Back to GetFilings.com
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, 1998
Commission File Numbers: 333-57285-01
333-57285
Mediacom LLC
Mediacom Capital Corporation*
(Exact names of Registrants as specified in their charters)
New York 06-1433421
New York 06-1513997
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Numbers)
100 Crystal Run Road
Middletown, New York 10941
(Address of principal executive offices)
914-695-2600
(Registrants' telephone number including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days:
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: Not Applicable
State the aggregate market value of the common equity held by non-affiliates
of the Registrants: Not Applicable
Indicate the number of shares outstanding of the Registrants' common stock:
Not Applicable
*Mediacom Capital Corporation meets the conditions set forth in General
Instruction I (1) (a) and (b) of Form 10-K and is therefore filing this form
with the reduced disclosure format.
MEDIACOM LLC AND SUBSIDIARIES
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business ............................................................................... 1
Item 2. Properties ............................................................................. 21
Item 3. Legal Proceedings ...................................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders .................................... 21
PART II
Item 5. Market for Registrants, Common Equity and Related Stockholder Matters .................. 22
Item 6. Selected Financial Data ................................................................ 23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................................ 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............................. 34
Item 8. Financial Statements and Supplementary Data ............................................ 35
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................................. 56
PART III
Item 10. Directors and Executive Officers of the Registrant ..................................... 57
Item 11. Executive Compensation ................................................................. 59
Item 12. Security Ownership of Certain Beneficial Owners and Management ......................... 60
Item 13. Certain Relationships and Related Transactions ......................................... 61
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........................ 62
PART I
------
ITEM 1. BUSINESS
Introduction
Mediacom LLC ("Mediacom" and collectively with its operating
subsidiaries, the "Company") was founded in July 1995 by Rocco B. Commisso
principally to acquire, operate and develop cable television systems in selected
non-metropolitan markets of the United States. As of December 31, 1998, the
Company had completed nine acquisitions of cable television systems (the
"Systems") that on such date passed approximately 520,000 homes and served
approximately 354,000 basic subscribers. The Company is among the top 25
multiple system operators ("MSOs") in the United States, operating in 14 states
and serving 313 franchise communities.
In pursuing its business strategy, the Company has sought to take
advantage of opportunities to acquire underperforming and undervalued cable
television systems and to build subscriber clusters through regionalized
operations. From the commencement of operations in March 1996 to December 1997,
the Company completed six acquisitions of cable television systems that, as of
December 31, 1998, served approximately 65,250 basic subscribers in California,
Arizona, Delaware and Maryland. In 1998, the Company completed three
acquisitions of cable television systems that, as of December 31, 1998, served
approximately 288,750 basic subscribers in eleven states, principally Alabama,
California, Florida, Kentucky, Missouri and North Carolina. The aggregate
purchase price for the Company's nine acquisitions was approximately $432.4
million (before closing costs).
The Company is committed to the rapid deployment of state-of-the-art
technology in the Systems. In 1998, the Company accelerated its capital
improvement program to upgrade the Systems' cable television network affecting
approximately 75.0% of its customer base. Upon the program's anticipated
completion in June 2000, the Company expects that approximately 85.0% of its
customer base will be served by Systems with 550MHz (78 analog channels) to
750MHz bandwidth capacity (78 analog channels, with 200MHz bandwidth capacity
reserved for digital cable television and other services). The result of this
capital improvement program will be a significant increase in network capacity,
quality and reliability. The upgraded network will enable the Company to provide
new and enhanced cable services, including digital cable television and high-
speed Internet access.
Mr. Commisso is the Chairman and Chief Executive Officer of the Company
and has over 21 years of experience with the cable television industry. Mr.
Commisso has assembled a management team with significant business experience in
acquiring, developing, operating and financing cable television operations. The
eleven most senior executives and managers of the Company have an average of
over 17 years of experience with the cable television industry. Prior to
founding Mediacom, Mr. Commisso served as Executive Vice President, Chief
Financial Officer and Director of Cablevision Industries Corporation from August
1986 to March 1995.
Mediacom was organized as a New York limited liability company to serve
as the holding company for its four operating subsidiaries, each of which is a
Delaware limited liability company. The operating subsidiaries are wholly-owned
by Mediacom, except for a 1.0% ownership interest in a subsidiary, Mediacom
California LLC, held by Mediacom Management Corporation ("Mediacom Management").
Mediacom Capital Corporation ("Mediacom Capital"), a New York corporation
wholly-owned by Mediacom, was formed in 1998 specifically to permit Mediacom to
issue debt in the public market and does not conduct operations of its own.
Pursuant to separate management agreements with Mediacom's operating
subsidiaries, Mediacom Management, a Delaware corporation wholly-owned by Mr.
Commisso, is paid management fees for managing the day-to-day operations of the
operating subsidiaries. In accordance with the operating agreement governing the
affairs and operations of Mediacom, Mr. Commisso is the sole manager of Mediacom
and has overall management and effective control of the business and affairs of
the Company.
1
This Form 10-K contains certain forward-looking statements concerning
the Company's operations, economic performance and financial condition,
including, in particular, the likelihood of the Company's success in developing
and expanding its business. The statements are based upon a number of
assumptions and estimates which are inherently subject to significant
uncertainties and contingencies, many of which are beyond the control of the
Company, and reflect future business decisions which are subject to change. Some
of these assumptions inevitably will not materialize, and unanticipated events
will occur which will affect the Company's actual results.
Recent Developments
On February 26, 1999, Mediacom and Mediacom Capital jointly issued $125
million aggregate principal amount of 7 7/8% Senior Notes (the "7 7/8% Senior
Notes") due February 2011. The net proceeds from this offering of approximately
$121.9 million were used to repay a substantial portion of outstanding
indebtedness under the Company's bank credit facilities. Interest on the 7 7/8%
Senior Notes will be payable semi-annually on February 15 and August 15 of each
year, commencing on August 15, 1999.
Cable Television Industry
Video Services
Cable television systems receive a variety of television, radio, and
data signals transmitted to the headend facilities by means of off-air antennas,
microwave relay systems and satellite earth stations. These signals are then
modulated, amplified and distributed, primarily through fiber optic and coaxial
cable, to customers who pay a fee for this service. Cable television systems may
also originate their own television programming and other information services
for distribution through the system. The cable television industry is regulated
by the Federal Communications Commission (the "FCC"), some state governments and
substantially all local governments. Cable television systems generally are
constructed and operated pursuant to non-exclusive franchises or similar
licenses granted by local governmental authorities for a specified term of
years, generally for extended periods of up to 15 years.
The cable television industry developed in the United States in the late
1940's and early 1950's in response to the needs of residents in predominantly
rural and mountainous areas of the country where the quality of off-air
television reception was inadequate due to factors such as topography and
remoteness from television broadcast towers. In the late 1960's, cable
television systems also developed in small and medium-sized cities and suburban
areas that had a limited availability of clear off-air television station
signals. All of these markets are regarded within the cable industry as
"classic" cable television markets. In more recent years, cable television
systems have been constructed in large urban cities and nearby suburban areas,
where good off-air reception from multiple television stations usually is
already available, in order to receive the numerous, satellite-delivered
channels carried by cable television systems which are not otherwise available
via broadcast television reception.
Cable television systems offer customers various levels (or "tiers") of
cable television services consisting of: (i) off-air television signals of local
network, independent and educational stations; (ii) a limited number of
television signals from so-called "superstations" originating from distant
cities (such as WGN); (iii) various satellite-delivered, non-broadcast channels
(such as Cable News Network ("CNN"), MTV: Music Television ("MTV"), the USA
Network ("USA"), Entertainment and Sports Programming Network ("ESPN") and
Turner Network Television ("TNT"); (iv) certain programming originated locally
by the cable television system (such as public, governmental and educational
access programs); and (v) informational displays featuring news, weather, stock
market and financial reports, and public service announcements. For an extra
monthly charge, cable television systems also offer premium television services
to their customers, such as Home Box Office ("HBO"), Showtime and regional
sports networks. These services are satellite-delivered channels consisting
principally of feature films, live sports events, concerts and other special
entertainment features, usually presented without commercial interruption.
A customer generally pays an initial installation charge and fixed
monthly fees for basic and premium television services and for other services
(such as the rental of converters and remote control devices). Such monthly
service fees constitute the primary source of revenue for cable operators. In
addition to customer revenue from these services, cable operators generate
revenue from additional fees paid by customers for pay-per-view programming of
movies and special events and from the sale of available advertising spots on
advertiser-supported programming. Cable operators also offer to their customers
home shopping services, which pay the cable operators a share of revenue from
sales of products in the cable operators' service areas.
2
In 1999, the Company plans to introduce digital cable television in
Systems that pass approximately 175,000 homes. To receive this service, the
Company's customers will require a digital set top converter. Digital cable
television is a computerized method of defining, transmitting and storing
information that makes up a television signal. Since digital signals can be
"compressed," they can transmit up to 12 channels in the space currently used to
transmit just one analog channel. The Company expects to provide to its digital
cable subscribers programming packages which include up to 15 new basic
services, up to 42 additional "multichannel" premium services, enhanced pay-per-
view options with up to 30 movie and sports channels, up to 40 channels of CD-
quality music, and an interactive on-screen program guide to help them navigate
the new digital choices.
High-Speed Data Services
The Company's accelerated capital improvement program and deployment of
fiber optic technology allows the use of the expanded bandwidth capacity for
high-speed cable modem services. High-speed cable modem services are now
available at speeds far in excess of that which is currently available through
the 56 kilobit per second telephone modem. In one of its Systems passing
approximately 17,000 homes, the Company currently offers high-speed Internet
access through the use of one-way cable modems, which permit data to be
downstreamed at high speed while utilizing a telephone line return path. The
Company also offers dial-up telephone Internet access in two of its markets.
This establishes the Company as an Internet service provider in these markets
and creates a customer base that can be upgraded to the high-speed cable modem
service in the future.
Business Strategy
The Company's ongoing business strategy is to: (i) acquire
underperforming and undervalued cable television systems primarily in non-
metropolitan markets, as well as related telecommunications businesses; (ii)
invest in the development of a state-of-the-art technological platform for
delivery of broadband video and other services to its customers; (iii) provide
superior customer service; and (iv) deploy a flexible financing strategy to
complement the Company's growth objectives and operating plans. The key elements
of the Company's business strategy are:
Pursue Strategic Acquisitions. The Company generally targets systems in
geographic proximity to its existing operations. By acquiring and developing
within its geographic proximity, the Company expects to realize significant
operating efficiencies through the consolidation of many managerial,
administrative and technical functions. The Company will pursue "fill-in"
acquisitions in geographic areas where it is the dominant provider of cable
television services. The Company may also expand its base of operations into
other markets or pursue related telecommunications businesses if such
acquisitions are consistent with its overall business strategy.
The Company is regularly presented with opportunities to acquire cable
television systems that are evaluated on the basis of the Company's acquisition
strategy. Although the Company presently does not have any definitive agreements
to acquire or sell any of its cable television systems, it is negotiating with
prospective sellers to acquire additional cable television systems. If
definitive agreements for all such potential acquisitions are executed, and if
such acquisitions are then consummated, the Company's customer base would
approximately double in size. These acquisitions are subject to the negotiation
and completion of definitive documentation, which will include customary
representations and warranties and will be subject to a number of closing
conditions. Financing for these potential transactions has not been determined;
however, if such acquisitions are consummated, the Company believes its total
indebtedness would substantially increase. No assurance can be given that such
definitive documents will be entered into or that, if entered into, the
acquisitions will be consummated.
Target Non-Metropolitan Markets. The Company has acquired clusters of
cable television systems serving primarily suburban areas within the top 50 to
100 television markets and small and medium sized communities where customers
generally require cable television to clearly receive a full complement of off-
air television signals. The Company believes that there are advantages in
acquiring and operating cable television systems in such markets, such as: (i)
less direct competition given the lower housing densities and the resulting
higher costs per customer of installing cable service; (ii) higher subscriber
penetration levels and lower customer turnover based on fewer competing
entertainment alternatives; and (iii) generally lower overhead and operating
costs than similar costs incurred by cable operators serving larger markets.
3
Invest in Technology and Capital Improvements. As part of its commitment
to customer satisfaction, the Company emphasizes high technical performance
standards. In 1998, the Company accelerated its capital improvement program to
upgrade the Systems' cable television network affecting approximately 75.0% of
its basic subscribers. Upon the program's anticipated completion in June 2000,
the Company expects that substantially all of its Systems will have a minimum
bandwidth capacity of 450MHz and that over 85.0% of its customer base will be
served by Systems with 550MHz to 750MHz bandwidth capacity. In most of the
Systems, the Company is deploying fiber optic cable to upgrade the technical
quality of the network using high capacity, hybrid fiber-coaxial ("HFC")
architecture. The result of the accelerated capital improvement program and
deployment of HFC architecture will be a significant increase in network
capacity, quality and reliability, enabling the Company also to deliver more
quickly to its customer base additional programming and new services.
The capital improvement program also provides for the interconnection of
cable television systems within a regional cluster through the use of fiber
optic cable, thus facilitating the consolidation of headend facilities. By
serving larger clusters of customers from a single headend facility, it becomes
economically feasible in smaller communities to launch new and enhanced
services, such as digital cable television and high-speed Internet access, and
to introduce local advertising sales. By the end of 1999, the Company expects to
reduce its headend facilities to 138 and to serve approximately 75.0% of its
basic subscribers from 34 headend facilities.
Expand Service Offerings. The Company has generally acquired cable
television systems that have underserved their customers. As a result, the
Company believes that significant opportunities exist to increase the revenues
of the Systems by promoting and expanding the programming services and pricing
options available to its customers. The Company has utilized the expanded analog
channel capacity, resulting from the Systems' technical upgrades, to introduce
several new basic programming services, multichannel premium services, and
numerous pay-per-view channels. In addition, the Company plans to introduce
digital cable television in Systems passing over 175,000 homes in 1999 and high-
speed Internet access to Systems passing over 400,000 homes over the next three
years.
Deploy Flexible Financing Strategy. The Company has deployed a financing
strategy which utilizes a blend of equity and debt capital to complement the
Company's acquisition and operating activities. Through its holding company
structure, the Company has raised equity from its members and issued public
long-term debt at the holding company level, while utilizing its subsidiaries to
access debt capital, principally in the commercial bank market, through two
stand-alone borrowing groups. The Company believes that this financing strategy
is beneficial because it broadens the Company's access to various debt markets,
enhances its flexibility in managing the Company's capital structure, reduces
the overall cost of debt capital and permits the Company to maintain a
substantial liquidity position in the form of unused and available bank credit
commitments.
As of December 31, 1998, Mediacom had raised $135.5 million of equity
commitments from its members, of which $125.0 million has been invested in
Mediacom, and had issued $200.0 million of senior notes in the public debt
market. In addition, the Company had established two subsidiary borrowing groups
which have obtained in the aggregate $325.0 million of bank credit facilities.
Such credit facilities are non-recourse to Mediacom, have no cross-default
provisions relating directly to each other and permit the subsidiaries, subject
to covenant and other restrictions, to make distributions to Mediacom. As of
December 31, 1998, the Company had approximately $189.9 million of unused bank
credit commitments, all of which could have been borrowed and distributed to
Mediacom under the most restrictive covenants in the Company's bank credit
agreements.
4
Development of the Systems
The Company commenced operations in March 1996 with the acquisition of
its first cable television system. As of December 31, 1998, the Company had
completed nine acquisitions of cable television systems. The following table
summarizes certain information relating to the acquisitions of the Systems in
chronological order:
Purchase
Price Basic
Location of Systems Predecessor Owner(1) Acquisition Date (in millions)(2) Subscribers(3)
- ------------------- ---------------- ---------------- ------------ -----------
Ridgecrest, CA Benchmark Communications March 1996 $ 18.8 9,450
Kern Valley, CA Booth American Company June 1996 11.0 6,100
Nogales, AZ Saguaro Cable TV Investors, L.P. December 1996 11.4 8,100
Valley Center, CA Valley Center CableSystems, L.P. December 1996 2.5 1,900
Dagsboro, DE American Cable TV Investors 5, Ltd. June 1997 42.6 29,800
Sun City, CA Cox Communications, Inc. September 1997 11.5 9,900
Clearlake, CA Jones Intercable, Inc. January 1998 21.4 17,750
Various States Cablevision Systems Corporation January 1998 308.2 267,200
Caruthersville, MO Cablevision Systems Corporation October 1998 5.0 3,800
------- -------
$ 432.4 354,000
======= =======
- ----------
(1) Purchased from the named party, one or more of its affiliates, or the
controlling or managing operator.
(2) Represents the final purchase price before closing costs.
(3) As of December 31, 1998.
Description of the Operating Regions
The Systems are managed from four operating regions: Southern, Mid-
Atlantic, Central and Western. The table below and the discussion that follows
provide an overview of selected operating and technical statistics for each of
the Company's four operating regions as of December 31, 1998.
Southern Mid-Atlantic Central Western Total
-------- ------------ ------- ------- -----
Homes passed 189,000 123,000 124,400 83,600 520,000
Miles of plant 4,775 2,930 2,960 1,285 11,950
Density(1) 40 42 42 65 44
Basic subscribers 134,200 85,500 81,100 53,200 354,000
Basic penetration 71.0% 69.5% 65.2% 63.6% 68.1%
Premium service units 202,000 82,900 101,700 20,500 407,100
Premium penetration 150.5% 97.0% 125.4% 38.5% 115.0%
Average monthly basic
revenues per basic
subscriber(2) $ 24.39 $ 24.76 $ 25.02 $ 28.97 $ 25.31
Average monthly
revenues per basic
subscriber(3) $ 33.22 $ 31.45 $ 31.63 $ 36.26 $ 32.88
Weighted average
analog channel
capacity(4) 63 64 54 72 63
(1) Homes passed divided by miles of plant.
(2) Represents average monthly revenues from basic and expanded basic
programming services for the three months ended December 31, 1998, divided
by basic subscribers as of the end of such period.
(3) Represents average monthly revenues for the three months ended December 31,
1998, divided by basic subscribers as of the end of such period.
(4) Determined on a per subscriber basis.
5
Southern Region. The Southern Region represents the Company's largest
region. Over 82.0% of the region's basic subscribers are located in the suburbs
and outlying areas of Pensacola, Fort Walton Beach and Panama City, Florida;
Mobile and Huntsville, Alabama; and Biloxi, Mississippi. As of December 31,
1998, the region's Systems passed approximately 189,000 homes and served
approximately 134,200 basic subscribers. The internal subscriber growth for this
region was 3.1% in 1998. The Company measures internal subscriber growth as the
percentage change in basic subscribers from the prior period excluding the
effects of acquisitions completed during the current period. All of the region's
basic subscribers are serviced from a regional customer service center in Gulf
Breeze, Florida, which provides 24-hour, 7-day per week service.
As of December 31, 1998, the weighted average analog channel capacity of
the region's Systems was 63 channels and the region's basic subscribers were
served by 53 headend facilities. Upon completion of the capital improvement
program in June 2000, the Company anticipates that approximately 83.0% of the
Southern Region's basic subscribers will be served by Systems with 550MHz to
750MHz bandwidth capacity. The Company eliminated four headend facilities
through fiber interconnection in 1998, and expects to eliminate at least one
additional headend facility by the end of 1999. The Company plans to launch
digital cable television in three of the Southern Region's Systems in 1999
passing approximately 72,000 homes.
Mid-Atlantic Region. The Mid-Atlantic Region's Systems serve communities
in lower Delaware, southeastern Maryland and the northeastern and western areas
of North Carolina. As of December 31, 1998, the region's Systems passed
approximately 123,000 homes and served approximately 85,500 basic subscribers.
The internal subscriber growth for this region was 4.9% in 1998. Approximately
65.0% of the region's basic subscribers are serviced from a regional customer
service center in Hendersonville, North Carolina, which provides 24-hour, 7-day
per week service.
As of December 31, 1998, the weighted average analog channel capacity of
the region's Systems was 64 channels and the region's basic subscribers were
served by 17 headend facilities. Upon completion of the capital improvement
program in June 2000, the Company expects that approximately 93.0% of the Mid-
Atlantic Region's basic subscribers will be served by Systems with 550MHz to
750MHz bandwidth capacity. By the end of 1999, the Company expects that five
headend facilities will be eliminated through fiber interconnection. In 1999,
the Company plans to launch digital cable television in two of the Mid-Atlantic
Region's Systems passing approximately 75,000 homes.
Central Region. The Central Region's Systems serve the suburbs and
outlying areas of Kansas City and Springfield, Missouri, and Topeka, Kansas, and
communities in the western portion of Kentucky. As of December 31, 1998, the
region's Systems passed approximately 124,400 homes and served approximately
81,100 basic subscribers. The internal subscriber growth rate of this region was
1.0% in 1998. Substantially all of the region's basic subscribers are serviced
from a regional customer service center in Benton, Kentucky, which provides 24-
hour, 7-day per week service.
As of December 31, 1998, the weighted average analog channel capacity of
the region's Systems was 54 channels and the region's basic subscribers were
served by 73 headend facilities. Upon completion of the capital improvement
program in June 2000, the Company anticipates that approximately 94.0% of the
Central Region's basic subscribers will be served by Systems with 550MHz to
750MHz bandwidth capacity. The Company eliminated two headend facilities through
fiber interconnection in 1998, and expects to eliminate seven other headend
facilities by the end of 1999. The Company plans to launch digital cable
television in one of the Central Region's Systems in 1999 passing approximately
11,000 homes.
