UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 28, 2006
MEDIACOM BROADBAND LLC
MEDIACOM BROADBAND CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 333-72440 06-1615412
Delaware 333-72440-01 06-1630167
(State of incorporation (Commission File Nos.) (IRS Employer Identification Nos.)
or organization)
100 Crystal Run Road
Middletown, New York 10941
(Address of principal executive offices)
Registrants' telephone number: (845) 695-2600
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the Registrants under any of the
following provisions:
|_| Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 7.01. Regulation FD Disclosure.
Disclosure of Certain Items in a Preliminary Offering Memorandum
Set forth below is an excerpt of certain items included in a
preliminary offering memorandum relating to a proposed offering of senior notes
by Mediacom Broadband LLC and Mediacom Broadband Corporation, wholly-owned
subsidiaries of Mediacom Communications Corporation.
RISK FACTORS
An investment in the notes involves a high degree of risk. You should
carefully consider the risk factors set forth below, as well as other
information appearing elsewhere in this offering memorandum and the incorporated
documents, before making an investment in the notes.
RISKS RELATED TO OUR BUSINESS
WE HAVE SUBSTANTIAL EXISTING DEBT AND HAVE SIGNIFICANT INTEREST PAYMENT
REQUIREMENTS, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO OBTAIN FINANCING IN
THE FUTURE AND REQUIRE OUR OPERATING SUBSIDIARIES TO APPLY A SUBSTANTIAL PORTION
OF THEIR CASH FLOW TO DEBT SERVICE.
We have now and after the closing of this offering will continue to have a
substantial amount of debt. As of June 30, 2006, after giving pro forma effect
to this offering and our redemption of our 11% senior notes due 2013 (and a
related borrowing transaction), we would have had approximately $1,583.7 million
of debt outstanding reflected on our consolidated balance sheet (including
approximately $1,183.7 million of debt of our subsidiaries), and our
subsidiaries would have had approximately $480.9 million of unused credit
commitments under the revolving credit portion of the subsidiary credit
facility, of which approximately $343.0 million could be borrowed and used for
general corporate purposes based on the terms and conditions of our debt
arrangements.
On a pro forma basis, assuming that this offering and the application of
the proceeds therefrom had occurred at June 30, 2006, our ratio of earnings to
fixed charges would have resulted in a deficiency of earnings over fixed charges
of approximately $846,000 for the six months ended June 30, 2006. The ratio of
earnings to fixed charges is often used by investors to evaluate a company's
capital structure and its ability to make payments on its debt.
Subject to restrictions in our subsidiary credit facility and the indenture
governing the notes offered hereby, we may incur significant amounts of
additional debt for working capital, capital expenditures, acquisitions and
other purposes.
Our high level of combined debt could have important consequences for you,
including the following:
- Our ability to access new sources of financing for working capital,
capital expenditures, acquisitions or other purposes may be limited;
- We will need to use a large portion of our revenues to pay interest on
borrowings under our subsidiary credit facility and the notes, which will
reduce the amount of money available to finance our operations, capital
expenditures and other activities;
- Some of our debt has a variable rate of interest, which may expose us to
the risk of increased interest rates;
- We may be more vulnerable to economic downturns and adverse developments
in our business;
- We may be less flexible in responding to changing business and economic
conditions, including increased competition and demand for new products
and services;
- We may be at a disadvantage when compared to our competitors that have
less debt; and
- We may not be able to implement our business strategy.
A DEFAULT UNDER THE INDENTURE GOVERNING THE NOTES OR UNDER OUR SUBSIDIARY CREDIT
FACILITY COULD RESULT IN AN ACCELERATION OF OUR INDEBTEDNESS AND OTHER MATERIAL
ADVERSE EFFECTS.
The agreements and instruments governing our own and our subsidiaries'
indebtedness contain numerous financial and operating covenants. The breach of
any of these covenants could cause a default, which could result in the
indebtedness becoming immediately due and payable. If this were to occur, we
would be unable to adequately finance our operations. In addition, a default
could result in a default or acceleration of our other indebtedness subject to
cross-default provisions. If this occurs, we may not be able to pay our debts or
borrow sufficient funds to refinance them. Even if new financing is available,
it may not be on terms that are acceptable to us. The membership interests of
our operating subsidiaries are pledged as collateral under our subsidiary credit
facility. A default under our subsidiary credit facility could result in a
foreclosure by the lenders on the membership interests pledged under
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that facility. Because we are dependent upon our operating subsidiaries for all
of our revenues, a foreclosure would have a material adverse effect on our
business, financial condition and results of operations.
OUR SUBSIDIARY CREDIT FACILITY IMPOSES SIGNIFICANT RESTRICTIONS.
Our subsidiary credit facility contains covenants that restrict our
subsidiaries' ability to:
- distribute funds or pay dividends to us;
- incur additional indebtedness or issue additional equity;
- repurchase or redeem equity interests and indebtedness;
- pledge or sell assets or merge with another entity;
- create liens; and
- make certain capital expenditures, investments or acquisitions.
The ability of our subsidiaries to comply with these provisions may be
affected by events beyond our control. If they were to breach any of these
covenants, they would be in default under the credit facilities and they would
be prohibited from making distributions to us.
Under certain circumstances, lenders could elect to declare all amounts
borrowed under our subsidiary credit facility, together with accrued interest
and other fees, to be due and payable. If that occurred, our obligations under
the existing senior notes and the notes could also become payable immediately.
Under such circumstances, we may not be able to repay such amounts or the senior
notes.
THE TERMS OF OUR INDEBTEDNESS COULD MATERIALLY LIMIT OUR FINANCIAL AND OPERATING
FLEXIBILITY.
Several of the covenants contained in the agreements and instruments
governing our own and our subsidiaries' indebtedness could materially limit our
financial and operating flexibility by restricting, among other things, our
ability and the ability of our operating subsidiaries to:
- incur additional indebtedness;
- create liens and other encumbrances;
- pay dividends and make other payments, investments, loans and guarantees;
- enter into transactions with related parties;
- sell or otherwise dispose of assets and merge or consolidate with another
entity;
- repurchase or redeem capital stock, other equity interests or debt;
- pledge assets; and
- issue capital stock or other equity interests.
Complying with these covenants could cause us to take actions that we
otherwise would not take or cause us not to take actions that we otherwise would
take.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO CONTINUE THE DEVELOPMENT OF
OUR BUSINESS.
We have invested substantial capital for the upgrade, expansion and
maintenance of our cable systems and the launch and expansion of new or
additional products and services. While we have completed our planned system
upgrades, if there is accelerated growth in our video, HSD and voice products
and services, or we decide to introduce other new advanced products and
services, or the cost to provide these products and services increases, we may
need to make unplanned additional capital expenditures. We may not be able to
obtain the funds necessary to finance additional capital requirements through
internally generated funds, additional borrowings or other sources. If we are
unable to obtain these funds, we would not be able to implement our business
strategy and our results of operations would be adversely affected.
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IF WE ARE UNSUCCESSFUL IN IMPLEMENTING OUR GROWTH STRATEGY, OUR BUSINESS AND
RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
We currently expect that a substantial portion of our future growth in
revenues will come from the expansion of relatively new services, the
introduction of additional new services, and, possibly, acquisitions. Relatively
new services include HSD, VOD, DVRs, HDTV and phone services. We may not be able
to successfully expand existing services due to unpredictable technical,
operational or regulatory challenges. It is also possible that these services
will not generate significant revenue growth.
OUR PROGRAMMING COSTS ARE INCREASING, AND OUR BUSINESS AND RESULTS OF OPERATIONS
WILL BE ADVERSELY AFFECTED IF WE CANNOT PASS THROUGH A SUFFICIENT PART OF THE
ADDITIONAL COSTS TO VIDEO SUBSCRIBERS.
In recent years, the cable and satellite video industries have experienced
a rapid increase in the cost of programming, particularly sports programming.
Increases in programming costs, our largest single expense item, are expected to
continue, and we may not be able to pass on all of these cost increases to our
video subscribers. In addition, as we add programming, we may not be able to
pass on all of the costs of this additional programming without the potential
loss of video subscribers. To the extent that we may not be able to pass on
increased programming costs, our business, financial condition and results of
operations could be adversely affected.
We also are and expect to continue to be subject to increasing financial
and other demands by broadcasters to obtain the required consents for the
transmission of their programming to our subscribers. We cannot predict the
impact of these negotiations on our business and results of operations or the
effect on our subscribers should we be required to suspend the carriage of any
portion of this programming.
A substantial number of local broadcast stations carried by our cable
television systems have elected to negotiate for retransmission consent, and we
have successfully negotiated retransmission consent agreements with most of
them.
Cable systems serving approximately half of our subscribers carry local
broadcast stations owned or programmed by Sinclair Broadcast Group, Inc. under a
month-to-month retransmission arrangement terminable at the end of any month on
45-days notice. All of these stations are affiliates of one of the "big-4"
networks, ABC, CBS, FOX and NBC. In negotiations with our manager for a longer-
term retransmission consent agreement, Sinclair is seeking compensation that we
believe to be in excess of what is appropriate, although the amount is not
material to our results of operations or financial condition. Sinclair has
threatened to give us notice, on or before October 15, 2006, to terminate
retransmission of all of its stations effective December 1, 2006.
While negotiations have narrowed the gap between Sinclair and us, we have
not yet reached agreement. We cannot predict if or when Sinclair may give us
notice to cease carrying any of its stations or, if it does, whether we will be
able to reach a new agreement before our systems actually have to cease
carriage. If there is an actual termination of carriage, we are unable to
predict how many of our subscribers might switch to direct broadcast service
providers that carry the Sinclair stations as the result of marketing campaigns
launched by those providers or Sinclair; however, a permanent loss of a
significant number of subscribers could adversely affect our results of
operations, financial condition and prospects.
WE OPERATE IN A HIGHLY COMPETITIVE BUSINESS ENVIRONMENT, WHICH AFFECTS OUR
ABILITY TO ATTRACT AND RETAIN CUSTOMERS AND CAN ADVERSELY AFFECT OUR BUSINESS
AND OPERATIONS. WE HAVE LOST A SIGNIFICANT NUMBER OF VIDEO SUBSCRIBERS TO DIRECT
BROADCAST SATELLITE COMPETITION, AND FURTHER LOSS OF VIDEO SUBSCRIBERS COULD
HAVE A MATERIAL NEGATIVE IMPACT ON OUR BUSINESS.
The industry in which we operate is highly competitive and is often subject
to rapid and significant changes and developments in the marketplace and in the
regulatory and legislative environment. In some instances, we compete against
companies with fewer regulatory burdens, easier access to financing, greater
resources and operating capabilities, greater brand name recognition and long-
standing relationships with regulatory authorities and customers.
Our video business faces competition primarily from DBS providers. The two
largest DBS companies, DIRECTV, Inc. and EchoStar Communications, are each among
the four largest providers of multichannel video
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programming services based on reported customers. In addition, DIRECTV's
affiliation with News Corporation could strengthen that company's competitive
positioning, as News Corporation also owns Fox Television Network and several
cable programming services. Liberty Media Corporation may acquire ownership and
control of DIRECTV. Liberty Media Corporation also has sole or significant
ownership interests in a number of cable programming services. DBS has grown
rapidly over the past several years and continues to do so. We have lost a
significant number of video subscribers to DBS competition, and will continue to
face significant challenges from DBS providers.
Local telephone companies are capable of offering video and other services
in competition with us and they may increasingly do so in the future. Certain
telephone companies have begun to deploy fiber more extensively in their
networks, and some have begun to deploy broadband services, including video
services, and in certain cases avoiding the regulatory burdens imposed on us.
