
|
319,500
|
|
Thereafter
|
|
|
2,363,000
|
|
|
|
|
|
|
Total
|
|
$
|
3,215,033
|
|
|
|
|
|
|
71
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We have authorized 300,000,000 shares of Class A
common stock, $.01 par value and 100,000,000 shares of
Class B common stock, $.01 par value. The holders of
Class A and Class B common stock are entitled to vote
as a single class on each matter in which our shareholders are
entitled to vote. Each Class A share is entitled to one
vote and each Class B share is entitled to ten votes.
Stock
Repurchase Plans
In November 2007, the Board of Directors authorized an
additional $50.0 million Class A common stock
repurchase program. During the years ended December 31,
2007, 2006 and 2005, we repurchased approximately
11.2 million, 5.8 million, and 2.7 million shares
for an aggregate cost of $69.0 million, $34.4 million
and $14.5 million, respectively, at an average price per
share of $6.18, $5.90 and $5.46, respectively. As of
December 31, 2007, approximately $20.0 million
remained available under the Class A common stock
repurchase program.
Share-based
Compensation
In April 2003, our Board of Directors adopted our 2003 Incentive
Plan, or 2003 Plan, which amended and restated our
1999 Stock Option Plan and incorporated into the 2003 Plan
options that were previously granted outside the 1999 Stock
Option Plan. The 2003 Plan was approved by our stockholders in
June 2003 and provides for the grant of incentive stock options,
nonqualified stock options, restricted shares, and other
stock-based awards, in addition to annual incentive awards. The
contractual life of share-based awards granted under the 2003
Plan is no more than 10 years. We deliver shares from
treasury upon the exercise of stock options or the conversion of
restricted stock units. The 2003 Plan has
21.0 million shares of common stock available for
issuance in settlement of awards. As of December 31, 2007,
approximately 13.8 million shares remained available
for issuance under the 2003 Plan.
Effective January 1, 2006, we adopted
SFAS No. 123(R) using the modified prospective method.
SFAS No. 123(R) revises SFAS No. 123,
Accounting for Stock-Based Compensation and
supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. SFAS No. 123(R)
requires the cost of all share-based payments to employees,
including grants of employee stock options, to be recognized in
the financial statements based on their fair values at the grant
date, or the date of later modification, over the requisite
service period. In addition, SFAS 123(R) requires
unrecognized cost, based on the amounts previously disclosed in
our pro forma footnote disclosure, related to options vesting
after the date of initial adoption to be recognized in the
financial statements over the remaining requisite service period.
Under this method, prior periods are not restated and the amount
of compensation cost recognized includes: (i) compensation
cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2008, based on the grant date fair
value estimated in accordance with the provisions of
SFAS No. 123; and (ii) compensation cost for all
share-based payments granted subsequent to January 1, 2008,
based on the grant date fair value estimated in accordance with
the provisions of SFAS No. 123(R). We use the
Black-Scholes option pricing model which requires extensive use
of accounting judgment and financial estimates, including
estimates of the expected term employees will retain their
vested stock options before exercising them, the estimated
volatility of our stock price over the expected term, and the
number of options that will be forfeited prior to the completion
of their vesting requirements. Application of alternative
assumptions could produce significantly different estimates of
the fair value of share-based compensation and consequently, the
related amounts recognized in the consolidated statements of
operations. The provisions of SFAS No. 123(R) apply to
new stock awards and stock awards outstanding, but not yet
vested, on the effective date. In March 2005, the SEC issued
SAB No. 107, Share-Based Payment,
relating to SFAS No. 123(R). We have applied the
provisions of SAB No. 107 in our adoption.
72
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Impact of
the Adoption of SFAS No. 123(R)
Upon adoption of SFAS 123(R), we recognize share-based
compensation expenses associated with share awards on a
straight-line basis over the requisite service period using the
fair value method. The incremental share-based compensation
expense recognized due to the adoption of SFAS 123(R) was
approximately $2.2 million for the year ended
December 31, 2006. Compensation expense related to
restricted stock units was recognized before the implementation
of SFAS No. 123(R). Results for prior periods have not
been restated.
Total share-based compensation expense was as follows (dollars
in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Share-based compensation expense by type of award:
|
|
|
|
|
|
|
|
|
Employee stock options
|
|
$
|
1,920
|
|
|
$
|
2,240
|
|
Employee stock purchase plan
|
|
|
284
|
|
|
|
287
|
|
Restricted stock units
|
|
|
3,095
|
|
|
|
1,951
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
|
5,299
|
|
|
|
4,478
|
|
Tax effect on stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect on net loss
|
|
$
|
(5,299
|
)
|
|
$
|
(4,478
|
)
|
|
|
|
|
|
|
|
|
|
Effect on loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.05
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
As required by SFAS No. 123(R), the Company 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 $8.4 million as of
December 31, 2007, which will be recognized over a weighted
average period of 1.4 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. We
have elected the short-cut method to calculate the
historical pool of windfall tax benefits.
Pro Forma
Information for Periods Prior to the Adoption of
SFAS No. 123(R)
Prior to January 1, 2006, we accounted for share-based
compensation in accordance with APB No. 25, as permitted by
SFAS No. 123, and accordingly did not recognize
compensation expense for stock options with an exercise price
equal to or greater than the market price of the underlying
stock at the date of grant. Had the fair value
73
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
method prescribed by SFAS No. 123 been applied, the
effect on net loss and loss per share would have been as follows
for the year ended December 31, 2005, respectively (dollars
in thousands, except per share data):
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2005
|
|
|
Net loss, as reported
|
|
$
|
(222,228
|
)
|
Add: Total stock-based compensation expense included in net loss
(income) as reported above
|
|
|
1,333
|
|
Deduct: Total stock based compensation expense determined under
fair value based method of all awards
|
|
|
(5,024
|
)
|
|
|
|
|
|
Pro forma, net loss income
|
|
$
|
(225,919
|
)
|
|
|
|
|
|
Basic and diluted loss per share:
|
|
|
|
|
As reported
|
|
$
|
(1.90
|
)
|
|
|
|
|
|
Pro forma
|
|
$
|
(1.93
|
)
|
|
|
|
|
|
Valuation
Assumptions
As required by SFAS 123(R), we estimated the fair value of
stock options using the Black-Scholes valuation model and the
straight-line attribution approach with the following weighted
average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock
|
|
Employee Stock
|
|
|
Option Plans
|
|
Purchase Plans
|
|
|
Year Ended
|
|
Year Ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
38.0
|
%
|
|
|
55.3
|
%
|
|
|
33.0
|
%
|
|
|
33.0
|
%
|
Risk free interest rate
|
|
|
4.5
|
%
|
|
|
4.8
|
%
|
|
|
4.3
|
%
|
|
|
4.7
|
%
|
Expected option life (in years)
|
|
|
6.1
|
|
|
|
4.1
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Forfeiture rate
|
|
|
14.0
|
%
|
|
|
14.0
|
%
|
|
|
|
|
|
|
|
|
We do not expect to declare dividends. Expected volatility is
based on a combination of implied and historical volatility of
our Class A common stock. Prior to January 1, 2006, we
used historical data and other factors to estimate the option
life of the share-based payments granted. For the year ended
December 31, 2006, we elected the simplified method in
accordance with SAB 107 to estimate the option life of
share-based awards. 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.