Western Region. The Western Region's Systems serve communities in the
following areas: (i) Clearlake, California; (ii) the Indian Wells Valley in
central California; (iii) portions of Riverside County and San Diego County,
California; and (iv) Nogales, Arizona and outlying areas. As of December 31,
1998, the region's Systems passed approximately 83,600 homes and served
approximately 53,200 basic subscribers. The Western Region's internal subscriber
growth was flat in 1998. The region's basic subscribers are serviced from seven
local offices.
6
As of December 31, 1998, the region's Systems had been significantly
upgraded. All of the region's basic subscribers are served by Systems with a
minimum 450MHz bandwidth capacity and approximately 65.0% are served by Systems
with 550MHz bandwidth capacity. As a result, the weighted average analog channel
capacity of the region's Systems was 72 channels. The region's basic subscribers
are served by nine headend facilities and the Company expects that one headend
facility will be eliminated through fiber interconnection by the end of 1999.
The Company plans to launch digital cable television in one of the Western
Region's Systems in 1999 passing approximately 17,000 homes.
Technological Overview
The following table summarizes the Systems' bandwidth capacity as of
December 31, 1998. On such date, the Systems have a weighted average analog
channel capacity of 63 channels.
Basic Weighted
Subscribers Percentage of Basic Subscribers by Channel Capacity Average
as of ------------------------------------------------------------------------------- Analog
Operating December 31 30 Channels 36 Channels 42 Channels 54 Channels 62 Channels 78 Channels Channel
Regions 1998 (270MHz) (300MHz) (330MHz) (400MHz) (450MHz) (550MHz) Capacity
- ------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- --------
Southern 134,200 0.3% 16.5% 10.5% 4.1% 21.2% 47.4% 63
Mid-Atlantic 85,500 0.0 11.0 25.4 0.6 3.2 59.8 64
Central 81,100 0.8 26.4 29.9 4.3 6.5 32.1 54
Western 53,200 0.0 0.0 0.0 0.0 35.0 65.0 72
----------- ----------- ----------- ----------- ----------- ----------- ----------- --------
Total 354,000 0.3% 15.0% 17.0% 2.7% 15.5% 49.5% 63
=========== =========== =========== =========== =========== =========== =========== ========
Since its commencement of operations in March 1996, the Company made a
commitment to upgrade the Systems in order to increase programming choices,
provide new and enhanced services, and improve overall customer satisfaction.
During the third quarter of 1998, the Company modified its previously disclosed
five-year capital improvement program by accelerating the program's completion
to two-and-a-half years. Moreover, various Systems that were originally
scheduled to be upgraded to 550MHz bandwidth capacity have been redesigned at
750MHz bandwidth capacity, with two-way capability and greater utilization of
fiber optic technology. This program will enable the Company to deliver digital
cable television and high-speed cable modem service earlier and in a more
widespread manner than previously planned, beginning in 1999. Completion of the
capital improvement program is expected by June 2000, at which time the Company
anticipates that over 85.0% of its customer base will be served by Systems with
550MHz to 750MHz bandwidth capacity.
An integral part of the Company's capital improvement program is the
deployment of high capacity, HFC architecture in the upgrade of the Systems. In
most Systems affected by the program, the Company deploys fiber to individual
nodes serving an average of 250 homes and coaxial cable from the node to the
home. This HFC network design provides increased channel capacity, superior
signal quality, improved reliability, reduced system maintenance costs and a
platform to develop high-speed data services, Internet access and emerging
telecommunication services to its customers.
The Company plans to eliminate several headend facilities through fiber
interconnection. In 1998, the Company eliminated six headend facilities. The
Company anticipates that the number of headend facilities will be reduced
further from 152 as of December 31, 1998, to 138 as of December 31, 1999, and
that approximately 75.0% of its basic subscribers will be served from 34 headend
facilities at the end of 1999.
The Company plans to deploy digital cable television technology capable
of expanding channel capacity significantly, with up to 12 digital channels
transmitted in the bandwidth normally used by one analog channel. Digital
transmission will allow the Company to introduce digital cable television
packages which include numerous new basic programming and multichannel premium
services, a wider variety of pay-per-view channels, an interactive program guide
and digital music services. In 1999, the Company expects to introduce digital
cable television in Systems that pass approximately 175,000 homes.
7
The Company provides Internet access to its customers through high-speed
cable modems and through traditional telephone dial-up modems. As of December
31, 1998, the Company served approximately 5,000 residential and commercial
Internet access customers in its Western Region. The Company currently is in
discussions with a number of service providers of high-speed Internet access and
is reviewing plans to launch its own high-speed Internet access in several of
the Systems. Over the next three years, the Company expects to launch high-speed
Internet access in Systems passing over 400,000 homes through a combination of
agreements with service providers and its own launches of such service.
As a result of this accelerated capital improvement program, total
capital expenditures (other than those related to acquisitions) were
approximately $53.7 million for 1998, of which approximately 64.0% were spent to
upgrade the Company's cable plant. The remaining capital expenditures primarily
funded plant extensions, new services, converters and replacements. Total
capital expenditures of approximately $63.0 million are planned in 1999, of
which approximately 64.0% will be spent to upgrade the network.
Marketing, Programming and Rates
The Company's marketing programs and campaigns are based upon offering a
variety of cable services creatively packaged and tailored to appeal to its
different markets and to segments within each market. The Company routinely
surveys its customer base to ensure that it is meeting the demands of its
customers and stays abreast of its competition in order to effectively counter
competitors' service offerings and promotional campaigns. The Company uses a
coordinated array of marketing techniques to attract and retain customers and to
increase premium service penetration, including door-to-door and direct mail
solicitation, telemarketing, media advertising, local promotional events
typically sponsored by programming services and cross-channel promotion of new
services and pay-per-view.
The Company has various contracts to obtain basic and premium
programming for the Systems from program suppliers whose compensation is
typically based on a fixed fee per customer. The Company's programming contracts
are generally for a fixed period of time and are subject to negotiated renewal.
Some program suppliers provide volume discount pricing structures or offer
marketing support to the Company. The Company's successful marketing of multiple
premium service packages emphasizing customer value enables the Company to take
advantage of such cost incentives. In addition, the Company is a member of the
National Cable Television Cooperative, Inc., a programming consortium consisting
of small to medium-sized MSOs serving, in the aggregate, over twelve million
cable subscribers. The consortium helps create efficiencies in the areas of
obtaining and administering programming contracts, as well as secures more
favorable programming rates and contract terms for small to medium-sized cable
operators. The Company intends to negotiate programming contract renewals both
directly and through the consortium to obtain the best available contract terms.
The Company's programming costs are expected to increase in the future due to
additional programming being provided to its customers, increased costs to
purchase programming, inflationary increases and other factors affecting the
cable television industry. The Company believes that it will be able to pass
through expected increases in its programming costs to customers, although there
can be no assurance that it will be able to do so. The Company also has various
retransmission consent arrangements with commercial broadcast stations which
generally expire in December 1999 and beyond. None of these consents require
payment of fees for carriage, however, the Company has entered into agreements
with certain stations to carry satellite-delivered cable programming which is
affiliated with the network carried by such stations.
Although services vary from system to system due to differences in
channel capacity, viewer interests and community demographics, the majority of
the Systems offer a "basic service tier," consisting of local television
channels (network and independent stations) available over-the-air, satellite-
delivered "superstations" originating from distant cities (such as WGN), and
local public, governmental, home-shopping and leased access channels. The
majority of the Systems offer, for a monthly fee, an expanded basic tier of
various satellite-delivered, non-broadcast channels (such as CNN, MTV, USA, ESPN
and TNT). In addition to these services, the Systems typically provide one or
more premium services such as HBO, Cinemax, Showtime, The Movie Channel and
Starz!, which are combined in different packages to appeal to the various
segments of the viewing audience. These services are satellite-delivered
channels consisting principally of feature films, original programming, live
sports events, concerts and other special entertainment features, usually
presented without commercial interruption. Such premium programming services are
offered by the Systems both on a per-channel basis and as part of premium
service packages designed to enhance customer value and to enable the Company to
take advantage of programming agreements offering cost incentives based on
premium service unit growth. Basic subscribers may subscribe for one or more
premium service units. A
8
"premium service unit" is a single premium service for which a subscriber must
pay an additional monthly fee in order to receive the service. The significant
expansion of bandwidth capacity resulting from the Company's capital improvement
program will allow it to expand the use of "tiered" and multichannel packaging
strategies for marketing premium services and promoting niche programming
services. The Company believes that these packaging strategies will increase
basic and premium penetration as well as revenue per basic subscriber. The
Systems also typically provide one or more pay-per-view services purchased from
independent suppliers such as Viewer's Choice and Showtime Event Television.
These services are satellite-delivered channels, consisting principally of
feature films, live sporting events, concerts and other special "events,"
usually presented without commercial interruption. Such pay-per-view services
are offered by the Company on a "per viewing" basis, with subscribers only
paying for programs which they select for viewing.
Monthly customer rates for services vary from market to market,
primarily according to the amount of programming provided. At December 31, 1998,
the Company's monthly basic service rates for residential customers ranged from
$3.89 to $17.00, the combined monthly basic and expanded basic service rates for
residential customers ranged from $21.50 to $36.95 and per-channel premium
service rates (not including special promotions) ranged from $2.95 to $11.95 per
service. For the three months ended December 31, 1998, the weighted average
monthly rate for the Company's combined basic and expanded basic services was
approximately $25.31.
A one-time installation fee, which the Company may wholly or partially
waive during a promotional period, is usually charged to new customers. The
Company charges monthly fees for converters and remote control tuning devices
and also charges administrative fees for delinquent payments for service.
Customers are free to discontinue service at any time without additional charge
in the majority of the Systems and may be charged a reconnection fee to resume
service. Commercial customers, such as hotels, motels and hospitals, are charged
negotiated monthly fees and a non-recurring fee for the installation of service.
Multiple dwelling unit accounts may be offered a bulk rate in exchange for
single-point billing and basic service to all units.
In addition to customer fees, the Company derives modest amounts of
revenues from the sale of local spot advertising time on locally originated and
satellite-delivered programming and from affiliations with home shopping
services (which offer merchandise for sale to customers and compensate system
operators with a percentage of their sales receipts).
The Company is an eligible "small cable company" under certain FCC
rules, which enables it to utilize a simplified rate setting methodology for
most of the Systems in establishing maximum rates for basic and expanded basic
services. This methodology almost always results in rates that exceed those
produced by the cost-of-service rules applicable to larger cable operators.
Approximately 75.0% of the basic subscribers served by the Systems are covered
by such FCC rules. The Company believes that its rate practices are generally
consistent with the current practices in the industry.
Customer Service and Community Relations
The Company is dedicated to providing superior customer service. The
Company expects that its accelerated capital improvement program will
significantly strengthen customer service as it will enhance the reliability of
the technical network, provide better picture quality and permit the
introduction of new programming and other services to the Company's customer
base. The Company has implemented stringent internal customer service standards,
which it believes meet or exceed those established by the National Cable
Television Association. The Company's three regional calling centers offer 24-
hour, 7-day per week coverage to over 76.0% of the Systems' customers on a toll-
free basis. The Company believes customer service is also enhanced by the
regional calling centers' ability to coordinate effectively technical service,
installation appointments, and response time to customer inquiries.
In addition, the Company is dedicated to fostering strong community
relations in the communities served by the Systems. The Company supports local
charities and community causes through staged events and promotional campaigns.
The Company also installs and provides free cable television service and, where
available, Internet access to public schools, government buildings and not-for-
profit hospitals in its franchise areas. The Company believes that its relations
with the communities in which the Systems operate are good.
9
Franchises
Cable television 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 number of channels,
types of programming and the provision of free service to schools and certain
other public institutions; and the granting of insurance and indemnity bonds by
the Company. The provisions of local franchises are subject to federal
regulation under the Cable Communications Policy Act of 1984 (the "1984 Cable
Act"), as amended by the Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Cable Act").
As of December 31, 1998, the Systems were subject to 313 franchises.
These franchises, which are non-exclusive, provide for the payment of fees to
the issuing authority. In most of the Systems, such franchise fees are passed
through directly to the customers. The 1984 Cable Act prohibits franchising
authorities from imposing franchise fees in excess of 5% of gross revenues and
also permit the cable television system operator to seek renegotiation and
modification of franchise requirements if warranted by changed circumstances.
Substantially all of the Systems' basic subscribers are in service areas
that require a franchise. The table below groups the franchises of the Systems
by date of expiration and presents the approximate number and percentage of
basic subscribers for each group of franchises as of December 31, 1998.
Percentage of Number of Percentage of
Number of Total Basic Total Basic
Year of Franchise Expiration Franchises Franchises Subscribers Subscribers
---------------------------- ---------- ---------- ----------- -----------
1999 through 2002 86 27.5% 112,000 31.6%
2003 and thereafter 227 72.5 242,000 68.4
---------- ---------- ----------- -----------
Total 313 100.0% 354,000 100.0%
========== ========== =========== ===========
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 system or effects a transfer of the system to another person,
the operator generally is entitled to the "fair market value" for the system
covered by such franchise. In addition, the 1984 Cable Act established
comprehensive renewal procedures which require that an incumbent franchisee's
renewal application be assessed on its own merits and not as part of a
comparative process with competing applications.
The Company believes that it generally has good relationships with its
franchising communities. The Company has never had a franchise revoked or failed
to have a franchise renewed. In addition, substantially all of the franchises of
the Company 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 the Company.
Competition
Cable television systems face competition from alternative methods of
distributing video programming and from other sources of news, information and
entertainment, such as off-air television broadcast programming, newspapers,
movie theaters, live sporting events, interactive online computer services and
home video products, including videotape cassette recorders. The extent to which
a cable television system is competitive depends, in part, upon that system's
ability to provide, at a reasonable price to customers, a greater variety of
programming and other communications services, and superior technical
performance and customer service.
Cable television systems generally operate pursuant to franchises
granted on a nonexclusive basis. The 1992 Cable Act prohibits franchising
authorities from unreasonably denying requests for additional franchises and
permits franchising authorities to operate cable television systems. Well-
financed businesses from outside the cable television industry (such as the
public utilities that own the poles to which cable is attached) may become
competitors for franchises or providers of competing services. Competition from
other video service providers exists in areas served by the Company. In a
limited number of the franchise areas served by the Systems, the Company faces
direct competition from
10
other franchised cable operators. There can be no assurance, however, that
additional cable television systems will not be constructed in other franchise
areas of the Systems.
Cable operators also face competition from private satellite master
antenna television ("SMATV") systems that serve condominium, apartment and
office complexes and private residential developments. SMATV systems offer both
improved reception of local television stations and many of the same satellite-
delivered program services offered by franchised cable television systems. SMATV
operators often enter into exclusive agreements with building owners or
homeowners associations, although some states have enacted laws that authorize
franchised cable operators access to such private complexes. These laws have
been challenged in the courts with varying results. In addition, some companies
are developing and/or offering to these private residential and commercial
developments packages of telephony, data and video services. The
Telecommunications Act of 1996 (the "1996 Telecom Act") states that SMATV
systems can interconnect non-commonly owned buildings without having to comply
with local, state and federal regulatory requirements that are imposed on cable
television systems providing similar services, as long as they do not use public
rights-of-way. For instance, while a franchised cable television system
typically is obligated to extend service to all areas of a community regardless
of population density or economic risk, a SMATV system may confine its operation
to small areas that are easy to serve and are more likely to be profitable. The
ability of the Company to compete for customers in residential and commercial
developments served by SMATV operators is uncertain.
The FCC has recently allocated a sizable amount of spectrum in the 27-31
GHz band for use by a new wireless service, Local Multipoint Distribution
Service ("LMDS"), which among other uses, can deliver over 100 channels of
programming directly to consumers' homes. The FCC completed an auction of this
spectrum to the public in March 1998, with cable operators and local telephone
companies restricted in their participation in this auction. The extent to which
the winning licensees for the LMDS service will use this spectrum in particular
regions of the country to deliver multichannel video programming and other
services to subscribers, and therefore provide competition to franchises cable
television systems, is uncertain at this time.
Individuals presently have the option to purchase earth stations, which
allow the direct reception of satellite-delivered broadcast and non-broadcast
program services formerly available only to cable television subscribers. Most
satellite-distributed program signals are electronically scrambled so as to
permit reception only with authorized decoding equipment for which the consumer
must pay a fee. The 1992 Cable Act enhances the right of satellite distributors
and other competitors to purchase non-broadcast satellite-delivered programming.
The fastest growing method of satellite distribution is by high-powered direct
broadcast satellites (DBS) utilizing video compression technology. This
technology has the capability of providing more than 100 channels of programming
over a single high-powered DBS satellite with significantly higher capacity
available if multiple satellites are placed in the same orbital position. DBS
service can be received virtually anywhere in the United States through the
installation of a small rooftop or side-mounted antenna. Three service providers
are presently heavily marketing DBS service on a nationwide basis. The 1996
Telecom Act and FCC regulations preempt certain local restrictions on the
location and use of DBS and other satellite receiver dishes.
High-power DBS services are currently being provided by DirecTV, Inc.
("DirecTV") and EchoStar Communications Corporation ("EchoStar"), and medium-
power service is being provided by PrimeStar, Inc. ("PrimeStar"). Recently
announced transactions would result in DirecTV and EchoStar obtaining additional
high-power DBS channel capacity through the acquisition of other DBS facilities,
and DirecTV's acquiring PrimeStar's medium-power DBS business. If these
transactions are approved and consummated, DirecTV and EchoStar will be able to
significantly increase the number of channels on which they can provide
programming to subscribers and will improve significantly their competitive
positions vis-a-vis cable operators. The Company is unable to predict the impact
that these enhanced DBS operations may have on its business and operations.
DBS systems currently have certain advantages over cable television
systems with respect to programming and digital quality, as well as
disadvantages that include high upfront costs and a lack of local programming,
service and equipment distribution. Legislation has been introduced in Congress
to include carriage of local signals by DBS providers under the copyright law.
The ability of DBS to deliver local signals would eliminate a significant
advantage that cable operators currently have over DBS providers. The Company
will magnify its competitive service price points and seek to maintain
programming parity with DBS by increasing the channel capacity of most of the
Systems to a minimum of 78 channels and by introducing new basic and premium
channels, additional pay-per-view programming, digital cable television, and
high-speed Internet access.
11
Cable television systems also compete with wireless program distribution
services such as multichannel, multipoint distribution systems ("MMDS"), which
uses low power microwave frequencies to transmit video programming over the air
to customers. Wireless distribution services generally provide many of the
programming services provided by cable television systems, and digital
compression technology is likely to increase significantly MMDS' channel
capacity. MMDS service requires unobstructed "line of sight" transmission paths.
In the majority of the Company's franchise service areas, prohibitive topography
and "line of sight" access has and is likely to continue to limit competition
from MMDS systems. The Company is not aware of any significant MMDS operation
currently within its cable television franchise service areas. However, Wireless
One, Inc., an MMDS operator, does compete in five market areas in the Southern
Region. The Company estimates that Wireless One's overall penetration in these
markets is less than 1.5%. The Company is not aware of any other MMDS operator
in any of its other markets. The Company is unable to predict whether MMDS will
have a material impact on its business operations.
The 1996 Telecom Act makes it easier for local exchange carriers
("LECs") and others to provide a wide variety of video services competitive with
services provided by cable television systems and to provide cable television
services directly to subscribers. For example, telephone companies may now
provide video programming directly to their subscribers in their telephone
service territory, subject to certain regulatory requirements. Various LECs
currently are providing video programming services within and outside their
telephone service areas through a variety of distribution methods, including
both the deployment of broadband wire facilities and the use of wireless
transmission facilities. Cable television systems could be placed at a
competitive disadvantage if the delivery of video programming services by LECs
becomes widespread, since LECs are not required, under certain circumstances, to
obtain local franchises to deliver such video services or to comply with the
variety of obligations imposed upon cable television systems under such
franchises. Issues of cross-subsidization by LECs of video and telephony
services also pose strategic disadvantages for cable operators seeking to
compete with LECs that provide video services. The Company cannot predict the
likelihood of success of video service ventures by LECs or the impact on the
Company of such competitive ventures. The Company believes, however, that the
non-metropolitan markets in which it provides or expects to provide cable
television services are unlikely to support competition in the provision of
video and telecommunications broadband services given the lower population
densities and higher capital costs per household of installing plant. The 1996
Telecom Act's provision promoting facilities-based broadband competition is
primarily targeted at larger markets, and its prohibition on buy-outs and joint
ventures between incumbent cable operators and LECs exempts small cable
operators and carriers meeting certain criteria. The Company believes that
significant growth opportunities exist for the Company by establishing
cooperative rather than competitive relationships with LECs within its service
areas, to the extent permitted by law.
The Company's Systems offer or plan to offer high-speed Internet access
to subscribers. These Systems will compete with a number of other companies,
many of whom have substantial resources, such as existing Internet service
providers, commonly known as ISPs, and local and long distance telephone
companies. Recently a number of ISPs have requested local authorities and the
FCC to provide rights of access to cable television systems' broadband
infrastructure in order that they be permitted to deliver their services
directly to their customers. In a recent report, the FCC declined to institute a
proceeding to examine this issue, and concluded that alternative means of access
are or soon will be made to a broad range of ISPs. Because the FCC believes the
marketplace is working and expanding consumer choice for broadband services, it
declined to take action on ISP access to broadband cable facilities and
indicated that it would continue to monitor the issue. Several local
jurisdictions are also reviewing this issue.