These deployments enable them to provide enhanced video, telephone and Internet
access services to consumers. New laws or regulations at the federal or state
level may clarify, modify or enhance the ability of the local telephone
companies to provide their services either without obtaining state or local
cable franchises or to obtain such franchises under terms and conditions more
favorable than those imposed on us. Several states have enacted such statues
that allow local telephone companies or other competitors to deliver services in
competition with our cable service without obtaining equivalent local
franchises. If local telephone companies are not required to obtain comparable
local franchises, our business, financial condition and results of operations
could be adversely affected.
Certain telephone companies, together with DBS providers, have launched
bundled offerings of satellite delivered video service with phone, Internet and
wireless service delivered by the telephone companies.
We face growing competition from municipal entities that construct
facilities and provide cable television, HSD, telephony and/or other related
services. In addition to hard-wired facilities, some municipal entities are
exploring building wireless networks to deliver these services. In Iowa, our
largest market, an organization named Opportunity Iowa began in early 2004 to
actively encourage Iowa municipalities to construct facilities that could be
used to provide services that compete with the services we offer. Referenda were
on the November 2005 ballot in thirty-two municipalities to authorize the
formation of a communications utility, a prerequisite to funding and
construction of facilities that may compete with ours. Referenda were
successfully passed in seventeen of those communities. In many of the
communities that passed a referendum, proponents and officials publicly stated
that a second vote would be taken prior to any actual construction or funding of
a competitive system, and only after a preliminary cost benefit analysis is
undertaken. Other Iowa communities may also hold elections to authorize the
creation of a telecommunications utility in their communities. Proponents or
officials in those communities may not take the same approach with regard to a
second vote before construction or funding or a cost-benefit analysis.
We also face competition from over-the-air television and radio
broadcasters and from other communications and entertainment media such as movie
theaters, live entertainment and sports events, newspapers and home video
products. Further losses of customers to DBS or other alternative video and HSD
services could also have a material adverse effect on our business, financial
condition and results of operations.
Competition in our HSD business primarily comes from telephone companies
and other providers of "dial-up" and DSL which already have telephone lines into
the household. DSL service is competitive with HSD service over cable systems.
In addition, certain DBS providers are currently offering two-way broadband data
access services, which compete with our ability to offer bundled services to our
customers.
Our HSD business may also face competition in the future from registered
utility holding companies and subsidiaries. In 2004, the Federal Communications
Commission ("FCC") adopted rules: (i) that affirmed the ability of electric
service providers to provide broadband Internet access services over their
distribution systems; and (ii) that seek to avoid interference with existing
services. Electric utilities could be formidable competitors to us.
Some of our competitors, including franchised, wireless or private cable
operators, DBS providers and local exchange carriers, may benefit from permanent
or temporary business combinations such as mergers, joint ventures and alliances
and the potential repeal of certain ownership rules, either through access to
financing, resources or efficiencies of scale, or the ability to provide
multiple services in direct competition with us. Some of our present or
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future competitors may have greater financial resources or, through their
affiliates, greater access to programming or other services, than we do.
IF WE ARE UNABLE TO KEEP PACE WITH TECHNOLOGICAL CHANGE, OUR BUSINESS AND
RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
Our industry is characterized by rapid technological change and the
introduction of new products and services. We cannot assure you that we will be
able to fund the capital expenditures necessary to keep pace with future
technological developments. We also cannot assure you that we will successfully
anticipate the demand of our customers for products and services requiring new
technology. This type of rapid technological change could adversely affect our
ability to maintain, expand or upgrade our systems and respond to competitive
pressures. An inability to keep pace with technological change and provide
advanced services in a timely manner, or to anticipate the demands of the market
place, could adversely affect our ability to compete and business, financial
condition and results of operations
OUR PHONE SERVICE WAS LAUNCHED IN 2005, AND CONSEQUENTLY, WE FACE NEW RISKS AND
UNCERTAINTIES AS WE SCALE THIS BUSINESS.
In June 2005, we launched Mediacom Phone in one of our smaller markets, and
by year-end 2005, our phone service was marketed to approximately 1.2 million of
our total estimated 1.5 million homes. We have limited operating experience with
our phone service, and managing its growth may present significant challenges
for us. We may encounter difficulties introducing Mediacom Phone in new markets
or increasing the scale of markets already launched. If our phone service is not
sufficiently reliable or we otherwise fail to meet customer expectations, our
business could be adversely affected. We face intense competition in offering
phone service, primarily from local telephone companies. We also depend on third
parties for interconnection, call switching, and other related services to
operate Mediacom Phone. As a result, the quality of our service may suffer if
these third parties are not capable of handling their responsibilities. We also
expect to see changes in technology, competition, and the regulatory and
legislative environment that may affect our phone business. Consequently, we are
unable to predict the effect that current or future developments in these areas
might have on our phone business.
IF OUR MANAGER WERE TO LOSE KEY PERSONNEL, OUR BUSINESS WOULD BE ADVERSELY
EFFECTED.
If any of our manager's key personnel ceases to participate in our business
and operations, our profitability could suffer. Our success is substantially
dependent upon the retention of, and the continued performance by, our manager's
key personnel, including Rocco B. Commisso, the Chairman and Chief Executive
Officer of our manager. Our manager has not entered into a long-term employment
agreement with Mr. Commisso. Neither our manager nor we currently maintain key
man life insurance on Mr. Commisso or other key personnel.
WE DEPEND ON OUR MANAGER FOR THE PROVISION OF ESSENTIAL MANAGEMENT FUNCTIONS.
We do not have separate senior management and are dependent on our manager
for the operation of our business. Our manager also manages Mediacom LLC's
operating subsidiaries. Following our acquisitions of the AT&T cable systems,
the number of customers served by the cable systems managed by our manager
increased significantly and our manager continues to devote a significant
portion of its personnel and other resources to the management of Mediacom LLC's
cable systems. As a result, the attention of our manager's senior executive
officers may be diverted from the management of our cable systems and the
allocation of resources between our cable systems and Mediacom LLC's cable
systems could give rise to conflicts of interest.
The successful execution of our business strategy depends on the ability of
our manager to efficiently manage our cable systems. If our manager were to
experience any material adverse change in its business, the risks described in
this risk factor could intensify and our business, financial condition and
results of operations could be materially adversely affected. In addition, we
are also dependent on our manager to operate Mediacom LLC's cable systems
effectively in order to enable us to achieve operating synergies, such as the
joint purchasing of programming. Mediacom LLC's operating subsidiaries have
substantial indebtedness that, among other things, could make our
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manager more vulnerable to economic downturns and to adverse developments in its
business. Although our manager charged management fees to our operating
subsidiaries in an amount equal to 2.0% of our gross operating revenues for the
year ended December 31, 2005, we cannot assure you that it will not exercise its
right under its management agreements with our operating subsidiaries to
increase the management fees, which under such agreements may not exceed 4.0% of
each subsidiary's gross operating revenues.
THE CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF OUR MANAGER HAS THE ABILITY TO
CONTROL ALL MAJOR DECISIONS, AND A SALE OF HIS STOCK IN OUR MANAGER COULD RESULT
IN A CHANGE OF CONTROL THAT WOULD HAVE UNPREDICTABLE EFFECTS.
Rocco B. Commisso, the Chairman and Chief Executive Officer of our manager,
beneficially owned common stock of our manager representing approximately 76.4%
of the combined voting power of all of its common stock as of December 31, 2005.
As a result, Mr. Commisso generally has the ability to control the outcome of
all matters requiring approval by stockholders of our manager, including the
election of its entire board of directors, and Mr. Commisso may be deemed to
control our company.
We cannot assure you that Mr. Commisso will maintain all or any portion of
his ownership in our manager or that he would continue as an officer or director
of our manager if he sold a significant part of his stock. The disposition by
Mr. Commisso of a sufficient number of his shares of our manager's stock could
result in a change in control of our manager and of us, and we cannot assure you
that a change of control would not adversely affect our business, financial
condition or results of operations. In addition, a change of control (as defined
in our bank credit facility) would result in a default under our bank credit
facility.
WE MAY NOT BE ABLE TO OBTAIN CRITICAL ITEMS AT A REASONABLE COST OR WHEN
REQUIRED, WHICH COULD ADVERSELY AFFECT BUSINESS, FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
We depend on third-party suppliers for equipment, software, services and
other items that are critical for the operation of our cable systems and the
provision of advanced services, including digital set-top converter boxes,
digital video recorders and routers, fiber-optic cable, telephone circuits,
software, the "backbone" telecommunications network for our high-speed data
service and construction services for expansion and upgrades of our cable
systems. In certain cases, these items are available from a limited number of
suppliers. Demand for these items has increased with the general growth in
demand for Internet and telecommunications services. We typically do not carry
significant inventories of equipment. Moreover, if there are no suppliers that
are able to provide set-top converter boxes that comply with evolving Internet
and telecommunications standards or that are compatible with other equipment and
software that we use, our business, financial condition and results of
operations could be materially adversely affected. If we are unable to obtain
critical equipment, software, communications or other services on a timely basis
and at an acceptable cost, our ability to offer our products and services and
roll out advanced services may be impaired, and our business, financial
condition and results of operations could be materially adversely affected.
RISKS RELATED TO LEGISLATIVE AND REGULATORY MATTERS
CHANGES IN CABLE TELEVISION REGULATIONS COULD ADVERSELY IMPACT OUR BUSINESS.
The cable television industry is subject to extensive legislation and
regulation at the federal and local levels, and, in some instances, at the state
level. Many aspects of such regulation are currently the subject of judicial and
administrative proceedings and legislative and administrative proposals, and
lobbying efforts by us and our competitors. We expect that court actions and
regulatory proceedings will continue to refine our rights and obligations under
applicable federal, state and local laws. The results of these judicial and
administrative proceedings and legislative activities may materially affect our
business operations.
Local authorities grant us non-exclusive franchises that permit us to
operate our cable systems. We renew or renegotiate these franchises from time to
time. Local franchising authorities may demand concessions, or other
commitments, as a condition to renewal, and these concessions or other
commitments could be costly. The Cable Communications Policy Act of 1984
("Communications Act") contains renewal procedures and criteria designed to
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protect incumbent franchisees against arbitrary denials of renewal, and although
such Act requires the local franchising authorities to take into account the
costs of meeting such concessions or commitments, there is no assurance that we
will not be compelled to meet their demands in order to obtain renewals. We
cannot predict whether any of the markets in which we operate will expand the
regulation of our cable systems in the future or the impact that any such
expanded regulation may have upon our business.
Similarly, due to the increasing popularity and use of commercial online
services and the Internet, certain aspects have become subject to regulation at
the federal and state level such as collection of information online from
children, disclosure of certain subscriber information to governmental agencies,
commercial emails or "spam," privacy, security and distribution of material in
violation of copyrights. In addition to the possibility that additional federal
laws and regulations may be adopted with respect to commercial online services
and the Internet, several individual states have imposed such restrictions and
others may also impose similar restrictions, potentially creating an intricate
patchwork of laws and regulations. Future federal and/or state laws may cover
such issues as privacy, access to some types of content by minors, pricing,
encryption standards, consumer protection, electronic commerce, taxation of e-
commerce, copyright infringement and other intellectual property matters.