74
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the activity of our option plans
for the years ended December 31, 2006 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Contractual
|
|
|
Aggregate Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term (In Years)
|
|
|
Value (In thousands)
|
|
|
Outstanding at January 1, 2006
|
|
|
4,931,915
|
|
|
$
|
14.12
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
415,000
|
|
|
|
5.73
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(14,000
|
)
|
|
|
6.94
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(234,670
|
)
|
|
|
13.85
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
5,098,245
|
|
|
$
|
13.35
|
|
|
|
4.5
|
|
|
$
|
2,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2006
|
|
|
4,954,230
|
|
|
$
|
13.54
|
|
|
|
4.5
|
|
|
$
|
2,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2006
|
|
|
4,069,569
|
|
|
$
|
15.06
|
|
|
|
4.3
|
|
|
$
|
679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2007
|
|
|
5,098,245
|
|
|
$
|
13.35
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
580,000
|
|
|
$
|
8.06
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(83,250
|
)
|
|
|
7.01
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(215,687
|
)
|
|
|
14.75
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
5,379,308
|
|
|
$
|
12.82
|
|
|
|
4.1
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at December 31, 2007
|
|
|
5,233,676
|
|
|
$
|
12.98
|
|
|
|
4.0
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
4,339,078
|
|
|
$
|
14.20
|
|
|
|
3.4
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic values in the table above represent the
total pre-tax intrinsic value, based on our stock price of $4.59
and $8.04 per share as of December 31, 2007 and 2006,
respectively, which would have been received by the option
holders had all option holders exercised their options as of
that date.
The weighted average exercise price at the date of grant of a
Class A common stock option granted under our option plan
during the years ended December 31, 2007 and 2006 was $8.06
and $5.73, respectively. During the years ended
December 31, 2007, and 2006, approximately 404,369 and
670,621 shares vested with a weighted average exercise
price of $6.98 and $9.15. The proceeds we received resulting
from the exercise of stock options during 2007 and 2006 were
immaterial.
The following table summarizes information concerning stock
option activity for the year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Outstanding at December 31, 2004
|
|
|
11,667,259
|
|
|
$
|
17.92
|
|
Granted
|
|
|
580,000
|
|
|
|
5.91
|
|
Exercised
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(7,315,344
|
)
|
|
|
18.85
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
4,931,915
|
|
|
$
|
14.12
|
|
|
|
|
|
|
|
|
|
|
75
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We had options exercisable on underlying shares amounting to
3,544,893 with an average price of $16.23 at December 31,
2005. The weighted average fair value of options granted was
$2.88 per share for the year ended December 31, 2005.
The following table summarizes information concerning stock
options outstanding as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
Number of
|
|
|
Remaining
|
|
|
Average
|
|
|
Intrinsic
|
|
|
Number of
|
|
|
Remaining
|
|
|
Average
|
|
|
Intrinsic
|
|
Range of
|
|
|
Shares
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Value
|
|
|
Shares
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Value
|
|
Exercise Prices
|
|
|
Outstanding
|
|
|
Life
|
|
|
Price
|
|
|
(In thousands)
|
|
|
Outstanding
|
|
|
Life
|
|
|
Price
|
|
|
(In thousands)
|
|
|
$
|
5.00 $12.00
|
|
|
|
2,923,735
|
|
|
|
5.5 years
|
|
|
$
|
7.86
|
|
|
$
|
|
|
|
|
1,883,505
|
|
|
|
4.9 years
|
|
|
$
|
8.31
|
|
|
$
|
|
|
$
|
12.01 $18.00
|
|
|
|
394,725
|
|
|
|
3.3 years
|
|
|
|
17.25
|
|
|
|
|
|
|
|
394,725
|
|
|
|
3.3 years
|
|
|
|
17.25
|
|
|
|
|
|
$
|
18.01 $22.00
|
|
|
|
2,060,848
|
|
|
|
2.1 years
|
|
|
|
19.01
|
|
|
|
|
|
|
|
2,060,848
|
|
|
|
2.1 years
|
|
|
|
19.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,379,308
|
|
|
|
4.1 years
|
|
|
$
|
12.82
|
|
|
$
|
|
|
|
|
4,339,078
|
|
|
|
3.4 years
|
|
|
$
|
14.20
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2005, we accounted for our stock option plans and
employee stock purchase program under APB No. 25.
Accordingly, no compensation expense has been recognized for any
option grants in the accompanying consolidated statements of
operations since the price of the options was at their fair
market value at the date of grant. SFAS No. 148
requires that information be determined as if we had accounted
for employee stock options under the fair value method of this
statement, including disclosing pro forma information regarding
net income (loss) and income (loss) per share. The weighted
average fair value of all of the employee options was estimated
on the date of grant using the Black-Scholes model with the
following weighted average assumptions: (i) risk free
average interest rate of 3.5% for the year ended
December 31, 2005; (ii) expected dividend yields of
0%; (iii) expected lives of 6 years; and
(iv) expected volatility of 45%. Had compensation expense
been recorded for the employee options under
SFAS No. 148, the compensation expense would have been
$5.1 million for the year ended December 31, 2005.
Restricted
Stock Units
We grant restricted stock units (RSUs) to certain
employees and directors (together, the participants)
in Class A common stock. Awards of RSUs are valued by
reference to shares of common stock that entitle participants to
receive, upon the settlement of the unit, one share of common
stock for each unit. The awards are subject to annual vesting
periods not exceeding 4 years from the date of grant. We
made estimates of expected forfeitures based on historic
voluntary termination behavior and trends of actual RSU
forfeitures and recognized compensation costs for equity awards
expected to vest. The aggregate intrinsic value of outstanding
RSUs, based on our stock price of $4.59 per share during the
year ended December 31, 2007, was $8.4 million.