Other new technologies may become competitive with services that cable
television systems can offer. The 1996 Telecom Act directed the FCC to
establish, and the FCC has adopted regulations and policies for the issuance of
licenses for digital television ("DTV") to incumbent television broadcast
licensees. DTV is expected to deliver high definition television pictures,
multiple digital-quality program streams as well as CD-quality audio programming
and advanced digital services, such as data transfer or subscription video. The
FCC also has authorized television broadcast stations to transmit textual and
graphic information useful both to consumers and businesses. The FCC also
permits commercial and noncommercial FM stations to use their subcarrier
frequencies to provide non-broadcast services including data transmissions. The
FCC established an over-the-air Interactive Video and Data Service that will
permit two-way interaction with commercial and educational programming along
with informational and data services. LECs and other common carriers provide
facilities for the transmission and distribution to homes and businesses of
video services, including interactive computer-based services like the Internet,
data and other non-video services.
The 1996 Telecom Act provides that registered utility holding companies
and their subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act of 1935, as
amended. Electric utilities must establish separate subsidiaries known as
"exempt telecommunications
12
companies" and must apply to the FCC for operating authority. Due to their
resources, electric utilities could be formidable competitors to traditional
cable television systems.
Advances in communications technology as well as changes in the
marketplace and the regulatory and legislative environments are constantly
occurring. Thus, it is not possible to predict the effect that ongoing or future
developments might have on the cable industry or on the operations of the
Company.
Employees
Other than the executive officers named under "Directors and Executive
Officers of the Registrants," Mediacom has no employees. As of December 31,
1998, the operating subsidiaries of Mediacom had approximately 650 full-time
equivalent employees. None of the Company's employees is represented by a labor
union. The Company considers its relations with its employees to be good.
13
Legislation and Regulation
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
Congress and various federal agencies have in the past, and may in the future,
materially affect the Company and the cable television industry. The following
is a summary of federal laws and regulations materially affecting the growth and
operation of the cable television industry and a description of certain state
and local laws. The Company believes that the regulation of its industry remains
a matter of interest to Congress, the FCC and other regulatory authorities.
There can be no assurance as to what, if any, future actions such legislative
and regulatory authorities may take or the effect thereof on the Company.
Federal Legislation
The principal federal statute governing the cable television industry is
the Communications Act of 1934 (the "Communications Act"). As it affects the
cable television industry, the Communications Act has been significantly amended
on three occasions, by the 1984 Cable Act, the 1992 Cable Act, and the 1996
Telecom Act. The 1996 Telecom Act altered the regulatory structure governing the
nation's telecommunications providers. It removed barriers to competition in
both the cable television market and the local telephone market. Among other
things, it also reduced the scope of cable rate regulation. In addition, the
1996 Telecom Act required the FCC to undertake a host of rulemakings to
implement the 1996 Telecom Act, the final outcome of which cannot yet be
determined.
FCC Regulation
The FCC, the principal federal regulatory agency with jurisdiction over
cable television, has adopted regulations covering such areas as cross-ownership
between cable television systems and other communications businesses, carriage
of television broadcast programming, cable rates, consumer protection and
customer service, leased access, indecent programming, programmer access to
cable television systems, programming agreements, technical standards, consumer
electronics equipment compatibility, ownership of home wiring, program
exclusivity, equal employment opportunity, consumer education and lockbox
enforcement, origination cablecasting and sponsorship identification, children's
programming, signal leakage and frequency use, maintenance of various records,
and antenna structure notification, marking and lighting. The FCC has the
authority to enforce these regulations through the imposition of substantial
fines, the issuance of cease and desist orders and/or the imposition of other
administrative sanctions, such as the revocation of FCC licenses needed to
operate certain transmission facilities often used in connection with cable
operations. Below is a brief summary of certain of these federal regulations as
adopted to date.
Rate Regulation
The 1984 Cable Act codified existing FCC preemption of rate regulation
for premium channels and optional non-basic program tiers. The 1984 Cable Act
also deregulated basic cable rates for cable television systems determined by
the FCC to be subject to effective competition. The 1992 Cable Act substantially
changed the previous statutory and FCC rate regulation standards. The 1992 Cable
Act replaced the FCC's old standard for determining effective competition, under
which most cable television systems were not subject to local rate regulation,
with a statutory provision that resulted in nearly all cable television systems
becoming subject to local rate regulation of basic service. The 1996 Telecom Act
expands the definition of effective competition to cover situations where a
local telephone company or its affiliate, or any multi-channel video provider
using telephone company facilities, offers comparable video service by any means
except DBS. Satisfaction of this test deregulates both basic and cable
programming service tiers ("CPST"). Additionally, the 1992 Cable Act required
the FCC to adopt a formula for franchising authorities to implement to assure
that basic cable rates are reasonable; allowed the FCC to review rates for cable
programming service tiers (other than per-channel or per-program services) in
response to complaints filed by franchising authorities and/or cable customers;
prohibited cable television systems from requiring basic subscribers to purchase
service tiers above basic service in order to purchase premium services if the
system is technically capable of doing so; required the FCC to adopt regulations
to establish, on the basis of actual costs, the price for installation of cable
service, remote controls, converter boxes and additional outlets; and allowed
the FCC to impose restrictions on the retiering and rearrangement of cable
services under certain limited circumstances. The 1996 Telecom Act limits the
class of complainants regarding CPST rates to franchising authorities only,
after first receiving two rate complaints from local subscribers.
14
The 1996 Telecom Act sunsets FCC regulation of CPST rates for all cable
television systems (regardless of size) on March 31, 1999. Efforts to delay or
reverse this regulatory sunset have thus far been unsuccessful, but can be
expected to continue. The 1996 Telecom Act also relaxes existing uniform rate
requirements by specifying that uniform rate requirements do not apply where the
operator faces "effective competition," and by exempting bulk discounts to
multiple dwelling units, although complaints about predatory pricing still may
made to the FCC.
The FCC's regulations contain standards for the regulation of basic
service and CPST rates (other than per-channel or per-program services). Local
franchising authorities and the FCC, respectively, are empowered to order a
reduction of existing rates which exceed the maximum permitted level for basic
and CPST services and associated equipment, and refunds can be required. The FCC
adopted a benchmark price cap system for measuring the reasonableness of
existing basic service and CPST rates. Alternatively, cable operators have the
opportunity to make cost-of-service showings, which, in some cases, may justify
rates above the applicable benchmarks. The rules also require that charges for
cable-related equipment (e.g., converter boxes and remote control devices) and
installation services be unbundled from the provision of cable service and based
upon actual costs plus a reasonable profit. The regulations also provide that
future rate increases may not exceed an inflation-indexed amount, plus increases
in certain costs beyond the cable operator's control, such as taxes, franchise
fees and increased programming costs. Cost-based adjustments to these capped
rates can also be made in the event a cable operator adds or deletes channels.
In addition, new product tiers consisting of services new to the cable
television system can be created free of rate regulation as long as certain
conditions are met such as not moving services from existing tiers to the new
tier. There is also a streamlined cost-of-service methodology available to
justify a rate increase on basic and regulated CPST tiers for "significant"
system rebuilds or upgrades.
As a further alternative, in 1995 the FCC adopted a simplified cost-of-
service methodology which can be used by "small cable systems" owned by "small
cable companies" (the "small system rules"). A "small system" is defined as a
cable television system that has, on a headend basis, 15,000 or fewer basic
subscribers. A "small cable company" is defined as an entity serving a total of
400,000 or fewer basic subscribers that is not affiliated with a larger cable
television company, (i.e., a larger cable television company does not own more
than a 20 percent equity share or exercise de jure control). This small system
rate-setting methodology establishes maximum rates for the basic and CPST
services, as well as for installation and equipment charges. This methodology
almost always results in rates that exceed those produced by the cost-of-service
rules applicable to larger cable operators. Under this simplified cost-of-
service methodology, a small cable company's rate showing is presumed reasonable
so long as the aggregate monthly per-subscriber, per-channel charge for all
regulated services does not exceed $1.24. Once the initial rates are set they
can be adjusted periodically for inflation and external cost changes as
described above. When an eligible "small system" grows larger than 15,000 basic
subscribers, it can maintain its then current rates but it cannot increase its
rates in the normal course until an increase would be warranted under the rules
applicable to larger cable television systems. When a "small cable company"
grows larger than 400,000 basic subscribers, the qualified systems it then owns
will not lose their small system eligibility. If a small cable company sells a
qualified system, or if the company itself is sold, the qualified systems retain
that status even if the acquiring company is not a small cable company. The
Company is an eligible "small cable company" under these rules because it has
fewer than 400,000 basic subscribers and is not affiliated with another MSO that
would bring it over that limit. Approximately 75.0% of the basic subscribers
served by the Systems are covered by the small system rules.
Finally, there are regulations which require cable television systems to
permit customers to purchase video programming 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, unless the cable television system is technically
incapable of doing so. Generally, this exemption from compliance with the
statute for cable television systems that do not have such technical capability
is available until a cable television system obtains the capability, but not
later than December 2002.
Carriage of Broadcast Television Signals
The 1992 Cable Act contains signal carriage requirements which allow
commercial television broadcast stations that are "local" to a cable television
system, (i.e., the system is located in the station's Area of Dominant
Influence) to elect every three years whether to require the cable television
system to carry the station, subject to certain exceptions, or whether the cable
television system will have to negotiate for "retransmission consent" to carry
the station. The next election between must-carry and retransmission consent
will be October 1, 1999. A cable television system is generally required to
devote up to one-third of its activated channel capacity for the carriage of
local commercial television stations whether pursuant to mandatory carriage
requirements or retransmission consent requirements of the 1992 Cable Act. Local
non-commercial television stations are also given mandatory carriage
15
rights, subject to certain exceptions, within the larger of: (i) a 50 mile
radius from the station's city of license; or (ii) the station's Grade B contour
(a measure of signal strength). Unlike commercial stations, noncommercial
stations are not given the option to negotiate retransmission consent for the
carriage of their signal. In addition, cable television systems have to obtain
retransmission consent for the carriage of all "distant" commercial broadcast
stations, except for certain "superstations" (i.e., commercial satellite-
delivered independent stations such as WGN). To date, compliance with the
"retransmission consent" and "must carry" provisions of the 1992 Cable Act has
not had a material effect on the Company, although this result may change in the
future depending on such factors as market conditions, channel capacity and
similar matters when such arrangements are renegotiated. The FCC has initiated a
rulemaking proceeding on the carriage of television signals in high definition
and digital formats. The outcome of this proceeding could have a material effect
on the number of services that a cable operator will be required to carry.
Franchise Fees
Although franchising authorities may impose franchise fees under the
1984 Cable Act, such payments cannot exceed 5% of a cable television system's
annual gross revenues. Under the 1996 Telecom Act, franchising authorities may
not exact franchise fees from revenues derived from telecommunications services
although they may be able to exact some additional compensation for the use of
public rights-of-way. Franchising authorities are also empowered in awarding new
franchises or renewing existing franchises to require cable operators to provide
cable-related facilities and equipment and to enforce compliance with voluntary
commitments. In the case of franchises in effect prior to the effective date of
the 1984 Cable Act, franchising authorities may enforce requirements contained
in the franchise relating to facilities, equipment and services, whether or not
cable-related. The 1984 Cable Act, under certain limited circumstances, permits
a cable operator to obtain modifications of franchise obligations.
Renewal of Franchises
The 1984 Cable Act established renewal procedures and criteria designed
to protect incumbent franchisees against arbitrary denials of renewal. While
these formal procedures are not mandatory unless timely invoked by either the
cable operator or the franchising authority, they can provide substantial
protection to incumbent franchisees. Even after the formal renewal procedures
are invoked, franchising authorities and cable operators remain free to
negotiate a renewal outside the formal process. Nevertheless, renewal is by no
means assured, as the franchisee must meet certain statutory standards. Even if
a franchise is renewed, a franchising authority may impose new and more onerous
requirements such as upgrading facilities and equipment, although the
municipality must take into account the cost of meeting such requirements.
Historically, franchises have been renewed for cable operators that have
provided satisfactory services and have complied with the terms of their
franchises. At this time, the Company is not aware of any current or past
material failure on its part to comply with its franchise agreements. The
Company believes that it has generally complied with the terms of its franchises
and has provided quality levels of service.
The 1992 Cable Act makes several changes to the process under which a
cable operator seeks to enforce his renewal rights which could make it easier in
some cases for a franchising authority to deny renewal. Franchising authorities
may consider the "level" of programming service provided by a cable operator in
deciding whether to renew. For alleged franchise violations occurring after
December 29, 1984, franchising authorities are no longer precluded from denying
renewal based on failure to substantially comply with the material terms of the
franchise where the franchising authority has "effectively acquiesced" to such
past violations. Rather, the franchising authority is estopped if, after giving
the cable operator notice and opportunity to cure, it fails to respond to a
written notice from the cable operator of its failure or inability to cure.
Courts may not reverse a denial of renewal based on procedural violations found
to be "harmless error."
Channel Set-Asides
The 1984 Cable Act permits local franchising authorities to require
cable operators to set aside certain television channels for public, educational
and governmental access programming. The 1984 Cable Act further requires cable
television systems with thirty-six or more activated channels to designate a
portion of their channel capacity for commercial leased access by unaffiliated
third parties to provide programming that may compete with services offered by
the cable operator. The 1992 Cable Act requires leased access rates to be set
according to a formula determined by the FCC. The leased access rules were
recently modified by the FCC to provide for lower rates than the original
formula produced.
16
Ownership
The 1996 Telecom Act repealed the statutory ban against LECs providing
video programming directly to customers within their local exchange telephone
service areas. Thus, under the 1996 Telecom Act and FCC rules recently adopted
to implement the 1996 Telecom Act, LECs may now provide video service as
broadcasters, common carriers, or cable operators. In addition, LECs and others
may also provide video service through "open video systems" ("OVS"), a
regulatory regime that may give them more flexibility than traditional cable
television systems. OVS operators (including LECs) may operate open video
systems without obtaining a local cable franchise, although they can be required
to obtain a franchise by local governmental bodies. In general, OVS operators
must make their systems available to programming providers on rates, terms and
conditions that are reasonable and nondiscriminatory. Where carriage demand by
programming providers exceeds the channel capacity of an open video system, two-
thirds of the channels must be made available to programmers unaffiliated with
the OVS operator.
The Unites States Court of Appeals for the Fifth Circuit recently
invalidated several rules of the FCC pertaining to OVS and upheld others. The
principal overturned rule was the FCC's preemption of local government authority
to require an OVS operator to obtain a franchise. The court held that local
governments do, in fact, have the authority to require a franchise, but do not
have to do so. This ruling does not affect the provisions of the 1996 Telecom
Act exempting OVS operators from such regulatory burdens as rate regulation and
customer service requirements. The Company expects the FCC to modify its open
video rules to comply with the court's decision, but is unable to predict the
impact any rule modifications may have on the Company's business and operations.
The 1996 Telecom Act generally prohibits LECs from purchasing cable
television systems (i.e., any ownership interest exceeding 10%) located within
the LEC's telephone service area, prohibits cable operators from purchasing LECs
whose service areas are located within the cable operator's franchise area, and
prohibits joint ventures between cable operators and LECs operating in
overlapping markets. There are some statutory exceptions, including a rural
exemption that permits buyouts in which the purchased cable television system or
LEC serves a non-urban area with fewer than 35,000 inhabitants, and exemptions
for the purchase of small cable television systems located in non-urbanized
areas. Also, the FCC may grant waivers of the buyout provisions in cases where:
(i) the cable operator or the LEC would be subject to undue economic distress if
such provisions were enforced; (ii) the system or facilities would not be
economically viable in the absence of a buyout or a joint venture; or (iii) the
anticompetitive effects of the proposed transaction are clearly outweighed by
the transaction's effect in light of community needs. The respective local
franchising authority must approve any such waiver.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the number
of cable television systems that a single cable operator can own. In general, no
cable operator can have an attributed interest in cable television systems that
pass more than 30% of all homes nationwide. Attributable interests for these
purposes include voting interests of 5% or more (unless there is another single
holder of more than 50% of the voting stock), officerships, directorships and
general partnership interests. The FCC has stayed the effectiveness of these
rules pending the outcome of an appeal from the U.S. District Court decision
holding the multiple ownership limit provision of the 1992 Cable Act
unconstitutional. The FCC is also considering changes to these rules.
The FCC has also adopted rules that limit the number of channels on a
cable television system that can be occupied by national video programming
services in which the entity that owns the cable television system has an
attributed interest. The limit is 40% of the first 75 activated channels.
The 1996 Telecom Act provides that registered utility holding companies
and subsidiaries may provide telecommunications services (including cable
television) notwithstanding the Public Utilities Holding Company Act of 1935, as
amended. Electric utilities must establish separate subsidiaries known as
"exempt telecommunications companies" and must apply to the FCC for operating
authority. Due to their resources, electric utilities could be formidable
competitors to traditional cable television systems.
EEO
The 1984 Cable Act includes provisions to ensure that minorities and
women are provided equal employment opportunities within the cable television
industry. The statute requires the FCC to adopt reporting and certification
rules that apply to all cable operators with more than five full-time employees.
Pursuant to the requirements of the 1992 Cable Act, the FCC has imposed more
detailed annual EEO reporting requirements on cable operators and has expanded
those requirements to all multichannel video service distributors. Failure to
comply with the EEO
17
requirements can result in the imposition of fines and/or other administrative
sanctions, or may, in certain circumstances, be cited by a franchising authority
as a reason for denying a franchisee's renewal request.
Privacy
The 1984 Cable Act imposes a number of restrictions on the manner in
which cable operators can collect and disclose data about individual system
customers. The statute also requires that the cable operator periodically
provide all customers with written information about its policies regarding the
collection and handling of data about customers, their privacy rights under
federal law and their enforcement rights. In the event that a cable operator
were found to have violated the customer privacy provisions of the 1984 Cable
Act, it could be required to pay damages, attorneys' fees and other costs. Under
the 1992 Cable Act, the privacy requirements were strengthened to require that
cable operators take such actions as are necessary to prevent unauthorized
access to personally identifiable information.
Franchise Transfers
The 1992 Cable Act requires franchising authorities to act on any
franchise transfer request within 120 days after receipt of all information
required by FCC regulations and by the franchising authority. Approval is deemed
to be granted if the franchising authority fails to act within such period.
Technical Requirements
The FCC has imposed technical standards applicable to all classes of
channels that carry downstream National Television System Committee (NTSC) video
programming. The FCC also has adopted additional standards applicable to cable
television systems using frequencies in the 108-137MHz and 225-400MHz bands in
order to prevent harmful interference with aeronautical navigation and safety
radio services and has also established limits on cable television system signal
leakage. Periodic testing by cable operators for compliance with the technical
standards and signal leakage limits is required and an annual filing of the
results of these measurements is required. The 1992 Cable Act requires the FCC
to periodically update its technical standards to take into account changes in
technology. Under the 1996 Telecom Act, local franchising authorities may not
prohibit, condition or restrict a cable television system's use of any type of
subscriber equipment or transmission technology.
The FCC has adopted regulations to implement the requirements of the
1992 Cable Act designed to improve the compatibility of cable television systems
and consumer electronics equipment. These regulations, inter alia, generally
prohibit cable operators from scrambling their basic service tier and from
changing the infrared codes used in their existing customer premises equipment.
This latter requirement could make it more difficult or costly for cable
operators to upgrade their customer premises equipment and the FCC has been
asked to reconsider its regulations. The 1996 Telecom Act directs the FCC to set
only minimal standards to assure compatibility between television sets, VCRs and
cable television systems, and to rely on the marketplace. Pursuant to this
statutory mandate, the FCC has adopted rules to assure the competitive
availability to consumers of customer premises equipment, such as converters,
used to access the services offered by cable television systems and other
multichannel video programming distributors ("MVPD"). Pursuant to those rules,
consumers are given the right to attach compatible equipment to the facilities
of their MVPD so long as the equipment does not harm the network, does not
interfere with the services purchased by other customers, and is not used to
receive unauthorized services. As of July 1, 2000, MVPDs (other than DBS
operators) are required to separate security from non-security functions in the
customer premises equipment which they sell or lease to their customers and
offer their customers the option of using component security modules obtained
from the MVPD with set-top units purchased or leased from retail outlets. As of
January 1, 2005, MVPDs will be prohibited from distributing new set-top
equipment integrating both security and non-security functions to their
customers.
Pursuant to the 1992 Cable Act, the FCC has adopted rules implementing
an Emergency Alert System ("EAS"). The rules require all cable television
systems to provide an audio and video EAS message on at least one programmed
channel and a video interruption and an audio alert message on all programmed
channels. The audio alert message is required to state which channel is carrying
the full audio and video EAS message. The FCC rules permit cable television
systems either to provide a separate means of alerting persons with hearing
disabilities of EAS messages, such as a terminal that displays EAS messages and
activates other alerting mechanisms or lights, or to provide audio and video EAS
messages on all channels. Cable television systems with 10,000 or more basic
subscribers per headend were required to install EAS equipment capable of
providing audio and video EAS messages on all programmed channels by December
31, 1998. Cable television
18
systems with 5,000 or more but fewer than 10,000 basic subscribers per headend
will have until October 1, 2002 to comply with that requirement. Cable
television systems with fewer than 5,000 basic subscribers per headend will have
a choice of providing either a national level EAS message on all programmed
channels or installing EAS equipment capable of providing audio alert messages
on all programmed channels, a video interrupt on all channels, and an audio and
video EAS message on one programmed channel. This must be accomplished by
October 1, 2002.