Recently, many states in which we operate have enacted laws requiring us to
notify customers in the event that certain customer information is accessed or
believed to have been accessed without authorization. The adoption of such laws
or regulations in the future may decrease the growth of such services and the
Internet, which could in turn decrease the demand for our cable modem service,
increase our costs of providing such service or have other adverse effects on
our business, financial condition and results of operations. Such laws or
regulations may also require disclosure of failures of our procedures or
breaches to our system by third parties, which can increase the likelihood of
claims against us by affected subscribers.
CHANGES IN CHANNEL CARRIAGE REGULATIONS COULD IMPOSE SIGNIFICANT ADDITIONAL
COSTS ON US.
Cable operators face significant regulation of their channel carriage.
Currently, they can be required to devote substantial capacity to the carriage
of programming that they might not carry voluntarily, including certain local
broadcast signals, local public, educational and government access programming,
and unaffiliated commercial leased access programming. If the FCC or Congress
were to require cable systems to carry both the analog and digital versions of
local broadcast signals or to carry multiple program streams included with a
single digital broadcast transmission, this carriage burden would increase
substantially. Recently, the FCC reaffirmed that cable operators need only carry
one programming service of each television broadcaster to fulfill its must-carry
obligation, however, changes in the composition of the FCC as well as proposals
currently under consideration could result in an obligation to carry both the
analog and digital version of local broadcast stations and/or to carry multiple
digital program streams. Further, this decision has been appealed to the D.C.
Circuit Court of Appeals.
Reversing the findings of a November 2004 report, the FCC released a report
in February 2006, finding that consumers could benefit under certain a la carte
models for delivery of video programming. The report did not specifically
recommend or propose the adoption of any specific rules by the FCC and it did
not endorse a pure a la carte model where subscribers could purchase specific
channels without restriction. Instead, it favored tiers plus individual channels
or smaller theme-based tiers. Shortly after release of the report, the FCC voted
to seek additional information as to whether cable systems with at least 36
channels are available to at least 70 percent of U.S. homes and whether 70
percent of households served by those systems subscribe. If so, the FCC may have
discretion under the Cable Act to promulgate additional rules necessary to
promote diversity of information sources. The FCC did not specify what rules it
would seek to promulgate, however, the Chairman of the FCC has expressed support
for family-friendly tiers of programming and availability of programming on an a
la carte basis. Certain cable operators have responded by creating "family-
friendly" programming tiers. It is not certain whether those efforts will
ultimately be regarded as a sufficient response. Congress may also consider
legislation regarding programming packaging, bundling or a-la-carte delivery of
programming. Any such requirements could fundamentally change the way in which
we package and price our services. We cannot predict the outcome of any current
or future FCC proceedings or legislation in this area, or the impact of such
proceedings on our business at this time.
Recently, the FCC imposed "reciprocal" good faith retransmission consent
negotiation obligations on cable operators and broadcasters. These rules
identify seven types of conduct that would constitute "per se" violations of
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the new requirements. Thus, even though we may have no interest in carrying a
particular broadcaster's programming, we may be required under the new rules to
engage in negotiations within the parameters of the FCC's rules. While noting
that the parties in retransmission consent negotiations were now subject to a
"heightened duty of negotiation," the FCC emphasized that failure to ultimately
reach an agreement is not a violation of the rules. The impact of these rules on
our business cannot be determined at this time.
OUR FRANCHISES ARE NON-EXCLUSIVE AND LOCAL FRANCHISING AUTHORITIES MAY GRANT
COMPETING FRANCHISES IN OUR MARKETS, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
Our cable systems are operated under non-exclusive franchises granted by
local franchising authorities. As a result, competing operators of cable systems
and other potential competitors, such as municipal utility providers, may be
granted franchises and may build cable systems in markets where we hold
franchises. Some may not require local franchises at all, such as certain
municipal utility providers. Any such competition could adversely affect our
business. The existence of multiple cable systems in the same geographic area is
generally referred to as an "overbuild." As of June 30, 2006, approximately
12.4% of the estimated homes passed by our cable systems were overbuilt by other
cable operators. We cannot assure you that competition from overbuilders will
not develop in other markets that we now serve or will serve after any future
acquisitions.
Legislation was recently passed in several states and similar legislation
is pending, or has been proposed in certain other states and in Congress, to
allow local telephone companies to deliver services in competition with our
cable service without obtaining equivalent local franchises. Such a
legislatively granted advantage to our competitors could adversely affect our
business. The effect of such initiatives, if any, on our obligation to obtain
local franchises in the future or on any of our existing franchises, many of
which have years remaining in their terms, cannot be predicted.
The FCC recently issued a Notice of Proposed Rulemaking seeking comment on
whether the current local franchising process constitutes an impediment to
widespread issuance of franchises to competitive cable providers in terms of the
sheer number of franchising authorities, the impact of state-level franchising
authorities, the burdens some local franchising authorities seek to impose as
conditions of granting franchises and whether state "level-playing field"
statutes also create barriers to entry. We cannot determine the outcome of any
potential new rules on our business; however, any change that would lessen the
local franchising burdens and requirements imposed on our competitors relative
to those that are or have been imposed on us could harm our business.
THE FCC MAY NOT DELAY AND WE MIGHT NOT BE ABLE TO OBTAIN A WAIVER OF THE JULY 1,
2007 DEADLINE TO DEPLOYMENT OF NEW SET-TOP BOXES WITH INTEGRATED SECURITY.
Over a multi-year phase-in period, FCC rules require multichannel video
programming distributors, other than direct broadcast satellite operators, to
separate security from non-security functions in set-top converters to allow
third party vendors to provide set-tops with basic converter functions.
Beginning July 1, 2007, cable operators will be prohibited from deploying and
leasing new digital set-top terminals that integrate security and basic
navigation functions. In August 2006, the D.C. Court of Appeals denied the cable
industry's appeal of this integration ban. The National Cable and
Telecommunications Association has filed a waiver request with the FCC for all
cable operators requesting a delay of the integration ban until after the 2009
digital transition. The success of this waiver request cannot be predicted. If
we are required to stop deploying certain set-top devices and either have a
substantial inventory of undeployed new digital devices and/or replacement
digital devices that separate security from basic navigation functions are not
readily commercially available in sufficient quantities or at commercially
reasonable prices, enforcement of this deadline could have a negative financial
effect.
PENDING FCC AND COURT PROCEEDINGS COULD ADVERSELY AFFECT OUR HSD SERVICE.
The legal and regulatory status of providing high-speed Internet access
service by cable television companies is uncertain. Although the United States
Supreme Court recently held that cable modem service was properly classified by
the FCC as an "information service," freeing it from regulation as a
"telecommunications service," it recognized that the FCC has jurisdiction to
impose regulatory obligations on facilities based Internet Service
12
Providers. The FCC has an ongoing rulemaking to determine whether to impose
regulatory obligations on such providers, including us. The FCC has issued a
declaratory ruling that cable modem service, as it is currently offered, is
properly classified as an interstate information service that is not subject to
common carrier regulation. However, the FCC is still considering the following:
whether to require cable companies to provide capacity on their systems to other
entities to deliver high-speed Internet directly to customers, also known as
open access; whether certain other regulatory requirements do or should apply to
cable modem service; and whether and to what extent cable modem service should
be subject to local franchise authorities' regulatory requirements or franchise
fees. The adoption of new rules by the FCC could place additional costs and
regulatory burdens on us, reduce our anticipated revenues or increase our
anticipated costs for this service, complicate the franchise renewal process,
result in greater competition or otherwise adversely affect our business. While
we cannot predict the outcome of this proceeding, we do note that the FCC
recently removed the requirement that telecommunications carriers provide access
to competitors to resell their DSL Internet access service citing the need for
competitive parity with cable modem service which has no similar access
requirement.
WE MAY BE SUBJECT TO LEGAL LIABILITY BECAUSE OF THE ACTS OF OUR HSD CUSTOMERS OR
BECAUSE OF OUR OWN NEGLIGENCE.
Our HSD service enables individuals to access the Internet and to exchange
information, generate content, conduct business and engage in various online
activities on an international basis. The law relating to the liability of
providers of these online services for activities of their users is currently
unsettled both within the United States and abroad. Potentially, third parties
could seek to hold us liable for the actions and omissions of our cable modem
service customers, such as defamation, negligence, copyright or trademark
infringement, fraud or other theories based on the nature and content of
information that our customers use our service to post, download or distribute.
We also could be subject to similar claims based on the content of other
Websites to which we provide links or third-party products, services or content
that we may offer through our Internet service. Due to the global nature of the
Web, it is possible that the governments of other states and foreign countries
might attempt to regulate its transmissions or prosecute us for violations of
their laws.
It is also possible that information provided directly by us will contain
errors or otherwise be negligently provided to users, resulting in third parties
making claims against us. For example, we offer Web-based email services, which
expose us to potential risks, such as liabilities or claims resulting from
unsolicited email, lost or misdirected messages, illegal or fraudulent use of
email, or interruptions or delays in email service. Additionally, we host
website "portal pages" designed for use as a home page by, but not limited to,
our HSD customers. These portal pages offer a wide variety of content from us
and third parties which could contain errors or other material that could give
rise to liability.
To date, we have not been served notice that such a claim has been filed
against us. However, in the future someone may serve such a claim on us in
either a domestic or international jurisdiction and may succeed in imposing
liability on us. Our defense of any such actions could be costly and involve
significant distraction of our management and other resources. If we are held or
threatened with significant liability, we may decide to take actions to reduce
our exposure to this type of liability. This may require us to spend significant
amounts of money for new equipment and may also require us to discontinue
offering some features or our cable modem service.
Since we launched our proprietary Mediacom Online service in February 2002,
from time to time, we receive notices of claimed infringements by our cable
modem service users. The owners of copyrights and trademarks have been
increasingly active in seeking to prevent use of the Internet to violate their
rights. In many cases, their claims of infringement are based on the acts of
customers of an Internet service provider -- for example, a customer's use of an
Internet service or the resources it provides to post, download or disseminate
copyrighted music, movies, software or other content without the consent of the
copyright owner or to seek to profit from the use of the goodwill associated
with another person's trademark. In some cases, copyright and trademark owners
have sought to recover damages from the Internet service provider, as well as or
instead of the customer. The law relating to the potential liability of Internet
service providers in these circumstances is unsettled. In 1996, Congress adopted
the Digital Millennium Copyright Act, which is intended to grant ISPs protection
against certain claims of copyright infringement resulting from the actions of
customers, provided that the ISP complies with certain requirements. So far,
Congress has not adopted similar protections for trademark infringement claims.
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WE MAY BE REQUIRED TO PROVIDE ACCESS TO OUR NETWORKS TO OTHER INTERNET SERVICE
PROVIDERS, WHICH COULD SIGNIFICANTLY INCREASE OUR COMPETITION AND ADVERSELY
AFFECT OUR ABILITY TO PROVIDE NEW PRODUCTS AND SERVICES.
Local authorities and the FCC have been asked to require cable operators to
provide nondiscriminatory access over their cable systems to other Internet
service providers. The recent decision by the United State Supreme Court
upholding the FCC's classification of cable modem service as an "information
service" may effectively forestall efforts by competitors to obtain access to
the networks of cable operators to provide Internet access services. As noted
above, however, the FCC continues to have jurisdiction over this issue and a
rulemaking initiated prior to the Supreme Court's decision remains ongoing.
While we cannot predict the outcome of this proceeding, we do note that the FCC
recently removed the requirement that telecommunications carriers provide access
to competitors to resell their DSL internet access service citing the need for
competitive parity with cable modem service which has no similar access
requirement. If we are required to provide access in this manner, it could have
a significant adverse impact on our business, financial condition and results of
operations, including by: (i) increasing competition; (ii) increasing the
expenses we incur to maintain our systems; and/or (iii) increasing the expense
of upgrading and/or expanding our systems.