76
MEDIACOM
COMMUNICATIONS CORPORATION 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, 2007:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
Non-Vested
|
|
|
Average Grant
|
|
|
|
Share Unit Awards
|
|
|
Date Fair Value
|
|
|
Unvested Awards at January 1, 2006
|
|
|
1,132,300
|
|
|
$
|
5.46
|
|
Granted
|
|
|
484,700
|
|
|
|
5.77
|
|
Awards Vested
|
|
|
(41,250
|
)
|
|
|
5.78
|
|
Forfeited
|
|
|
(96,325
|
)
|
|
|
5.54
|
|
|
|
|
|
|
|
|
|
|
Unvested Awards at December 31, 2006
|
|
|
1,479,425
|
|
|
$
|
5.55
|
|
Granted
|
|
|
553,000
|
|
|
|
8.05
|
|
Awards Vested
|
|
|
(163,275
|
)
|
|
|
5.71
|
|
Forfeited
|
|
|
(36,675
|
)
|
|
|
6.94
|
|
|
|
|
|
|
|
|
|
|
Unvested Awards at December 31, 2007
|
|
|
1,832,475
|
|
|
$
|
6.26
|
|
|
|
|
|
|
|
|
|
|
Employee
Stock Purchase Plan
We maintain an employee stock purchase plan (ESPP).
Under the plan, all employees are allowed to participate in the
purchase of shares of our Class A common stock at a 15%
discount on the date of the allocation. Shares purchased by
employees amounted to 157,999, 183,906 and 173,026 for the years
ended December 31, 2007, 2006 and 2005 respectively. The
net proceeds to us were approximately $0.9 million,
$0.9 million and $1.0 million for the years ended
December 31, 2007, 2006 and 2005, respectively. During
2005, compensation expense was not recorded on the distribution
of these shares in accordance with APB No. 25. The weighted
average fair value of all of the stock issued under the ESPP was
estimated on the purchase date using the Black-Scholes model
with the following assumptions: (i) discount rate equal to
the six year bond rate on the stock purchase date;
(ii) expected dividend yields of 0%; (iii) expected
lives of six months; and (iv) expected volatility of 45%.
Had compensation expense been recorded for the stock issued for
the ESPP under SFAS No. 148, the compensation costs
would have been approximately $0.3 million for the year
ended December 31, 2005.
Income tax expense relates to minimum state and local taxes and
capital taxes paid in certain jurisdictions, as well as an
increase in the valuation allowance against certain deferred tax
assets. For the year ended December 31, 2007, total income
tax expense differed from the tax benefit at the
U.S. statutory rate primarily due to the increase in the
valuation allowance against certain deferred tax assets. The
reconciliation of the income tax expense at the United States
federal statutory rate to the actual income tax expense is as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Tax (benefit) provision at the United States statutory rate
|
|
$
|
(13,353
|
)
|
|
$
|
(22,808
|
)
|
|
$
|
(8,738
|
)
|
State taxes, net of federal tax benefit
|
|
|
8,549
|
|
|
|
9,124
|
|
|
|
9,836
|
|
Valuation allowance
|
|
|
61,552
|
|
|
|
72,450
|
|
|
|
195,667
|
|
Permanent items and other
|
|
|
818
|
|
|
|
968
|
|
|
|
497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
57,566
|
|
|
$
|
59,734
|
|
|
$
|
197,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007, total income tax
expense differed from the tax benefit at the U.S. statutory
rate primarily due to an increase in the valuation allowance
against certain deferred tax assets (see below). State tax
expense primarily represents the change in the state valuation
allowance.
77
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On a quarterly basis, we evaluate discrete tax matters occurring
during the period. During the year ended December 31, 2007,
we have again determined that deferred tax assets from net
operating loss carryforwards, that were created in the
respective periods, will not be realized under the
more-likely-than-not standard required by
SFAS No. 109, Accounting for Income
Taxes. As a result, we increased our valuation
allowance recorded against these assets. We have utilized APB
No. 28, Interim Financial Reporting, to
record income taxes on an interim period basis. A tax provision
of $57.6 million, $59.7 million and
$197.3 million was recorded for the years ended
December 31, 2007, 2006 and 2005, respectively. The
respective tax provision amounts substantially represent the
increase in the deferred tax liabilities related to the basis
differences of our indefinite-lived intangible assets.
Our net deferred tax liability consists of the following
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
6,884
|
|
|
$
|
6,383
|
|
Allowance for doubtful accounts
|
|
|
790
|
|
|
|
848
|
|
|
|
|
|
|
|
|
|
|
Total current deferred tax assets
|
|
|
7,674
|
|
|
|
7,231
|
|
Less: Valuation allowance
|
|
|
(5,250
|
)
|
|
|
(4,764
|
)
|
|
|
|
|
|
|
|
|
|
Current deferred tax assets, net
|
|
$
|
2,424
|
|
|
$
|
2,467
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
897,921
|
|
|
$
|
812,970
|
|
Capital loss
|
|
|
10,300
|
|
|
|
9,997
|
|
Other assets
|
|
|
6,382
|
|
|
|
7,310
|
|
Valuation allowance
|
|
|
(625,757
|
)
|
|
|
(547,023
|
)
|
|
|
|
|
|
|
|
|
|
Long-term deferred tax assets, net
|
|
$
|
288,846
|
|
|
$
|
283,254
|
|
Long-term deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Investment in cable television systems:
|
|
|
|
|
|
|
|
|
Tangible fixed assets and definite-lived intangible assets
|
|
$
|
291,270
|
|
|
$
|
285,720
|
|
Indefinite-lived intangible assets
|
|
|
314,178
|
|
|
|
256,834
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred tax liabilities
|
|
$
|
605,448
|
|
|
$
|
542,554
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred tax liabilities, net
|
|
$
|
316,602
|
|
|
$
|
259,300
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 and 2006, we had deferred tax
assets of $922.3 million and $837.5 million,
respectively, with valuation allowances of $631.0 million
and $551.8 million, respectively. Most of the deferred tax
assets relate to pre-tax net operating loss carryforwards for
federal and state purposes. These federal net operating loss
carryforwards had a balance of approximately $2.2 billion
and $2.0 billion as of December 31, 2007 and 2006,
respectively, and if not utilized will expire in the years 2020
through 2027. These state net operating loss carryforwards had a
balance of approximately $2.0 billion and $1.8 billion
as of December 31, 2007 and 2006, respectively, and if not
utilized will expire in the years 2008 through 2027.