Pole Attachments
The FCC currently regulates the rates and conditions imposed by
investor-owned public utilities for use of their poles and conduits unless state
public service commissions are able to demonstrate that they adequately regulate
the rates, terms and conditions of cable television pole attachments. A number
of states and the District of Columbia have certified to the FCC that they
adequately regulate the rates, terms and conditions for pole attachments. Of the
states in which the Company operates, California, Delaware and Kentucky have
made such certification. In the absence of state regulation, the FCC administers
such pole attachment and conduit use rates through use of a formula which it has
devised. Pursuant to the 1996 Telecom Act, the FCC has adopted a new rate
formula for any attaching party, including cable television systems, which offer
telecommunications services. This new formula will result in higher attachment
rates than at present, but they will apply only to cable television systems
which elect to offer telecommunications services. Any increases pursuant to this
new formula will not begin until 2001, and will be phased in by equal increments
over the five ensuing years. The FCC has also initiated a proceeding to
determine whether it should adjust certain elements of the current rate formula.
If adopted, these adjustments could increase rates for pole attachments and
conduit space .
Other FCC Matters
FCC regulation pursuant to the 1934 Communications Act, as amended, also
includes matters regarding a cable television system's carriage of local sports
programming; restrictions on origination and cablecasting by cable operators;
rules governing political broadcasts; nonduplication of network programming;
deletion of syndicated programming; registration procedure and reporting
requirements; customer service; closed captioning; obscenity and indecency;
program access and exclusivity arrangements; and limitations on advertising
contained in nonbroadcast children's programming.
The FCC recently adopted new procedural guidelines governing the
disposition of home run wiring (a line running to an individual subscriber's
unit from a common feeder or riser cable) in multi-dwelling units ("MDUs"). MDU
owners can use these new rules to attempt to force cable operators without
contracts to either sell, abandon or remove home run wiring and terminate
service to MDU subscribers unless operators retain rights under common or state
law to maintain ownership rights in the home run wiring. In a separate
proceeding, the FCC has preempted restrictions on the deployment of private
antennas on rental property within the exclusive use of a tenant (such as
balconies and patios).
The 1996 Telecom Act requires video programming distributors to employ
technology to restrict the reception of programming by persons not subscribing
to those channels. In the case of channels primarily dedicated to sexually-
oriented programming, the distributor must fully block reception of the audio
and video portion of the channels; a distributor that is unable to comply with
this requirement may only provide such programming during a "safe harbor" period
when children are not likely to be in the audience, as determined by the FCC.
With respect to other kinds of channels, the 1996 Telecom Act requires that the
audio and video portions of the channel be fully blocked, at no charge, upon
request of the person not subscribing to the channel.
Internet Access
The Company's Systems offer or plan to offer high-speed Internet access
to subscribers. These Systems will compete with a number of other companies,
many of whom have substantial resources, such as existing Internet service
providers, commonly known as ISPs, and local and long distance phone companies.
Recently a number of ISPs have requested local authorities and the FCC to
provide rights of access to cable television systems' broadband infrastructure
in order that they be permitted to deliver their services directly to their
customers. In a recent report, the FCC declined to institute a proceeding to
examine the issue, and concluded that alternative means of access are or soon
will be made to a broad range of ISPs. Because the FCC believes the marketplace
is working and expanding customer choice for broadband services, it declined to
take action regarding ISP access to broadband cable facilities and indicated
that it would continue to monitor the issue. Several local jurisdictions also
are reviewing this issue.
19
Copyright
Cable television systems are subject to federal copyright licensing
covering carriage of broadcast signals. In exchange for making semi-annual
payments to a federal copyright royalty pool and meeting certain other
obligations, cable operators are granted a statutory license to retransmit
broadcast signals. The amount of this royalty payment varies, depending on the
amount of system revenues from certain sources, the number of distant signals
carried, and the location of the cable television system with respect to over-
the-air television stations. Any future adjustment to the copyright royalty
rates will be done through an arbitration process to be supervised by the U.S.
Copyright Office. Cable operators are liable for interest on underpaid and
unpaid royalty fees, but are not entitled to collect interest on refunds
received for overpayment of copyright fees. The 1992 Cable Act's retransmission
consent provisions expressly provide that retransmission consent agreements
between television broadcast stations and cable operators do not obviate the
need for cable operators to obtain a copyright license for the programming
carried on each broadcaster's signal.
Copyrighted music performed in programming supplied to cable television
systems by pay cable networks (such as HBO) and basic cable networks (such as
USA Network) is licensed by the networks through private agreements with the
American Society of Composers and Publishers ("ASCAP") and BMI, Inc. ("BMI"),
the two major performing rights organizations in the United States. As a result
of extensive litigation, both ASCAP and BMI now offer "through to the viewer"
licenses to the cable networks which cover the retransmission of the cable
networks' programming by cable television systems to their customers.
Licenses to perform copyrighted music by cable television systems
themselves, including on local origination channels, in advertisements inserted
locally on cable television networks, and in cross promotional announcements,
must be obtained by the cable operator. Cable television industry negotiations
with ASCAP, BMI and SESAC, Inc. (a smaller performing rights organization) are
in progress.
State and Local Regulation
Cable television systems generally are operated pursuant to nonexclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. The terms and conditions of franchises vary materially
from jurisdiction to jurisdiction, and even from city to city within the same
state, historically ranging from reasonable to highly restrictive or burdensome.
Franchises generally contain provisions governing fees to be paid to the
franchising authority, length of the franchise term, renewal, sale or transfer
of the franchise, territory of the franchise, design and technical performance
of the cable television system, use and occupancy of public streets and number
and types of cable television services provided. The terms and conditions of
each franchise and the laws and regulations under which it was granted directly
affect the profitability of the cable television system. The 1984 Cable Act
places certain limitations on a franchising authority's ability to control the
operation of a cable television system. The 1992 Cable Act prohibits exclusive
franchises, and allows franchising authorities to exercise greater control over
the operation of franchised cable television systems, especially in the area of
customer service and rate regulation. The 1992 Cable Act also allows franchising
authorities to operate their own multichannel video distribution system without
having to obtain a franchise and permits states or local franchising authorities
to adopt certain restrictions on the ownership of cable television systems.
Moreover, franchising authorities are immunized from monetary damage awards
arising from regulation of cable television systems or decisions made on
franchise grants, renewals, transfers and amendments. The 1996 Telecom Act
prohibits a franchising authority from either requiring or limiting a cable
operator's provision of telecommunications services.
Various proposals have been introduced at the state and local levels
with regard to the regulation of cable television systems, and a number of
states have adopted legislation subjecting cable television systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility. To date, other
than Delaware, no state in which the Company currently operates has enacted
state level regulation.
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. Other existing federal regulations, copyright licensing
and, in many jurisdictions, state and local franchise requirements, currently
are the subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying degrees,
the manner in which cable television systems operate. Neither the outcome of
these proceedings nor their impact upon the cable television industry or the
Company can be predicted at this time.
20
ITEM 2. PROPERTIES
The Company's principal physical assets consist of cable television
operating plant and equipment, including signal receiving, encoding and decoding
devices, headend facilities and distribution systems and customer house drop
equipment 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, consisting of associated
electronic equipment necessary for the reception, amplification and modulation
of signals, are located near the receiving devices. Some basic subscribers of
the Systems utilize converters that can be addressed by sending coded signals
from the headend facility over the cable network. The Company's distribution
system consists primarily of coaxial and fiber optic cables and related
electronic equipment.
The Company owns or leases parcels of real property for signal reception
sites (antenna towers and headend facilities), microwave facilities and business
offices, and owns all of its service vehicles. The Company believes that its
properties, both owned and leased, are in good condition and are suitable and
adequate for the Company's operations.
The Company's cables 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 Systems require periodic upgrading to improve system
performance and capacity.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is
a party or to which any of its properties are subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the three
months ended December 31, 1998.
21
PART II
-------
ITEM 5. MARKET FOR REGISTRANTS, COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is no public trading market for Mediacom's membership interests.
There are nine holders of Mediacom's membership interests. There is no public
trading market for the common stock of Mediacom Capital, which is a wholly-owned
subsidiary of Mediacom.
22
ITEM 6. SELECTED FINANCIAL DATA
The following table presents: (i) selected historical financial data for
the period from January 1, 1996, through March 11, 1996, and as of and for the
years ended December 31, 1994, and 1995, derived from the audited financial
statements of Benchmark Acquisition Fund II Limited Partnership (the
"Predecessor Company"); and (ii) selected historical consolidated financial and
operating data as of and for the period from the commencement of operations
(March 12, 1996) to December 31, 1996, and for the years ended December 31,
1997, and 1998, derived from the Company's audited consolidated financial
statements and should be read in conjunction with those statements.
Predecessor Company The Company(1)
============================================== ==============================================
Jan. 1, 1996 Mar. 12, 1996
Year Ended Year Ended through through Year Ended Year Ended
Dec. 31, 1994 Dec. 31, 1995 Mar. 11, 1996 Dec. 31, 1996 Dec. 31, 1997 Dec. 31, 1998
------------------------------------------------ -----------------------------------------------
(dollars in thousands, except per subscriber data)
Statement of Operations Data:
- -----------------------------
Revenues $ 5,075 $ 5,171 $1,038 $ 5,411 $ 17,634 $ 129,297
Service costs 1,322 1,536 297 1,511 5,547 43,849
Selling, general and
administrative expenses 1,016 1,059 222 931 2,696 25,596
Management fee expense 252 261 52 270 882 5,797
Depreciating and amortization 4,092 3,945 527 2,157 7,636 65,793
------- ------- ------ -------- -------- ---------
Operating income (loss) $(1,607) $(1,630) $ (60) $ 542 $ 873 $ (11,738)
Interest expense, net 878 935 201 1,528 4,829 23,994
Other expense - - - 967 640 4,058
------- ------- ------ -------- -------- ---------
Net loss $(2,485) $(2,565) $ (261) $ (1,953) $ (4,596) $ (39,790)
======= ======= ====== ======== ======== =========
Other Financial Data:
- ---------------------
EBITDA (2) $ 2,485 $ 2,315 $ 467 $ 2,699 $ 8,509 $ 54,055
EBITDA margin (3) 49.0% 44.8% 45.0% 49.9% 48.3% 41.8%
Annualized EBITDA (4) $ 11,998 $ 59,996
Ratio of total indebtedness
to annualized EBITDA 6.07x 5.63x
Net cash flows from operating
activities $ 1,395 $ 1,478 $ 226 $ 237 $ 7,007 $ 53,556
Net cash flows from investing
activities (552) (261) (86) (45,257) (60,008) (397,085)
Net cash flows from financing
activities (919) (1,077) - 45,416 53,632 344,714
Operating Data (end of
period, except average):
- -------------------------
Homes passed 38,749 87,750 520,000
Basic subscribers 27,153 64,350 354,000
Basic penetration 70.1% 73.3% 68.1%
Premium service units 11,691 39,288 407,100
Premium penetration 43.1% 61.1% 115.0%
Average monthly revenue per
basic subscriber (5) $32.11 $32.88
Annualized EBITDA per basic
subscriber (6) $ 186 $ 169
Balance Sheet Data (end of
period):
- --------------------------
Total assets $11,755 $ 8,149 $ 46,560 $102,791 $ 451,152
Total indebtedness 13,294 12,217 40,529 72,768 337,905
Total members' equity (2,003) (4,568) 4,537 24,441 78,651
- ----------
(1) See Note 3 to the Company's audited consolidated financial statements for
information with respect to acquisitions completed during the years ended
December 31, 1998 and 1997.
(2) EBITDA represents operating income (loss) before depreciation and
amortization. EBITDA is not intended to be a performance measure that should
be regarded as an alternative to either operating income or net income as an
indicator of operating performance, or an alternative to the statement of
cash flows as a measure of liquidity. EBITDA is not intended to represent
funds available for debt service, dividends, reinvestment or other
discretionary uses, and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles. EBITDA is included herein because the
Company believes that EBITDA is a meaningful measure of performance as it is
commonly used in the cable television industry to analyze and compare cable
television companies on the basis of operating performance, leverage and
liquidity and a company's overall ability to service its debt. The Company's
definition of EBITDA may not be identical to similarly titled measures
reported by other companies.
(3) Represents EBITDA as a percentage of revenues.
(4) EBITDA for the three months ended December 31, 1998 and 1997, multiplied by
four.
(5) Represents average monthly revenue for the three months ended December 31,
1998 and 1997, divided by basic subscribers as of the end of the period.
(6) Annualized EBITDA divided by basic subscribers as of the end of the period.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Mediacom was founded in July 1995 principally to acquire, operate and
develop cable television systems in selected non-metropolitan markets of the
United States. The Company's business strategy is to: (i) acquire
underperforming and undervalued cable television systems primarily in non-
metropolitan markets, as well as related telecommunications businesses; (ii)
invest in the development of a state-of-the-art technological platform for
delivery of broadband video and other services to its customers; (iii) provide
superior customer service; and (iv) deploy a flexible financing strategy to
complement the Company's growth objectives and operating plans. The Company
commenced operations in March 1996 with the acquisition of its first cable
television system. As of December 31, 1998, the Company had completed nine
acquisitions of cable television systems that on such date passed approximately
520,000 homes and served approximately 354,000 basic subscribers. All
acquisitions have been accounted for under the purchase method of accounting
and, therefore, the Company's historical results of operations include the
results of operations for each acquired system subsequent to its respective
acquisition date.
General
The Company's revenues are primarily attributable to monthly
subscription fees charged to basic subscribers for the Company's basic and
premium cable television programming services. Basic revenues consist of monthly
subscription fees for all services (other than premium programming) as well as
monthly charges for customer equipment rental and installation fees. Premium
revenues consist of monthly subscription fees for programming provided in
packages on a per channel basis. Other revenues are derived from pay-per-view
charges, late payment fees, advertising revenues and commissions related to the
sale of goods by home shopping services. The Company generated significant
increases in revenues for each of the past two years and for the period ended
December 31, 1996, substantially due to acquisitions. The following table sets
forth for the periods indicated the percentage of the Company's total revenues
attributable to the sources indicated:
1998 1997 1996
---- ---- ----
Basic revenues 80.0% 81.0% 80.0%
Premium revenues 15.0% 9.0% 8.0%
Other revenues 5.0% 10.0% 12.0%
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
The Company's operating expenses consist of service costs and selling,
general, and administrative ("SGA") expenses directly attributable to the
Systems. Service costs include fees paid to programming suppliers, expenses
related to copyright fees, wages and salaries of technical personnel and plant
operating costs. Programming fees have historically increased at rates in excess
of inflation due to increases in the number of programming services offered by
the Company and improvements in the quality of programming. The Company believes
that under the FCC's existing cable rate regulations, it will be able to
increase its rates for cable television services to more than cover any
increases in the costs of programming. However, competitive factors may limit
the Company's ability to increase its rates. The Company benefits from its
membership in a cooperative with over twelve million basic subscribers which
provides its members with significant volume discounts from programming
suppliers and cable equipment vendors. SGA expenses directly attributable to the
Systems include wages and salaries for customer service and administrative
personnel, franchise fees and expenses related to billing, marketing, bad debt,
advertising sales and office administration.
The Company relies on Mediacom Management for all of its strategic,
managerial, financial and operational oversight and advice. In exchange for all
such services, Mediacom Management is entitled to receive annual management fees
from 4.0% to 5.0% of the annual gross revenues of the Company. Mediacom
Management is also entitled to receive a fee of 0.5% or 1.0% of the purchase
price of acquisitions made by the Company and such fees are included in other
expenses. See Item 13: Certain Relationships and Related Transactions.
-------------------------------------------------------
24
EBITDA represents operating income (loss) before depreciation and
amortization. EBITDA is not intended to be a performance measure that should be
regarded as an alternative either to operating income or net income as an
indicator of operating performance, or an alternative to the statement of cash
flows as a measure of liquidity as determined in accordance with generally
accepted accounting principles. EBITDA is included herein because the Company
believes that EBITDA is a meaningful measure of performance as it is commonly
used by the cable television industry and by the investment community to analyze
and compare cable television companies on the basis of operating performance,
leverage and liquidity. In addition, the primary debt instruments of the Company
contain certain covenants, compliance with which is measured by computations
similar to determining EBITDA. The Company's definition of EBITDA may not be
identical to similarly titled measures reported by other companies.
The high level of depreciation and amortization associated with the
Company's acquisition activities as well as the interest expense related to its
financing activities have caused the Company to report net losses in its limited
operating history. The Company believes that such net losses are common for
cable television companies and anticipates that it will continue to incur net
losses for the foreseeable future.
Results of Operations
The following table sets forth the Company's historical percentage
relationship to revenues of items in the consolidated statements of operations:
Percentage of Revenues
Year Ended December 31,
1998 1997 1996
------- ------- -------
Revenues
100.0% 100.0% 100.0%
Service costs
33.9 31.5 27.9
SGA expenses 19.8 15.3 17.2
Management fee expense 4.5 5.0 5.0
------- ------- -------
EBITDA 41.8% 48.2% 49.9%
Depreciation and amortization 50.9 43.3 39.9
------- ------- -------
Operating income (loss) (9.1%) 4.9% 10.0%
Interest expense 18.6 27.4 28.2
Other expenses 3.1 3.6 17.9
------- ------- -------
Net loss (30.8%) (26.1%) (36.1%)
======= ======= =======
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The following historical information for the years ended December 31,
1998 and 1997 includes the results of operations of the Lower Delaware System
(acquired on June 24, 1997), the Sun City System (acquired on September 19,
1997), the Clearlake System (acquired on January 9, 1998), the Cablevision
Systems (acquired on January 23, 1998), and the Caruthersville System (acquired
on October 1, 1998) (collectively, the "Acquired Systems") only for that portion
of the respective period that such cable television systems were owned by the
Company. See Note 3 of the Company's audited consolidated financial statements.
The Acquired Systems comprise a substantial portion of the Company's
basic subscribers. At December 31, 1998, the Acquired Systems served
approximately 328,350 basic subscribers, representing 92.8% of the approximately
354,000 subscribers served by the Company as of such date. Accordingly, the
acquisitions of the Acquired Systems have had a significant impact on the
results of operations for the year ended December 31, 1998, compared to the
prior year. Consequently, the Company believes that any comparison of its
results of operations between the years ended December 31, 1998 and 1997 are not
indicative of the Company's results of operations in the future.
25
Revenues increased to approximately $129.3 million for the year ended
December 31, 1998, from approximately $17.6 million for the prior fiscal year
principally due to: (i) the inclusion of the results of operations of the Lower
Delaware System and the Sun City System for the full year ended December 31,
1998; (ii) the inclusion of the results of operations of the Clearlake System,
the Cablevision Systems and the Caruthersville System from their respective
acquisition dates; (iii) the implementation of average monthly basic service
rate increases of approximately $3.34 per basic subscriber; and (iv) internal
basic subscriber growth of approximately 2.5%.
Service costs increased to approximately $43.8 million for the year
ended December 31, 1998, from approximately $5.5 million for the prior fiscal
year. Substantially all of this increase was due to the inclusion of the results
of operations of the Acquired Systems. Of the service costs for the year ended
December 31, 1998, approximately 72.0% were attributable to programming and
copyright costs, 11.0% to technical personnel costs, and 17.0% to plant
operating costs. Of the service costs for the prior fiscal year, approximately
70.0% were attributable to programming and copyright costs, 15.0% to technical
personnel costs, and 15.0% to plant operating costs.
SGA expenses increased to approximately $25.6 million for the year ended
December 31, 1998, from approximately $2.7 million for the prior fiscal year.
Substantially all of this increase was due to the inclusion of the results of
operations of the Acquired Systems. Of the SGA expenses for the year ended
December 31, 1998, 28.0% were attributable to customer service and
administrative personnel costs, 23.0% to franchise fees, other fees and taxes,
12.0% to customer billing expenses, and 37.0% to marketing, advertising sales
and office administration expenses. Of the SGA expenses for the prior fiscal
year, approximately 36.0% were attributable to customer service and
administrative personnel costs, 9.0% to franchise fees, other fees and taxes,
13.0% to customer billing expenses, and 42.0% to marketing, advertising sales
and office administration expenses.
Management fee expense increased to approximately $5.8 million for the
year ended December 31, 1998, from approximately $0.9 million for the prior
fiscal year due to the higher revenues generated in 1998.
Depreciation and amortization expense increased to approximately $65.8
million for the year ended December 31, 1998, from approximately $7.6 million
for the prior fiscal year.
Due to the factors described above, the Company generated an operating
loss of approximately $11.7 million for the year ended December 31, 1998,
compared to operating income of $0.9 million for the prior fiscal year.
Interest expense, net, increased to approximately $24.0 million for the
year ended December 31, 1998, from approximately $4.8 million for the prior
fiscal year. This increase was substantially due to the additional debt incurred
in connection with the purchase of the Acquired Systems. Other expenses
increased to approximately $4.1 million for the year ended December 31, 1998,
from approximately $0.6 million for the prior fiscal year. This increase was
substantially due to acquisition fees paid to Mediacom Management in connection
with the acquisitions of the Clearlake System and the Cablevision Systems. Due
to the factors described above, the net loss increased to approximately $39.8
million for the year ended December 31, 1998, from approximately $4.6 million
for the prior fiscal year.