WE MAY BECOME SUBJECT TO ADDITIONAL REGULATORY BURDENS BECAUSE WE OFFER CABLE
TELEPHONY SERVICE.
The regulatory treatment of VoIP services like those we and others offer
remains uncertain. The FCC, Congress, the courts and the states continue to look
at issues surrounding the provision of VoIP, including whether this service is
properly classified as a telecommunications service or an information service.
The FCC's decision to classify VoIP as an information service should eliminate
much if not all local regulation of the service and should limit federal
regulation to consumer protection, as opposed to economic issues. For example,
on the federal level, the FCC recently required providers of "interconnected"
VoIP services, such as ours, to file a letter with the FCC certifying compliance
with certain E-911 functionality. Disputes have also arisen with respect to the
rights of VoIP providers and their telecommunications provider partners to
obtain interconnection and other rights under the Act from incumbent telephone
companies. We cannot predict how these issues will be resolved, but
uncertainties in the existing law as it applies to VoIP or any determination
that results in greater or different regulatory obligations than competing
services would result in increased costs, reduce anticipated revenues and impede
our ability to effectively compete or otherwise adversely affect our ability to
successfully roll-out and conduct our telephony business.
In May 2006, the FCC affirmed the May 14, 2007 deadline by which
facilities-based broadband Internet access and interconnected VoIP services must
comply with Communications Assistance for Law Enforcement Act requirements. In
June 2006, the FCC announced that it would require VoIP providers to contribute
to the Universal Service Fund based on their interstate service revenues.
Recently, the FCC issued a Further Notice of Proposed Rulemaking with respect to
possible changes in the intercarrier compensation model in a way that could
financially disadvantage us and benefit some of those who compete with us. It is
unknown what conclusions or actions the FCC may take or the effects on our
business.
ACTIONS BY POLE OWNERS MIGHT SUBJECT US TO SIGNIFICANTLY INCREASED POLE
ATTACHMENT COSTS.
Our cable facilities are often attached to or use public utility poles,
ducts or conduits. Historically, cable system attachments to public utility
poles have been regulated at the federal or state level. Generally this
regulation resulted in favorable pole attachment rates for cable operators. The
FCC clarified that the provision of Internet access does not endanger a cable
operator's favorable pole rates; this approach ultimately was upheld by the
Supreme Court of the United States. That ruling, coupled with the recent Supreme
Court decision upholding the FCC's classification of cable modem service as an
information service, should strengthen our ability to resist such rate increases
based solely on the delivery of cable modem services over our cable systems. As
we continue our deployment of cable telephony and certain other advanced
services, utilities may seek to invoke higher rates based on the FCC's
telecommunications services rate formula which produces higher permitted maximum
attachment rates. A formal hearing is currently before the FCC in which Gulf
Power is attempting to demonstrate that pole attachment rates above its marginal
costs meet the just compensation test approved by the United States Court of
Appeals for the 11th Circuit which would allow it to ask for and receive rates
from cable operators over and above the rates set by
14
FCC regulation. If successful, Gulf Power and perhaps all utilities in areas
served by us may have a similar claim thereby increasing their ability to raise
rates.
Our business, financial condition and results of operations could suffer a
material adverse impact from any significant increased costs, and such increased
pole attachment costs could discourage system upgrades and the introduction of
new products and services.
CHANGES IN COMPULSORY COPYRIGHT REGULATIONS MIGHT SIGNIFICANTLY INCREASE OUR
LICENSE FEES.
Filed petitions for rulemaking with the United States Copyright Office seek
clarification with regard to, and propose revisions to, certain cable compulsory
copyright license reporting requirements and seek clarification of certain
issues relating to the application of the compulsory license to the carriage of
digital broadcast stations. The petitions seek, among other things: (i)
clarification of the inclusion in gross revenues of digital converter fees,
additional set fees for digital service and revenue from required "buy throughs"
to obtain digital service; (ii) reporting of "dual carriage" and multicast
signals; (iii) revisions to the Copyright Office's rules and Statement of
Account forms, including increased detail regarding services, rates and
subscribers, additional information regarding non-broadcast tiers of service,
cable headend location information, community definition clarification and
identification of the county in which the cable community is located and the
effect of interest payments on potential liability for late filing; and (iv)
payment for certain distant signals in communities where the signal is not
carried, dubbed "phantom signals." The Copyright Office may open one or more
rulemakings or inquiry proceedings in response to these petitions. In August
2006, the Copyright Office opened a Notice of Inquiry requesting comments on
changes in reporting requirements pursuant to which cable operators would report
more detailed information including subscriber counts and rates for each
subscriber category (e.g., owner of a private residence, resident of an
apartment, owner of a motel, owner of a multiple dwelling unit building),
headend location and county. Provision of such information may make it easier
for copyright owners to make claims that copyright filings should be
reconfigured which could in some cases result in significantly higher copyright
costs. In September 2006, the Copyright Office opened a Notice of Inquiry
("Digital Signals NOI") proceeding seeking comment on copyright issues relating
to the retransmission of digital broadcast signals, including matters relating
to the identification of digital broadcast signals on Statements of Account
(including dual carriage and multicast) and the treatment of digital broadcast
signals for purposes of calculating the compulsory license royalty fee. The
Digital Signals NOI also seeks comment regarding the reporting of certain fees
charged cable customers in connection with the receipt of digital broadcast
signals. Furthermore, the Copyright Office is reviewing an approach by which all
copyright payments would be computed electronically by a system administered by
the Copyright Office. We cannot predict the outcome of any such inquiries,
rulemakings or proceedings; however, it is possible that certain changes in the
rules or copyright compulsory license fee computations or compliance procedures
could have an adverse affect on our business, financial condition and results of
operations by increasing our copyright compulsory license fee costs or by
causing us to reduce or discontinue carriage of certain broadcast signals that
we currently carry on a discretionary basis.
RISKS RELATED TO THE NOTES
WE AND OUR SUBSIDIARIES MAY STILL BE ABLE TO INCUR SUBSTANTIALLY MORE DEBT WHICH
COULD EXACERBATE THE RISKS DESCRIBED ABOVE.
We and our subsidiaries may be able to incur substantial additional debt in
the future. If we or our subsidiaries do so, the risks described above could
intensify. The terms of the indenture governing the notes does not fully
prohibit us or our subsidiaries from doing so. As of June 30, 2006, as adjusted
to give effect to this offering, the application of the proceeds therefrom and
our redemption of our 11% senior notes due 2013 (and a related borrowing
transaction), our subsidiaries would have had approximately $480.9 million of
unused credit commitments under the revolving credit portion of the subsidiary
credit facility, of which approximately $343.0 million could be borrowed and
used for general corporate purposes based on the terms and conditions of our
debt arrangements. We expect to continue to borrow under this facility.
15
THE NOTES WILL BE EFFECTIVELY SUBORDINATED TO ALL DEBT AND OTHER LIABILITIES OF
OUR SUBSIDIARIES.
Mediacom Broadband LLC is a holding company. As a result, the notes are
effectively subordinated to all existing and future liabilities of our
subsidiaries, including debt under our subsidiary credit facility. If the
maturity of the loans under our subsidiary credit facility were accelerated, our
subsidiaries would have to repay all debt outstanding under that credit facility
before they could distribute any assets or cash to us. Remedies to the lenders
under our subsidiary credit facility could constitute events of default under
the indenture governing the notes. If these remedies were exercised, the
maturity of the notes could be accelerated, and our subsidiaries' obligations
under our subsidiary credit facility could be accelerated also. In such
circumstances, there can be no assurance that our subsidiaries' assets would be
sufficient to repay all of their debt and then to make distributions to us to
enable us to meet our obligations under the indenture. Claims of creditors of
our subsidiaries, including general trade creditors, will generally have
priority over holders of the notes as to the assets of our subsidiaries.
Additionally, any right we may have to receive assets of any of our subsidiaries
upon such subsidiary's liquidation or reorganization will be effectively
subordinated to the claims of the subsidiary's creditors, except to the extent,
if any, that we ourselves are recognized as a creditor of such subsidiary, in
which case our claims would still be subordinate to the claims of such creditors
who hold security in the assets of such subsidiary to the extent of such assets
and to the claims of such creditors who hold indebtedness of such subsidiary
senior to that held by us. As of June 30, 2006, after giving pro forma effect to
this offering, the application of the proceeds therefrom and our redemption of
our 11% senior notes due 2013 (and a related borrowing transaction), the
aggregate amount of the debt and other liabilities of our subsidiaries reflected
on our consolidated balance sheet as to which holders of the notes would have
been effectively subordinated was approximately $1,183.7 million and our
subsidiaries would have had approximately $480.9 million of unused credit
commitments under the revolving credit portion of the subsidiary credit
facility, of which approximately $343.0 million could be borrowed and used for
general corporate purposes based on the terms and conditions of our debt
arrangements. Our subsidiaries may incur additional debt or other obligations in
the future and the notes will be effectively subordinated to such debt or other
obligations.
THE NOTES ARE OBLIGATIONS OF A HOLDING COMPANY WHICH HAS NO OPERATIONS AND
DEPENDS ON ITS SUBSIDIARIES FOR CASH.
As a holding company, we do not have any operations or hold any assets
other than our investments in and our advances to our operating subsidiaries.
Consequently, our subsidiaries conduct all of our consolidated operations and
own substantially all of our consolidated assets. The only source of cash we
have to pay interest on, and repay the principal of, our indebtedness and to
meet our other obligations is the cash that our subsidiaries generate from their
operations and their borrowings. Our subsidiaries are not obligated to make
funds available to us. Our subsidiaries' ability to make payments to us will
depend upon their operating results and will be subject to applicable laws and
contractual restrictions, including the agreements governing our subsidiary
credit facilities and other indebtedness. Those agreements permit our
subsidiaries to distribute cash to us under certain circumstances, but only so
long as there is no default under any of such agreements.
OUR OWNERSHIP INTERESTS IN OUR SUBSIDIARIES ARE PLEDGED AS COLLATERAL UNDER OUR
SUBSIDIARY CREDIT FACILITY AND MAY NOT BE AVAILABLE TO HOLDERS OF THE NOTES.
All of our ownership interests in our subsidiaries are pledged as
collateral under our subsidiary credit facility. Therefore, if we were unable to
pay principal or interest on the notes, the ability of the holders of the notes
to proceed against the ownership interests in our subsidiaries to satisfy such
amounts would be subject to the prior satisfaction in full of all amounts owing
under our subsidiary credit facility. Any action to proceed against such
interests by or on behalf of the holders of notes would constitute an event of
default under our subsidiary credit facility entitling the lenders thereunder to
declare all amounts owing thereunder to be immediately due and payable. In
addition, as secured creditors, the lenders under our subsidiary credit facility
would control the disposition and sale of our subsidiaries' interests after an
event of default under our subsidiary credit facility and would not be legally
required to take into account the interests of our unsecured creditors, such as
the holders of the notes, with respect to any such disposition or sale. There
can be no assurance that our assets after the satisfaction of claims of our
secured creditors would be sufficient to satisfy any amounts owing with respect
the notes.
16
WE MAY NOT BE ABLE TO GENERATE ENOUGH CASH TO SERVICE OUR DEBT.