SFAS No. 109 requires that deferred tax assets be
reduced by a valuation allowance if it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. We periodically assess the likelihood of realization
of our deferred tax assets considering all available evidence,
both positive and negative, including our most recent
performance, the scheduled reversal of deferred tax liabilities,
our forecast of taxable income in future periods and the
availability of prudent tax planning strategies. As a result of
these assessments in prior periods, we have established
valuation allowances on a portion of our deferred tax assets due
to the uncertainty surrounding the realization of these assets.
78
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the years ended December 31, 2007, 2006, and 2005,
based on our assessment of the facts and circumstances, we
concluded that an additional portion of our deferred tax assets
from net operating loss carryfowards would not be realized under
the more-likely-than-not standard of SFAS No. 109. As
a result, we increased our valuation allowance against deferred
tax assets by $57.3 million, $59.5 million, and
$197.3 million in these years, respectively, and recognized
a corresponding non-cash charge to income tax expense in each
year. These amounts related to the portion of deferred tax
liabilities based upon the book vs. tax basis difference of our
indefinite-lived intangible assets. Our assessment of the facts
and circumstances took into account our history of losses, the
reduced likelihood of future taxable income and the limited
availability of prudent tax planning strategies.
We expect to continue to increase our valuation allowance for
any increase in the deferred tax liabilities relating to certain
goodwill and indefinite-lived intangible assets. We will adjust
our valuation allowance if we assess that there is sufficient
change in our ability to recover our deferred tax assets. Our
income tax expense in future periods will be reduced or
increased to the extent of offsetting decreases or increases,
respectively, in our valuation allowance. These changes could
have a significant impact on our future earnings. In the event
of a change in control, our net operating losses would be
subject to Internal Revenue Code Section 382 limitations.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes- An
Interpretation of FASB Statement No. 109.
FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an entitys financial statements in
accordance with SFAS Statement No. 109, Accounting
for Income Taxes and prescribes a recognition
threshold and measurement attributes for financial statement
disclosure of tax positions taken or expected to be taken on a
tax return. Under FIN 48, the impact of an uncertain income
tax position on the income tax return must be recognized at the
largest amount that is more-likely-than-not to be sustained upon
audit by the relevant taxing authority. An uncertain income tax
position will not be recognized if it has less than a 50%
likelihood of being sustained. Additionally, FIN 48
provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006. We adopted the provisions of
FIN 48 on January 1, 2007, however the adoption did
not have a material effect on us, and resulted in no adjustment
to retained earnings as of January 1, 2007. We have no
unrecognized tax benefits as of the adoption date and as of
December 31, 2007. We do not think it is reasonably
possible that the total amount of unrealized tax benefits will
significantly change in the next twelve months.
We file U.S. federal consolidated income tax returns and
income tax returns in various state and local jurisdictions. Our
2004, 2005, and 2006 U.S. federal tax years and various
state and local years from 2003 through 2006 remain subject to
income tax examinations by tax authorities.
We classify interest and penalties associated with uncertain tax
positions as a component of income tax expense. During the years
December 31, 2007, 2006 and 2005, respectively, no interest
and penalties were accrued.
|
|
10.
|
RELATED
PARTY TRANSACTIONS
|
Mediacom Management Corporation (Mediacom
Management), a Delaware corporation, holds a 1% direct
ownership interest in Mediacom California LLC, which in turn
holds a 1% interest in Mediacom Arizona LLC. Revenues related to
these ownership interests represent less than 1% of our total
revenues. Mediacom Management is wholly-owned by the Chairman
and CEO of MCC.
One of our directors is a partner of a law firm that performs
various legal services for us. For the years ended
December 31, 2007, 2006 and 2005, we paid this law firm
approximately $1.2 million, $0.6 million and
$0.9 million, respectively, for services performed.
|
|
11.
|
EMPLOYEE
BENEFIT PLANS
|
Substantially all of our employees are eligible to participate
in a defined contribution plan pursuant to the Internal Revenue
Code Section 401(k) (the Plan). Under such
Plan, eligible employees may contribute up to 15%
79
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of their current pre-tax compensation. The 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 we determine annually. We presently match 50%
on the first 6% of employee contributions. Our contributions
under the Plan totaled approximately $2.4 million,
$2.1 million and $2.1 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
|
|
12.
|
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 $6.3 million, $5.7 million and
$4.8 million for the years ended December 31, 2007,
2006 and 2005, respectively. Future minimum annual rental
payments are as follows (dollars in thousands):
|
|
|
|
|
2008
|
|
$
|
5,138
|
|
2009
|
|
|
4,540
|
|
2010
|
|
|
3.321
|
|
2011
|
|
|
2,560
|
|
2012
|
|
|
1,755
|
|
Thereafter
|
|
|
5,222
|
|
|
|
|
|
|
Total
|
|
$
|
22,536
|
|
|
|
|
|
|
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 $9.8 million, $10.4 million and
$10.0 million for the years ended December 31, 2007,
2006 and 2005, respectively.
Letters
of Credit
As of December 31, 2007, approximately $32.0 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
Mediacom LLC, one of our wholly owned subsidiaries, is 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, by which the plaintiffs are
seeking
class-wide
damages for alleged trespasses on land owned by private parties.
The lawsuit was originally filed in April 2001. Pursuant to
various agreements with the relevant state, county or other
local authorities and with utility companies, Mediacom LLC
placed interconnect fiber optic cable within state and county
highway rights-of-way and on utility poles in areas of Missouri
not presently encompassed by a cable franchise. The lawsuit
alleges that Mediacom LLC placed cable in unauthorized locations
and, therefore, was required but failed to obtain permission
from the landowners to place the cable. The lawsuit had not made
a claim for specified damages in the original complaint. An
order declaring that this action is appropriate for class relief
was entered in April 2006. Mediacom LLCs petition for an
interlocutory appeal or in the alternative a writ of mandamus
was denied by order of the Supreme Court of Missouri in October
2006. Mediacom LLC continues to vigorously defend against any
claims made by the plaintiffs, including at trial, and on
appeal, if necessary. Mediacom LLC has tendered the lawsuit to
our insurance carrier for defense and indemnification. The
carrier has agreed to defend Mediacom LLC under a reservation of
rights, and a declaratory judgment action is pending regarding
the carriers defense and coverage responsibilities. 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 expert, the plaintiffs claim compensatory damages of
approximately $14.5 million. Legal fees, prejudgment
interest, potential punitive damages and other costs could
80
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
increase this estimate to approximately $26.0 million. We
are unable to reasonably determine the amount of our final
liability in this lawsuit, as our experts have estimated our
liability to be within the range of approximately
$0.1 million to approximately $1.2 million, depending
on the courts determination of the proper measure of
damages. We believe, however, that the amount of such liability,
as stated by any of the parties, would not have a material
effect on our consolidated financial position, results of
operations, cash flows or business. There can be no assurance
that the actual liability would not exceed this estimated range.