EBITDA increased to approximately $54.1 million for the year ended
December 31, 1998, from approximately $8.5 million for the prior fiscal year.
This increase was substantially due to the inclusion of the results of
operations of the Acquired Systems. EBITDA as a percentage of revenues decreased
to 41.8% for the year ended December 31, 1998, from 48.3% for the prior fiscal
year. This decrease was principally due to the higher programming costs and SGA
expenses of the Acquired Systems in relation to the revenues generated by such
cable television systems.
Year Ended December 31, 1997 Compared to the Period from March 12, 1996
(commencement of operations) to December 31, 1996
The following historical information includes the results of operations
of the Ridgecrest System (acquired on March 12, 1996, which is the date of
commencement of operations of the Company), the Kern Valley System (acquired on
June 28, 1996), the Valley Center and Nogales Systems (acquired on December 27,
1996), the Lower Delaware System (acquired on June 24, 1997) and the Sun City
System (acquired on September 19, 1997) only for that portion of the respective
period that such Systems were owned by the Company. See Item I: Business--
------------------
Development of the Systems and Note 3 of the Company's audited consolidated
- --------------------------
financial statements.
26
The results of operations of the Company for the year ended December 31,
1997, were impacted by the inclusion of: (i) the full year of results of
operations of the Ridgecrest System, the Kern Valley System, the Nogales System
and the Valley Center System (collectively, the "1996 Systems"); (ii) the
results of operations of the Lower Delaware System from the date of its
acquisition on June 24, 1997; and (iii) the results of operations of the Sun
City System from the date of its acquisition on September 19, 1997. Revenues
increased to approximately $17.6 million for the year ended December 31, 1997,
from approximately $5.4 million for the period ended December 31, 1996.
Service costs increased to approximately $5.5 million for the year ended
December 31, 1997, from approximately $1.5 million for the period ended December
31, 1996. Substantially all of this increase was due to the inclusion of the
results of operations of the aforementioned acquisitions in 1997 and the full
year of results of operations of the 1996 Systems. Of the service costs for the
year ended December 31, 1997, approximately 70.0% were attributable to
programming and copyright costs, 15.0% to technical personnel costs, and 15.0%
to plant operations. Of the service costs for the period ended December 31,
1996, approximately 72.0% were attributed to programming and copyright costs,
13.0% to technical personnel costs and 15.0% to plant operating costs.
SGA expenses increased to approximately $2.7 million for the year ended
December 31, 1997, from approximately $0.9 million for the period ended December
31, 1996. Substantially all of this increase was due to the inclusion of the
results of operations of the aforementioned acquisitions in 1997 and the full
year of results of operations of the 1996 Systems. Of the SGA expenses for the
year ended 1997, approximately 36.0% were attributed to customer service and
administrative personnel costs, 9.0% to franchise fees, other fees and taxes,
13.0% to customer billing expenses and 42.0% to marketing, advertising sales and
office administrative expenses. Of the SGA expenses for the period ended
December 31, 1996, approximately 28.0% were attributed to customer billing
service and administrative personnel costs, 8.0% to franchise fees and other
fees and taxes, 10.0% to customer billing expenses and 54.0% to marketing,
advertising sales and office administrative expenses.
Management fee expense increased to approximately $0.9 million for the
year ended December 31, 1997, from approximately $0.3 million for the period
ended December 31, 1996, due to the higher revenues generated in 1997.
Depreciation and amortization expense increased to approximately $7.6
million for the year ended December 31, 1997, from approximately $2.2 million
for the period ended December 31, 1996. This increase was substantially due to
the inclusion of the results of operations of the aforementioned acquisitions in
1997 and the 1996 Systems.
Due to the factors described above, the Company generated operating
income of approximately $0.9 million for the year ended December 31, 1997,
compared to approximately $0.5 million for the period ended December 31, 1996.
Interest expense increased to approximately $4.8 million for the year
ended December 31, 1997, from approximately $1.5 million for the period ended
December 31, 1996. This increase was principally due to the increased levels of
debt incurred in connection with the aforementioned acquisitions in 1997. Other
expenses decreased to approximately $0.6 million for the year ended December 31,
1997, from approximately $1.0 million for the period ended December 31, 1996.
This decrease was principally due to pre-acquisition expenses recorded in 1996.
Due to the factors described above, the net loss increased to approximately $4.6
million for the year ended December 31, 1997, from approximately $2.0 million
for the period ended December 31, 1996.
EBITDA increased to approximately $8.5 million for the year ended
December 31, 1997, from approximately $2.7 million for the period ended December
31, 1996. This increase was substantially due to the inclusion of the results of
operations of the aforementioned acquisitions in 1997 and the results of
operations for the full year of the 1996 Systems. EBITDA as a percentage of
revenues decreased to 48.3% for the year ended December 31, 1997, from 49.9% for
the period ended December 31, 1996. This decrease was principally due to the
higher programming costs of the Systems acquired during 1997 in relation to the
revenues generated by such cable television systems.
27
Selected Pro Forma Results
The Company has reported the results of operations of the Acquired
Systems from the date of their respective acquisition. The following financial
information for the three months and for the years ended December 31, 1998, and
1997, presents selected unaudited pro forma operating results assuming the
purchase of the Acquired Systems had been consummated on January 1, 1997. See
Note 3 to the Company's audited consolidated financial statements for a
description of the Company's acquisitions in 1997 and 1998.
Three Months Ended Year Ended
------------------ ----------
December 31, December 31,
------------ ------------
1998 1997 1998 1997
--------- --------- ---------- ----------
(dollars in thousands, except per subscriber data)
Revenues $ 34,923 $ 30,757 $ 136,148 $ 120,511
Costs and expenses:
Service costs 10,973 12,477 46,408 48,849
SGA expenses 7,493 7,171 26,501 27,845
Management fee expense 1,458 723 6,071 1,480
--------- --------- ---------- ----------
EBITDA $ 14,999 $ 10,386 $ 57,168 $ 42,337
========= ========= ========== ==========
EBITDA margin(1) 42.9% 33.8% 42.0% 35.1%
Basic subscribers(2) 354,000 345,525 354,000 345,525
Average monthly revenue
per basic subscriber(3) $32.88 $29.67 $32.88 $29.67
- ----------
(1) Represents EBITDA as a percentage of revenues.
(2) As of end of period.
(3) Represents average monthly revenues for the three months ended December 31,
1998 divided by the number of basic subscribers at the end of the period.
Pro Forma Results for the Year Ended December 31, 1998 Compared to Pro
Forma Results for the Year Ended December 31, 1997
Revenues increased to approximately $136.1 million for the year ended
December 31, 1998, from approximately $120.5 million for the prior fiscal year.
This increase was attributable principally to internal subscriber growth of
approximately 2.5% and higher average monthly revenue per subscriber.
Service costs and SGA expenses in the aggregate decreased to
approximately $72.9 million for the year ended 1998 from approximately $76.7
million for the prior fiscal year. This decrease was principally due to the
allocation in 1997 of annual corporate overhead expenses and employee stock
expense of the previous owners of the Acquired Systems, offset by an increase in
management fee expense to approximately $6.1 million for the year ended 1998
from approximately $1.5 million for the prior fiscal year. This increase in
management fee expense was due to the higher revenues generated in 1998.
EBITDA increased to approximately $57.2 million for the year ended 1998
from approximately $42.3 million for the prior fiscal year. EBITDA as a
percentage of revenues increased to 42.0% for the year ended 1998 period from
35.1% for the prior fiscal year. This increase was due to internal subscriber
growth, higher average monthly revenue per subscriber, and the aforementioned
decrease in service costs and SGA expenses, offset by an increase in management
fee expense.
28
Actual Results for Three Months Ended December 31, 1998 Compared to Pro
Forma Results for Three Months Ended December 31, 1997.
Revenues increased to approximately $34.9 million for the three months
ended December 31, 1998, from approximately $30.8 million for the corresponding
period of 1997. This increase was attributable principally to internal
subscriber growth of approximately 2.5% and higher average monthly revenue per
subscriber.
Service costs and SGA expenses in the aggregate decreased to
approximately $18.5 million for the 1998 period from approximately $19.6 million
for the corresponding period of 1997. This decrease was principally due to the
allocation in the 1997 period of annual corporate overhead expenses and employee
stock expense of the previous owners of the Acquired Systems, offset by an
increase in management fee expense to approximately $1.5 million for the 1998
period from approximately $0.7 million for the corresponding period of 1997.
This increase in management fee expense was due to the higher revenues generated
in the 1998 period.
EBITDA increased to approximately $15.0 million for the 1998 period from
approximately $10.4 million for the corresponding period of 1997. EBITDA as a
percentage of revenues increased to 42.9% for the 1998 period from 33.8% for the
corresponding period of 1997. The increase was due to internal subscriber
growth, higher average monthly revenue per subscriber, and the aforementioned
decrease in service costs and SGA expenses, offset by the increase in management
fee expense.
The pro forma financial information presented above has been prepared
for comparative purposes only and does not purport to be indicative of the
operating results which actually would have resulted had the acquisitions of the
Acquired Systems been consummated on January 1, 1997.
Liquidity and Capital Resources
The cable television business is a capital intensive business that
generally requires financing for the upgrade, expansion and maintenance of the
technical infrastructure. In addition, the Company has pursued, and continues to
pursue, a business strategy that includes selective acquisitions. The Company
has funded its working capital requirements, capital expenditures and
acquisitions through a combination of internally generated funds, long-term
borrowings and equity contributions. The Company intends to continue to finance
such expenditures through these same sources.
During 1997 and 1998, the Company upgraded certain Systems serving
approximately 129,800 basic subscribers as of December 31, 1998. During the
third quarter of 1998, the Company modified its previously announced five-year
capital improvement program by accelerating its planned completion date to June
30, 2000. Moreover, various projects that were originally scheduled to be
upgraded to 550MHz bandwidth capacity are being redesigned at 750MHz capacity,
with two-way capability, and greater utilization of fiber optic technology. This
accelerated program will enable the Company to deliver digital cable television
and high-speed cable modem service earlier and more widespread than previously
planned, beginning in 1999. Upon the program's anticipated completion in June
30, 2000, the Company expects that over 85% of its customer base will be served
by Systems with 550MHz to 750MHz bandwidth capacity. For the year ended December
31, 1997, the Company's capital expenditures (other than those related
toacquisitions) were $4.7 million. As a result of the Company's accelerated
capital improvement program, total capital expenditures (other than those
related to acquisitions) were approximately $53.7 million for 1998. In addition,
the Company plans to spend approximately $63.0 million in 1999. The Company
intends to utilize cash generated from operations and its available unused
credit commitments under its bank credit facilities, as described below, to fund
the foregoing capital expenditures.
From the Company's commencement of operations in March 1996 through
December 31, 1997, the Company invested approximately $97.8 million (before
closing costs) to acquire cable television systems serving approximately 65,250
basic subscribers as of December 31, 1998. In 1998, the Company invested
approximately $334.6 million (before closing costs) to acquire cable television
systems serving approximately 288,750 basic subscribers as of December 31, 1998.
In the aggregate, the Company has invested approximately $432.4 million (before
closing costs) to acquire the Systems.
29
On January 9, 1998, the Company completed the acquisition of the
Clearlake System, serving approximately 17,200 subscribers on such date, for a
purchase price of $21.4 million (before closing costs). The acquisition of the
Clearlake System and related closing costs and adjustments were financed with
cash on hand and borrowings under the Company's bank credit facilities. See
Notes 3 and 8 to the Company's audited consolidated financial statements.
On January 23, 1998, the Company completed the acquisition of the
Cablevision Systems, serving approximately 260,100 subscribers on such date, for
a purchase price of approximately $308.2 million (before closing costs). The
acquisition of the Cablevision Systems and related closing costs and adjustments
were financed with: (i) $211.0 million of borrowings under the Company's bank
credit facilities; (ii) the proceeds of $20.0 million aggregate principal amount
of the notes issued by the Company to a bank (the "Holding Company Notes"); and
(iii) $94.0 million of equity capital contributed to Mediacom by its members. On
April 1, 1998, the Holding Company Notes were repaid in full from the net
proceeds of the 8 1/2% Senior Notes offering (see below). See Notes 1, 3 and 8
to the Company's audited consolidated financial statements.
On October 1, 1998, the Company acquired the assets of a cable
television system serving approximately 3,800 subscribers in Caruthersville,
Missouri, for a purchase price of $5.0 million (before closing costs). The
acquisition of the Caruthersville System was financed with cash on hand and
borrowings under the Company's bank credit facilities. See Notes 3 and 8 to the
Company's audited consolidated financial statements.
Mediacom is a limited liability company that serves as the holding
company for its various subsidiaries, each of which is also a limited liability
company. The Company's financing strategy is to raise equity from its members
and issue public long-term debt at the holding company level, while utilizing
its subsidiaries to access debt capital, principally in the commercial bank
market, through two stand-alone borrowing groups. The Company believes that this
financing strategy is beneficial because it broadens the Company's access to
various debt markets, enhances its flexibility in managing the Company's capital
structure, reduces the overall cost of debt capital and permits the Company to
maintain a substantial liquidity position in the form of unused and available
bank credit commitments.
Financings of the subsidiaries are currently effected through two stand-
alone borrowing groups, each with separate lending groups. The credit
arrangements in these borrowing groups are non-recourse to Mediacom, have no
cross-default provisions relating directly to each other, have different
revolving credit and term periods and contain separately negotiated covenants
tailored for each borrowing group. These credit arrangements permit the
subsidiaries, subject to covenant restrictions, to make distributions to
Mediacom. As of December 31, 1998, the Company was in compliance with all of the
financial and other covenants provided for in its bank credit agreements.
As of December 31, 1998, in order to finance its working capital
requirements, capital expenditures and acquisitions and to provide liquidity for
future capital requirements, the Company had completed the following financing
arrangements: (i) a $100.0 million bank credit facility expiring in September
2005; (ii) a $225.0 million bank credit facility expiring in September 2006;
(iii) a seller note in the original principal amount of $2.8 million issued in
connection with the acquisition of a cable television system; (iv) $200.0
million offering of 8 1/2% Senior Notes (see below); and (v) $125.0 million of
equity capital invested in Mediacom by the members of Mediacom. See Notes 1 and
8 to the Company's audited consolidated financial statements.
On April 1, 1998, Mediacom and Mediacom Capital jointly issued $200.0
million aggregate principal amount of 8 1/2% Senior Notes (the "8 1/2% Senior
Notes") due on April 15, 2008. Mediacom used approximately $20.0 million of the
net proceeds of this offering to repay in full the principal amount of the
Holding Company Notes. The remaining net proceeds of approximately $173.5
million were used to repay a portion of outstanding indebtedness under the
Company's bank credit facilities.
As of December 31, 1998 the Company had entered into interest rate swap
agreements to hedge a notional amount of $60.0 million of borrowings under the
Company's bank credit facilities, which expire from 1999 through 2002. As a
result of the Company's interest rate swap agreements, and after giving pro
forma effect to the issuance of the 8 1/2% Senior Notes, approximately 78.0% of
the Company's indebtedness was at fixed interest rates or subject to interest
rate protection as of December 31, 1998.
30
As a result of the financing transactions described above, as of
December 31, 1998, the Company had the ability to borrow up to approximately
$189.9 million under the Company's bank credit facilities, all of which could
have been borrowed and distributed to Mediacom under the most restrictive
covenants in the Company's bank credit agreements. For the three months ended
December 31, 1998, the weighted average interest rate on all indebtedness
outstanding under the Company's bank credit facilities was approximately 6.9%
before giving effect to the aforementioned interest rate swap agreements, and
7.2% after giving effect to said interest rate swap agreements.
On February 26, 1999, Mediacom and Mediacom Capital jointly issued $125
million aggregate principal amount of 7 7/8% Senior Notes (the "7 7/8% Senior
Notes") due February 2011. The net proceeds from this offering of approximately
$121.9 million were used to repay a substantial portion of outstanding
indebtedness under the Company's bank credit facilities. Interest on the 7 7/8%
Senior Notes will be payable semi-annually on February 15 and August 15 of each
year, commencing on August 15, 1999. After giving pro forma effect to the
offering of the 7 7/8% Senior Notes and use of net proceeds therefrom, as of
December 31, 1998, the Company would have had approximately $311.6 million of
unused credit commitments, all of which could have been borrowed and distributed
to Mediacom under the most restrictive covenants in the Company's bank credit
agreements.
The Company is regularly presented with opportunities to acquire cable
television systems that are evaluated on the basis of the Company's acquisition
strategy. Although the Company presently does not have any definitive agreements
to acquire or sell any of its cable television systems, it is negotiating with
prospective sellers to acquire additional cable television systems. If
definitive agreements for all such potential acquisitions are executed, and if
such acquisitions are then consummated, the Company's customer base would
approximately double in size. These acquisitions are subject to the negotiation
and completion of definitive documentation, which will include customary
representations and warranties and will be subject to a number of closing
conditions. Financing for these potential transactions has not been determined;
however, if such acquisitions are consummated, the Company believes its total
indebtedness would substantially increase. No assurance can be given that such
definitive documents will be entered into or that, if entered into, the
acquisitions will be consummated.
Although the Company has not generated earnings sufficient to cover
fixed charges, the Company has generated cash and obtained financing sufficient
to meet its debt service, working capital, capital expenditure and acquisition
requirements. The Company expects that it will continue to be able to generate
funds and obtain financing sufficient to service its obligations. There can be
no assurance that the Company will be able to refinance its indebtedness or
obtain new financing in the future or, if the Company were able to do so, that
the terms would be favorable to the Company.
Recent Accounting Pronouncements
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income," Statement of Financial Accounting Standard No. 131, "Disclosure about
Segments of an Enterprise and Related Information" and Statement of Financial
Accounting Standard No. 132, "Employer's Disclosure about Pension and Other Post
Retirement Benefits" which are effective for the Company's fiscal 1998 financial
statements. During the years ended December 31, 1998 and 1997 and the period
ended December 31, 1996, the Company had no items of comprehensive income. Refer
to Note 13 of the Company's audited consolidated financial statements for
disclosure about segments and other related information. Additionally, the
Company does not have any defined benefit plans, therefore, additional
disclosures are not applicable to the notes of the financial statements.
In 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") and
Statement of Position 98-5, "Reporting on the Costs of Start up Activities"
("SOP 98-5") were issued. SFAS 133 establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Company
will adopt SFAS 133 in fiscal 1999 but has not quantified the impact or not yet
determined the timing or method of the adoption. SOP 98-5 provides guidance on
accounting for the costs of start-up activities, which include preopening costs,
preoperating costs, organization costs, and start-up costs. The Company will
adopt SOP 98-5 in fiscal 1999. As of December 31, 1998, the Company had
approximately $2.8 million of organization costs on its balance sheet. In
accordance with SOP 98-5, these organization costs will be reported as a
cumulative effect of a change in accounting principle in fiscal 1999.
31
Inflation and Changing Prices
The Company's costs and expenses are subject to inflation and price
fluctuations. However, because changes in costs are generally passed through to
subscribers, such changes are not expected to have a material effect on the
Company's results of operations.
Year 2000
The Company has formed a Year 2000 program management team responsible
for overseeing, coordinating and reporting on the Year 2000 remediation efforts.
The Company has implemented a company-wide effort to assess and remediate its
computer systems, related software and equipment to ensure such systems,
software and equipment recognize, process and store information in the year 2000
and thereafter. Such Year 2000 remediation efforts include an assessment of the
most critical systems, such as customer service and billing systems, headend
facilities, business support operations, and other equipment and facilities. The
Company is also verifying the Year 2000 readiness of its significant suppliers
and vendors.
The program management team has defined a four-step approach to
determining the Year 2000 readiness of the Company's internal systems, software
and equipment. Such approach is intended to provide a detailed method for
tracking the evaluation, repair, and testing of systems, software, and
equipment, as follows:
Phase 1: Assessment -- involves the inventory of all systems, software and
equipment and the identification of any Year 2000 issues.
Phase 2: Remediation -- involves repairing, upgrading and/or replacing any non-
compliant equipment and systems.
Phase 3: Testing -- involves testing systems, software, and equipment for Year
2000 readiness, or in certain cases, relying on test results provided
to the Company.
Phase 4: Implementation -- involves placing compliant systems, software and
equipment into production or service.
The following is the status of the Year 2000 readiness project as of
December 31, 1998: Phase 1 was substantially complete, with final completion by
April 1999; Phase 2 was underway with final completion expected by June 1999;
and Phases 3 and 4 are in the early stages, with final completion expected by
September 1999.
The completion dates set forth above are based on current expectations.
However, due to the uncertainties inherent in Year 2000 remediation, no
assurances can be given as to whether such projects will be completed on such
dates.
Third Party Systems, Software and Equipment
The program management team is surveying the Company's significant
third-party vendors and suppliers whose systems, services or products are
important to its operations (e.g., suppliers of addressable controllers and set-
top boxes, and the provider of billing services). The Year 2000 readiness of
such providers is critical to the continued provision of cable television
service without interruptions. The project management team has received
information that the most critical systems, services or products supplied to its
cable television systems by third-parties are either Year 2000 ready or are
expected to be Year 2000 ready by mid-1999. The project management team is
currently developing contingency plans for systems provided by vendors who have
not responded to its surveys or systems that may not be Year 2000 ready in a
timely fashion.