Our ability to make payments on and to refinance our debt, including the
notes, and to fund planned capital expenditures will depend on our ability to
generate cash. This is subject, in part, to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. Accordingly, we cannot assure you that our business will generate
sufficient cash flows from operations or that future distributions will be
available to us in amounts sufficient to enable us to pay our indebtedness,
including the notes, or to fund our other liquidity needs.
We may need to refinance all or a portion of our indebtedness, including
the notes, on or before maturity. We cannot assure you that we will be able to
refinance any of our indebtedness on commercially reasonable terms or at all.
UNDER CERTAIN CIRCUMSTANCES, FEDERAL AND STATE LAWS MAY ALLOW COURTS TO VOID OR
SUBORDINATE CLAIMS WITH RESPECT TO THE NOTES OR TO MODIFY THE CONTRACTUAL OR
STRUCTURAL RELATIONSHIP BETWEEN DIFFERENT CLASSES OF CREDITORS.
Under the federal Bankruptcy Code and comparable provisions of state
fraudulent transfer laws, a court could void claims with respect to the notes,
or subordinate them, if, among other things, we, at the time the notes were
issued:
- received less than reasonably equivalent value or fair consideration for
the notes; and
- was insolvent or rendered insolvent by reason of the incurrence;
- was engaged in a business or transaction for which its remaining assets
constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they became due.
The measures of insolvency for purposes of these fraudulent or preferential
transfer laws vary depending upon the law applied in any proceeding to determine
whether a fraudulent or preferential transfer has occurred. Generally, however,
we would be considered insolvent if:
- the sum of its debts, including contingent liabilities, was greater than
the fair saleable value of all of its assets;
- the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they became absolute and
mature; or
- it could not pay its debts as they became due.
Based upon information currently available to us, we believe that the notes
are being incurred for proper purposes and in good faith.
In addition, if there were to be a bankruptcy of our parent and/or its
subsidiaries, creditors of our parent may attempt to make claims against us and
our subsidiaries, including seeking substantive consolidation of our and our
subsidiaries' assets and liabilities with the liabilities of our parent, which
(if successful) could have an adverse effect on holders of the notes and their
recoveries in any bankruptcy proceeding.
OUR ABILITY TO PURCHASE YOUR NOTES ON A CHANGE OF CONTROL MAY BE LIMITED.
If we undergo a change of control, we may need to refinance large amounts
of our debt, including our subsidiary credit facility, and we must offer to buy
back the notes for a price equal to 101% of their principal amount, plus accrued
and unpaid interest to the repurchase date. We cannot assure you that we will
have sufficient
17
funds available to make the required repurchases of the notes in that event, or
that we will have sufficient funds to pay our other debts.
In addition, our subsidiary credit facility prohibits our subsidiaries from
providing us with funds to finance a change of control offer after a change of
control until our subsidiaries have repaid in full their debt under our
subsidiary credit facility. If we fail to repurchase the notes upon a change of
control, we will be in default under the indenture governing the notes and the
indenture governing our existing senior notes. Any future debt that we incur may
also contain restrictions on repurchases in the event of a change of control or
similar event. These repurchase requirements may delay or make it harder to
obtain control of our company.
The change of control provisions may not protect you in a transaction in
which we incur a large amount of debt, including a reorganization,
restructuring, merger or other similar transaction, because that kind of
transaction may not involve any shift in voting power or beneficial ownership,
or may not involve a shift large enough to trigger a change of control.
YOU SHOULD NOT EXPECT MEDIACOM BROADBAND CORPORATION TO PARTICIPATE IN MAKING
PAYMENTS ON THE NOTES.
Mediacom Broadband Corporation is a wholly-owned subsidiary of Mediacom
Broadband LLC that was incorporated to accommodate the issuance of indebtedness
by Mediacom Broadband LLC. Mediacom Broadband Corporation has no operations,
revenues or cash flows and has no assets, liabilities or stockholders' equity on
its balance sheet, other than a one- hundred dollar receivable from an affiliate
and the same dollar amount of common stock on its consolidated balance sheets.
You should not expect Mediacom Broadband Corporation to participate in servicing
the interest or principal obligations on the notes.
AN ACTIVE LIQUID TRADING MARKET FOR THE NOTES MAY NOT DEVELOP.
The notes are a new issue of securities with no existing trading market and
will not have the same CUSIP number as our existing 8 1/2% senior notes due
2015. We do not intend to have the notes listed on a national securities
exchange, although we expect that they will be eligible for trading in The
PORTAL Market. However, we cannot assure you that the notes will be so
designated for trading in The PORTAL Market at the time the notes are delivered
to purchasers or at any other time. Each of the initial purchasers has informed
us that it intends to make a market in the notes. However, none of them are
obligated to do so, and any or all of them may discontinue such market making at
any time without notice. Moreover, the initial purchasers' market making
activities will be subject to limits imposed by the Securities Act or the
Securities Exchange Act of 1934 during the pendency of any exchange offer
described under "Exchange offer and registration rights agreement." There can be
no assurance that an active trading market for the notes will develop, or if one
does develop, that it will be sustained.
Historically, the market for non-investment grade debt has been highly
volatile in terms of price. It is possible that the market for the notes and the
exchange notes will also be volatile. This volatility in price may affect your
ability to resell your notes or exchange notes or the timing of their sale.
THERE ARE RESTRICTIONS ON RESALE OF THE NOTES.
The notes have not been registered under the Securities Act or any state
securities laws, and may not be offered or sold except pursuant to an exemption
from the registration requirements of the Securities Act and applicable state
securities laws, or pursuant to an effective registration statement. We have
agreed to commence a registered exchange offer for the notes or to register
resales of the notes under the Securities Act, but no assurances can be given
that such a registration will be completed or that any trading market will
develop thereafter. See "Description of the notes," "Exchange offer and
registration rights agreement" and "Notice to investors."
18
BUSINESS
The section entitled "Business -- Competition -- Telephone Companies" in
Part I, Item 1 of the 2005 Annual Report is updated and modified in its entirety
with the following:
TELEPHONE COMPANIES
In addition to their joint-marketing alliances with DBS providers, Verizon
Communications Inc. and AT&T Inc. are now constructing and both have begun to
operate, new fiber networks that replace their existing networks and allow them
to offer video services, in addition to improved voice and high speed data
services. These telephone companies have substantial resources. Several states
have enacted statutes that allow telephone companies to deliver services that
compete with our cable service without obtaining equivalent local franchises.
While the video competition we face from telephone companies is currently
limited, if they decide to rebuild their networks in our markets and begin to
offer video services, they could present a significant competitive challenge to
us.
21
LEGISLATION AND REGULATION
The section entitled "Business -- Legislation and Regulation" in Part I,
Item 1 of the 2005 Annual Report is updated and modified in its entirety with
the following:
GENERAL
Federal, state and local laws regulate the development and operation of
cable communications systems. In the following paragraphs, we summarize the
federal laws and regulations materially affecting us and other cable operators.
We also provide a brief description of certain relevant state and local laws.
Currently few laws or regulations apply to Internet services. Existing federal,
state and local laws and regulations and state and local franchise requirements
are currently the subject of judicial proceedings, legislative hearings and
administrative proceedings that could change, in varying degrees, the manner in
which cable systems operate. Neither the outcome of these proceedings nor their
impact upon the cable industry, our business or our operations can be predicted
at this time.
FEDERAL REGULATION
The principal federal statutes governing the cable industry, the
Communications Act of 1934, as amended by the Cable Communications Policy Act of
1984, the Cable Television Consumer Protection and Competition Act of 1992 and
the Telecommunications Act of 1996 (collectively, the "Cable Act"), establish
the federal regulatory framework for the industry. The Cable Act allocates
principal responsibility for enforcing the federal policies among the Federal
Communications Commission ("FCC") and state and local governmental authorities.
The Cable Act and the regulations and policies of the FCC affect
significant aspects of our cable system operations, including:
- subscriber rates;
- the content of the programming we offer to subscribers, as well as the
way we sell our program packages to subscribers;
- the use of our cable systems by the local franchising authorities, the
public and other unrelated companies;
- our franchise agreements with local governmental authorities;
- cable system ownership limitations and prohibitions; and
- our use of utility poles and conduit.
The FCC and some state regulatory agencies regularly conduct administrative
proceedings to adopt or amend regulations implementing the statutory mandate of
the Cable Act. At various times, interested parties to these administrative
proceedings challenge the new or amended regulations and policies in the courts
with varying levels of success. Further court actions and regulatory proceedings
may occur that might affect the rights and obligations of various parties under
the Cable Act. The results of these judicial and administrative proceedings may
materially affect the cable industry and our business and operations.
SUBSCRIBER RATES
The Cable Act and the FCC's regulations and policies limit the ability of
cable systems to raise rates for basic services and customer equipment. No other
rates are subject to regulation. Federal law exempts cable systems from all rate
regulation in communities that are subject to effective competition, as defined
by federal law and where affirmatively declared by the FCC. Federal law defines
effective competition as existing in a variety of circumstances that
historically were rarely satisfied but are increasingly satisfied with the
increases in DBS penetration and the announced plans of some local phone
companies to offer comparable video service. Although the FCC is conducting a
proceeding that may streamline the process for obtaining effective competition
determinations, neither the outcome of this proceeding nor its impact upon the
cable industry or our business or operations can be predicted at this time.
22
Where there is no effective competition to the cable operator's services,
federal law gives local franchising authorities the ability to regulate the
rates charged by the operator for:
- the lowest level of programming service offered by the cable operator,
typically called basic service, which includes, at a minimum, the local
broadcast channels and any public access or governmental channels that
are required by the operator's franchise;
- the installation of cable service and related service calls; and
- the installation, sale and lease of equipment used by subscribers to
receive basic service, such as converter boxes and remote control units.
Local franchising authorities who wish to regulate basic service rates and
related equipment rates must first affirmatively seek and obtain FCC
certification to regulate by following a simplified FCC certification process
and agreeing to follow established FCC rules and policies when regulating the
cable operator's rates. Currently, the majority of the communities we serve have
not sought such certification to regulate our rates.
Several years ago, the FCC adopted detailed rate regulations, guidelines
and rate forms that a cable operator and the local franchising authority must
use in connection with the regulation of basic service and equipment rates. The
FCC adopted a benchmark methodology as the principal method of regulating rates.
However, if this methodology produces unacceptable rates, the operator may also
justify rates using either a detailed cost-of-service methodology or an add-on
to the benchmark rate based on the additional capital cost and certain operating
expenses resulting from qualifying upgrades to the cable plant. The Cable Act
and FCC rules also allow franchising authorities to regulate equipment rates on
the basis of actual cost plus a reasonable profit, as defined by the FCC.
If the local franchising authority concludes that a cable operator's rates
exceed what is permitted under the FCC's rate rules, the local franchising
authority may require the cable operator to reduce rates and to refund
overcharges to subscribers, with interest. The cable operator may appeal adverse
local rate decisions to the FCC.
The FCC's regulations allow a cable operator to modify regulated rates on a
quarterly or annual basis to account for changes in:
- the number of regulated channels;
- inflation; and
- certain external costs, such as franchise and other governmental fees,
copyright and retransmission consent fees, taxes, programming fees and
franchise-imposed obligations.
The Cable Act and/or the FCC's regulations also:
- require cable operators to charge uniform rates throughout each franchise
area that is not subject to effective competition;
- prohibit regulation of non-predatory bulk discount rates offered by cable
operators to subscribers in multiple dwelling units; and
- permit regulated equipment rates to be computed by aggregating costs of
broad categories of equipment at the franchise, system, regional or
company level.