A trial date of November 2008 has been set for the claim by the
class representative.
We are involved in various other legal actions arising in the
ordinary course of business. In the opinion of management, the
ultimate disposition of these other matters will not have a
material adverse effect on our consolidated financial position,
results of operations, cash flows or business.
|
|
13.
|
HURRICANE
LOSSES IN 2005
|
In July and August 2005, as a result of Hurricanes Dennis and
Katrina, our cable systems in areas of Alabama, Florida, and
Mississippi experienced, to varying degrees, damage to their
cable plant and other property and equipment, service
interruption and loss of customers. We estimate that the
hurricanes initially caused losses of approximately 9,000 basic
subscribers, 2,000 digital customers and 1,000 data customers.
As of December 31, 2007, we have not recovered a
significant number of these subscribers.
We are insured against certain hurricane related losses,
principally damage to our facilities, subject to varying
deductible amounts. We cannot estimate at this time the amounts
that will be ultimately recoverable under our insurance policies.
|
|
14.
|
SALE OF
ASSETS, INVESTMENTS AND CABLE SYSTEMS, NET
|
We recorded a net gain on sale of investments amounting to
$2.6 million for the year ended December 31, 2005, due
to the sale of our investment in American Independence
Corporation common stock. We recorded a net gain on sale of
assets, amounting to $11.1 million, for the year ended
December 31, 2007, due to the sale of certain cable systems
in Iowa and South Dakota.
81
MEDIACOM
COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
15.
|
SELECTED
QUARTERLY FINANCIAL DATA (all amounts in thousands, except per
share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
(Unaudited)
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
307,876
|
|
|
$
|
324,734
|
|
|
$
|
328,252
|
|
|
$
|
332,513
|
|
Operating income
|
|
|
52,327
|
|
|
|
60,961
|
|
|
|
55,439
|
|
|
|
53,602
|
|
Net loss
|
|
|
(16,880
|
)
|
|
|
(6,644
|
)
|
|
|
(34,733
|
)
|
|
|
(36,872
|
)
|
Basic and diluted net loss per share
|
|
$
|
(0.15
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(0.35
|
)
|
Basic and diluted weighted average common shares outstanding
|
|
|
109,890
|
|
|
|
109,758
|
|
|
|
108,013
|
|
|
|
103,649
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
289,348
|
|
|
$
|
302,421
|
|
|
$
|
305,556
|
|
|
$
|
313,075
|
|
Operating income
|
|
|
52,696
|
|
|
|
59,850
|
|
|
|
55,963
|
|
|
|
55,111
|
|
Net (loss) income
|
|
|
(37,208
|
)
|
|
|
5,725
|
|
|
|
(89,827
|
)
|
|
|
(3,612
|
)
|
Basic and diluted net (loss) income per share
|
|
$
|
(0.33
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.82
|
)
|
|
$
|
(0.03
|
)
|
Basic and diluted weighted average common shares outstanding
|
|
|
113,529
|
|
|
|
110,922
|
|
|
|
109,689
|
|
|
|
109,798
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
266,244
|
|
|
$
|
277,332
|
|
|
$
|
274,959
|
|
|
$
|
280,287
|
|
Operating income
|
|
|
45,049
|
|
|
|
51,766
|
|
|
|
45,161
|
|
|
|
42,710
|
|
Net loss
|
|
|
(841
|
)
|
|
|
(5,989
|
)
|
|
|
(2,731
|
)
|
|
|
(212,667
|
)
|
Basic and diluted net loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(1.82
|
)
|
Basic and diluted weighted average common shares outstanding
|
|
|
117,861
|
|
|
|
117,488
|
|
|
|
116,864
|
|
|
|
116,580
|
|
|
|
|
(1) |
|
Effective January 1, 2006, we adopted
SFAS No. 123(R) (see Note 8). |
82
Schedule II
MEDIACOM COMMUNICATIONS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
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Additions
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Deductions
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Balance at
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Charged to
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Charged to
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Charged to
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Charged to
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Beginning of
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Costs
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Other
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Costs
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Other
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Balance at
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Period
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and Expenses
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Accounts
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and Expenses
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Accounts
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end of Period
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(All dollar amounts in thousands)
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December 31, 2005
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Allowance for doubtful accounts:
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Current receivables
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$
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3,659
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$
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1,622
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$
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$
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1,831
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$
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372
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$
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3,078
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Valuation allowance:
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Deferred tax assets
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$
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222,772
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$
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206,708
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$
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$
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$
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$
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429,480
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December 31, 2006
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Allowance for doubtful accounts:
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Current receivables
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$
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3,078
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$
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4,148
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$
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$
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5,053
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$
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$
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2,173
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Valuation allowance:
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Deferred tax assets
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$
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429,480
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$
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122,307
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$
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$
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$
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$
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551,787
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December 31, 2007
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Allowance for doubtful accounts:
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Current receivables
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$
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2,173
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$
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5,416
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$
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$
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5,482
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$
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$
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2,107
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Valuation allowance:
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Deferred tax assets
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$
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551,787
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$
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79,220
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$
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$
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$
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$
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631,007
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ITEM 9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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None.
ITEM 9A. CONTROLS
AND PROCEDURES
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we evaluated the effectiveness of our
disclosure controls and procedures (as defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934) as of the end of
the period covered by this report. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were
effective as of December 31, 2007.
There has not been any change in our internal control over
financial reporting (as defined in
Rule 13a-15(f)
under the Exchange Act) during the quarter ended
December 31, 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
Managements
Report on Internal Control Over Financial Reporting
Management of our company 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 our principal executive and principal financial
officers and effected by our board of directors, management and
other personnel to provide reasonable assurance
83
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:
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pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions
of the assets of the company;
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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 the company are being made
only in accordance with authorizations of management and
directors of the company; and
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provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
our assets that could have a material effect on the financial
statements.