In addition to the survey process described above, the project
management team has identified the Company's most critical supplier/vendor
relationships and has instituted a verification process to determine the
vendors' Year 2000 readiness. Such verification includes reviewing vendors' test
and other data and engaging in regular communications with vendors' Year 2000
teams. The Company is currently testing to validate the Year 2000 compliance of
certain critical products and services.
32
Costs
As of December 31, 1998, Year 2000 costs incurred were not material.
Although no assurances can be given, the Company currently expects that the
total projected costs associated with the Year 2000 program will be less than
$350,000.
Contingency Plans
The failure to correct a material Year 2000 problem could result in an
interruption or failure of certain important business operations. The Company
believes that its Year 2000 program will significantly reduce risks associated
with the changeover to the Year 2000 and is currently developing certain
contingency plans to minimize the effect of any potential Year 2000 related
disruptions. The risks and the uncertainties discussed below and the associated
contingency plans relate to systems, software, equipment, and services that the
Company has deemed critical in regard to customer service, business operations,
financial impact or safety.
The failure of addressable controllers contained in the headend
facilities could disrupt the delivery of premium services to customers and could
necessitate crediting customers for failure to receive such premium services. In
this unlikely event, the Company expects that it will identify and transmit the
lowest cost programming tier. Unless other contingency plans are developed with
the program suppliers, premium and pay-per-view channels would not likely be
transmitted until the addressable controller share had been repaired.
A failure of the services provided by the Company's billing systems
service provider could result in a loss of customer records which could disrupt
the ability to bill customers for a protracted period. The Company plans to
prepare electronic backup records of its customer billing information prior to
the Year 2000 to allow for data recovery as its first step to remedy this
situation in the event of billing systems failure. The Company will continue to
monitor the Year 2000 readiness of its customer-billing supplier.
Advertising revenue could be adversely affected by the failure of
certain advertising insertion equipment which could impede or prevent the
insertion of advertising spots in cable television programming. The Company
anticipates that it can minimize such effect by manually resetting the dates
each day until the equipment is repaired.
The financial impact of any or all of the above worst-case scenarios has
not been and cannot be estimated by the Company due to the numerous
uncertainties and variables associated with such scenarios.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company uses interest rate swap
agreements in order to fix the interest rate for the duration of the contract as
a hedge against interest rate volatility. As of December 31, 1998, the Company
had interest rate exchange agreements (the "Swaps") with various banks pursuant
to which the interest rate on $60.0 million is fixed at a weighted average swap
rate of approximately 6.2%, plus the average applicable margin over the
Eurodollar Rate option under the Company's bank credit facilities. Under the
terms of the Swaps, which expire from 1999 through 2002, the Company is exposed
to credit loss in the event of nonperformance by the other parties of Swaps. The
fair value of the Swaps is the estimated amount that the Company would receive
or pay to terminate the Swaps, taking into account current interest rates and
the current creditworthiness of the Swap counterparties. The Company would have
paid approximately $1.5 million at December 31, 1998 to terminate the Swaps,
inclusive of accrued interest. The table below provides information for the
Company's long term debt. See Notes 8 and 12 to the Company's audited
consolidated financial statements.
Expected Maturity
---------------------------------------------------------
(All dollar amounts in 000's)
1999 2000 2001 2002 2003 Thereafter Total Fair Value
------ ------ ------ ------ ------ ---------- ----- ----------
Fixed rate $ - $ - $ - $ - $ - $203,480 $203,480 $207,980
Weighted average
interest rate - - - - - 8.5% 8.5%
Variable rate $2,000 $2,300 $6,600 $9,500 $13,600 $100,425 $134,425 $134,425
Weighted average
interest rate 6.9% 6.9% 6.9% 6.9% 6.9% 6.9% 6.9%
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's audited consolidated financial statements, and related
notes thereto, and the report of the Company's independent public accountants
follow.
MEDIACOM LLC AND SUBSIDIARIES
-----------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
----
Report of Independent Public Accountants 36
Consolidated Balance Sheets as of December 31, 1998 and 1997 37
Consolidated Statements of Operations for the Years Ended December 31, 1998 and
1997, for the Period from Commencement of Operations (March 12, 1996) to
December 31, 1996, and for the Period from January 1, 1996 through March 11, 1996 38
Consolidated Statements of Changes in Members' Equity for the Years Ended December
31, 1998 and 1997, and for the Period from Commencement of Operations (March 12,
1996) to December 31, 1996 39
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and
1997, for the Period from Commencement of Operations (March 12, 1996) to
December 31, 1996, and for the Period from January 1, 1996 through March 11, 1996 40
Notes to Consolidated Financial Statements 41
Valuation and Qualifying Accounts 52
MEDIACOM CAPITAL CORPORATION
----------------------------
INDEX TO FINANCIAL STATEMENT
----------------------------
Report of Independent Public Accountants 53
Balance Sheet as of December 31, 1998 54
Notes to Balance Sheet 55
35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mediacom LLC:
We have audited the accompanying consolidated balance sheets of Mediacom LLC (a
New York limited liability company) and subsidiaries as of December 31, 1998,
1997 and 1996, and the related consolidated statements of operations, changes in
members' equity and cash flows for the years ended December 31, 1998 and 1997,
and for the period from the commencement of operations (March 12, 1996) to
December 31, 1996 and the statements of operations and cash flows from the
period January 1, 1996 through March 11, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mediacom LLC and
its subsidiaries as of December 31, 1998, 1997 and 1996, and the results of
their operations, members' equity and cash flows for the years ended December
31, 1998 and 1997, and for the period from commencement of operations (March 12,
1996) to December 31, 1996 and the statements of operations and cash flows from
the period January 1, 1996 through March 11, 1996 in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Schedule II - Valuation and
Qualifying Accounts is presented for purposes of complying with the Securities
and Exchange Commissions rules and is not part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
Arthur Andersen LLP
Stamford, Connecticut
March 5, 1999
36
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All dollar amounts in 000's)
December 31,
-----------------
1998 1997
---- ----
ASSETS
Cash and cash equivalents $ 2,212 $ 1,027
Subscriber accounts receivable, net of allowance for doubtful accounts of $298
in 1998 and $56 in 1997 2,512 618
Prepaid expenses and other assets 1,712 1,358
Investment in cable television systems:
Inventory 8,240 1,032
Property, plant and equipment, at cost 314,627 51,735
Less - accumulated depreciation (45,423) (5,737)
---------- --------
Property, plant and equipment, net 269,204 45,998
Intangible assets, net of accumulated amortization of $25,578 in 1998 and
$3,377 in 1997 148,897 47,859
---------- --------
Total investment in cable television systems 426,341 94,889
Other assets, net of accumulated amortization of $4,583 in 1998 and $627 in 1997 18,375 4,899
---------- --------
Total assets $ 451,152 $102,791
========== ========
LIABILITIES AND MEMBERS' EQUITY
LIABILITIES
Debt $337,905 $ 72,768
Accounts payable 2,678 853
Accrued expenses 29,446 4,021
Subscriber advances 1,510 603
Management fees payable 962 105
---------- --------
Total liabilities 372,501 78,350
---------- --------
MEMBERS' EQUITY
Capital contributions 124,990 30,990
Accumulated deficit (46,339) (6,549)
---------- --------
Total members' equity 78,651 24,441
---------- --------
Total liabilities and members' equity $451,152 $102,791
========== =========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
37
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All dollar amounts in 000's)
The Company Predecessor
============================================== ===============
March 12,
1996
through January 1, 1996
Year Ended December 31, December 31, through
1998 1997 1996 March 11, 1996
--------- ------- -------- ---------------
Revenues $129,297 $17,634 $ 5,411 $1,038
Costs and expenses:
Service costs 43,849 5,547 1,511 297
Selling, general, and
administrative expenses 25,596 2,696 931 222
Management fee expense 5,797 882 270 52
Depreciation and amortization 65,793 7,636 2,157 527
--------- ------- -------- ---------------
Operating income (loss) (11,738) 873 542 (60)
--------- ------- -------- ---------------
Interest expense, net 23,994 4,829 1,528 201
Other expenses 4,058 640 967 -
--------- ------- -------- ---------------
Net loss $(39,790) $(4,596) $(1,953) $ (261)
========= ======= ======== ===============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
38
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
(All dollar amounts in 000's)
Balance, Commencement of Operations (March 12, 1996) $ 5,490
Capital Contributions 1,000
Net Loss (1,953)
--------
Balance, December 31, 1996 4,537
Capital Contributions 24,500
Net Loss (4,596)
--------
Balance, December 31, 1997 24,441
Capital Contributions 94,000
Net Loss (39,790)
--------
Balance, December 31, 1998 $78,651
========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
39
MEDIACOM LLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in 000's)
The Company Predecessor
========================================= ===========
March 12, January 1,
1996 1996
through through
Year Ended December 31, December 31, March 11,
1998 1997 1996 1996
-------- ------- -------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(39,790) $(4,596) $(1,953) $ (261)
Adjustments to reconcile net loss to net cash
flows from operating
activities:
Accretion of interest on seller note 287 264 129 -
Depreciation and amortization 65,793 7,636 2,157 527
Changes in assets and liabilities, net of effects
from acquisitions:
Increase in subscriber
accounts receivable (1,437) (351) (267) (40)
Decrease (increase) in prepaid
expenses and other assets 329 (34) (1,323) -
Increase (decrease) in accounts payable 1,822 (242) 514 -
Increase in accrued expenses 24,843 3,762 840 -
Increase in subscriber advances 852 498 105 -
Increase in management fees payable 857 70 35 -
-------- ------- ------- -------
Net cash flows from operating activities 53,556 7,007 237 226
-------- ------- ------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (53,721) (4,699) (671) (86)
Acquisitions of cable television systems (343,330) (54,842) (44,539) -
Other, net (34) (467) (47) -
-------- ------- ------- -------
Net cash flows used in investing activities (397,085) (60,008) (45,257) (86)
-------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
New borrowings 488,200 72,225 39,200 -
Repayment of debt (223,350) (40,250) (1,600) -
Increase in seller note - - 2,800 -
Capital contributions 94,000 24,500 6,490 -
Financing costs (14,136) (2,843) (1,474) -
-------- ------- ------- -------
Net cash flows from financing activities 344,714 53,632 45,416 -
-------- ------- ------- -------
Net increase in cash and cash equivalents 1,185 631 396 140
CASH AND CASH EQUIVALENTS, beginning of period 1,027 396 - 266
-------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period $ 2,212 $ 1,027 $ 396 $ 406
======== ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 21,127 $ 4,485 $ 1,190 $ 201
The accompanying notes to consolidated financial statements
are an integral part of these statements.
40
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
(1) The Limited Liability Company:
Organization
Mediacom LLC ("Mediacom" and collectively with its subsidiaries,
the "Company"), a New York limited liability company, was formed on July 17,
1995 and initially conducted its affairs pursuant to an operating agreement
dated March 12, 1996 (the "1996 Operating Agreement"). On March 31 and June 16,
1997, the 1996 Operating Agreement was amended and restated upon the admission
of new members to Mediacom (the "1997 Operating Agreement"). On January 20,
1998, the 1997 Operating Agreement was amended and restated upon the admission
of additional members to Mediacom (the "1998 Operating Agreement"). As of
December 31, 1998, the Company had acquired and was operating cable television
systems in fourteen states, principally Alabama, California, Florida, Kentucky,
Missouri and North Carolina. (See Note 3).
Mediacom Capital Corporation ("Mediacom Capital"), a New York
corporation wholly owned by Mediacom, was organized in March 1998 for the sole
purpose of acting as co-issuer with Mediacom of $200,000 aggregate principal
amount of 8 1/2% Senior Notes due 2008 (the "8 1/2% Senior Notes"), which were
issued on April 1, 1998. Mediacom Capital has nominal assets and does not
conduct operations of its own. The 8 1/2% Senior Notes are joint and several
obligations of Mediacom and Mediacom Capital, although Mediacom received all the
net proceeds of the 8 1/2% Senior Notes.
Capitalization
The Company was initially capitalized on March 12, 1996, with
equity contributions of $5,445 from Mediacom's members and $45 from Mediacom
Management Corporation ("Mediacom Management"), a Delaware corporation. On June
28, 1996, Mediacom received additional equity contributions of $1,000 from an
existing member.
On June 22 and September 18, 1997, Mediacom received additional
equity contributions of $19,500 and $5,000, respectively, from its members. On
January 22, 1998, Mediacom received additional equity contributions of $94,000
from its members.
Allocation of Losses, Profits and Distributions
For 1996, pursuant to the 1996 Operating Agreement, net losses
were allocated 98% to the manager as defined in the operating agreements (the
"Manager") and the balance to the other members ratably in accordance with their
respective membership units. For 1997, pursuant to the 1997 Operating Agreement,
net losses were allocated first to the Manager and the balance to the other
members ratably in accordance with their respective membership units. For 1998,
pursuant to the 1998 Operating Agreement, net losses are to be allocated first
to the Manager; second, to the member owning the largest number of membership
units in Mediacom; and third, to the members, other than the Manager, ratably in
accordance with their respective positive capital account balances and
membership units.
Profits are allocated first to the members to the extent of
their deficit capital account; second, to the members to the extent of their
preferred capital; third, to the members (including the Manager) until they
receive an 8% preferred return on their preferred capital (the "Preferred
Return"); fourth, to the Manager until the Manager receives an amount equal to
25% of the amount provided to deliver the Preferred Return to all members; the
balance, 80% to the members (including the Manager) in proportion to their
respective membership units and 20% to the Manager. The 1997 Operating Agreement
increased the Preferred Return from 8% to 12%.
Distributions are made first to the members (including the
Manager) in proportion to their respective membership units until they receive
amounts equal to their preferred capital; second, to the members (including the
Manager) in proportion to their percentage interests until all members receive
the Preferred Return; third, to the Manager until the Manager receives 25% of
the amount provided to deliver the Preferred Return; the balance, 80% to the
members (including the Manager) in proportion to their percentage interests and
20% to the Manager.
41
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
Redemption Rights
Except as set forth below, no member has the right to have its
membership interests redeemed or its capital contributions returned prior to
dissolution of Mediacom. Pursuant to the 1998 Operating Agreement, each member
has the right to require Mediacom to redeem its membership interests at any time
if the holding of such interests exceeds the amount permitted, or is otherwise
prohibited or becomes unduly burdensome, by any law to which such member is
subject, or, in the case of any member which is a Small Business Investment
Company as defined in and subject to regulation under the Small Business
Investment Act of 1958, as amended, upon a change in the Company's principal
business activities to an activity not eligible for investment by a Small
Business Investment Company or a change in the reported use of proceeds of a
member's investment in Mediacom. If Mediacom is unable to redeem for cash any or
all of such membership interests at such time, Mediacom will issue as payment
for such interests a junior subordinated promissory note with a five-year
maturity date and deferred interest which accrues and compounds at an annual
rate of 5% over the prime rate.
In addition, in connection with the Company's acquisition of the
Cablevision Systems on January 23, 1998 (See Note 3), the Federal Communications
Commission (the "FCC") issued a transactional forbearance from its cross-
ownership restrictions, effective for a period of one year, permitting a certain
existing member (the "Transactional Member") to purchase additional units of
membership interest in Mediacom. This temporary waiver was originally set to
expire on January 23, 1999. However, on January 15, 1999, the FCC granted an
extension of such waiver to July 23, 1999. If at the end of this extension, the
Transactional Member's membership interest in Mediacom remains above the
limitations imposed by the FCC's cross-ownership restrictions, Mediacom will be
required to repurchase such number of the Transactional Member's units of
membership interest which exceed the permissible ownership level. If such
repurchase were to occur on July 23, 1999 (i.e., upon expiration of the
transactional forbearance), and assuming no changes in the number of outstanding
membership units of Mediacom and no changes in such cross-ownership rules, the
repurchase price for such excess membership interests would be approximately
$7,500 plus accrued interest.
Duration and Dissolution
Mediacom will be dissolved upon the first to occur of the
following: (i) December 31, 2020; (ii) certain events of bankruptcy involving
the Manager or the occurrence of any other event terminating the continued
membership of the Manager, unless within one hundred eighty days after such
event the Company is continued by the vote or written consent of no less than
two-thirds of the remaining membership interests; or (iii) the entry of a decree
of judicial dissolution.
(2) Summary of Significant Accounting Policies:
Basis of Preparation of Consolidated Financial Statements
The consolidated financial statements include the accounts of
Mediacom and its subsidiaries. All significant intercompany transactions and
balances have been eliminated. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The financial statements for the period from January 1, 1996,
through March 11, 1996, and reflecting the results of operations and statement
of cash flows, are referred to as the "Predecessor" financial statements. The
Predecessor is Benchmark Acquisition Fund II Limited Partnership which owned the
assets comprising the cable television system serving at the time of its
acquisition by the Company 10,300 subscribers in Ridgecrest, California.
Accordingly, the accompanying financial statements of the Predecessor and the
Company are not comparable in all material respects since those financial
statements report results of operations and cash flows of these two separate
entities.
42
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
Revenue Recognition
Revenues are recognized in the period in which the related services are
provided to the Company's subscribers.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Concentration of Credit Risk
The Company's accounts receivable is 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 the Company's customer base and their geographic
dispersion.
Property, Plant and Equipment
Property, plant and equipment is recorded at purchased and
capitalized cost. Repairs and maintenance are charged to operations, and
replacements, renewals and additions are capitalized. The Company capitalized a
portion of salaries and overhead related to the installation of property, plant
and equipment of approximately $6,548 and $681 in 1998 and 1997, respectively.
The Company capitalizes interest on funds borrowed for projects
under construction. Such interest is charged to property, plant and equipment
and amortized over the approximate life of the related assets. Capitalized
interest was approximately $1,014 in 1998.
Depreciation is calculated on a straight-line basis over the
following useful lives:
Buildings 45 years
Leasehold improvements Life of respective lease
Cable systems and equipment 5 to 10 years
Subscriber devices 5 years
Vehicles 5 years
Furniture, fixtures and office equipment 5 to 10 years
Intangible Assets
Intangible assets include franchising costs, goodwill, subscriber lists
and covenants not to compete. Amortization of intangible assets is calculated on
a straight-line basis over the following lives:
Franchising costs 15 years
Goodwill 15 years
Subscriber lists 5 years
Covenants not to compete 3 to 7 years
Impairment of Long-Lived Assets
The Company follows the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by any entity, be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
There has been no impairment of long-lived assets of the Company under SFAS 121.
43
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
Other Assets
Other assets include organizational and financing costs. In accordance
with Statement of Position 98-5, organization costs of approximately $2,755 will
be reported as a cumulative effect of a change in accounting principle in fiscal
1999. See Note 5. Organizational costs are being amortized on a straight-line
basis over 5 years. Financing costs incurred to raise debt and equity capital
are deferred and amortized on a straight-line basis over the expected term of
such financings. Included in other assets are financing costs of approximately
$14,136 and $3,963 as of December 31, 1998 and 1997, respectively.
Income Taxes
Since Mediacom is a limited liability company and the Predecessor is a
limited partnership, they are not subject to federal or state income taxes, and
no provision for income taxes relating to their statements of operations have
been reflected in the accompanying financial statements. The members of Mediacom
and the limited partners of the Predecessor are required to report their share
of income or loss in their respective income tax returns.
(3) Acquisitions:
The Company has completed the undernoted acquisitions (the "Acquired
Systems") in 1998 and 1997. These acquisitions were accounted for using the
purchase method of accounting, and accordingly, the purchase price of these
Acquired Systems have been allocated to the assets acquired and liabilities
assumed at their estimated fair values at their respective date of acquisition.
The results of operations of the Acquired Systems have been included with those
of the Company since the dates of acquisition.
1998
On January 9, 1998, Mediacom California LLC ("Mediacom California"), a
subsidiary of Mediacom, acquired the assets of a cable television system serving
approximately 17,200 subscribers in Clearlake, California and surrounding
communities (the "Clearlake System") for a purchase price of $21,400. The
purchase price has been preliminarily allocated as follows: $8,560 to property,
plant and equipment, and $12,840 to intangible assets. Such allocations are
subject to adjustments based upon the final appraisal information received by
the Company. The final allocations of the purchase price are not expected to
differ materially from the preliminary allocations. Additionally, approximately
$226 of direct acquisition costs has been allocated to other assets. In the
first quarter of 1998, the Company recorded acquisition reserves related to this
acquisition in the amount of approximately $370, which are included in accrued
expenses. The acquisition of the Clearlake System and related closing costs and
adjustments were financed with borrowings under the Company's bank credit
facilities. See Note 8.
On January 23, 1998, Mediacom Southeast LLC, ("Mediacom Southeast"), a
wholly-owned subsidiary of Mediacom, acquired the assets of cable television
systems serving approximately 260,100 subscribers in various regions of the
United States (the "Cablevision Systems") for a purchase price of $308,200. The
purchase price has been allocated based on independent appraisal as follows:
$205,500 to property, plant and equipment, and $102,700 to intangible assets.
Additionally, approximately $3,500 of direct acquisition costs has been
allocated to other assets. In the first quarter of 1998, the Company recorded
acquisition reserves related to this acquisition in the amount of $3,750, which
are included in accrued expenses. The acquisition of the Cablevision Systems and
related closing costs and adjustments were financed with equity contributions,
borrowings under the Company's bank credit facilities, and other bank debt. See
Notes 1 and 8.