Reversing the findings of a November 2004 report, the FCC released a report
in February 2006 finding that consumers could benefit under certain a la carte
models for delivery of video programming. This report did not specifically
recommend or propose the adoption of any specific rules by the FCC and it did
not endorse a pure a la carte model where subscribers could purchase specific
channels without restriction. Instead, it favored tiers plus individual channels
or smaller theme-based tiers. Shortly after release of the report, the FCC voted
to seek additional information as to whether cable systems with at least 36
channels are available to at least 70 percent of U.S. homes and whether 70
percent of households served by those systems subscribe. If so, the FCC may have
additional discretion under the Cable Act to promulgate additional rules
necessary to promote diversity of information sources. The FCC did not specify
what rules it would seek to promulgate; however, the Chairman of the FCC has
expressed support for family-friendly tiers of programming and availability of
programming on an
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a la carte basis. Certain cable operators have responded by announcing that they
will launch "family-friendly" programming tiers. It is not certain whether those
efforts will ultimately be regarded as a sufficient response. Congress may also
consider legislation regarding programming packaging, bundling or a-la-carte
delivery of programming. Any such requirements could fundamentally change the
way in which we package and price our services. We cannot predict the outcome of
any current or future FCC proceedings or legislation in this area, or the impact
of such proceedings on our business at this time.
CONTENT REQUIREMENTS
MUST CARRY AND RETRANSMISSION CONSENT
The FCC's regulations contain broadcast signal carriage requirements that
allow local commercial television broadcast stations to elect once every three
years whether to require a cable system:
- to carry the station, subject to certain exceptions; or
- to negotiate the terms by which the cable system may carry the station on
its cable systems, commonly called retransmission consent.
- The Cable Act and the FCC's regulations require a cable operator to
devote up to one-third of its activated channel capacity for the carriage
of local commercial television stations. The Cable Act and the FCC's
rules also give certain local non-commercial educational television
stations mandatory carriage rights, but not the option to negotiate
retransmission consent. Additionally, cable systems must obtain
retransmission consent for carriage of:
- all distant commercial television stations, except for certain commercial
satellite-delivered independent superstations such as WGN;
- commercial radio stations; and
- certain low-power television stations.
Under legislation enacted in 1999, Congress barred broadcasters from
entering into exclusive retransmission consent agreements (extended through
2009) and required that broadcasters negotiate retransmission consent agreements
in "good faith;" in 2004, Congress extended this "good faith" requirement to
cover all multi-channel video programming distributors, including cable
operators.
Must-carry obligations may decrease the attractiveness of the cable
operator's overall programming offerings by including less popular programming
on the channel line-up, while cable operators may need to provide some form of
consideration to broadcasters to obtain retransmission consent to carry more
popular programming. We carry both broadcast stations based on must-carry
obligations and others that have granted retransmission consent.
No later than February 18, 2009, all television broadcasts must be solely
in digital format. After February 17, 2009, broadcasters must return their
analog spectrum. The FCC has issued a decision that effectively requires
mandatory carriage of local television stations that surrender their analog
channel and broadcast only digital signals. These stations are entitled to
request carriage in their choice of digital or converted analog format. Stations
transmitting in both digital and analog formats ("Dual Format Broadcast
Stations"), which is permitted during the transition period, have no carriage
rights for the digital format during the transition unless and until they turn
in their analog channel. The FCC has recently reaffirmed that cable operators
are not required to carry the digital signal of Dual Format Broadcast Stations
that currently have must-carry rights for their analog signals, however, changes
in the composition of the Commission as well as proposals currently under
consideration could result in an obligation to carry both the analog and digital
version of local broadcast stations or to carry multiple digital program
streams. In addition to rejecting a "dual carriage" requirement during the
transition, the FCC also confirmed that a cable operator need only carry a
broadcaster's "primary video" service (rather than all of the digital "multi-
cast" services), both during and after the transition. The adoption, by
legislation or FCC regulation, of additional must-carry requirements would have
a negative impact on us because it would reduce available channel capacity and
thereby could require us to either discontinue other channels of programming or
restrict our ability to carry new channels of programming or other services that
may be more desirable to our customers.
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In the Satellite Home Viewer Extension and Reauthorization Act of 2004
("SHVERA"), Congress directed the FCC to conduct an inquiry and submit a report
to Congress regarding the impact on competition in the multichannel video
programming distribution market of the Cable Act's provisions and the FCC's
rules on retransmission consent, network-non-duplication, syndicated
exclusivity, and sports blackouts. The FCC completed this inquiry and submitted
the required report to Congress in September 2005. While generally recommending
that Congress continue its efforts to "harmonize" the rules applicable to cable,
DBS and other multichannel video programming distributors to the extent feasible
in light of technological differences, the FCC found that it was unnecessary to
recommend any specific statutory amendments "at this time." Rather, the FCC
concluded that specific suggestions for change should await the results of a
pair of companion studies to be conducted by the Copyright Office pursuant to
SHVERA, the results of which are discussed below in the Copyright section.
A substantial number of local broadcast stations carried by our cable
television systems have elected to negotiate for retransmission consent, and we
have successfully negotiated retransmission consent agreements with most of
them.
Cable systems serving approximately half of our subscribers carry local
broadcast stations owned or programmed by Sinclair Broadcast Group, Inc. under a
month-to-month retransmission arrangement terminable at the end of any month on
45-days notice. All of these stations are affiliates of one of the "big-4"
networks, ABC, CBS, FOX and NBC. In negotiations with our manager for a longer-
term retransmission consent agreement, Sinclair is seeking compensation that we
believe to be in excess of what is appropriate, although the amount is not
material to our results of operations or financial condition. Sinclair has
threatened to give us notice, on or before October 15, 2006, to terminate
retransmission of all of its stations effective December 1, 2006.
While negotiations have narrowed the gap between Sinclair and us, we have
not yet reached agreement. We cannot predict if or when Sinclair may give us
notice to cease carrying any of its stations or, if it does, whether we will be
able to reach a new agreement before our systems actually have to cease
carriage. If there is an actual termination of carriage, we are unable to
predict how many of our subscribers might switch to direct broadcast service
providers that carry the Sinclair stations as the result of marketing campaigns
launched by those providers or Sinclair; however, a permanent loss of a
significant number of subscribers could adversely affect our results of
operations, financial condition and prospects.
TIER BUY THROUGH
The Cable Act and the FCC's regulations require our cable systems, other
than those systems which are subject to effective competition, to permit
subscribers to purchase video programming we offer on a per channel or a per
program basis without the necessity of subscribing to any tier of service other
than the basic service tier.
The FCC is reviewing a complaint with respect to another cable operator to
determine whether certain charges routinely assessed by many cable operators,
including us, to obtain access to digital services, violate this "anti-buy-
through" provision. Any decision that requires us to restructure or eliminate
such charges would have an adverse effect on our business.
PROGRAM ACCESS
To increase competition between cable operators and other video program
distributors, the Cable Act and the FCC's regulations:
- preclude any satellite video programmer affiliated with a cable company,
or with a common carrier providing video programming directly to its
subscribers, from favoring an affiliated company over competitors;
- require such programmers to sell their programming to other unaffiliated
video program distributors; and
- limit the ability of such programmers to offer exclusive programming
arrangements to cable operators.
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OTHER PROGRAMMING
Federal law actively regulates other aspects of our programming, involving
such areas as:
- our use of syndicated and network programs and local sports broadcast
programming;
- advertising in children's programming;
- political advertising;
- origination cablecasting;
- adult programming;
- sponsorship identification; and
- closed captioning of video programming.
USE OF OUR CABLE SYSTEMS BY THE GOVERNMENT AND UNRELATED THIRD PARTIES
The Cable Act allows local franchising authorities and unrelated third
parties to obtain access to a portion of our cable systems' channel capacity for
their own use. For example, the Cable Act:
- permits franchising authorities to require cable operators to set aside
channels for public, educational and governmental access programming; and
- requires a cable system with 36 or more activated channels to designate a
significant portion of its channel capacity for commercial leased access
by third parties to provide programming that may compete with services
offered by the cable operator.
The FCC regulates various aspects of third party commercial use of channel
capacity on our cable systems, including:
- the maximum reasonable rate a cable operator may charge for third party
commercial use of the designated channel capacity;
- the terms and conditions for commercial use of such channels; and
- the procedures for the expedited resolution of disputes concerning rates
or commercial use of the designated channel capacity.
FRANCHISE MATTERS
We have non-exclusive franchises in virtually every community in which we
operate that authorize us to construct, operate and maintain our cable systems.
Although franchising matters are normally regulated at the local level through a
franchise agreement and/or a local ordinance, the Cable Act provides oversight
and guidelines to govern our relationship with local franchising authorities.
For example, the Cable Act and/or FCC regulations and determinations:
Provide guidelines for the exercise of local regulatory authority that:
- affirm the right of franchising authorities, which may be state or local,
depending on the practice in individual states, to award one or more
franchises within their jurisdictions;
- generally prohibit us from operating in communities without a franchise;
- permit local authorities, when granting or renewing our franchises, to
establish requirements for cable-related facilities and equipment, but
prohibit franchising authorities from establishing requirements for
specific video programming or information services other than in broad
categories; and
- permit us to obtain modification of our franchise requirements from the
franchise authority or by judicial action if warranted by commercial
impracticability.
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Generally prohibit franchising authorities from:
- imposing requirements during the initial cable franchising process or
during franchise renewal that require, prohibit or restrict us from
providing telecommunications services;
- imposing franchise fees on revenues we derive from providing
telecommunications or information services over our cable systems;
- restricting our use of any type of subscriber equipment or transmission
technology; and
- requiring payment of franchise fees to the local franchising authority in
excess of 5.0% of our gross revenues derived from providing cable
services over our cable system.
Encourage competition with existing cable systems by:
- allowing municipalities to operate their own cable systems without
franchises; and
- preventing franchising authorities from granting exclusive franchises or
from unreasonably refusing to award additional franchises covering an
existing cable system's service area.
Provide renewal procedures:
- The Cable Act contains renewal procedures designed to protect us against
arbitrary denials of renewal of our franchises although, under certain
circumstances, the franchising authority could deny us a franchise
renewal. Moreover, even if our franchise is renewed, the franchising
authority may seek to impose upon us new and more onerous requirements,
such as significant upgrades in facilities and services or increased
franchise fees as a condition of renewal to the extent permitted by law.
Similarly, if a franchising authority's consent is required for the
purchase or sale of our cable system or franchise, the franchising
authority may attempt to impose more burdensome or onerous franchise
requirements on the purchaser in connection with a request for such
consent. Historically, cable operators providing satisfactory services to
their subscribers and complying with the terms of their franchises have
almost always obtained franchise renewals. We believe that we have
generally met the terms of our franchises and have provided quality
levels of service. We anticipate that our future franchise renewal
prospects generally will be favorable.
- Various courts have considered whether franchising authorities have the
legal right to limit the number of franchises awarded within a community
and to impose substantive franchise requirements. These decisions have
been inconsistent and, until the U.S. Supreme Court rules definitively on
the scope of cable operators' First Amendment protections, the legality
of the franchising process generally and of various specific franchise
requirements is likely to be in a state of flux. Furthermore, the FCC
recently issued a Notice of Proposed Rulemaking seeking comment on
whether the current local franchising process constitutes an impediment
to widespread issuance of franchises to competitive cable providers in
terms of the sheer number of franchising authorities, the impact of
state-level franchising authorities, the burdens some local franchising
authorities seek to impose as conditions of granting franchises and
whether state "level-playing field" statutes also create barriers to
entry. We cannot determine the outcome of any potential new rules on our
business; however, any change that would lessen the local franchising
burdens and requirements imposed on our competitors relative to those
that are or have been imposed on us could harm our business.