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Because of our 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 our companys
internal control over financial reporting as of
December 31, 2007. 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, 2007, our
companys internal control over financial reporting was
effective.
The effectiveness of our internal control over financial
reporting as of December 31, 2007 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which is included
herein.
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ITEM 9B.
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OTHER
INFORMATION
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None
PART III
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ITEM 10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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Information called for by Item 10 is set forth under the
heading Directors and Executive Officers of the
Registrant in Item 4A of this annual report and in
our proxy statement relating to the 2008 Annual Meeting of
Stockholders (the Proxy Statement), which
information is incorporated herein by this reference.
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ITEM 11.
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EXECUTIVE
COMPENSATION
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Information called for by Item 11 is set forth in our Proxy
Statement, which information is incorporated herein by this
reference.
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ITEM 12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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Information called for by Item 12 is set forth in our Proxy
Statement, which information is incorporated herein by this
reference.
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ITEM 13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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Information called for by Item 13 is set forth in our Proxy
Statement, which information is incorporated herein by this
reference.
84
ITEM 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
Information called for by Item 14 is set forth in our Proxy
Statement, which information is incorporated herein by this
reference.
PART IV
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ITEM 15.
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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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.
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:
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Exhibit
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Number
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Exhibit Description
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3
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.1
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Restated Certificate of Incorporation of Mediacom Communications
Corporation(1)
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3
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.2
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Amended and Restated
By-laws of
Mediacom Communications
Corporation(2)
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4
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.1
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Form of certificate evidencing share of Class A common
stock(1)
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4
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.2
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Indenture relating to
77/8% senior
notes due 2011 of Mediacom LLC and Mediacom Capital
Corporation(3)
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4
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.3
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Indenture relating to
91/2% senior
notes due 2013 of Mediacom LLC and Mediacom Capital
Corporation(4)
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4
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.4
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Indenture relating to
81/2% senior
notes due 2015 of Mediacom Broadband LLC and Mediacom Broadband
Corporation(5)
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10
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.1(a)
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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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10
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.1(b)
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Amendment No. 1, dated as of May 5, 2006, to the
Credit Agreement, dated as of October 21, 2004, among the
operating subsidiaries of Mediacom LLC, the lenders thereto and
JPMorgan Chase Bank, as administrative agent for the
lenders(7)
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10
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.1(c)
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Amendment No. 2, dated as of June 11, 2007, to the
Credit Agreement, dated as of October 21, 2004, among the
operating subsidiaries of Mediacom LLC, the lenders party
thereto and JPMorgan Chase Bank as administrative agent for the
lenders(8)
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10
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.1(d)
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Amendment No. 3, dated as of June 11, 2007, to the
Credit Agreement, dated of October 21, 2004, among the
operating subsidiaries of Mediacom LLC, the lenders party
thereto and JPMorgan Chase Bank, as administrative agent for the
lenders(8)
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10
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.2(a)
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Amendment and Restatement, dated December 16, 2004, of
Credit Agreement, dated as of July 18, 2001, among the
operating subsidiaries of Mediacom Broadband LLC, the lenders
thereto and JPMorgan Chase Bank, as administrative agent for the
lenders(9)
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10
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.2(b)
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Amendment No. 1, dated as of October 11, 2005, to the
Amendment and Restatement, dated as of December 16, 2004,
of Credit Agreement, dated as of July 18, 2001, among the
operating subsidiaries of Mediacom Broadband LLC, the lenders
thereto and JP Morgan Chase Bank, as administrative agent for
the
lenders(10)
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10
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.2(c)
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Amendment No. 2, dated as of May 5, 2006, to the
Amendment and Restatement, dated as of December 16, 2004,
of Credit Agreement, dated as of July 18, 2001, among the
operating subsidiaries of Mediacom Broadband LLC, the lenders
thereto and JPMorgan Chase Bank, as administrative agent for the
lenders(7)
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85
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Exhibit
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Number
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Exhibit Description
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10
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.1(d)
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Amendment No. 3, dated as of June 11, 2007, to the
Amendment and Restatement, dated as of December 16, 2004,
of Credit Agreement, dated as of July 18, 2001, among the
operating subsidiaries of Mediacom Broadband LLC, the lenders
party thereto and JPMorgan Chase Bank, as administrative agent
for the
lenders(8)
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10
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.1(e)
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Amendment No. 4, dated as of June 11, 2007, to the
Amendment and Restatement, dates as of December 16,2004, of
Credit Agreement, dated as of July 18, 2001, among the
operating subsidiaries of Mediacom Broadband LLC, the lenders
party thereto and JPMorgan Chase Bank, as administrative agent
for the
lenders(8)
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10
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.3
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Incremental Facility Agreement, dated as of May 5, 2006,
between the operating subsidiaries of Mediacom LLC, the lenders
signatory thereto and JPMorgan Chase Bank, N.A., as
administrative
agent(7)
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10
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.4
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Incremental Facility Agreement, dated as of May 5, 2006,
between the operating subsidiaries of Mediacom Broadband LLC,
the lenders signatory thereto and JPMorgan Chase Bank. N.A., as
administrative
agent(7)
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10
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.5*
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Form of Amended and Restated Registration Rights Agreement by
and among Mediacom Communications Corporation, Rocco B.
Commisso, BMO Financial, Inc., CB Capital Investors, L.P., Chase
Manhattan Capital, L.P., Morris Communications Corporation,
Private Market Fund, L.P. and U.S. Investor,
Inc.(1)
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10
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.6
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Fifth Amended and Restated Operating Agreement of Mediacom
LLC(11)
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10
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.7
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Amended and Restated Limited Liability Company Operating
Agreement of Mediacom Broadband
LLC(12)
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10
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.8*
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Compensation Agreement of Rocco
Commisso(13)
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10
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.9
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2001 Employee Stock Purchase
Plan(14)
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10
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.10(a)*
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2003 Incentive
Plan(15)
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10
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.10(b)*
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Form of Option
Agreement(16)
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10
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.10(c)*
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Form of Restricted Stock Unit Award
Agreement(16)
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12
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.1
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Schedule of Computation of Ratio of Earnings to Fixed Charges
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21
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.1
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Subsidiaries of Mediacom Communications Corporation
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23
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.1
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Consent of PricewaterhouseCoopers LLP
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31
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.1
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Rule 13a-14(a)
Certifications
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32
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.1
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Section 1350 Certifications
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(c)
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Financial
Statement Schedule
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The financial statement schedule
Schedule II Valuation and Qualifying
Accounts is part of this
Form 10-K
and is on page 83.