On October 1, 1998, Mediacom Southeast acquired the assets of a cable
television system serving approximately 3,800 subscribers in Caruthersville,
Missouri (the "Caruthersville System") for a purchase price of $5,000. The
purchase price has been preliminarily allocated as follows: $2,000 to property,
plant and equipment, and $3,000 to intangible assets. Such allocations are
subject to adjustments based upon the final appraisal information received by
the Company. The final allocations of the purchase price are not expected to
differ materially from the preliminary allocations. The acquisition of the
Caruthersville System and related closing costs and adjustments were financed
with borrowings under the Company's bank credit facilities. See Note 8.
44
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
1997
On June 24, 1997, Mediacom Delaware LLC ("Mediacom Delaware"), a wholly-
owned subsidiary of Mediacom, acquired the assets of cable television systems
serving approximately 29,300 subscribers in lower Delaware and southwestern
Maryland (the "Lower Delaware System") for a purchase price of $42,600. The
purchase price has been allocated as follows: $21,300 to property, plant and
equipment, and $21,300 to intangible assets. Additionally, $409 of direct
acquisition costs has been allocated to other assets.
On September 19, 1997, Mediacom California acquired the assets of a
cable television system serving approximately 9,600 subscribers in Sun City,
California (the "Sun City System") for a purchase price of $11,500. The purchase
price has been allocated as follows: $7,150 to property, plant and equipment,
and $4,350 to intangible assets. Additionally, $52 of direct acquisition costs
has been allocated to other assets.
(4) Pro Forma Results:
Summarized below are the pro forma unaudited results of operations for
the years ended December 31, 1998 and 1997, assuming the purchase of the
Acquired Systems had been consummated as of January 1, 1997. Adjustments have
been made to: (i) depreciation and amortization reflecting the fair value of the
assets acquired; and (ii) interest expense. The pro forma results may not be
indicative of the results that would have occurred if the combination had been
in effect on the dates indicated or which may be obtained in the future.
1998 1997
Revenue $ 136,148 $ 120,511
Operating loss (11,809) (15,352)
Net loss $ (41,340) $ (42,921)
(5) Recent Accounting Pronouncements:
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income," Statement of Financial Accounting Standard No. 131, "Disclosure about
Segments of an Enterprise and Related Information" and Statement of Financial
Accounting Standard No. 132, "Employer's Disclosure about Pension and Other Post
Retirement Benefits" which are effective for the Company's fiscal 1998 financial
statements. During the years ended December 31, 1998 and 1997 and the period
ended December 31, 1996, the Company had no items of comprehensive income. Refer
to Note 13 of the consolidated financial statements for disclosure about
segments and other related information. Additionally, the Company does not have
any defined benefit plans, therefore, additional disclosures are not applicable
to the notes of the financial statements.
In 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") and
Statement of Position 98-5, "Reporting on the Costs of Start up Activities"
("SOP 98-5") were issued. SFAS 133 establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Company
will adopt SFAS 133 in fiscal 1999 but has not quantified the impact or not yet
determined the timing or method of the adoption. SOP 98-5 provides guidance on
accounting for the costs of start-up activities, which include preopening costs,
preoperating costs, organization costs, and start-up costs. The Company will
adopt SOP 98-5 in fiscal 1999. As of December 31, 1998, the Company had
approximately $2,800 of organization costs on its balance sheet. In accordance
with SOP 98-5, these organization costs will be reported as a cumulative effect
of a change in accounting principle in fiscal 1999.
45
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
(6) Property, Plant and Equipment:
As of December 31, 1998 and 1997, property, plant and equipment
consisted of:
1998 1997
--------- --------
Land and land improvements $ 341 $ 108
Buildings and leasehold improvements 5,731 337
Cable systems, equipment and subscriber devices 300,051 49,071
Vehicles 5,051 1,135
Furniture, fixtures and office equipment 3,453 1,084
--------- --------
$ 314,627 $ 51,735
Accumulated depreciation (45,423) (5,737)
--------- --------
$ 269,204 $ 45,998
========= ========
(7) Intangible Assets:
The following table summarizes the net asset value for each intangible
asset category as of December 31, 1998 and 1997:
Gross Asset Net Asset
----------- ---------
1998 Value Amortization Value
---- ----- ------------ -----
Franchising costs $ 87,509 $ 7,983 $ 79,526
Goodwill 5,640 584 5,056
Subscriber lists 76,484 15,701 60,783
Covenants not to compete 4,842 1,310 3,532
---------- ---------- ----------
$ 174,475 $ 25,578 $ 148,897
========== ========== ==========
Gross Asset Net Asset
----------- ---------
1997 Value Amortization Value
---- ----- ------------ -----
Franchising costs $ 22,181 $ 1,732 $ 20,449
Goodwill 5,640 232 5,408
Subscriber list 18,573 1,085 17,488
Covenants not to compete 4,842 328 4,514
---------- ---------- ----------
$ 51,236 $ 3,377 $ 47,859
========== ========== ==========
(8) Debt:
As of December 31, 1998 and 1997, debt consisted of:
1998 1997
--------- ---------
Mediacom:
8-1/2% Senior Notes (a) $ 200,000 $ -
Subsidiaries:
Bank Credit Facilities (b) 134,425 69,575
Seller Note (c) 3,480 3,193
--------- ---------
$ 337,905 $ 72,768
========= =========
(a) On April 1, 1998, Mediacom and Mediacom Capital jointly issued $200,000
aggregate principal amount of 8 1/2% Senior Notes due on April 15, 2008.
The 8 1/2% Senior Notes are unsecured obligations of the Company, and the
indenture for the 8 1/2% 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 the
Company. Interest accrues at 8 1/2% per annum, beginning from the date of
issuance
46
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
and is payable semi-annually on April 15 and October 15 of each year,
commencing on October 15, 1998. The 8 1/2% Senior Notes may be redeemed
at the option of Mediacom, in whole or part, at any time after April 15,
2003, at redemption prices decreasing from 104.25% of their principal
amount to 100% in 2006, plus accrued and unpaid interest.
(b) On January 23, 1998, Mediacom Southeast entered into an eight and one-
half year, $225,000 reducing revolver and term loan agreement (the
"Southeast Credit Facility"). On June 24, 1997, Mediacom California,
Mediacom Delaware and Mediacom Arizona LLC, a wholly-owned subsidiary of
Mediacom (collectively, the "Western Group"), entered into an eight and
one-half year, $100,000 reducing revolver and term loan agreement (the
"Western Credit Facility" and, together with the Southeast Credit
Facility, the "Bank Credit Facilities"). At December 31, 1998, the
aggregate commitments under the Bank Credit Facilities were $324,400. The
Bank Credit Facilities are non-recourse to Mediacom and have no cross-
default provisions relating directly to each other. The reducing
revolving credit lines under the Bank Credit Facilities make available a
maximum commitment amount for a period of up to eight and one-half years,
which is subject to quarterly reductions, beginning September 30, 1998,
ranging from 0.21% to 12.42% of the original commitment amount of the
reducing revolver. The term loans under the Bank Credit Facilities are
repaid in consecutive installments beginning September 30, 1998, ranging
from 0.42% to 12.92% of the original term loan amount. The Bank Credit
Facilities require mandatory reductions of the reducing revolvers and
mandatory prepayments of the term loans from excess cash flow, as
defined, beginning December 31, 1999. The Bank Credit Facilities provide
for interest at varying rates based upon various borrowing options and
the attainment of certain financial rations and for commitment fees of
3/8% to 1/2% per annum on the unused portion of available credit under
the reducing revolver credit lines. The effective interest rates on
outstanding debt under the Bank Credit Facilities were 7.2% and 8.8% for
the three months ending December 31, 1998 and December 31, 1997,
respectively, after giving effect to the interest rate swap agreements
discussed below.
The applicable margins for the respective borrowing rate options have
the following ranges:
Interest Rate Option Margin Rate
-------------------- ----------------
Base Rate 0.250% to 1.625%
Eurodollar Rate 1.250% to 2.625%
The Bank Credit Facilities require Mediacom's subsidiaries to maintain
compliance with certain financial covenants including, but not limited
to, the leverage ratio, the interest coverage ratio, the fixed charge
coverage ratio and the pro forma debt service coverage ratio, as defined
in the respective credit agreements. The Bank Credit Facilities also
require Mediacom's subsidiaries to maintain 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 restrictive payments, and
certain transactions with affiliates. The Company was in compliance with
all covenants as of December 31, 1998.
The Bank Credit Facilities are secured by Mediacom's pledge of all its
ownership interests in the subsidiaries and a first priority lien on all
the tangible and intangible assets of the operating subsidiaries, other
than real property in the case of the Southeast Credit Facility. The
indebtedness under the Bank Credit Facilities is guaranteed by Mediacom
on a limited recourse basis to the extent of its ownership interests in
the operating subsidiaries. At December 31, 1998, the Company had
approximately $189,900 of unused commitments under the Bank Credit
Facilities, all of which could have been borrowed by the operating
subsidiaries for purposes of distributing such borrowed proceeds to
Mediacom under the most restrictive covenants in the Company's bank
credit agreements.
As of December 31, 1998, the Company had entered into interest rate
exchange agreements (the "Swaps") with various banks pursuant to which
the interest rate on $60,000 is fixed at a weighted average swap rate of
approximately 6.2%, plus the average applicable margin over the
Eurodollar Rate option under the Bank Credit Facilities. Any amounts paid
or received due to swap arrangements are recorded as an
47
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
adjustment to interest expense. Under the terms of the Swaps, which
expire from 1999 through 2002, the Company is exposed to credit loss in
the event of nonperformance by the other parties to the Swaps. However,
the Company does not anticipate nonperformance by the counterparties.
(c) In connection with the acquisition of the Kern Valley System, the Western
Group issued to the seller an unsecured senior subordinated note (the
"Seller Note") in the amount of $2,800, with a final maturity of June 28,
2006. Interest is deferred throughout the term of the note and is payable
at maturity or upon prepayment. For the five-year period ending June 28,
2001, the annual interest rate is 9.0%. After the initial five-year
period, the annual interest rate increases to 15.0%, with an interest
clawback for the first five years. After the initial seven-year period,
the interest rate increases to 18.0%, with an interest clawback for the
first seven years. The Company intends to prepay the Seller Note plus
accrued interest on or before June 28, 2001, subject to prior approval by
the parties to the Western Credit Facilities, which the Company believes
it will obtain. The Company expects to repay the Seller Note with cash
flow generated from operations and future borrowings. There are no
penalties associated with prepayment of this note.
The Seller Note agreement contains a debt incurrence covenant limiting
the ability of the Western Group to incur additional indebtedness. The
Seller Note is subordinated and junior in right of payment to all senior
obligations, as defined in the Western Credit Facility.
The stated maturities of all debt outstanding as of December 31, 1998, are as
follows:
1999 $ 2,000
2000 2,300
2001 6,600
2002 9,500
2003 13,600
Thereafter 303,905
--------
$337,905
========
(9) Related Party Transactions:
Separate management agreements with each of Mediacom's subsidiaries
provide for Mediacom Management to be paid compensation for management services
performed for the Company. Under such agreements, Mediacom Management, which is
wholly-owned by the Manager, is entitled to receive annual management fees
calculated as follows: (i) 5.0% of the first $50,000 of annual gross operating
revenues of the Company; (ii) 4.5% of such revenues in excess thereof up to
$75,000; and (iii) 4.0% of such revenues in excess of $75,000. The Company
incurred management fees of approximately $5,797, $882, and $270 for the years
ended 1998 and 1997, and for the period ended December 31, 1996, respectively.
The operating agreement of Mediacom provides for Mediacom Management to
be paid a fee of 1.0% of the purchase price of acquisitions made by the Company
until the Company's pro forma consolidated annual operating revenues equal
$75,000 and 0.5% of such purchase price thereafter. The Company incurred
acquisition fees of approximately $3,327, $544, and $441 for the years ended
1998 and 1997, and for the period ended December 31, 1996, respectively. The
acquisition fees are included in other expenses in the statement of operations.
In addition, the operating agreements of the Company provide for the
reimbursement of reasonable out-of-pocket expenses of Mediacom Management
incurred in connection with the operation of the business of the Company and
acting for or on behalf of the Company in connection with any potential
acquisitions. The Company reimbursed Mediacom Management approximately $53, $59,
and $29 for the years ended 1998 and 1997, and for the period ended December 31,
1996, respectively.
48
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
(10) Employee Benefit Plans:
Substantially all employees of the Company are eligible to participate
in a deferred arrangement pursuant to IRC Section 401(k) (the "Plan"). Under
such arrangement, eligible employees may contribute up to 15% of their current
pre-tax compensation to the Plan. The Plan permits, but does not require,
matching contributions and non-matching (profit sharing) contributions to be
made by the Company up to a maximum dollar amount or maximum percentage of
participant contributions, as determined annually by the Company. The Company
presently matches 50% on the first 6% of employee contributions. The Company's
contributions under the Plan totaled approximately $264, $14, and $10 for the
years ended 1998 and 1997, and for the period ended December 31, 1996,
respectively.
(11) Commitments and Contingencies:
Under various lease and rental agreements for offices, warehouses and
computer terminals, the Company had rental expense of approximately $588, $138,
and $22 for the years ended 1998 and 1997, and for the period ended December 31,
1996, respectively. Future minimum annual rental payments are as follows:
1999 $1,815
2000 1,190
2001 768
2002 379
2003 267
In addition, the Company rents utility poles in its operations generally
under short-term arrangements, but the Company expects these arrangements to
recur. Total rental expense for utility poles was approximately $1,709, $102,
and $24 for the years ended 1998 and 1997, and for the period ended December 31,
1996, respectively.
Legal Proceedings
Management is not aware of any legal proceedings currently that will
have a material adverse impact on the Company's financial statements.
Regulation in the Cable Television Industry
The cable television industry is subject to extensive regulation by
federal, local and, in some instances, state government agencies. The Cable
Television Consumer Protection and Competition Act of 1992 and the Cable
Communication Policy Act of 1984 (collectively, the "Cable Acts"), both of which
amended the Communications Act of 1934 (as amended, the "Communications Act"),
established a national policy to guide the development and regulation of cable
television systems. The Communications Act was recently amended by the
Telecommunications Act of 1996 (the "1996 Telecom Act"). Principal
responsibility for implementing the policies of the Cable Acts and the 1996
Telecom Act has been allocated between the FCC and state or local regulatory
authorities.
Federal Law and Regulation
The Cable Acts and the FCC's rules implementing such acts generally have
increased the administrative and operational expenses of cable television
systems and have resulted in additional regulatory oversight by the FCC and
local or state franchise authorities. The Cable Acts and the corresponding FCC
regulations have established, among other things: (i) rate regulations; (ii)
mandatory carriage and retransmission consent requirements that require a cable
television system under certain circumstances to carry a local broadcast station
or to obtain consent to carry a local or distant broadcast station; (iii) rules
for franchise renewals and transfers; and (iv) other requirements covering a
variety of operational areas such as equal employment opportunity, technical
standards and customer service requirements.
49
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
The 1996 Telecom Act deregulates rates for cable programming services
tiers ("CPST") on March 31, 1999 and, for certain small cable operators,
immediately eliminates rate regulation of CPST, and, in certain limited
circumstances, basic services. The FCC is currently developing permanent
regulations to implement the rate deregulation provisions of the 1996 Telecom
Act. The Company is currently unable to predict the ultimate effect of the Cable
Acts or the 1996 Telecom Act on its financial statements.
The FCC and Congress continue to be concerned that rates for regulated
programming services are rising at a rate exceeding inflation. It is therefore
possible that the FCC will further restrict the ability of cable television
operators to implement rate increases and/or Congress will enact legislation
which would, for example, delay or suspend the scheduled March 1999 termination
of CPST rate regulation.
State and Local Regulation
Cable television systems generally operate pursuant to non-exclusive
franchises, permits or licenses granted by a municipality or other state or
local governmental entity. The terms and conditions of franchises vary
materially from jurisdiction to jurisdiction. A number of states subject cable
television systems to the jurisdiction of centralized state government agencies.
To date, other than Delaware, no state in which the Company currently operates
has enacted state level regulation. The Company cannot predict whether any of
the states in which currently operates will engage in such regulation in the
future.
(12) Disclosures about Fair Value of Financial Instruments:
Debt
The fair value of the Company's debt is estimated based on the current
rates offered to the Company for debt of the same remaining maturities. The fair
value of the senior bank debt and the Seller Note approximates the carrying
value. The fair value at December 31, 1998 of the 8 1/2% Senior Notes was
approximately $204,500.
Interest Rate Exchange Agreements
The fair value of the Swaps is the estimated amount that the Company
would receive or pay to terminate the Swaps, taking into account current
interest rates and the current creditworthiness of the Swap counterparties. At
December 31, 1998, the Company would have paid approximately $1,464 to terminate
the Swaps, inclusive of accrued interest.
(13) FASB 131 - Disclosure about Segments of an Enterprise and Related
Information:
During the fourth quarter of fiscal year 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure about
Segments of an Enterprise and Related Information". This statement requires the
Company to report segment financial information consistent with the
presentations made to the Company's management for decision-making purposes. All
revenues of the Company are derived solely from cable television operations and
related activities. Decision making of the Company's management is based
primarily on consolidated system cash flow, defined as operating income before
management fee expense, and depreciation and amortization. For the years ended
1998 and 1997, and for the period ended December 31, 1996, the Company's
consolidated system cash flow was approximately $59,850, $9,390, and $2,960,
respectively.
(14) Subsequent Events:
On February 26, 1999, Mediacom and Mediacom Capital, a New York
corporation wholly-owned by Mediacom, jointly issued $125,000 aggregate
principal amount of 7 7/8% Senior Notes due on February 15, 2011. The net
proceeds from this offering of approximately $121,900 were used to repay a
substantial portion of outstanding indebtedness under the Company's bank credit
facilities. Interest on the 7 7/8% Senior Notes will be payable semi-annually on
February 15 and August 15 of each year, commencing on August 15, 1999.
50
MEDIACOM LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in 000's)
The Company is regularly presented with opportunities to acquire cable
television systems that are evaluated on the basis of the Company's acquisition
strategy. Although the Company presently does not have any definitive agreements
to acquire or sell any of its cable television systems, it is negotiating with
prospective sellers to acquire additional cable television systems. If
definitive agreements for all such potential acquisitions are executed, and if
such acquisitions are then consummated, the Company's customer base would
approximately double in size. These acquisitions are subject to the negotiation
and completion of definitive documentation, which will include customary
representations and warranties and will be subject to a number of closing
conditions. Financing for these potential transactions has not been determined;
however, if such acquisitions are consummated, the Company believes its total
indebtedness would substantially increase. No assurance can be given that such
definitive documents will be entered into or that, if entered into, the
acquisitions will be consummated.
51
MEDIACOM LLC AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(All dollar amounts in 000's)
Schedule II
Balance at Additions
beginning of charged to costs Balance at
period and expenses Deductions end of period
------------ ---------------- ---------- -------------
December 31, 1996
Allowance for doubtful accounts
Current receivables $ - $ 91 $ 66 $ 25
Acquisition reserves
Accrued expenses $ - $ - $ - $ -
December 31, 1997
Allowance for doubtful accounts
Current receivables $ 25 $ 45 $ 14 $ 56
Acquisition reserves
Accrued expenses $ - $ - $ - $ -
December 31, 1998
Allowance for doubtful accounts
Current receivables $ 56 $ 1,694 $ 1,452 $ 298
Acquisition reserves(1)
Accrued expenses $ - $ 4,120 $ - $ 4,120
- ----------
(1) Addition was charged to intangible asset
52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of Mediacom Capital Corporation:
We have audited the accompanying balance sheet of Mediacom Capital Corporation
as of December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above present fairly, in all
material respects, the consolidated financial position of Mediacom Capital
Corporation as of December 31, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Stamford, Connecticut
March 5, 1999
53
MEDIACOM CAPITAL CORPORATION
BALANCE SHEET
December 31, 1998
ASSETS
------
Note receivable - from affiliate for issuance of common stock $ 100
------
Total assets $ 100
======
LIABILITIES AND OWNER'S EQUITY
------------------------------
Owner's equity
Common stock, par value $0.10; 200 shares authorized;
100 shares issued and outstanding $ 10
Additional paid-in capital 90
------
Total owner's equity $ 100
------
Total liabilities and owner's equity $ 100
======
The accompanying notes to the balance sheet
are an integral part of this statement.
54
MEDIACOM CAPITAL CORPORATION
NOTES TO THE BALANCE SHEET
(All dollar amounts in 000's)
(1) Organization:
Mediacom Capital Corporation ("Mediacom Capital"), a New York
corporation wholly-owned by Mediacom LLC, was organized on March 9, 1998 for the
sole purpose of acting as co-issuer with Mediacom LLC of $200,000 aggregate
principal amount of the 8 1/2% Senior Notes due April 15, 2008. Mediacom Capital
has no operations.
(2) Subsequent Events:
On February 26, 1999, Mediacom LLC and Mediacom Capital jointly issued
$125,000 aggregate principal amount of 7 7/8% Senior Notes due on February 15,
2011. The net proceeds from this offering of approximately $121,900 were used to
repay a substantial portion of outstanding bank debt under the Company's bank
credit facilities. Interest on the 7 7/8% Senior Notes will be payable semi-
annually on February 15 and August 15 of each year, commencing on August 15,
1999.