The Cable Act and the FCC allow cable operators to pass franchise fees on
to subscribers and to separately itemize them on subscriber bills. In 2003, an
appellate court affirmed an FCC ruling that franchise fees paid by cable
operators on non-subscriber related revenue (such as cable advertising revenue
and home shopping commissions) may be passed through to subscribers and itemized
on subscriber bills regardless of the source of the revenues on which they were
assessed.
In connection with its decision in 2002 classifying high-speed Internet
services provided over a cable system as interstate information services, the
FCC stated that revenues derived from cable operators' Internet services should
not be included in the revenue base from which franchise fees are calculated.
Although the United States Supreme Court subsequently held that cable modem
service was properly classified by the FCC as an "information service," freeing
it from regulation as a "telecommunications service," it recognized that the FCC
has jurisdiction to impose regulatory obligations on facilities based Internet
Service Providers. The FCC has an ongoing rulemaking to
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determine whether to impose regulatory obligations on such providers, including
us. Because of the FCC's decision, we are no longer collecting and remitting
franchise fees on our high-speed Internet service revenues. We are unable to
predict the ultimate resolution of these matters but do not expect that any
additional franchise fees we may be required to pay will be material to our
business and operations.
In June 2006, the United States Court of Appeals for the District of
Columbia Circuit remanded the FCC's denial of SBC's (now AT&T) petition seeking
forbearance from Title II common carrier regulation of its Internet Protocol
("IP") services. AT&T has widely announced its intent to provide IP video, voice
and data. The outcome of this proceeding or its impact on our business cannot be
predicted.
OWNERSHIP LIMITATIONS
The FCC previously adopted nationwide limits on the number of subscribers
under the control of a cable operator and on the number of channels which can be
occupied on a cable system by video programming in which the cable operator has
an interest. The U.S. Court of Appeals for the District of Columbia Circuit
reversed the FCC's decisions implementing these statutory provisions and
remanded the case to the FCC for further proceedings.
The 1996 amendments to the Cable Act eliminated the statutory prohibition
on the common ownership, operation or control of a cable system and a television
broadcast station in the same service area. The identical FCC regulation
subsequently has been invalidated by a federal appellate court.
The 1996 amendments to the Cable Act made far-reaching changes in the
relationship between local telephone companies and cable service providers.
These amendments:
- eliminated federal legal barriers to competition in the local telephone
and cable communications businesses, including allowing local telephone
companies to offer video services in their local telephone service areas;
- preempted legal barriers to telecommunications competition that
previously existed in state and local laws and regulations;
- set basic standards for relationships between telecommunications
providers; and
- generally limited acquisitions and prohibited joint ventures between
local telephone companies and cable operators in the same market.
Pursuant to these changes in federal law, local telephone companies may now
provide service as traditional cable operators with local franchises or they may
opt to provide their programming over open video systems, subject to certain
conditions, including, but not limited to, setting aside a portion of their
channel capacity for use by unaffiliated program distributors on a non-
discriminatory basis. Open video systems are exempt from certain regulatory
obligations that currently apply to cable operators. The decision as to whether
an operator of an open video system must obtain a local franchise is left to
each community.
The 1996 amendments to the Cable Act allow registered utility holding
companies and subsidiaries to provide telecommunications services, including
cable television, notwithstanding the Public Utilities Holding Company Act of
1935, as amended. In 2004, the FCC adopted rules: (i) that affirmed the ability
of electric service providers to provide broadband Internet access services over
their distribution systems; and (ii) that seek to avoid interference with
existing services. Electric utilities could be formidable competitors to cable
system operators.
Legislation was recently passed in several states and similar legislation
is pending, or has been proposed, in certain other states and in Congress, to
allow local telephone companies or other competitors to deliver services in
competition with our cable service without obtaining equivalent local
franchises. Such a legislatively granted advantage to our competitors could
adversely affect our business. The effect of such initiatives, if any, on our
obligation to obtain local franchises in the future or on any of our existing
franchises, many of which have years remaining in their terms, cannot be
predicted in all cases. In some cases, we may become eligible for state issued
franchises on comparable terms and conditions as our existing franchises expire
or as competitive franchises are issued.
The Cable Act generally prohibits us from owning or operating a satellite
master antenna television system or multichannel multipoint distribution system
in any area where we provide franchised cable service and do not have
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effective competition, as defined by federal law. We may, however, acquire and
operate a satellite master antenna television system in our existing franchise
service areas if the programming and other services provided to the satellite
master antenna television system subscribers are offered according to the terms
and conditions of our local franchise agreement.
CABLE EQUIPMENT
The Cable Act and FCC regulations seek to promote competition in the
delivery of cable equipment by giving consumers the right to purchase set-top
converters from third parties as long as the equipment does not harm the
network, does not interfere with services purchased by other customers and is
not used to receive unauthorized services. Over a multi-year phase-in period,
the rules also require multichannel video programming distributors, other than
direct broadcast satellite operators, to separate security from non-security
functions in set-top converters to allow third party vendors to provide set-tops
with basic converter functions. Beginning July 1, 2007, cable operators will be
prohibited from leasing digital set-top terminals that integrate security and
basic navigation functions. In August 2006, the D.C. Court of Appeals denied the
cable industry's appeal of this integration ban. The National Cable and
Telecommunications Association has filed a waiver request with the FCC for all
cable operators requesting a delay of the integration ban until after the 2009
digital transition. The success of this waiver request cannot be predicted.
To promote compatibility of cable television systems and consumer
electronics equipment, the FCC recently adopted rules implementing "plug and
play" specifications for one-way digital televisions. The rules require cable
operators to provide "CableCard" security modules and support for digital
televisions equipped with built-in set-top functionality. The FCC continues to
push the cable television and consumer electronics industries to develop two-way
"plug and play" specifications.
POLE ATTACHMENT REGULATION
The Cable Act requires certain public utilities, defined to include all
local telephone companies and electric utilities, except those owned by
municipalities and co-operatives, to provide cable operators and
telecommunications carriers with nondiscriminatory access to poles, ducts,
conduit and rights-of-way at just and reasonable rates. This right to access is
beneficial to us. Federal law also requires the FCC to regulate the rates, terms
and conditions imposed by such public utilities for cable systems' use of
utility pole and conduit space unless state authorities have demonstrated to the
FCC that they adequately regulate pole attachment rates, as is the case in
certain states in which we operate. In the absence of state regulation, the FCC
will regulate pole attachment rates, terms and conditions only in response to a
formal complaint. The FCC adopted a new rate formula that became effective in
2001 which governs the maximum rate certain utilities may charge for attachments
to their poles and conduit by companies providing telecommunications services,
including cable operators.
This telecommunications services formula which produces higher maximum
permitted attachment rates applies only to cable television systems which elect
to offer telecommunications services. The FCC ruled that the provision of
Internet services will not, in and of itself, trigger use of the new formula.
The Supreme Court affirmed this decision and also held that the FCC's authority
to regulate rates for attachments to utility poles extended to attachments by
cable operators and telecommunications carriers that are used to provide
Internet service or for wireless telecommunications service. The Supreme Court's
decision upholding the FCC's classification of cable modem service as an
information service, should strengthen our ability to resist such rate increases
based solely on the delivery of cable modem services over our cable systems. As
we continue our deployment of cable telephony and certain other advanced
services, utilities may continue to seek to invoke the higher rates.
At present there is a formal hearing before the FCC in which Gulf Power is
attempting to demonstrate that pole attachment rates above its marginal costs
meet the just compensation test approved by the United States Court of Appeals
for the 11th Circuit. As a result of the Supreme Court case upholding the FCC's
classification of cable modem service as an information service, the 11th
Circuit has considered whether there are circumstances in which a utility can
ask for and receive rates from cable operators over and above the rates set by
FCC regulation. If successful, Gulf Power and perhaps all utilities in areas
served by us may have a similar claim thereby increasing their ability to raise
rates. It is not known at this time what, if any, financial impact could occur.
29
OTHER REGULATORY REQUIREMENTS OF THE CABLE ACT AND THE FCC
The FCC has adopted cable inside wiring rules to provide a more specific
procedure for the disposition of residential home wiring and internal building
wiring that belongs to an incumbent cable operator that is forced by the
building owner to terminate its cable services in a building with multiple
dwelling units.
The Cable Act and/or FCC rules include provisions, among others, regulating
other parts of our cable operations, involving such areas as:
- equal employment opportunity;
- consumer protection and customer service;
- technical standards and testing of cable facilities;
- consumer electronics equipment compatibility;
- registration of cable systems;
- maintenance of various records and public inspection files;
- microwave frequency usage; and
- antenna structure notification, marking and lighting.
The FCC may enforce its regulations through the imposition of fines, the
issuance of cease and desist orders or the imposition of other administrative
sanctions, such as the revocation of FCC licenses needed to operate transmission
facilities often used in connection with cable operations. The FCC routinely
conducts rulemaking proceedings that may change its existing rules or lead to
new regulations. We are unable to predict the impact that any further FCC rule
changes may have on our business and operations.
COPYRIGHT
Our cable systems typically include in their channel line-ups local and
distant television and radio broadcast signals, which are protected by the
copyright laws. We generally do not obtain a license to use this programming
directly from the owners of the programming, but instead comply with an
alternative federal compulsory copyright licensing process. In exchange for
filing certain reports and contributing a percentage of our revenues to a
federal copyright royalty pool, we obtain blanket permission to retransmit the
copyrighted material carried on these broadcast signals. The nature and amount
of future copyright payments for broadcast signal carriage cannot be predicted
at this time.
In a report to Congress, the U.S. Copyright Office recommended major
revisions to both the cable television and satellite compulsory licenses. In
1999, Congress modified the satellite compulsory license in a manner that
permits DBS providers to become more competitive with cable operators. Congress
recently adopted legislation extending this authority through 2009. The possible
simplification, modification or elimination of the cable compulsory copyright
license is the subject of continuing legislative review. The elimination or
substantial modification of the cable compulsory license could adversely affect
our ability to obtain suitable programming and could substantially increase the
cost of programming that remains available for distribution to our subscribers.
We are unable to predict the outcome of this legislative activity related to
either the cable compulsory license or the right of direct broadcast satellite
providers to deliver local broadcast signals.
Filed petitions for rulemaking with the United States Copyright Office seek
clarification with regard to, and propose revisions to certain cable compulsory
copyright license reporting requirements and seek clarification of certain
issues relating to the application of the compulsory license to the carriage of
digital broadcast stations. The petitions seek, among other things: (i)
clarification of the inclusion in gross revenues of digital converter fees,
additional set fees for digital service and revenue from required "buy throughs"
to obtain digital service; (ii) reporting of "dual carriage" and multicast
signals; (iii) revisions to the Copyright Office's rules and Statement of
Account forms, including increased detail regarding services, rates and
subscribers, additional information regarding non-broadcast tiers of service,
cable headend location information, community definition clarification and
identification of the county in which the cable community is located and the
effect of interest payments on
30
potential liability for late filing; and (iv) payment for certain distant
signals in communities where the signal is not carried, dubbed "phantom
signals." The Copyright Office may open one or more rulemakings or inquiry
proceedings in response to these petitions. In August 2006, the Copyright Office
opened a Notice of Inquiry requesting comments on changes in reporting
requirements pursuant to which cable operators would report more detailed
information including subscriber counts and rates for each subscriber category
(e.g., owner of a private residence, resident of an apartment, owner of a motel,
owner of a multiple dwelling unit building), headend location and county.