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* |
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Compensatory Plan |
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(1) |
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Filed as an exhibit to the Registration Statement on
Form S-1
(File
No. 333-90879)
of Mediacom Communications Corporation and incorporated herein
by reference. |
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(2) |
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Filed as an exhibit to the Current Report on
Form 8-K,
dated December 21, 2007, of Mediacom Communications
Corporation and incorporated herein by reference. |
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(3) |
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Filed as an exhibit to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 1998 of Mediacom LLC
and Mediacom Capital Corporation and incorporated herein by
reference. |
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(4) |
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Filed as an exhibit to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2000 of Mediacom
Communications Corporation and incorporated herein by reference. |
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(5) |
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Filed as an exhibit to the Current Report on
Form 8-K,
dated August 30, 2005, of Mediacom Broadband LLC and
Mediacom Broadband Corporation and incorporated herein by
reference. |
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(6) |
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Filed as an exhibit to the Quarterly Report on
Form 10-Q
for the quarterly period ended September 30, 2004 of
Mediacom Communications Corporation and incorporated herein by
reference. |
86
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(7) |
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Filed as an exhibit to the Quarterly Report of
Form 10-Q
for the quarterly period ended March 31, 2006 of Mediacom
Communications Corporation and incorporated herein by reference. |
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(8) |
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Filed as an exhibit to the Quarterly Report of
Form 10-Q
for the quarterly period ended June 30, 2007 of Mediacom
Communications Corporation and incorporated herein by reference. |
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(9) |
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Filed as an exhibit to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 2004 of Mediacom
Communications Corporation and incorporated herein by reference. |
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(10) |
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Filed as an exhibit to the Quarterly Report on
Form 10-Q
for the quarterly period ended September 30, 2005 of
Mediacom Communications Corporation and incorporated herein by
reference. |
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(11) |
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Filed as an exhibit to the Annual Report on
Form 10-K
for the fiscal year ended December 31, 1999 of Mediacom
Communications Corporation and incorporated herein by reference. |
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(12) |
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Filed as an exhibit to the Registration Statement on
Form S-4
(File
No. 333-72440)
of Mediacom Broadband LLC and Mediacom Broadband Corporation and
incorporated herein by reference. |
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(13) |
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Filed as an exhibit to the Quarterly Report on
Form 10-Q
for the quarterly period ended March 31, 2004 of Mediacom
Communications Corporation and incorporated herein by reference. |
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(14) |
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Filed as an exhibit to the Registration Statement on
Form S-8
(File
No. 333-68306)
of Mediacom Communications Corporation and incorporated herein
by reference. |
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(15) |
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Filed as Exhibit A to the definitive Proxy Statement of
Mediacom Communications Corporation filed with the SEC on
April 30, 2003 and incorporated herein by reference. |
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(16) |
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Filed as an exhibit to the Quarterly Report on
Form 10-Q
for the quarterly period ended June 30, 2006 of Mediacom
Communications Corporation and incorporated herein by reference. |
87
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant has duly caused this report to be signed on our
behalf by the undersigned, thereunto duly authorized.
Mediacom Communications Corporation
March 14, 2008
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By:
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/s/ Rocco
B. Commisso
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Rocco B. Commisso
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
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Signature
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Title
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Date
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/s/ Rocco
B. Commisso
Rocco
B. Commisso
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Chairman and Chief Executive Officer (principal executive
officer)
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March 14, 2008
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/s/ Mark
E. Stephan
Mark
E. Stephan
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Executive Vice President, Chief Financial Officer and Director
(principal financial officer and principal accounting officer)
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March 14, 2008
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/s/ William
S. Morris III
William
S. Morris III
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Director
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March 14, 2008
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/s/ Craig
S. Mitchell
Craig
S. Mitchell
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Director
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March 14, 2008
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/s/ Thomas
V. Reifenheiser
Thomas
V. Reifenheiser
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Director
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March 14, 2008
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/s/ Natale
S. Ricciardi
Natale
S. Ricciardi
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Director
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March 14, 2008
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/s/ Robert
L. Winikoff
Robert
L. Winikoff
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Director
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March 14, 2008
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88
EX-12.1
Exhibit 12.1
Mediacom
Communications Corporation and Subsidiaries
Schedule
of Computation of Ratio of Earnings to Fixed Charges
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For the Years Ended December 31,
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2007
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2006
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2005
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2004
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2003
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(In thousands, except ratio amounts)
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Earnings:
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(Loss) income before income taxes
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$
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(95,129
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)
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$
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(65,188
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)
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$
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(24,965
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)
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$
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13,628
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$
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(62,051
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)
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Interest expense, net
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239,015
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227,206
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208,265
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192,740
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190,199
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Amortization of capitalized interest
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3,069
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2,678
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2,357
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2,055
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2,083
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Amortization of debt issuance costs
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4,884
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5,998
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8,613
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8,725
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6,696
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Interest component of rent
expense(1)
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5,787
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5,755
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5,267
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4,931
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4,583
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Earnings available for fixed charges
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$
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157,626
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$
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176,449
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$
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199,537
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$
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222,079
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$
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141,510
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Fixed Charges:
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Interest expense, net
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$
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239,015
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227,206
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$
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208,265
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$
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192,740
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$
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190,199
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Capitalized interest
|
|
|
3,818
|
|
|
|
3,603
|
|
|
|
3,756
|
|
|
|
3,012
|
|
|
|
6,957
|
|
Amortization of debt issuance costs
|
|
|
4,884
|
|
|
|
5,998
|
|
|
|
8,613
|
|
|
|
8,725
|
|
|
|
6,696
|
|
Interest component of rent expense(1)
|
|
|
5,787
|
|
|
|
5,755
|
|
|
|
5,267
|
|
|
|
4,931
|
|
|
|
4,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed charges
|
|
$
|
253,504
|
|
|
$
|
242,562
|
|
|
$
|
225,901
|
|
|
$
|
209,408
|
|
|
$
|
208,435
|
|
Ratio of earnings to fixed charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.06
|
|
|
|
|
|
Deficiency of earnings over fixed charges
|
|
$
|
(95,878
|
)
|
|
$
|
(66,112
|
)
|
|
$
|
(26,364
|
)
|
|
$
|
|
|
|
$
|
(66,925
|
)
|
|
|
|
(1) |
|
A reasonable approximation (one-third) is deemed to be the
interest factor included in rental expense. |
EX-21.1
Exhibit 21.1
Subsidiaries
of Mediacom Communications Corporation
|
|
|
|
|
|
|
State of Incorporation
|
|
Names under which
|
Subsidiary
|
|
or Organization
|
|
subsidiary does business
|
|
Mediacom LLC
|
|
New York
|
|
Mediacom LLC
|
Mediacom Arizona LLC
|
|
Delaware
|
|
Mediacom Arizona Cable Net
|
|
|
|
|
Mediacom Cable LLC
|
Mediacom California LLC
|
|
Delaware
|
|
Mediacom California LLC
|
Mediacom Capital Corporation
|
|
New York
|
|
Mediacom Capital Corporation
|
Mediacom Delaware LLC
|
|
New York
|
|
Mediacom Delaware LLC
|
|
|
|
|
Maryland Mediacom Delaware
|
Mediacom Illinois LLC
|
|
Delaware
|
|
Mediacom Illinois LLC
|
Mediacom Indiana LLC
|
|
Delaware
|
|
Mediacom Indiana LLC
|
Mediacom Indiana Partnerco LLC
|
|
Delaware
|
|
Mediacom Indiana Partnerco
|
Mediacom Indiana Holdings, L.P.