55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
56
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
The following table sets forth certain information concerning the
executive officers of Mediacom (the "Executive Officers"), none of whom are
compensated by the Company for their respective services to the Company. The
Executive Officers are instead compensated by Mediacom Management which receives
management fees pursuant to management agreements with the Company. All such
Executive Officers hold the same positions in Mediacom Management and the
operating subsidiaries. Mr. Commisso is also the sole manager of Mediacom (the
"Manager") pursuant to the operating agreement of Mediacom, and the President
and sole Director of Mediacom Management and Mediacom Capital. Mr. Stephan is
also the Treasurer and Secretary of Mediacom Capital. Mr. Commisso and Mr.
Stephan are members of the executive committee (the "Executive Committee") of
Mediacom, for which Mr. Commisso acts as Chairman.
Executive Officers
Name Age Position
- ---- --- --------
Rocco B. Commisso 49 Chairman and Chief Executive Officer
Mark E. Stephan 42 Senior Vice President, Chief Financial Officer
and Treasurer
Joseph Van Loan 57 Senior Vice President, Technology
Italia Commisso Weinand 45 Senior Vice President, Programming and
Human Resources and Secretary
John G. Pascarelli 37 Vice President, Marketing
Brian M. Walsh 33 Vice President and Controller
The following table sets forth information concerning persons who hold
key operating management positions with the operating subsidiaries of the
Company.
Field Management
Name Age Position
- ---- --- --------
James M. Carey 47 Senior Vice President, Operations
Arnold Cool 50 Regional Manager, Central Region
Louis Gentile 39 Regional Manager, Western Region
Richard L. Hale 49 Regional Manager, Southern Region
Donald E. Zagorski 39 Regional Manager, Mid-Atlantic Region
Rocco B. Commisso has over 21 years of experience with the cable
television industry and has served as Chairman and Chief Executive Officer since
founding Mediacom in July 1995. From August 1986 to March 1995, Mr. Commisso
served as Executive Vice President, Chief Financial Officer and Director of
Cablevision Industries Corporation ("CVI"). At the time of Mr. Commisso's
arrival, CVI was a regional cable company serving less than 300,000 basic
subscribers in four states. During his tenure, CVI completed 40 acquisitions of
cable television systems with an aggregate value exceeding $1.2 billion. Mr.
Commisso was directly responsible for all aspects of CVI's financing activities,
including the completion of over 35 separate financing transactions with
aggregate capital commitments exceeding $5.0 billion.
Prior to that time, Mr. Commisso served as Senior Vice President of
Royal Bank of Canada's affiliate in the United States from 1981 where he founded
and directed a specialized lending group to manage the bank's lending activities
to media and communications companies. Mr. Commisso began his association with
the cable television industry in 1978 at The Chase Manhattan Bank, where he was
assigned to manage the bank's lending activities to communications firms
including the nascent cable television industry. Mr. Commisso holds a Bachelor
of Science in Industrial Engineering and a Masters of Business Administration
from Columbia University.
57
Mark E. Stephan has 12 years of experience with the cable television
industry and has served as Senior Vice President, Chief Financial Officer and
Treasurer since March 1996. Previously, Mr. Stephan served as Vice President,
Finance for CVI from July 1993 to February 1996. From 1987 to June 1993, he
served as Manager of the telecommunications and media lending group of Royal
Bank of Canada where he engaged in financing activities for the cable
television, wireless telecommunications and diversified media industries. Mr.
Stephan holds a Bachelor of Science in Economics from Colorado State University.
Joseph Van Loan has 23 years of experience in the cable television
industry and has served as Senior Vice President of Technology since November
1996. Previously, Mr. Van Loan served as Senior Vice President of Engineering
for CVI from 1990. From 1988 to 1990, he managed a private telecommunications
consulting practice specializing in domestic and international cable television
and broadcasting. Prior to that time, Mr. Van Loan served as Vice President of
Engineering for Viacom Cable from 1976 to 1988. Mr. Van Loan received the 1986
Vanguard Award for Science and Technology from the National Cable Television
Association. Mr. Van Loan holds a Bachelor of Science in Electrical Engineering
from California State Polytechnic University.
Italia Commisso Weinand has 21 years of experience in the cable
television industry and has served as Senior Vice President of Programming and
Human Resources and Secretary since February 1998. Ms. Weinand joined the
Company in April 1996 as Vice President of Operations. Previously, she served as
System Manager and Regional Manager for Comcast Corporation from July 1985 to
March 1996. Prior to that time, Ms. Weinand held various management positions in
system operations, marketing, customer service, and government relations with
Time Warner Inc., Times Mirror Cable, and Tele-Communications, Inc., beginning
in 1978. Ms. Weinand holds a Bachelor of Science in Marketing from Fordham
University. Ms. Weinand is the sister of Mr. Commisso.
John G. Pascarelli has 19 years of experience in the cable television
industry and joined the Company as Vice President of Marketing in March 1998.
Previously, Mr. Pascarelli served as Vice President of Marketing for Helicon
Corporation from January 1996 to February 1998, and as Corporate and Divisional
Director of Marketing for CVI from November 1988 to December 1995. Mr.
Pascarelli has worked in the cable television industry since 1980 when he joined
Continental Cablevision as a sales manager and thereafter held positions in
sales and marketing with Cablevision Systems Corporation ("Cablevision") and
Storer Communications, Inc..
Brian M. Walsh has 11 years of experience in the cable television
industry and has served as Vice President and Controller since February 1998.
Mr. Walsh joined the Company in April 1996 as Director of Accounting.
Previously, he served as Divisional Business Manager for CVI from January 1994
to December 1995 and as Regional Business Manager for CVI from January 1992 to
December 1993. Mr. Walsh has worked in the cable television industry since 1988
when he joined CVI as a staff accountant. Mr. Walsh holds a Bachelor of Science
in Accounting from Siena College.
James M. Carey has 18 years of experience in the cable television
industry and has served as Senior Vice President of Operations of the Company
since February 1998, and as a consultant to the Company since September 1997.
Previously, Mr. Carey was founder and President of Infinet Results, a consulting
firm to the telecommunications industry, from December 1996 to August 1997.
Prior to that time, Mr. Carey served as Executive Vice President of Operations
at MediaOne Group, Inc. ("MediaOne") from August 1995 to November 1996, where he
was responsible for MediaOne's Atlanta cluster consisting of 500,000 basic
subscribers. From December 1988 to July 1995, he served as Regional Vice
President of CVI's Southern Region serving 180,000 basic subscribers. Mr. Carey
holds a Bachelor of Business Administration in Management from Georgia College.
Arnold Cool has 21 years of experience in the cable television industry
and has served as Regional Manager of the Central Region since September 1998.
Previously, Mr. Cool served as Director of Engineering for the Central Region
from February 1998 to September 1998. Prior to that time, he served as Chief
Engineer from November 1996 to January 1998, and as Technical Supervisor from
April 1993 to October 1996, for Cablevision's cable television systems in
Kentucky and Missouri. Mr. Cool has held various technical and supervisory
responsibilities for Cablevision and for smaller cable television companies
since 1978.
Louis Gentile has 10 years of experience in the cable television
industry and has served as Regional Manager of the Western Region since February
1999. Previously, Mr. Gentile served as Divisional Financial Director for
Mediacom Southeast from February 1998 to January 1999. Prior to that time, he
served as Regional Business Manager for Cablevision from March 1995 to January
1998 and as Business Manager for Cablevision's Florida Systems from January 1992
to February 1995. Mr. Gentile began his career in the cable television industry
in 1989 when he joined MultiVision Cable Television as an accountant. Mr.
Gentile holds a Masters of Business Administration from the
58
Sacred Heart University Graduate School of Business Administration and a
Bachelor of Science in Accounting from Mercy College.
Richard L. Hale has 15 years of experience in the cable television
industry and has served as Regional Manager of the Southern Region since
September 1998. Previously, Mr. Hale served as Regional Manager for the Central
Region from January 1998 to August 1998. Prior to that time, Mr. Hale served as
Regional Manager of Cablevision's Kentucky/Missouri Region from February 1996 to
December 1997, as General Manager of Cablevision's cable television systems in
Arkansas and Missouri from February 1992 to January 1996, and as Regional Sales
and Marketing Director of such systems from 1988 to 1991. Mr. Hale began his
career in the cable television industry in 1984 as Regional Sales and Marketing
Director of Adams-Russell, Inc.
Donald E. Zagorski has 18 years of experience in the cable television
industry and has served as Regional Manager of the Mid-Atlantic Region since
September 1998. Previously, Mr. Zagorski served as General Manager of Mediacom's
Lower Delaware system since June 1997. Prior to that time, he served as System
and Regional Manager for Tele-Media Company from March 1990 to May 1997. From
1981 to 1988, Mr. Zagorski held various technical and supervisory positions with
Outer Banks Cablevision and Group W Cable. Mr. Zagorski holds a Bachelor of Arts
in Business Administration from the State University of New York.
Management and Executive Committee
The operating agreement of Mediacom provides that one Manager shall have
overall management and control of the business and affairs of the Company, and
that Rocco B. Commisso is to serve as the Manager. Mr. Commisso may designate a
corporation or other entity controlled by him to serve as Manager of Mediacom.
The operating agreement provides for the establishment of a five-member
Executive Committee to whom Mr. Commisso, as Manager, is required to report with
respect to certain matters. Approval of the Executive Committee must be obtained
for certain extraordinary actions. Mr. Commisso serves as Chairman of the
Executive Committee and is entitled to designate two additional members, one of
whom may be an employee of Mediacom Management or an operating subsidiary of
Mediacom. The remaining two members of the Executive Committee are designated by
the other member or members of Mediacom having the largest equity holdings. The
Executive Committee's members are Rocco B. Commisso, Mark E. Stephan, Robert L.
Winikoff, William S. Morris III and Craig S. Mitchell. Each member of the
Executive Committee shall serve until a successor is duly elected and duly
qualified.
ITEM 11. EXECUTIVE COMPENSATION
The Company does not make any payments in respect to compensation to any
of its executive officers. Such executive officers receive compensation from
Mediacom Management, which is entitled to receive management fees from the
Company in exchange for providing management services. See Item 13: Certain
----------------
Relationships and Related Transactions.
- --------------------------------------
59
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth as of December 31, 1998, certain information
regarding each of the beneficial owners of membership interests in Mediacom.
Rocco B. Commisso is the only executive officer of the Company owning such
interests. Mediacom Capital, a wholly-owned subsidiary of Mediacom, has no
assets and does not conduct any operations of its own.
Percentage
of Outstanding
Number of Membership
Beneficial Owner Membership Units Interests
---------------- ---------------- --------------
Rocco B. Commisso 14,474.37 9.65%
c/o Mediacom LLC
100 Crystal Run Road
Middletown, NY 10941
Morris Communications Corporation 96,776.25 64.51
725 Broad Street
Augusta, GA 30901
CB Capital Investors, L.P.(1) 14,306.01 9.54
c/o Chase Manhattan Capital Corporation
380 Madison Avenue
New York, NY 10017
U.S. Investor, Inc.(2) 10,379.76 6.92
333 West Fort Street
Detroit, MI 48226
Private Market Fund, L.P. 7,931.33 5.29
c/o Pacific Corporate Group
1200 Prospect Street, Suite 200
La Jolla, CA 92037
BMO Financial 5,682.52 3.79
c/o Bank of Montreal
430 Park Avenue
New York, NY 10022
Other Investors 449.76 0.30
---------- ------
150,000.00 100.00%
========== ======
- ---------
(1) Includes approximately 2.0% in respect of membership interests owned by its
affiliate, Chase Manhattan Capital, L.P.
(2) An affiliate of Booth American Company.
60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Agreements
Separate management agreements with each of the Company's operating
subsidiaries provide for Mediacom Management, which is wholly-owned by Mr.
Commisso, to be paid annual management fees of 5.0% of the first $50.0 million
of annual gross operating revenues of the Company, 4.5% of such revenues in
excess thereof up to $75.0 million, and 4.0% of such revenues in excess of $75.0
million. In 1998, the aggregate amount of management fees paid to Mediacom
Management was approximately $5.8 million.
Transaction Fees and Expense Reimbursement
The operating agreement of Mediacom provides for Mediacom Management to be
paid a fee of 1.0% of the purchase price of acquisitions made by the Company
until the Company's pro forma consolidated annual revenues equal $75.0 million,
and 0.5% of such purchase price thereafter. In 1998, the aggregate amount of
acquisition fees paid to Mediacom Management was approximately $3.3 million.
Other Relationships with Members of Mediacom
Chase Manhattan Capital, L.P. and CB Capital Investors, L.P., which
collectively hold approximately 9.5% of the membership interests in Mediacom,
are affiliates of Chase Securities Inc. and The Chase Manhattan Bank ("Chase").
Chase is the administrative agent and a lender under each of the Company's two
bank credit facilities and has received customary fees for acting in such
capacities. Mediacom repaid promissory notes in the aggregate principal amount
of $20.0 million, which principal amount plus all interest accrued in the
amount of approximately $0.3 million was repaid to Chase in April 1998. In
1998, Chase received fees in the amount of approximately $0.2 million for
providing a letter of credit. Chase Securities Inc. was the initial purchaser
of the 8 1/2% Senior Notes offering and received fees of $5.5 million in 1998 in
connection with such offering. Chase Securities Inc. acted as placement agent
in connection with the placement of membership interests in Mediacom and as
advisory agent in connection with the Company's purchase of the Cablevision
Systems. For such placement and advisory services, Chase Securities Inc.
received fees totaling approximately $3.5 million in 1998.
Morris Communications Corporation, which holds approximately 64.5% of the
membership interests in Mediacom, received fees in 1998 of approximately $2.0
million with respect to its equity contribution to Mediacom.
In connection with the purchase of a cable television system in Kern
County, California from Booth American Company ("Booth"), Mediacom California
issued to Booth, who holds approximately 6.9% of the membership interests in
Mediacom, the Seller Note in the original principal amount of $2.8 million.
Interest is deferred throughout the term of the Seller Note and is payable at
maturity on June 28, 2006. The annual interest rate was 9.0% in 1998. See Note
8 of the Company's audited consolidated financial statements.
61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits, which are numbered in accordance with Item 601 of
Regulation S-K, are filed herewith or, as noted, incorporated by
reference herein:
Exhibit
Number Exhibit Descriptions
------ --------------------
2.1 Asset Purchase and Sale Agreement dated May 23, 1996 between Mediacom California LLC and Booth
American Company.(1)
2.2 Asset Purchase Agreement dated August 29, 1996 between Mediacom LLC and Saguaro Cable TV
Investors, L.P.(1)
2.3 Asset Purchase Agreement dated August 29, 1996 between Mediacom California LLC and Valley Center
Cablesystems, L.P.(1)
2.4 Asset Purchase Agreement dated December 24, 1995 between Mediacom LLC and American Cable TV
Investors 5, Ltd.(1)
2.5 Asset Purchase Agreement dated May 22, 1997 between Mediacom California LLC and CoxCom, Inc.(1)
2.6 Asset Purchase Agreement dated September 18, 1997 between Mediacom California LLC and Jones Cable
Income Fund 1-B/C Venture.(1)
2.7 Asset Purchase Agreement dated August 29, 1997 among Mediacom LLC, U.S. Cable Television Group,
L.P., ECC Holding Corporation, Missouri Cable Partners, L.P. and Cablevision Systems Corporation.(1)
2.8 Asset Purchase Agreement, dated June 24, 1998, among Mediacom
Southeast LLC, Mediacom LLC, Bootheel Video, Inc., and CSC Holdings,
Inc.
3.1(a) Articles of Organization of Mediacom LLC filed July 17, 1995.(1)
3.1(b) Certificate of Amendment of the Articles of Organization of Mediacom
LLC filed December 8, 1995.(1)
3.2 Third Amended and Restated Operating Agreement of Mediacom LLC.(1)
3.4 By-laws of Mediacom Capital Corporation.(1)
3.5 Certificate of Formation of Mediacom Arizona LLC filed September 5, 1996.(1)
3.6 Operating Agreement of Mediacom Arizona LLC.(1)
3.7 Certificate of Formation of Mediacom California LLC filed November 22, 1995.(1)
3.8 Operating Agreement of Mediacom California LLC.(1)
3.9 Certificate of Formation of Mediacom Delaware LLC filed December 27, 1996.(1)
3.10 Operating Agreement of Mediacom Delaware LLC.(1)
3.11 Certificate of Formation of Mediacom Southeast LLC filed August 21,
1997.(1)
62
3.12 Operating Agreement of Mediacom Southeast LLC.(1)
4.1(a) Indenture dated April 1, 1998 among Mediacom LLC, Mediacom Capital
Corporation, and Bank of Montreal Trust Company, as Trustee.(1)
4.1(b) Exchange and Registration Rights Agreement dated April 1, 1998 among Mediacom LLC, Mediacom
Capital Corporation and Chase Securities, Inc.(1)
4.1(c) Purchase Agreement dated March 27, 1998 among Mediacom LLC, Mediacom Capital Corporation, and
Chase Securities, Inc.(1)
4.2(a) Indenture dated February 26, 1999 among Mediacom LLC, Mediacom
Capital Corporation, and Bank of Montreal Trust Company, as
Trustee.
4.2(b) Exchange and Registration Rights Agreement dated February 26, 1999 among Mediacom LLC, Mediacom
Capital Corporation and Chase Securities, Inc.
4.2(c) Purchase Agreement dated February 19, 1999 among Mediacom LLC, Mediacom Capital Corporation,
and Chase Securities, Inc.
10.1 Management Agreement dated as of December 27, 1996 between Mediacom Arizona LLC and Mediacom
Management Corporation.(1)
10.2 First Amended and Restated Management Agreement dated December 27, 1996 between Mediacom
California LLC and Mediacom Management Corporation.(1)
10.3 Management Agreement dated June 24, 1997 between Mediacom Delaware LLC and Mediacom
Management Corporation.(1)
10.4 Management Agreement dated as of January 23, 1998 between Mediacom Southeast LLC and Mediacom
Management Corporation.(1)
10.5(a) Second Amended and Restated Credit Agreement dated June 24, 1997
among Mediacom California LLC, Mediacom Delaware LLC, Mediacom
Arizona LLC, The Chase Manhattan Bank and First Union National
Bank as lenders and managing agents, and various other lenders
.(1)
10.5(b) Amendment No. 1 dated January 23, 1998 among Mediacom California
LLC, Mediacom Delaware LLC, Mediacom Arizona LLC, The Chase
Manhattan Bank and First Union National Bank as lenders and
managing agents, and various other lenders.(1)
10.5(c) Amendment No. 2 dated March 24, 1998 among Mediacom California
LLC, Mediacom Delaware LLC, Mediacom Arizona LLC, The Chase
Manhattan Bank and First Union National Bank as lenders and
managing agents, and various other lenders.(1)
10.5(d) Amendment No. 3 dated July 1, 1998 among Mediacom California LLC,
Mediacom Delaware LLC, Mediacom Arizona LLC, The Chase Manhattan
Bank and First Union National Bank as lenders and managing agents,
and various other lenders.
10.5(e) Amendment No. 4 dated January 26, 1999 among Mediacom California
LLC, Mediacom Delaware LLC, Mediacom Arizona LLC, The Chase
Manhattan Bank and First Union National Bank as lenders and
managing agents, and various other lenders.
10.6(a) Credit Agreement dated January 23, 1998 among Mediacom Southeast
LLC, The Chase Manhattan Bank as lender and administrative agent,
and various other lenders.(1)
10.6(b) Amendment No. 1 dated March 24, 1998 among Mediacom Southeast LLC, The Chase Manhattan Bank
as lender and administrative agent, and various other lenders.(1)
63
10.6(c) Amendment No. 2 dated July 1, 1998 among Mediacom Southeast LLC,
The Chase Manhattan Bank as lender and administrative agent, and
various other lenders.
10.6(d) Amendment No. 3 dated January 26, 1999 among Mediacom Southeast
LLC, The Chase Manhattan Bank as lender and administrative agent,
and various other lenders.
12.1 Schedule of Earnings to Fixed Charges.
21.1 Subsidiaries of Mediacom LLC.(1)
27.1 Financial Data Schedule.
(b) Financial Statement Schedule
None.
(c) Reports on Form 8-K
None.
(1) Such Exhibits were filed with the Company's Registration Statement on Form
S-4 (File No. 333-57285) and is incorporated herein by reference
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MEDIACOM LLC
March 31, 1999 By: /s/ Rocco B. Commisso
-----------------------
Rocco B. Commisso
Manager, 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.
Signature Title Date
--------- ----- ----
/s/ Rocco B. Commisso Manager, Chairman and Chief March 31, 1999
- ---------------------------------------------------- Executive Officer (principal
Rocco B. Commisso executive officer)
/s/ Mark E. Stephan Senior Vice President, March 31, 1999
- ---------------------------------------------------- Chief Financial Officer and
Mark E. Stephan Treasurer (principal
financial officer and
principal accounting officer)
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MEDIACOM CAPITAL CORPORATION
March 31, 1999 By: /s/ Rocco B. Commisso
------------------------
Rocco B. Commisso
President, Chief Executive Officer,
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Rocco B. Commisso Chief Executive Officer, March 31, 1999
- ---------------------------------------------------- President and Director
Rocco B. Commisso (principal executive officer)
/s/ Mark E. Stephan Treasurer and Secretary March 31, 1999
- ---------------------------------------------------- (principal financial officer
Mark E. Stephan and principal accounting
officer)
66