Provision of such information may make it easier for copyright owners to make
claims that copyright filings should be reconfigured which could in some cases
result in significantly higher copyright costs. In September 2006, the Copyright
Office opened a Notice of Inquiry ("Digital Signals NOI") proceeding seeking
comment on copyright issues relating to the retransmission of digital broadcast
signals, including matters relating to the identification of digital broadcast
signals on Statements of Account (including dual carriage and multicast) and the
treatment of digital broadcast signals for purposes of calculating the
cumpolsory license royalty fee. The Digital Signals NOI also seeks comment
regarding the reporting of certain fees charged cable customers in connection
with the receipt of digital broadcast signals. Furthermore, the Copyright Office
is reviewing an approach by which all copyright payments would be computed
electronically by a system administered by the Copyright Office that may not
reflect the unique circumstances of each of our systems and/or groupings of
systems. We cannot predict the outcome of any such inquiries, rulemakings or
proceedings; however, it is possible that certain changes in the rules or
copyright compulsory license fee computations or compliance procedures could
have an adverse affect on our business by increasing our copyright compulsory
license fee costs or by causing us to reduce or discontinue carriage of certain
broadcast signals that we currently carry on a discretionary basis.
In February 2006, the Copyright Office reported to Congress as required by
SHVERA. The Copyright Office concluded that: (i) the current DBS compulsory
license royalty fee for distant signals did not reflect fair market value; (ii)
copyright owners should have the right to audit the statements of account
submitted by DBS providers; and (iii) the cost of administering the compulsory
license system be paid by those using the copyrighted material. A second report
is due by June 30, 2008. Neither the outcome of those proceedings, their impact
on cable television operators, nor their impact on subsequent legislation,
regulations, the cable industry, or our business and operations can be predicted
at this time.
Copyrighted material in programming supplied to cable television systems by
pay cable networks and basic cable networks is licensed by the networks through
private agreements with the copyright owners. These entities generally offer
through to-the-viewer licenses to the cable networks that cover the
retransmission of the cable networks' programming by cable television systems to
their customers.
Our cable systems also utilize music in other programming and advertising
that we provide to subscribers. The rights to use this music are controlled by
various music performing rights organizations from which performance licenses
must be obtained. Cable industry representatives negotiated standard license
agreements with the largest music performing rights organizations covering
locally originated programming, including advertising inserted by the cable
operator in programming produced by other parties. These standard agreements
require the payment of music license fees for earlier time periods, but such
license fees have not had a significant impact on our business and operations.
INTERACTIVE TELEVISION
The FCC has issued a Notice of Inquiry covering a wide range of issues
relating to interactive television ("ITV"). Examples of ITV services are
interactive electronic program guides and access to a graphic interface that
provides supplementary information related to the video display. In the near
term, cable systems are likely to be the platform of choice for the distribution
of ITV services. The FCC posed a series of questions including the definition of
ITV, the potential for discrimination by cable systems in favor of affiliated
ITV providers, enforcement mechanisms, and the proper regulatory classification
of ITV service.
PRIVACY
The Cable Act imposes a number of restrictions on the manner in which cable
television operators can collect, disclose and retain data about individual
system customers and requires cable operators to take such actions as
31
necessary to prevent unauthorized access to such information. The statute also
requires that the system operator periodically provide all customers with
written information about its policies including the types of information
collected; the use of such information; the nature, frequency and purpose of any
disclosures; the period of retention; the times and places where a customer may
have access to such information; the limitations placed on the cable operator by
the Cable Act; and a customer's enforcement rights. In the event that a cable
television operator is found to have violated the customer privacy provisions of
the Cable Act, it could be required to pay damages, attorneys' fees and other
costs. Certain of these Cable Act requirements have been modified by certain
more recent federal laws. Other federal laws currently impact the circumstances
and the manner in which we disclose certain customer information and future
federal legislation may further impact our obligations. In addition, some states
in which we operate have also enacted customer privacy statutes, including
obligations to notify customers where certain customer information is accessed
or believed to have been accessed without authorization. These state provisions
are in some cases more restrictive than those in federal law.
CABLE MODEM SERVICE
There are currently few laws or regulations that specifically regulate
communications or commerce over the Internet. Section 230 of the Communications
Act declares it to be the policy of the United States to promote the continued
development of the Internet and other interactive computer services and
interactive media, and to preserve the vibrant and competitive free market that
presently exists for the Internet and other interactive computer services,
unfettered by federal or state regulation. One area in which Congress did
attempt to regulate content over the Internet involved the dissemination of
obscene or indecent materials.
The Digital Millennium Copyright Act is intended to reduce the liability of
online service providers for listing or linking to third-party Websites that
include materials that infringe copyrights or other rights or if customers use
the service to publish or disseminate infringing materials. The Children's
Online Protection Act and the Children's Online Privacy Protection Act are
intended to restrict the distribution of certain materials deemed harmful to
children and impose additional restrictions on the ability of online services to
collect user information from minors. In addition, the Protection of Children
From Sexual Predators Act of 1998 requires online service providers to report
evidence of violations of federal child pornography laws under certain
circumstances.
A number of ISPs have asked local authorities and the FCC to give them
rights of access to cable systems' broadband infrastructure so that they can
deliver their services directly to cable systems' customers, which is often
called "open access". The FCC, in connection with its review of the AOL-Time
Warner merger, imposed, together with the Federal Trade Commission, limited
multiple access and other requirements related to the merged company's Internet
and Instant Messaging platforms.
In 2002, the FCC announced that it was classifying Internet access service
provided through cable modems as an interstate information service. Although the
United States Supreme Court recently held that cable modem service was properly
classified by the FCC as an "information service," freeing it from regulation as
a "telecommunications service," it recognized that the FCC has jurisdiction to
impose regulatory obligations on facilities based Internet Service Providers.
The FCC has an ongoing rulemaking to determine whether to impose regulatory
obligations on such providers, including us. The adoption of new rules by the
FCC could impose additional costs and regulatory burdens on us, reduce our
anticipated revenues or increase our anticipated costs for this service,
complicate the franchise renewal process, result in greater competition or
otherwise adversely affect our business. While we cannot predict the outcome of
this proceeding, we do note that the FCC recently removed the requirement that
telecommunications carriers provide access to competitors to resell their DSL
Internet access service citing the need for competitive parity with cable modem
service which has no similar access requirement. Any such requirements could
adversely affect our results of operations.
VOICE-OVER-INTERNET PROTOCOL TELEPHONY
The 1996 amendments to the Cable Act created a more favorable regulatory
environment for cable operators to enter the phone business. Currently, numerous
cable operators have commenced offering VoIP telephony as a competitive
alternative to traditional circuit-switched telephone service. Various states,
including states where we operate, have adopted or are considering differing
regulatory treatment, ranging from minimal or no regulation to
32
full-blown common carrier status. As part of the proceeding to determine any
appropriate regulatory obligations for VoIP telephony, the FCC recently decided
that alternative voice technologies, like certain types of VoIP telephony,
should be regulated only at the federal level, rather than by individual states.
Many implementation details remain unresolved, and there are substantial
regulatory changes being considered that could either benefit or harm VoIP
telephony as a business operation. While the final outcome of the FCC
proceedings cannot be predicted, it is generally believed that the FCC favors a
"light touch" regulatory approach for VoIP telephony, which might include
preemption of certain state or local regulation. In February 2006, the FCC
commenced a proceeding to determine whether additional security measures are
required to protect certain customer information including call records. In May
2006, the FCC affirmed the May 14, 2007 deadline by which facilities-based
broadband Internet access and interconnected VoIP services must comply with
Communications Assistance for Law Enforcement Act requirements. In June 2006,
the FCC announced that it would require VoIP providers to contribute to the
Universal Service Fund based on their interstate service revenues. Recently, the
FCC issued a Further Notice of Proposed Rulemaking with respect to possible
changes in the intercarrier compensation model in a way that could financially
disadvantage us and benefit some of our competitors. It is unknown what
conclusions or actions the FCC may take or the effects on our business.
STATE AND LOCAL REGULATION
Our cable systems use local streets and rights-of-way. Consequently, we
must comply with state and local regulation, which is typically imposed through
the franchising process. Our cable systems generally are operated in accordance
with non-exclusive franchises, permits or licenses granted by a municipality or
other state or local government entity. Our franchises generally are granted for
fixed terms and in many cases are terminable if we fail to comply with material
provisions. The terms and conditions of our franchises vary materially from
jurisdiction to jurisdiction. Each franchise generally contains provisions
governing:
- franchise fees;
- franchise term;
- system construction and maintenance obligations;
- system channel capacity;
- design and technical performance;
- customer service standards;
- sale or transfer of the franchise; and
- territory of the franchise.
33
DESCRIPTION OF THE NOTES
The following was reported in this section:
As of July 1, 2006, the total amount available for making Restricted
Payments under the foregoing clause (iii) was approximately $411.5 million.
34
General
The senior notes will be offered to qualified institutional buyers
under Rule 144A and to persons outside the placecountry-regionUnited States
under Regulation S. The senior notes will not be registered under the Securities
Act of 1933, as amended (the "Securities Act"), and, unless so registered, may
not be offered or sold in the United States except pursuant to an exemption
from, or in a transaction not subject to, the registration requirements of the
Securities Act and applicable state securities laws. This Form 8-K shall not
constitute an offer to sell, or the solicitation of an offer to buy, the senior
notes nor shall there be any sale of the senior notes in any state in which such
offer, solicitation, or sale would be unlawful prior to registration or
qualification under the securities laws of any such state.
Any statements in this Form 8-K that are not historical facts are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements are subject
to risks and uncertainties that could cause actual results to differ materially
from historical results or those Mediacom Broadband LLC and Mediacom Broadband
Corporation anticipate. For a discussion of such risks and uncertainties, which
could cause actual results to differ from those contained in the forward-looking
statements, see the reports and documents Mediacom Broadband LLC and Mediacom
Broadband Corporation file from time to time with the Securities and Exchange
Commission. Statements included in this Form 8-K are based upon information
known to Mediacom Broadband LLC and Mediacom Broadband Corporation as of the
date of this Form 8-K, and Mediacom Broadband LLC and Mediacom Broadband
Corporation assume no obligation to (and expressly disclaim any such obligation
to) publicly update or alter their forward-looking statements made in this Form
8-K, whether as a result of new information, future events or otherwise, except
as otherwise required by applicable federal securities laws.
Item 8.01. Other Events
On September 28, 2006, Mediacom Broadband LLC and Mediacom Broadband
Corporation issued a press release pursuant to Rule 135c of the Securities Act
concerning the proposed issuance by Mediacom Broadband LLC and Mediacom
Broadband Corporation of senior notes under Rule 144A. A copy of such press
release is attached hereto as Exhibit 99.1.
Item 9.01. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired - None
(b) Pro Forma Financial Information - None
(c) Shell Company Transactions - None
(d) Exhibits:
Exhibit No. Description
----------- -----------
99.1 Press release issued by the Registrants on September
28, 2006
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: September 28, 2006
Mediacom Broadband LLC
By: /s/ Mark E. Stephan
------------------------------
Mark E. Stephan
Executive Vice President
and Chief Financial Officer
Mediacom Broadband Corporation
By: /s/ Mark E. Stephan
------------------------------
Mark E. Stephan
Executive Vice President
and Chief Financial Officer