|
|
Delaware
|
|
Mediacom Indiana Holdings, L.P.
|
Mediacom Iowa LLC
|
|
Delaware
|
|
Mediacom Iowa LLC
|
Mediacom Minnesota LLC
|
|
Delaware
|
|
Mediacom Minnesota LLC
|
Mediacom Southeast LLC
|
|
Delaware
|
|
Mediacom Southeast LLC
|
|
|
|
|
Mediacom New York LLC
|
Mediacom Wisconsin LLC
|
|
Delaware
|
|
Mediacom Wisconsin LLC
|
Zylstra Communications Corporation
|
|
Minnesota
|
|
Zylstra Communications Corporation
|
Illini Cable Holding, Inc.
|
|
Illinois
|
|
Illini Cable Holding, Inc.
|
Illini Cablevision of Illinois, Inc.
|
|
Illinois
|
|
Illini Cablevision of Illinois, Inc.
|
Mediacom Broadband LLC
|
|
Delaware
|
|
Mediacom Broadband LLC
|
Mediacom Broadband Corporation
|
|
Delaware
|
|
Mediacom Broadband Corporation
|
MCC Georgia LLC
|
|
Delaware
|
|
MCC Georgia LLC
|
MCC Illinois LLC
|
|
Delaware
|
|
MCC Illinois LLC
|
MCC Iowa LLC
|
|
Delaware
|
|
MCC Iowa LLC
|
MCC Missouri LLC
|
|
Delaware
|
|
MCC Missouri LLC
|
MCC Telephony, LLC
|
|
Delaware
|
|
MCC Telephony, LLC
|
MCC Telephony of Florida, LLC
|
|
Delaware
|
|
MCC Telephony of Florida, LLC
|
MCC Telephony of Georgia, LLC
|
|
Delaware
|
|
MCC Telephony of Georgia, LLC
|
MCC Telephony of Illinois, LLC
|
|
Delaware
|
|
MCC Telephony of Illinois, LLC
|
MCC Telephony of Iowa, LLC
|
|
Delaware
|
|
MCC Telephony of Iowa, LLC
|
MCC Telephony of Missouri, LLC
|
|
Delaware
|
|
MCC Telephony of Missouri, LLC
|
Mediacom Enterprise Solutions, Inc.
|
|
Delaware
|
|
MCC Enterprises Solutions, Inc.
|
MCC Enterprise, Inc.
|
|
Delaware
|
|
MCC Enterprises, Inc.
|
MCC Telephony of the Mid-Atlantic, LLC
|
|
Delaware
|
|
MCC Telephony of the Mid-Atlantic, LLC
|
MCC Telephony of the Mid-West, LLC
|
|
Delaware
|
|
MCC Telephony of the Mid-West, LLC
|
MCC Telephony of the South, LLC
|
|
Delaware
|
|
MCC Telephony of the South, LLC
|
MCC Telephony of Minnesota, LLC
|
|
Delaware
|
|
MCC Telephony of Minnesota, LLC
|
MCC Telephony of the West, LLC
|
|
Delaware
|
|
MCC Telephony of the West, LLC
|
Mediacom Arizona Cable Network LLC
|
|
Delaware
|
|
Mediacom Arizona Cable Network LLC
|
Mediacom Management Corporation
|
|
Delaware
|
|
Mediacom Management Corporation
|
Mediacom Cable TV I LLC
|
|
New York
|
|
Mediacom Cable TV I LLC
|
EX-23.1
Exhibit 23.1
Consent
of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the
Registration Statements on
Form S-3
(File
No. 333-82124)
and
Form S-8
(File Nos.
333-41360,
333-68306,
333-122787
and
333-129008)
of Mediacom Communications Corporation of our report dated
March 14, 2008 relating to the financial statements,
financial statement schedule, and the effectiveness of internal
control over financial reporting, which appear in this
Form 10-K.
/s/ PricewaterhouseCoopers
LLP
PricewaterhouseCoopers LLP
New York, New York
March 14, 2008
EX-31.1
Exhibit 31.1
CERTIFICATIONS
I, Rocco B. Commisso, certify that:
(1) I have reviewed this report on
Form 10-K
of Mediacom Communications 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 registrants 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 registrants
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
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal
control over financial reporting; and
(5) The registrants other certifying officer and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants
auditors and the audit committee of registrants 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
registrants 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
registrants internal control over financial reporting.
Rocco B. Commisso
Chairman and Chief Executive Officer
March 14, 2008
Exhibit 31.1
I, Mark E. Stephan, certify that:
(1) I have reviewed this report on
Form 10-K
of Mediacom Communications 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 registrants 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 registrants
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
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal
control over financial reporting; and
(5) The registrants other certifying officer and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants
auditors and the audit committee of registrants 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
registrants 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
registrants internal control over financial reporting.
Mark E. Stephan
Executive Vice President and Chief Financial Officer
March 14, 2008
EX-32.1
Exhibit 32.1
CERTIFICATION
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Mediacom Communications
Corporation (the Company) on
Form 10-K
for the period ended December 31, 2007 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
Chairman and Chief Executive Officer
Mark E. Stephan
Executive Vice President and
Chief Financial Officer
March 14, 2008